Thursday, July 23, 2009
Questions Loan Underwriters Ask - Part 1
Credit Application and the information contained therein:
1. Who is the client? The credit application starts with a brief overview to give a lender an idea of who the client is, where they live, how long they've lived there, and often times a snapshot of their aviation experience. This provides basic info on how to reach the client, and gives the lender a general sense of who they are considering lending to.
2. How is the aircraft being registered? The Application reflects the structure of the transaction requested. For example, if a husband and wife are co-borrowers for a loan, or if the aircraft is to be held in a single-purpose entity for tax or liability purposes, it will be outlined in the Application. The Application also identifies the owners of the company to give a lender a sense for who is authorized to sign on behalf of the company if a guarantee is involved.
3. How does the applicant make their money? The Application identifies the customer's occupation - their specific title along with the type of work they do. For example, an applicant may be the President of the company but a lender will want to know what type of work the company engages in. In addition, the lender is looking at how long the applicant has worked for this employer and/ or in this specific profession. This provides a sense of job and income stability. It's not uncommon for a lender to request more information on the company at this point, to get a better sense of the profession, industry and evolving picture of the applicant.
4. What type of financing is being requested? An overview of the financing request is included in the Application - what is the Applicant buying and how much are they looking to finance? This includes the specific figures (purchase price, down-payment, loan amount), as well as an overview of the type of aircraft (year, make, model), and the intended utilization of the airplane. In the case of a pre-approval, much of the aircraft-specific information is left empty, but a lender will often want a general sense of what the client's buying within the outline of a given purchase price and loan amount.
5. What is the client's personal financial situation? A short personal financial statement gives a general overview of the client's assets and liabilities. This is usually provided through a simple form with the application, or an applicant may attach their own personal financial statement. Finally, some basic questions that are often not answered elsewhere are included on a Credit Application. These questions may include citizenship, any significant derogatory credit issues (i.e. bankruptcy) that may not be included on a credit bureau report if too old, and any contingent liabilities, alimony or child support payments (often not included or accurately reflected on tax returns).
Questions Loan Underwriters Ask - Part 2
In this article, we'll discuss an applicant's Credit Report:
1. What is the client's Credit Score? Each lender has a set of lending policies/ credit policies within which they must operate. Often times, this credit policy outlines the minimum credit score acceptable to the financial institution. The average credit score in the US varies by credit bureau, but currently ranges from 692 to 723. In the late 1990s, the FDIC (the auditor of federally-insured banks) issued a memorandum identifying a credit score of 660 as a break-point between risky and non-risky borrowers. Lenders were still able to lend to borrowers with lower scores, but needed to provide documentation and a good explanation when the loan was written below this level. The same situation applies today (although lenders are a bit less likely to make exceptions), but a credit score of 700+ is what most aircraft underwriters are looking for in today's economy.
While mortgage and credit card companies may vary their rates depending on the credit score, you will not often see a variance in rate offerings based on a clients' credit score with an aircraft loan, as it is a very niche market and all borrowers are typically required to be A-credit quality.
2. How does the applicant manage their credit (payments)? The most important part of the credit report is information about the customers' payment history, as 35% of an applicant's "credit score" is driven from payment history. Do they pay their obligations on time? Historically, have they shown they pay their debts within the terms as agreed with the creditor? The credit report gives a 7-year payment history and ideally, underwriters are looking for minimal delinquencies. Specifically, lenders are looking at the most recent two years' payment history, as this has the greatest impact on the credit profile. If there are more than a hand-full of recent late payments, lenders worry about the reliability of the applicant regardless of their current income level or job title.
The credit report also reveals other significant financial information regarding the applicant's credit history - tax liens, legal judgments, and bankruptcies. Even if the credit score is satisfactory, a bankruptcy, unpaid tax lien, unresolved judgment, or other large blemish may disqualify the applicant.
3. What is the debt-load and what type of debt do they have? The 2nd most important element of the credit report (30% of the score) revolves around how the applicant manages their credit - the amounts owed relative to the credit extended. This may include the total amount of credit extended and the type of accounts. Since the credit report breaks down each obligation separately, it gives a good sense of the types of debt the customer has. Mortgage? Car? Home equity line? Revolving credit card debt? Credit is typically organized into real estate, installment, or revolving debt, and analyzed in these three categories. Generally, keeping revolving balances low (i.e. credit card debt) relative to the total balances available will improve your score. The underwriter will also take debt-load into account for the analysis of the customer's available cash-flow for the purchase.
