Aircraft Finance FAQ's

We often review our evaluation process in advance with clients in an effort to "flag" issues that may arise during an evaluation. The "4 C's" are the benchmarks used to evaluate a financing prospect, and involve a review of Credit, Cash flows, Collateral, and Character.

Part I – Credit: The credit report is a picture of an individual's payment history and paying habits. The length of time a borrower takes to make a payment impacts the cost to the fundor. For example, if a borrower is consistently 30 days past due on payments, the fundor would assume additional exposure and cost of funds for the extra 30 days and pass this cost along in the form of a higher interest rate.

The credit review focuses on the credit report – an individual's past 10 years' credit activity – with an emphasis on the most recent 2 years. Derogatory items are kept on the report for up to 10 years (depending on the type of information), while positive information will remain indefinitely. The credit report details the recent payment history, amount of credit owing, length of time credit established, types of credit established, and an individual's search for and acquisition of new credit. Each of these factors play into influencing an individual's credit "score".

Other items obtained from a credit report that impact the credit score include:

- High balances on revolving credit facilities (credit cards),
- Established credit history
- Established "high credit" (consistent with projected loan value)
- Requests for new credit
- Judgments, charge-offs, credit accounts closed by creditor

While the credit report and credit scores are not used solely - as they are with auto loans and credit cards, they play a substantial role in the evaluation process.

Part II – Cash Flows: This element is key to determining the "affordability" of an aircraft. The key component to a cash flow review is an analysis of a clients' "debt ratio". The debt ratio is the relationship of gross monthly income to net monthly payments. The debt ratio is an individual's cash position relative to current expenses, and, with common assumptions for tax burden and living expenses; it provides insight as to the ability to afford the new aircraft payment. An example analysis is illustrated below:

- Gross Monthly Income ($240,000/ yr.)	$20,000
- Taxes	7,000
Net Monthly Expenses
- Real estate mortgages, home equity loans,	$ 3,500
- Auto loans and leases,	1,100
- Credit cards - monthly payments,	250
- Credit lines and other loans,	450
- New loan - Aircraft	2,700
TOTAL Net Monthly Payments (Debt Ratio ~ 40%)	$8,000
- Balance for Monthly Living Expenses (~25%)	$ 5,000

Gross monthly income is averaged from historical tax returns, pay stubs, W2s, 1099s, or other income-proving sources. Net monthly payments are derived from the credit report and personal financial statement. With allowances for tax and general living expenses, most lenders target a minimum of 40-45% with some flexibility based on other strengths.

Part III – Collateral: The strength of the collateral (aircraft) value in a loan transaction assists in securing the financing. Lenders generally conduct a desktop appraisal of an aircraft, using one of the industry-accepted sources (Aircraft "Bluebook" Price Digest, Vref). For larger transactions or "over book" valuations, fundors may also require a physical appraisal of the aircraft and logbooks.

Fundors will often require 10% equity in the aircraft as a minimum. This may vary depending on the size of the transaction and strength of the collateral. For larger aircraft (business jets), where the corporate guaranty is A+ credit strength, 100% financing may be available. In some cases, where higher utilization of the aircraft is anticipated, a fundor may require additional equity in the aircraft from the onset of the loan (15% or 20% for a leaseback to a flight school for example).

In addition to the normal criteria for valuing aircraft, recent attention has focused more sharply on the avionics, paint and interior condition of the collateral. As avionics systems have upgraded exponentially in recent years, attention is paid to the age (date of installation). Damage history – particularly if recent, and completeness of logbooks can also weigh heavily on valuations in today's market.

How Accurate is my Credit?

Familiarity with credit and taking proactive measures to correct errors are invaluable in the hunt to secure financing. A regular review of credit will also assist in protecting against the fraud issues prevalent today. There are three credit reporting agencies that most finance companies use: Trans Union, Equifax, and Experian. Credit reports from these bureaus can be obtained via the Internet either directly through each company or try www.myfico.com.

Common errors and issues that may be on a credit report:

- old accounts not closed
- duplicate accounts
- accounts that don't belong to the applicant
- inaccurate reporting of delinquencies
- problem accounts where the applicant acted as a "co-signor"
- old delinquencies or credit problems that should have been removed

Monitoring reports are available through various credit agencies that can assist with familiarity with credit. Subscription to one of these services will inform of any changes to an individual's report, and detail recent inquiries to obtain credit

Bankruptcy Impact

A bankruptcy will show up on an individual's credit report up to 10 years after the final settlement or discharge. The impact on the individual's ability to obtain a new aircraft loan will depend on:

- How long ago were the bankruptcy and the discharge?
- What is the reason for the bankruptcy?
- Has the individual re-established credit?
- Has the re-established credit been maintained well?

A client who has filed bankruptcy, whether for personal reasons (medical expenses/ student loans), corporate reasons (contingent liabilities to a company), or other circumstances (lawsuit), may still be able to qualify. Terms for a client with a past bankruptcy may be different, depending on the factors listed above. We will work to structure a program that will accommodate their situation and, if this effort does not result in financing, we can usually place the client with an asset-based/ collateral lender.

One of the more frequent opinions offered is "my client filed once, but cannot file again so he should be creditworthy". While it is true that an individual is only permitted one filing of bankruptcy, there is no guarantee that an individual will not have a problem similar to that which caused the bankruptcy filing. From a lender's perspective, there is no ability to clear these new debts with a bankruptcy, and the recourse would be to file suit against the individual, liquidate assets, or incarcerate – a long and painful process.

Do You Need My Entire Tax Return?

One of the key requirements for financing is a careful review of federal tax returns. Tax returns speak volumes to the strength of a prospect.

The goal in an evaluation is to understand the clients' recurring annual income. By carefully analyzing the tax returns, we maximize the client's cash flow. For example, we add back non-cash deductions (i.e. depreciation) and all sheltered income in a Schedule C and Schedule E. Other non-cash deductions may be offset in a K-1 (partnership statement). Net loss carry-forward, occasional capital gains, and passive losses are evaluated to determine the true recurring cash flows over a period of time.

While the returns may range from 5 to 205 pages, we are intimately familiar with the evaluation and will track the cash flows through to the strength of the entity financing the aircraft.

Balloon Payment?

Why should someone choose a loan with a balloon payment over a full payout? Two reasons. First, long-term money costs more than short-term money and; secondly, the average aircraft buyer keeps an aircraft only 32 to 36 months.

For the average aircraft owner who wants to keep his/ her payments low with a long-term amortization but wishes to take advantage of a lower rate, our 20-year amortization with 5 or 7-year balloon is ideal. For the borrower who plans to keep the aircraft for 15 to 20 years, our fixed rate program locks the rate for the entire term (up to 20 years) for only 1/4% to 1/2% increase in rate.