Hot Topics in Finance and Leasing

ROTOR Staff 2018 Summer

Industry Experts Answer Your Questions

Q. Why are hourly-cost maintenance programs (HCMPs) often required when financing or leasing a helicopter?

An HCMP, often referred to as “paying by the hour,” is a program that allows operators to fulfill maintenance requirements, stay on top of costs, and reduce risks, regardless of whether the helicopter is financed or leased.

An operator enters an HCMP program with either the manufacturer or an independent entity and pays a flat hourly rate per flight hour to have a guaranteed percentage of all qualified scheduled and unscheduled maintenance costs covered. The client reports flight hours either monthly or at agreed-upon intervals and pays the subsequent flight-hour invoice while the HCMP covers the agreed-upon percentage of maintenance costs for the term.

Finance and leasing entities usually mandate HCMP programs because of the strategic and financial benefits to their customers and the overall reduced risk of the investment. In addition to streamlining the maintenance budget to a flat hourly rate per flight hour, HCMPs also maintain the residual value of the helicopter. Valuations of aircraft with HCMPs are higher than valuations of aircraft without them.

Furthermore, HCMPs also protect both operators and lenders/lessors from certain financial risks because the necessary funds for future maintenance are accrued in real time. In addition, the risk of qualified unscheduled failures is borne by the HCMP service provider, who may also assume the risk of some other variable costs, such as mandatory service bulletins and airworthiness directives.

The lending and leasing communities usually mandate the use of HCMPs to combat value loss and mitigate the financial risk of maintenance costs.

– Kyle Sale, director of business development for Jet Support Services, Inc. (JSSI)

Q. How are aircraft registration structures such as owner trusts used to facilitate financings of and investments in aircraft leasing companies?.

Helicopter leasing companies and aircraft lenders and investors recognize the value of having aircraft on the US registry and are familiar with the benefits of using owner trusts. Even if aircraft are based outside the United States, N-registered aircraft generally maintain their value better than aircraft registered elsewhere, and when the leasing company is ready to dispose of the helicopter, it is already registered in the United States, where the market for aircraft sales is strong.

Also, lenders often prefer the US registry because of the well-established US judicial system and legal precedents regarding the enforcement of security interests. Finally, when managing fleets of aircraft, uniformity in registration avoids the need to keep track of and conform to different sets of rules.

Some leasing companies have foreign ownership or control issues and may use an owner trust to comply with the US registration requirements. For example, a leasing company may have more than 25 percent of its interests owned by non-US citizens or have a controlling party such as a president who is not a citizen. Leasing companies may prefer to use owner trusts for other reasons too, such as enabling easy transfers of beneficial interests to accommodate a future business restructuring.

Owner trusts are often integrated with complex finance structures for other reasons. A trust is sometimes used as a party to a lease or sublease, and they may be used to protect the interests of particular lenders or investors in the event of a default or as a conduit for payments.

– Jeff Towers, vice president and general counsel at TVPX

Q. In contrast to four to five years ago, we no longer hear about big lending transactions in the helicopter space. Are lenders doing new helicopter deals?

True, there was a flurry of capital markets activity in 2013–14, as new helicopter lessors were formed. Then along came the downturn in the energy markets, with oil prices plummeting and, in at least a couple of cases, ensuing bankruptcies of helicopter operators. This had a clear impact on lessors with exposure in the offshore market.

On the supply side, the current market is “issuer friendly” — that is, there is a significant supply of capital chasing all sorts of deals. However, helicopters have never had universal appeal, so this supply of capital does not uniformly impact all helicopters. Additionally, the supply of capital is far from monolithic. In fact, it’s more of a patchwork: large and small banks, nonbank lenders, other yield-driven capital pools, and a full range of appetites beyond.

On the demand side, helicopter transactions involving air medical, law enforcement, or onshore utility operations that utilize light-single, twin, and possibly medium helicopters are finding receptive capital markets. Credit quality continues to be an issue, however, and this is why we need lessors. Many operators need operating leases as they build their businesses, one contract at a time.

As long as lenders are willing to provide capital to lessors, and lessors can get returns attractive enough to keep equity investors interested, I predict the following: (1)Lease rates will have to adjust to the new reality of residual values, which for the most part were overstated versus current market values; and (2) The resulting increase in lease rate factors and, most likely, monthly payments will continue to bring needed capital into the market.

Clearly, operators need to be able to make money and to service higher lease rates with existing cash flows. This will likely contribute to helicopters remaining an inflationary asset class, as it has historically been. In the short run, this should be good for the OEMs, but there is no way for the capital markets to address the underbanked or unbanked segments of the market if lessors cannot profitably serve them.

Owners are supposed to be compensated for the risk of ownership. It would appear that the expected return was overestimated and the downside risk was under­estimated. Stay tuned!

– Joe Hawke, chief executive officer of Uniflight Global

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