4. What experience does the client have with managing credit? Do they have comparable credit? Since aircraft are generally an expensive purchase, underwriters use the credit report to get comfortable with the customer's ability to handle this level of debt. Specifically, has the client managed a debt at or above the same size as that requested for the aircraft loan? In most cases, this is covered with the client's home ownership, as it is often the largest debt held by an applicant, and usually exceeds the loan amount. In addition, a lender is looking at general credit - length of time with managing the specific credit accounts - which can comprise up to 15% of an applicant's overall credit profile. In a nutshell however, it may be more difficult for an underwriter to approve a loan without a history of comparable credit.
5. Has the Applicant been attempting to secure a lot of new credit recently? There are 3 credit bureaus (Equifax, Experian, and Trans Union). Historically, local bankers would only report to their local credit bureau, or just one of the bureaus, which is why a lender is more apt today to pull all three bureaus to get a complete credit history. Each of the 3 bureaus address inquiries differently, but generally the bureaus feel that a client attempting to secure a lot of new credit - and varying types - at the same time presents a "risky" credit profile. As backup, FICO reports that "statistically, people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports". However, exceptions are made for clients rate-shopping within a 30-day window for the same types of credit (FICO is currently extending this to 45 days).
End
Wednesday, July 1, 2009
A Sense of Where We Are
Activity
Here at AirFleet, we can attest to an increase in activity in prospects shopping for aircraft. During the past four weeks we visited over 55 airports around the country, and the feedback we received universally from aircraft sales professionals was that activity has started increasing, and in some cases above 2008 activity levels year-to-date.
But don't just take our word for it, here are some comments from well-respected sources in our industry to support what we've been seeing and hearing recently. According to Vref (the Aircraft Value Reference) in their most recent quarterly newsletter, "activity us up almost across the board". In addition to this, Controller Magazine reflects a 3.4% decrease in for-sale inventory over the past 60 days. Perhaps the most pertinent comments came from UBS in their Business Jet Monthly report published last week - noting that their "straight up measure of absolute business conditions increased for the first time in over a year". In their survey of customer interest, USB reported a "42% increase in customer interest" in the past month.
Aircraft Values
According to UBS in their Business Jet Monthly report, inventories remain at record high levels but "finally look to be stabilizing". With respect to values, "despite stabilizing inventory levels, used pricing continues to fall, with average asking prices for most young aircraft models 30-40% below peak levels and off another 3-4% over the past month". However, on the lighter aircraft side, Vref reports in their June newsletter that there was "no change in the Vref Light Single Index" - reflecting that "most light piston singles have stabilized" in value.
Interest Rates
Overall, underlying rates have stopped their downward slide and have actually crept up a good bit in the past 3 months (they bottomed-out around mid-March). As of June 30th, 3-year treasury rates had crept up a half-point since March 18th, while 7-year treasury rates had crept up over a full point over the same period (although they have both dropped from higher peaks earlier in June). Consider this when evaluating an aircraft loan - according to Bankrate.com, interest rates for a new car, unaided by a manufacturer- or dealer-sponsored rate buydown, were at 7.29% for 4 years last week (a similar used car loan was at 7.89% for 4 years). Aircraft loan interest rates comparatively start in the low- to mid- 6's today and can be fixed for up to 20 years.
Financing Appetite
Bank appetite varies on a number of items, not the least of which includes current default activity. If a lender is engaged in recovering assets from current note-holders, their focus may not concern ongoing expansion of their loan portfolio. From a practical standpoint, if the Titanic is sinking, the Captain isn't thinking about how to design a better boat, he's focused on preserving the ship and the people in it. With a decrease in the current level of defaults, and a growing desire in the banking community to start booking loans again, the lending system is starting to repair itself. As the market starts to heal and the banks start to heal, appetite will continue to return.
Reflective of this, UBS reported "improved financing availability" compared with conditions in March in their Business Jet Monthly. This month financing availability (worldwide) moved into the positive territory for the first time this year, a clear sign that appetite is returning to the finance market.
Although the dust hasn't completely cleared, we are seeing things start to shift and are optimistic that with increased confidence and buyer's realizing the great market they find themselves in today, conditions are starting to improve.
