The term aviation finance refers to the provision of capital to airlines and leasing companies so that they can purchase (or refinance) commercial aircraft. Capital can be in the form of debt or equity. Given insurers’ preference for fixed cash flows, this paper focuses on aviation debt.
A sustained low-yield environment and demanding regulatory requirements have placed considerable pressure on insurance companies and pension schemes over the last few years. In response, investors have looked to less liquid, alternative investments that offer a higher risk adjusted return. Increased investor appetite has led to a reduced yield on more “traditional” loans and a search for more unconventional opportunities. This paper looks at one such opportunity: aviation finance.
There is considerable demand for finance in the aviation space, and institutions such as insurance companies and pension schemes can play an important role in meeting this need. Funding is provided in various forms, from traditional shares and loans to aviation specialist products such as enhanced equipment trust certificates. The characteristics and investor rewards vary widely across different products. We believe that some of these characteristics may appeal to institutional investors — in particular, the opportunity to access investment grade debt collateralized on a long-lasting asset. However, there are also a number of operational and analytical challenges that can either be performed in-house or outsourced to external parties. These include the need for sector-specific expertise, the complexity around asset valuations under various regulatory regimes, and also the potential requirement for system developments.
This paper begins by exploring the aviation finance landscape, including why there is a demand for finance, who has met this demand historically and what forms financing can take. The paper continues to consider the investment opportunity from the point of view of an institutional investor and asks: why would an insurer or pension scheme want to invest in aviation finance, and what are the challenges of doing so?
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