News / Challenges persist, but operators see new freighter finance opportunities

27/02/2024

Since Covid, investors have begun to notice freight – but the cost of financing has risen.

Last month, WFW Global Aviation in the UK advised on the acquisition financing of a 777F for Atlas Air. The company’s global aviation co-head and partner Jim Bell noted that Covid had offered an uptick in the performance of freight and logistics companies.

“The passenger airlines that tended to do reasonably well during Covid were either conveniently placed geographically, had a tendency for shorter-haul, or had prominent freight businesses,” said Mr Bell.

Much of the investment during Covid was focused on freighter aircraft because they made the most economic sense, he said. Also, while much of that investment had steered back towards passenger airlines or divisions, Mr Bell noted that investorsnot previously focused on freight were now familiar with it – and will likely continue to invest.

Dr Scott Levy, CEO of Bluemount Capital (UK), has also noticed a trend in the lending and finance markets, especially for freighters.

“This is not surprising because of the constant issues around containerised transport,” he noted. “We saw this trend starting towards the end of Covid, with some larger wholesalers and retailers resorting to long-term leases of equipment to ensure supply lines remained open. The markets continue to fragment, but there is capital to deploy for good assets.”

Things were made more challenging with rising interest rates, added Mr Bell, but the tide moving to reducing interest rates should stimulate financing opportunities.

“As ever, financing opportunities are dependent upon the specific economics of the investment. The financing of leased freighters where the leases were entered in a low-demand and low-interest rate environment will be more challenging than for freighters with newer leases in a higher-demand and higher-interest rate environment.”

Dr Levy noted: “Last year was painful, but things are improving and financing costs are coming down by as much 1 percentage point. This is quite a significant saving and, if the macro level political environment stabilises, this should continue to improve.”

Unlike passenger aircraft, where a concentration of very large lessors can fund the majority of new aircraft leases, much of the expected replacement and growth in the freighter market is for converted freighters, explained Marc Cho, MD of Halo AirFinance, which last year financed the acquisition of a 737-800SF for Nauru Airlines.

“Financing converted freighters can be challenging for lenders as the feedstock is often over 20 years old and typically outside bank lending policy. This is where a non-bank lenders, such as Halo, can be helpful,” added Mr Cho.

The freighter market experienced unprecedented demand during the pandemic, and has moderated with recovering passenger traffic and reactivation of belly space. Mr Cho said he thought the recent cooling off had reduced confidence in the lending sector especially for converted freighters with operators less than investment grade.

The general consensus for US dollar interest rates is towards a downward trend, according to Mr Cho, who reckons concerns surrounding rising rates, at least in the near term, have dissipated.

He said: “Whether or not interest rates secured by aircraft debt move upward or downward, the interest rate in isolation is only one component of the true cost of secured financing. The loan advance, especially the loan balloon, will determine the true cost to the borrower, as the required equity capital for the acquisition, and the resulting free cash flow from the repayment profile, will drive the resulting return on equity for the borrower.”