Tuesday, June 2, 2009
The Variable Rate Conundrum
1. If a client is considering a variable rate, the client assumes the additional rate risk normally reserved for the bank. The risk stems from rate market instability. As we all know, the economy is subject to large swings and what may be a low PRIME rate today (also referred to as New York Prime) could increase 2 or 3-fold in a relatively short period. As an example, the last time our economy was in somewhat similar shape, rates increased from 8% to 20% in a period of 27 months. Although no one can guess where rates will go in the upcoming months and years, customers need to balance their short term gains over the risk of longer term rate increases.
2. Variable rates offer a low payment today, but there's no magic here - with a variable rate product the rate risk also shifts the risk of cash flow to the borrower. Although fixed rates may be slightly higher in the short term, comparatively they are still well below the historical average of 9.25%. Given what we've seen with rate volatility, a customer should ask, "Would I finance a 30-year mortgage on a variable rate, even if it was 2% below what a full-term fixed rate today would be?" Many would argue that these are the programs that contributed to our current Real Estate crisis. In some cases, the variable rate will make sense (i.e. short-term borrowing) ... but in many cases, and in light of recent news, customers may want to place a higher value on the peace of mind that comes with a low fixed-interest rate product.
3. The best time to secure a variable rate product is in a decreasing rate market. As rates have for the most part bottomed-out, you may be safer with a fixed-rate alternative today, locking-in the currently low longer-term rates. Variable rates are likely only going up from here, and history shows us that many companies who locked-in variable rate loan structures in the late 1970s were out of business by the early 1980s when their rates were in the 20%'s - the last time a parallel can be drawn on the state of the economy.
Finally, the one caveat we would mention is that if you are accustomed to short-term borrowing this type of structure may make sense for you. For example, in measuring the economics of only owning the asset for a year, you may come out ahead with a short-term variable rate product.
Recalculating (Today's Finance Market)
Therein lies the state of aircraft financing today. The rate market and bank appetites are constantly recalculating, and we can either rely on our own business experience and the reality of our individual situations to see the way forward, or listen to the "chirping" we're constantly hearing that is eroding our confidence.
To clear up current rumors, below are 4 tips for keeping your sanity today:
1. We have money!!! There's plenty of money available to write aircraft loans. Yes, there is a shortage of funds available for financing in some segments of the market, and a few aircraft finance sources have scaled-back or shut-down this year. But the fact remains that there is a strong network of finance institutions (including ours of course!) that have capital ready and available to lend today.
2. Rate Turbulence: Interest rates are very fluid right now. Clients can lock an interest rate today for up to 30 days - so if the rate increases, the client is protected for up to 30 days after approval. What happens if the rates drop dramatically after the client takes delivery of their airplane? No problem - refinance at the new lower rates, in most cases without a pre-pay fee.
3. Stay Smart: Financing is a good financial decision especially in today's market. Aircraft financing is more popular right now given the losses investment portfolios are sustaining. Those losses aren't realized until a client cashes-out of the stocks, so ride it out and finance your aircraft purchase.
4. Don't Panic! Financing is available for most of the market's demands. Historically, aircraft purchasers are higher net-worth and A-credit buyers. Financing for this historical buyer remains readily available today. The interest rates are still exceptionally low compared to historical averages, and business buyers find 2009 to be an incredible tax environment. So remain cool, don't listen to the chirping, and trust your instincts to get you into the left seat.
Wednesday, May 27, 2009
Lending Appetite
Now fast-forward to the banking and lending community.
Appetite in banking may depend on a bank's capacity to lend, often a function of deposits and available liquidity. For example, if a bank has seen a decrease in depositors, they may also have a corresponding lack of loan appetite. Couple with this the actual source of funds a lender may use for loan offerings. A lender needs a source of funds for heavier borrowing, and if there is no liquidity in this market (i.e. if a lender "sells" their loans to Wall Street in packets), lending capability is restricted. If the neighbor's daughter has a lemonade stand but cannot get her hands on a steady supply of lemons, her capability to offer her product is likewise hindered.
A bank's appetite may also depend on it's current financial strength (profitability) and rating by it's auditors, and the recent reviews by same auditors. If the Fed audits a bank and clamps down on their lending practices, the bank will focus more internally on it's policies and procedures, and in booking loans consistent with the tighter standards. But as a result, tighter lending practices will be forced on the banks by the Fed who are in part auditing to ensure a strong financial system, and they're the same group trying to push liquidity into the market to encourage more lending.
