New Aircraft Sector Understanding 

Toward balanced global airplane export credit financing

Since 1986, the Large Aircraft Sector Understanding (LASU) had served as the guideline for export credit agencies (ECAs) to extend credit or guarantees to airlines for the acquisition of civil aircraft. Administered by the international Organization for Economic Cooperation and Development (OECD), the LASU, as its name implies, covered only large aircraft, in effect limiting the agreement’s scope to the products of Boeing Commercial Airplanes and Airbus Industrie.

Negotiated by the civil aircraft producing countries—the United States, United Kingdom, Germany, France and Spain—during a period of exceptionally high interest rates, the agreement aimed to ensure balanced competition between aircraft manufacturers by establishing financing guidelines for direct loans or guarantees. The participating countries also observed a “Home Market Rule,” which precludes ECAs headquartered in one aircraft-producing nation from extending credits to airlines based in other aircraft producing nations. Because the LASU did not cover smaller regional jets, ECAs in countries where regional jets are manufactured were not bound by the home market rule.

The OECD had long hoped to extend the understanding to cover aircraft of all sizes and to bring regional jet producing countries—notably Canada and Brazil—into a common framework that would provide for fair and balanced competition among all the world’s aircraft manufacturers, airlines, and ECAs.

On July 30, 2007, a new agreement, the Aircraft Sector Understanding (ASU), was signed, establishing new terms and conditions under which the U.S., EU, Japanese, Brazilian and Canadian ECAs can provide export credit financing relating to aircraft and engines. The new agreement expands coverage to civil aircraft of all sizes and gives more focus to loan guarantees, pricing disparities with commercial financial markets and regulation of ECAs in regional jet producing countries. It also provides a mechanism for reviewing the terms of the agreement. This review is essential to address issues as they arise and facilitate necessary changes to the agreement to keep pace with the dynamics of the global marketplace.

Terms vary across aircraft categories

The new ASU is actually two agreements under one title. It establishes three categories of civil aircraft. Category 1 is defined as “Large Aircraft.” Categories 2 and 3, which include regional jets, business jets, and executive jets, fall under the heading of “Other Aircraft,” and will be referred to as “Regional Jets” in this article. It is worth noting that the Large Aircraft category includes all Airbus and Boeing commercial aircraft, with the exception of the Airbus A318 and Boeing 737-600, which are governed under Category 2. BBJs and A320-family Executive Jets are listed under Category 3.

The agreement sets minimum premiums, not mandatory terms, based on five new risk categories for Large Aircraft and 15 risk categories for Regional Jets. Risk categories are based on an airline’s senior unsecured credit rating. Large Aircraft financing is in the form of loan guarantees, while Regional Jet financing may be in the form of direct lending or loan guarantees.

The basic security package is defined differently for Large Aircraft and Regional Jets. A first priority security interest in the aircraft is required for Large Aircraft categories. Regional Jet security packages may include either a first priority security interest in the aircraft or a sovereign guarantee. The sovereign guarantee package is optional for Large Aircraft, however it is burdened with a separate, higher fee schedule. The maximum repayment term for Large Aircraft is 12 years, with a 3-month repayment interval, while the maximum term for Regional Jets is 15 years (10 years for business and executive jets) with a 6-month interval and an optional 12-month grace period on the principal. The maximum amount to be financed for both categories of aircraft is 85% of the net price.

The ASU, unlike the LASU, defines net price for the purposes of the agreement. For both categories of aircraft, the net price is the invoiced price after discounts, cash credits, and other credits or concessions fairly allocated. The price of Buyer Furnished Equipment is unspecified. The specifics must be documented as required by the relevant ECA and supported by representations from the manufacturer. Another feature of the agreement is the provision for discounts to airlines in nations that ratify the Cape Town Treaty.Discounts for Large Aircraft range from 5% to 20%, based on the risk category of the buyer. The discount for Regional Jets varies from 9% to 12%, but also applies to buyers based in ASU participant countries, regardless of whether those countries ratify the Cape Town Treaty.

A new element to the ASU is a requirement for additional credit or structural enhancements, called risk mitigants, to improve the credit quality of the transaction. Depending upon an airline’s risk classification, risk mitigants are required for Large Aircraft, but risk mitigants are not required for Regional Jets.

To classify airlines into risk categories that establish fee levels and the number of risk mitigants required, ECAs participating in the new ASU will jointly place all airlines on a common rating list maintained by the OECD. The airline rating becomes binding at the time of the ECA commitment. The rating is valid for Large Aircraft until an update is agreed to by the ECAs. Regional Jet risk classifications are regularly updated every six months. Such risk classification quoted to an airline is valid for 12 months and can be extended for another 18 months after an ECA final commitment has been made. If the ECAs cannot agree on a common rating for an airline, they will use an independent rating agency to make a binding determination. This new risk assessment system poses some practical problems. For example, certain ECAs may have more information on a particular airline than others, making it difficult to challenge ratings. In addition, there is currently no procedure for airlines to challenge a risk classification. Additionally, there will be confusion for those airlines purchasing both large and regional aircraft because the validity periods and actual ratings can differ for the two categories.

A dynamic agreement

An important feature of the ASU is that it provides a process for changing the agreement in response to future industry developments and for reviewing issues that arise among signatory nations. Periodic reviews are anticipated to surface and address any need to readjust ASU fees to prevailing commercial market levels or to update the agreement. Additionally, Boeing has requested the Government of the United States to call for an ad hoc review to address several issues that could have adverse effects on airlines.

Changes mandated by the ASU will phase in gradually, as Large Aircraft contracts signed by April 30, 2007, with deliveries through December 31, 2010, are exempt from the terms of the new agreement. For Regional Jets, ECA commitments given by July 1, 2007, with deliveries scheduled through December 31, 2009, are also “grandfathered.”

The terms of the new ASU are more stringent in many respects than those of the previous agreement. Boeing is working with airline customers to ensure an accurate understanding of the ASU and its potential impact, and to make certain that customers can make the best use of opportunities under this new agreement.