Morrow further adds that the current interest rate environment actually benefits alternative lenders in the aviation space: “Today’s interest rate environment is certainly creating a lot of dislocation and uncertainty in this market,” she says. “There is also the disconnect between the movement in interest rates and the expectations on the aircraft trading side and lease rates. I do think this will be favourable to alternative lenders as the more traditional lenders move to other markets in this interest rate environment.”
Margins on secured debt are rising, albeit slowly due to the still competitive environment, but higher interest rates are also causing a higher cost of funds eliminating gains for lenders. Although price is still a major factor for borrowers awarding mandates, volatility in many funding markets is placing more importance on other factors – namely certainty of execution.
For Morrow, borrowers will decide on which debt products for aircraft financing by the lowest price, but she adds that “there are other considerations that might now carry more weight given the current state of play, for example, execution risk, term, repayment profile, and refinancing risk”.
Morrow reports that clients are most concerned by the higher cost of borrowing but also the fact that asset values have not yet adjusted to the current market conditions, with secondary aircraft trades still being priced based on past conditions with sellers holding on to now unrealistic expectations. She says: “There is an imbalance of the speed of movement in the debt market adjusting to the new environment versus the speed on the equity/trading side”.