Successful aircraft financing requires accurate appraisals, sound evaluation policies, and consideration of market values and borrower creditworthiness.
FREMONT, CA: Aircraft financing can be a lucrative endeavor if managed properly; however, the industry is also rife with fraud, deceit, and misrepresentation of facts. Unverified information and undisclosed details in this complex landscape can lead to erroneous conclusions, evaluations, and decisions. To tackle these challenges, financial institutions must adopt prudent policies and exercise caution when extending aircraft loans.
Traditionally, aircraft financing has focused on closing deals at any cost, a strategy that some banks have paid dearly for. There is a growing trend towards greater caution in the industry, with banks beginning to prioritize a more balanced approach that considers both the aircraft's value and the borrower's creditworthiness. The banks that have found success place equal emphasis on the asset itself and the borrower's financial standing. Those who rely on outdated policies or underestimate the importance of thorough appraisals often encounter regulatory issues and additional work to evade scrutiny.
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A significant gap in aircraft financing policies lies in evaluating and documenting aircraft assets. Surprisingly, during aircraft repossessions, it is common to find little to no appraisal report on file for the aircraft in question. Often, banks lack comprehensive documentation, providing only a simple number on a piece of paper with limited supporting evidence. Justifying the absence of proper appraisal reports by highlighting the strength of the borrower over the asset raises doubts, especially when the borrower's default prompts the need for an appraisal and subsequent asset liquidation.
Real estate transactions adhere to stricter regulations, requiring thorough appraisals for lending purposes. In contrast, aircraft financing sometimes lacks the same level of scrutiny. This discrepancy becomes apparent when evaluating aircraft with significant value, where banks may possess very limited information on file to document the aircraft's contents and condition. Understanding a specific aircraft's market value is critical in decision-making; however, the belief that it can be readily derived from public sources and adjusted accordingly is a myth.
In reality, there is no comprehensive public database of aircraft selling prices, and making the appropriate adjustments involves a complex analysis that considers various parameters. While some evaluators may deem their results close enough, the accuracy of such conclusions can be questionable. Publications that serve as general guides for market values often come with disclaimers, making them inadequate for appraising specific aircraft due to various limitations and inaccuracies.
In most cases, relying solely on a publication as a resource for determining a specific aircraft's market value is not viable due to factors like damage history, missing logbooks, airframe issues, and more. Evaluators must supplement their analysis with other resources or make difficult choices that may lead to incomplete or erroneous conclusions. Another misconception in aircraft financing pertains to sufficient cushion in the loan-to-value (LTV) percentage to protect the bank in the event of repossession. Based on unreliable publications or third-party information connected to the deal, the initial evaluation approach often leads banks to overextend on loans.
