4/11/2024 0 Comments Leveraged loans arrangement fees![]() ![]() An example of a leveraged loan in the aircraft space would be a buy-out of an operating lessor by a private equity firm. An emergent secondary market for leveraged loans has improved the liquidity profile for such instruments. Typical contractual maturity for a leveraged loan is up to eight years but the borrower often chooses to exercise an early prepayment option. Leveraged loans are typically tranched, with the senior secured loan(s) benefitting from lower leverage and enhanced security provisions compared to the investor protections offered to junior secured (“second lien” or “mezzanine”) tranches. Deal size varies but can exceed $1 billion, transactions are normally syndicated by investment banks among a group of lenders. Leveraged loans are sub-investment grade instruments issued by large highly leveraged companies to finance mergers, acquisitions and leveraged buy-outs (LBOs) (e.g. Unsecured borrowing by an airline is an example of corporate direct lending. Corporate direct lending is more likely to be arranged directly with a borrower, rather than syndicated or marketed by an intermediary. The loan size may vary anywhere from $25 million to $75 million, even though bigger sized deals may be arranged. ![]() Such companies may have annual revenues of up to $500 million and be focused on a given geography or market sector and lack diversification. They are often issued on a senior unsecured basis, which is protected through strong covenants.Ĭorporate direct lending is normally extended on a bilateral basis to mature, low leverage yet sub-investment grade mid-sized companies. ![]() With maturities of up to 12 years, private placements are designed to be held to maturity and are therefore illiquid. ![]() Investors participate in negotiating the deal structure and are expected to underwrite their share of the placement which may contain multiple tranches of different tenors and sizes. In general, private placements are unlisted debt securities-structured as bonds, loans or notes-issued by mature, often privately owned, investment grade or equivalent corporates to a limited group of investors through an agent bank. Private placements have been relied on repeatedly by operating lessors such as AerCap and aircraft-backed funds such as Apollo Aviation. Here are the major characteristics in more detail: Some of private debt instruments are illiquid, while a limited secondary market does exist for others. Private lending for aviation assets is usually arranged through a few principal formats: leveraged loans, corporate direct lending, leveraged direct lending and private placements.Ĭorporate borrowers will choose to use these format depending on their size, place on the creditworthiness spectrum and pricing/tenor requirements. An issuance in the public markets is normally subject to minimum amounts and significant regulatory mandated disclosures which may make it less attractive, or prohibitively expensive, for companies with smaller capital-raising requirements. The trade-off for flexibility is normally stronger investor protections and willingness to accept closer investor monitoring on an ongoing basis. Nearly all private lending structures are arranged, and structured, by banks and then placed with investors. The primary appeal of a private debt instrument to an issuer is the confidentiality of the transaction and the flexibility it affords in regards to terms and conditions. Moreover these private structure are often structurally enhanced transactions with significant downside/recovery protections. Typical private lending structures continue to provide investors with access to attractive returns on a historically well-performing asset class. Investors, on the other hand, are hungry for private deals to ensure they gain exposure to aircraft assets. The benefit of a private deal for aviation borrowers is that they can take advantage of tighter margin spreads, opt for smaller deals and ensure more flexibility in the terms of the loan. The Ishka View is that private placements will likely retain its appeal to both issuers and new and existing investors. Airlines and operating lessors have been able to tap into institutional investors’ significant appetite for yield and US denominated hard assets by offering EETC and ABS-type issuances. With the advent of complex financial instruments and bespoke structuring over the past 20 years, borrowers have been able to offer institutional investors a way to invest in debt arranged through private and confidential transactions.įinanciers confirm that there has been a dramatic increase in privately placed debt structures in aviation over the last three years. In older and simpler days, a business seeking debt financing could get a bank loan or, if it was a large corporate, tap capital markets with a bond issuance. Investor’s guide: Private lending in aircraft finance ![]()
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