Bank appetite may also vary depending on current default activity. If a lender is engaged in recovering assets from current note-holders, their focus may not concern ongoing expansion of their loan portfolio. From a practical standpoint, if the Titanic is sinking, the Captain isn't thinking about how to design a better boat, he's focused on preserving the ship and the people in it. If banks can quantify their losses through defaults and take the charges/ write-offs, they will bottom-out.
But new loan volume will at some point become important to the lending community again. Loans eventually go away, whether through refinancing, sale of an asset (and payoff of corresponding debt), maturity of the debt - full payoff, or through the default and resultant write-off. But at some point, loan portfolios will start to shrink and a bank will recognize the need to generate new loan volume, thereby resuming the hunt for income producing loans.
So we have sifted through the elements comprising appetite that will create a more favorable lending environment today and a return to loan growth. With a decrease in the current level of defaults, and a growing desire to start booking loans again, the system starts to clean itself, resulting in increasing profitability of the banks. As the market starts to heal and the banks start to heal, appetite will return.
Digging in Kansas
Overall, the weather did not cooperate (very windy and stormy, and the last day was actually cold with the wind). Paired with a somewhat removed location - a bit of a drive from Kansas City, and a poor economy, and the result was very light attendance. However, there were a few flashes of quality and optimism in the group.
Cirrus - hoping to sell another 40 aircraft in May, a repeat of the 40 aircraft sold in April? Somehow, the folks up in Duluth are figuring out how to sell airplanes in a market where there appears to be very little activity.
Gobosh - at a show with little "Sport" presence, Gobosh seemed busy throughout the event, and ran demos constantly. It seemed there was almost always someone at the Gobosh booth chatting it up with the Gobosh reps.
A couple of the resale, or late-model "used" aircraft sales folks reported nice activity starting around March. Although it's down for the year, they are still selling aircraft, and perhaps today's aircraft buyer is finding pretty attractive offerings with late-model used aircraft, especially for sellers who have been negatively impacted by our slumping economy and need to "blow the airplane out the door".
Sunday, April 26, 2009
Sun-n-Fun 2009 Recap
The weather was pretty phenomenal, albeit warm (near 90 a few days), but with no rain and lower humidity, it wasn't bad for a late-April dated show.
Piper announced G1000 in their Meridian - a great airplane just got better. The G1000 includes a 15" Multi-Function display (MFD) in the center of the console, with two 10.4 inch displays on each side. The MFD in the center continuously displays engine data, allowing the user to scroll through other screens.
Cirrus discontinued (or postponed) their LSA at Sun N Fun, but had heavy traffic throughout the event. Their sales groups seem to be clicking on all cylinders with above-normal activity.
The Mooney booth was modest given their well publicized factory shutdown, but was very well-traffic'd and displayed a new Mooney Acclaim with an awesome paint scheme - a checkerboard pattern on the nose cowl, wings and tail that represented Mooney's first-place finish in the speed contest.
Cessna had a nice and well-traffic'd booth. It seems like they didn't spare the expenses that were spared by other OEMs. They had their full range of products, and overall a nice and busy display.
Diamond's display highlighted the lycoming-powered DA42 Twin-Star (a long time coming and an engine configuration many are really looking foward to). Diamond had a better booth this year insofar as last year's mud bog had time to dry-out, and their attendance seemend to reflect better this year in part due to the weather. Diamond has a complex situation with their Twin-Star's ongoing development, along with the DA50 and DJet product development, so the booth reflected the "in process" nature of their fleet transformation.
Tiger had a suprising presence at the show - an old aircraft with a proven track record seems to have new legs (or new gear I suppose). They reported that they'll be restarting production in the next 2 months, then hoping to deliver their first aircraft off the new production line in Valdosta, Georgia in late 2009. Amazing to see them back again!
Otherwise, Beechcraft had the nicest booth I've seen them front in nearly a dozen years. They have a different sales approach in 2009 given the dispensation of their dealer network at 2008 year-end, so it's welcome to see the step-up in presentation.
CubCrafters had a nice show- with their new Sport Cub "sporting" a wonderful handcrafted paint scheme with flames along the cowl and airframe - looked awesome. Other LSA OEMs had nice booths as well - Legend Cub with a presentation "font and center" in clear sight of the show, and Flight Design with an always professional and polished presentation. Evektor had a stepped-up presence as well with their new management (the 3rd group in as many years) hoping to bring the aircraft back to the prominence it had when the LSA was first launched a few years ago.