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The Bank Liquidity Crisis and Aircraft Finance

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The Bank Liquidity Crisis and Aircraft Finance: A Sector Review
By Ronald Scheinberg
Fewer lenders, higher pricing, yield protection among results of the worldwide liquidity crisis. The liquidity crisis in world financial markets precipitated in fall 2008 by, among other things, the collapse of Lehman Brothers, has continued unabated. This crisis has affected the extension of bank credit to every industry, with banks reluctant to make loans so as to preserve their capital, especially in anticipation of deteriorating performance of existing customers/borrowers in the face of the worldwide recession. One industrial sector particularly hard hit by the crisis is the financing and refinancing of commercial aircraft for both airlines and aircraft lessors. In this article, I review the myriad effects that the liquidity crisis has had on that sector, which may help shed some light on the crisis as a whole. The major manufacturers of commercial aircraft, Airbus, Boeing, Bombardier and Embraer, have been producing between 937 and 1,152 aircraft every year over the last five years. Commercial aircraft are rather expensive capital goods, with list prices ranging from $32 million for a 70-seat Embraer ERJ¬170 regional jet to almost $340 million for a 525-seat Airbus A380 superjumbo jet. It is estimated that some $70 billion of new commercial aircraft will be delivered in 2009, and many billions of dollars of other aircraft will need to be refinanced. In light of their large expense, commercial aircraft are seldom paid for with cash. Historically, they have been fi ¬nanced on delivery by means of bank loans, capital markets debt, operating leases and manufacturer support.1 In the current market environment, access to the capital markets (such as EETCs2) is limited,3 and the operating lessors who supply lease fi nanc¬ing are necessarily looking at the remaining sources of

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