Boeing sees surge in Boutique plane funding following Norwegian Air Shuttle deal

Boeing Co. predicts a jump in the proportion of aircraft financed through private placements after Norwegian Air Shuttle last week funded the purchase of five of the planemaker’s 737-800 jets using such a deal.

Placements will complement so-called Enhanced Equipment Trust Certificates, or EETCs, by providing carriers with tailored solutions for smaller batches of planes at economics similar to larger transactions, according to Kostya Zolotusky, managing director of Boeing Capital Corp., who said the market could be worth several billion dollars a year.

The Norwegian Air deal, which closed on Jan. 16, saw the discount carrier turn to an unspecified U.S. insurance company to pay for single-aisle aircraft worth about $450 million at list price, with boutique investment group Aviation Finance Co. Ltd. facilitating the borrowing.
 
“There are far more airlines wanting two, three, five plane deals, with few big enough for billion-dollar EETC-size deals,” Zolotusky said in an interview at the Airline Economics Growth Frontiers conference in Dublin. “We have a lot of institutional investors that like EETCs but don’t get enough.”
 
EETCs let airlines issue investment-grade debt at lower yields and transfer the burden of financing orders to the bond market. Purchases that employ such instruments -- in which debt is backed by the jets on which investors have a claim if the carries goes bankrupt -- are generally worth around $1 billion and involve multiple parties providing the funding.

BA Transaction

A typical deal saw British Airways owner IAG SA (IAG) sell $927 million of EETCs in June backed by six Boeing 787s, two 777s and six Airbus Group (AIR) A320s. Still, such sales are frequently three or four times oversubscribed, leaving investors with smaller chunks than they would have liked, Zolotusky said.
 
Analysis also suggests EETC packages require a value of no less than $600 million, making them viable for only 15 airlines, plus or minus five, outside the U.S., the executive said.
 
While Boeing estimates that more than 33,000 commercial aircraft will be required over the next two decades, it reckons fewer than 20 percent will be ordered by U.S. carriers as growth in travel surges fastest in emerging economies.
 
Capital markets -- including EETCs and private placements -- will provide about 22 percent of the anticipated $112 billion in financing required for aircraft purchases this year, up from 14 percent in 2013, according to Boeing.
 
They’ll join bank debt and cash as the primary vehicle, replacing state-backed export credit that’s forecast to shrink to 18 percent of funding from almost one-third when other lending dried up during the financial crisis, it estimates.

 (Andrea Rothman - Bloomberg)