After climbing out of the 2008/09 recession and enjoying several good years, aircraft manufacturers have lately found it hard to sell factory-new jets without deep discounts.

A major reason has been preowned values that in some cases have plummeted 20% or more in the last year—a decline that has been variously blamed on an oversupply of preowned aircraft for sale, stagnating fuel prices, global economic malaise, Brexit, and a troubling US presidential election.

Who wants to buy a factory-new aircraft for $40 million that will be worth $32 million a year later?

Not your bank. Even though the creditworthiness of the borrower primarily drives business jet finance, the value of the collateral remains important, especially in lease financing, where the bank often ends up having to sell the aircraft at the end of the lease. Faced with declining values, banks have been re-evaluating their residual assumptions, which makes financing more difficult and expensive, which makes jets harder to sell, which makes values drop, which makes banks again re-evaluate their residual assumptions.

Future jet values

The crystal ball for forecasting future jet values has clouded up so much that some banks are calling residual values “impossible to forecast” and have pulled back on tax leases, often pushing synthetic leases (which put residual risk on the lessee) instead.

Some institutions, such as Norlease, have pulled out of aircraft leases altogether. Jet loans are being affected as well. The “rule of 25” (the age of the aircraft plus amortization) has lately shrunk to the “rule of 20,” and in some places, the “rule of 18 or even less,” barring unusual circumstances.

PNC, which is known for non-recourse aircraft financings as well as limited-recourse and financial-disclosure aircraft loans, reports another good year. Wayne Starling, who heads up the bank’s aircraft finance team, says that PNC clients who are interested in buying a replacement aircraft have been taking advantage of the bank’s 50% non-recourse and limited-financial-disclosure products to finance the down payment on the purchase on a short-term basis.

Meanwhile, it has been a turbulent time for the financial institutions themselves. And on the regulatory front, implementation of the Basel III standards continues apace.

Among other things, the standards effectively encourage banks to finance aircraft for their existing customers. “Know your customer” requirements arguably have a similar impact. Though such institutions as Bank of America and BB&T continue to finance business jet acquisitions for anyone who meets their requirements, other banks restrict aircraft financing to existing customers, or in some cases, hot prospects.

Lease accounting challenges

Moreover, in February 2016, the Accounting Standards Board finally released long-expected final changes in lease accounting standards. Public entities must comply with the standards for fiscal years beginning after December 15, 2018; everyone else has another year.

Under the new rules, a leased aircraft will be reflected on the balance sheet as the net present value of a stream of lease payments (and other financing costs) as an intangible “right to use” asset, with a corresponding liability. The new “asset” should generally have a value significantly less than the aircraft’s fair market value, but its presence on the balance sheet makes it more difficult to disguise the fact that it is being leased.

Business jet financing terms remain relatively attractive, but costs have been inching upward.

That’s certainly true of lease rates, which have been affected by the unusually high market depreciation of business jets. Lessees can expect to pay a monthly lease rate of 0.8 to 0.9% of the aircraft’s value, but rates can be higher depending on the lessee, the aircraft, and the lease term. Banks have little appetite for short-term leases and may require a significant “refundable security deposit” no matter what the term is.

The best leasing deals may be available from financial institutions carrying aircraft that have “come in” off lease; the lessor isn’t eager to recognize a loss and would prefer to lease the aircraft for a while.

Floating interest rates for business jet loans average about 200 basis points over 30-day Libor, with fixed rates in the 3 to 4% range. A 10% down payment is still typical, with the “rule of 20” actively enforced.

High-net-worth individuals

For the best terms, aircraft buyers should start with their own banks. This is especially true for high-net-worth individuals, who may find the best aircraft finance deal at their private bank, which is already managing investments and securities and financing other assets, like homes and boats.

Of course, the down side is that the aircraft loan may then be cross-collateralized with the same homes and boats. Incidentally, some commercial lenders now refrain from financing jets for high-net-worth individuals or require that the jet be employed chiefly in a trade or business.

What is the impact on the buy-sell transaction of the buyer financing the purchase?

For one thing, it makes the closing more complex. It adds a party, one whose participation and approval of everything is obviously crucial, and additional closing documents which are often not finalized until a few minutes before the closing call. The bank generally conducts an appraisal of the aircraft to verify that the purchase price is appropriate; I’ve never seen a business jet flunk one of those, but it’s possible.

As further due diligence, the bank may also require that it receive a copy of the pre-buy report.

Such reports aren’t exactly easy reading, and I’m not aware of an occasion when the bank has done anything with the report except put it in a file; no banker has ever called me to ask why a particular service bulletin wasn’t complied with. Paying off an existing lien or buying an aircraft that is to be deregistered from a foreign registry prior to closing can be more complicated when bank financing is involved, depending on the bank’s requirements.

Sellers outnumber buyers

All of this can make financing sound like a bad idea, especially for the seller, who has nothing to gain. Or does he?

Aviation attorney Amanda Applegate at Aerlex Law Group points out that, in a market like the current one, where sellers outnumber buyers, financing may be a decided plus for the seller.

That’s especially true if it makes the difference between a sale and the aircraft languishing for additional months in a falling market. She suggests that buyers intent on financing an aircraft purchase may even want to include a financing contingency in their letter of intent and/or purchase agreement, a step that admittedly is far from customary.

This is a turbulent time in business jet finance. We all miss the days when banks fought hard to finance business jets for all comers. But it could be worse: financing is cheap and available and still beats tying up your cash in an aircraft.

Jeff Wieand is a senior vice president at Boston JetSearch and a member of the National Business Aviation Association’s Tax Committee.