Jim Simpson discusses aircraft financing provided by First Republic Bank to the Business Aircraft community. Areas covered include:
Jim Simpson, Senior Managing Director, First Republic Bank – Jim commenced flying aircraft in high school. He came to First Republic Bank in 2006 from Bank of American where he provided financing for corporate, regional, and major domestic and international airlines that incorporated financing structures for Foreign Sales Corporations, EXIM Guarantees, Japanese Leveraged Leases for 25 + years.
Through his leadership at First Republic Bank, he established a team that provides customized financing of the aviation needs of the Bank’s clients, who are High Net Worth US Citizens/US Resident Non US Citizens and their businesses. He speaks at many industry conferences on topics related to financing aircraft for the High Net Worth; serves on the Board of the National Aircraft Finance Association; and Co-Chairs the 2020 NBAA Finance, Registration & Legal Conference.
First Republic Bank’s Aviation loan portfolio is geographically diverse with its clients centered in the Bank’s key geographic markets. Furthermore, our clients are involved in diverse business activities for which FRB specializes in meeting the unique financing needs of these industries – such as real estate, private equity, hedge funds, venture capital, and the wine industry– and they use aircraft as a tool to conduct business. Since inception in 2006, the team has funded over 150 aircraft transactions with original commitments exceeding $950MM since the team commenced operations. Our foreclosures and losses have totaled $0.00 during this time.
Founded in 1985, First Republic Bank (NYSE: FRC) and its subsidiaries offer private banking, business banking, and private wealth management services. These services include a complete line of banking products for individuals and businesses are offered through our San Francisco, Palo Alto, Los Angeles, Santa Barbara, Newport Beach, San Diego, Portland, Jackson Wyoming, Boston, Palm Beach, Greenwich, and New York City area preferred banking offices. Publicly traded under the NYSE stock symbol “FRC,” First Republic is a constituent of the S&P 500 Index and KBW Nasdaq Bank Index. The Bank exceeds all of the current regulatory guidelines to be well-capitalized and is a member of the Federal Deposit Insurance Corp. (FDIC) and an Equal Housing Lender.
The Bank, with over $115 Billion in Assets, was rated in the top 50 Banks in 2019.
Welcome to another Asset Insight podcast covering the aircraft ownership life cycle. I am Tony Kioussis, president of Asset Insight and your host. We’re discussing aircraft finance with Jim Simpson, who is the Senior Managing Director, Aviation Marine Finance at First Republic. Welcome and thank you for contributing to our podcast covering the aircraft ownership life cycle.
Jim, let’s start off by covering the types of aircraft financing transactions structured by First Republic Bank.
Jim Simpson (01:03):
First Republic Bank is a number of high net worth individuals, so we get into personal use aircraft. Some of our clients have their own companies, so they may charter them off to the company or do a dry lease to a company, but it’s mostly personal use assets. Our transactions are based off of structured debt. We don’t do true leases or operating leases. This is term debt, and what we try and do is set an amortization pattern and match the balloon on the debt to what we think the aircraft’s going to be worth at the end of the term. And that’s a bit of art, science, and can be guesswork, at times.
Tony Kioussis (01:36):
The typical characteristic of the aircraft financing that you’re doing is you’re matching the aircraft loan to the residual value?
Jim Simpson (01:46):
Well, let me explain how we do this. And so we get into a new deal with a client or a prospect and we ask for the spec sheets on the aircraft and the CAMP or my [CMP 00:01:57] or flight doc runs. Then we have one of our aircraft appraisers develop a current value and a future value and draw a curve for us. And it’s based on how many hours in cycles, every year the aircraft’s going to be operated, the type of aircraft, obviously. How many have been built? How far is it from current production? All those good things.
So we come up with future values, and that’s how we plot out and start our amortization curve in our loan amortization.
Tony Kioussis (02:21):
So what should a prospective borrower expect in the market today, especially as it relates to the rate environment and the COVID-19 pandemic?
Jim Simpson (02:30):
Well, rates right now are very, very good, given what’s going on with the economics. In the US, treasury rates are set, so we’re offering some great rates, as most lenders are, too. We’ll go up to seven years, with a 15 to 18-year amortization pattern, based off again, what the appraisers give us the future values on the aircraft. Given COVID-19, we’re very active. We’re seeing a number of deals on the market. It just takes a little bit longer to get the deals done, and a lot of it has to do with logistics.
So the aircraft may be in X location. The owner or the owner’s representatives, or the buyer’s representatives want to go out and see the airplane. How do they get to the airplane? And how do they do it in a safe manner? So that can take some time. Getting the planes into pre-buy centers can take some time. While pre-buy slots are available, it’s my understanding that a number of the pre-buy facilities are working single shifts or they’re segregating their workers so there is not too many people at once for personal space. So it just takes a little bit longer to get it done.
Tony Kioussis (03:27):
Yeah, we’ve been hearing that from a number of different lenders and a number of folks trying to establish transactions, that the transactions are taking longer these days. Let’s talk about small business owners, many of whom are owner pilots. What’s unique to financing these individuals, and what might the financing process be? Is it any different, as an example?
Jim Simpson (03:50):
No, it really isn’t different. We structure our loans where typically there’s a special purpose company or an LLC that’s the owner of the aircraft, and we get a personal guarantee, along with that, from the owner. In this case, sometimes the owner pilot. It takes time to understand a owner’s financial position and what they’re all about. Many of these owners have complex financial lives, and to look at the statements is one thing, but to talk through them and what they’re doing is another thing. And that just takes time to put it together.
Oftentimes, we see margin lines of credit or securities pledged in their portfolios, and it just takes time to understand what they’re doing and what their liquidity is about. We really study the generators of the cash flow that are going to pay the bills for the airplane, and what we figured out, and this is nothing new, that airplanes typically don’t produce revenue or make money for an owner. They cost money. They use money. So we’re very careful to understand what are the cashflow generators the clients have?
The second thing in this environment now has been the insurance, the hull insurance and liability insurance. We have seen rates just skyrocket. There’s one owner we have which flies his jet aircraft single pilot on occasion, and his insurance, I think, tripled from 30,000 to $90,000 a year, or something in that magnitude. And so that’s a big concern, too. And then there’s the limits that people can get. Some of the limits have gone down, not so much on hull, but mostly on liability. So we work with people like Steve Johns and Ellen Snow and a few others. They’re really trying to figure out what’s the best insurance or what the owners can get.
Tony Kioussis (05:21):
Insurance is becoming a serious problem for a number of operators, and we hear that a lot. What are some of the changes in the financing as the collateral size increases? Say you’re going from turbo prop to a light jet or from a light jet to a medium or large jet. Any differences there?
Jim Simpson (05:39):
Yeah, there are, and what we’re seeing is a lot of the large jets … And let’s take the Gulfstream 450s or 550s, Global Xrs, or 5000. A number of those are not on maintenance programs, and the engines in particular, and the engine overhauls, are a big area and a very high-cost item. I’ve heard all sorts of numbers quoted on what it takes to overhaul a Rolls Royce VR710 engine. I’ve heard 3.5 to four million dollars per engine, and so we’ll take a very close look at the aircraft, the condition, the records, and what programs we can put the owners on. There are some wonderful programs available out there through non-OEM companies like JSSI. They offer some really neat programs that are very helpful and protect the client and protect the bank against the falling asset value.
Tony Kioussis (06:27):
Any other unique financing considerations that people should keep in mind?
Jim Simpson (06:32):
I think keeping free liquidity available to pay the bills is something that’s very critical in a time like this. We have a number of real estate developers as clients, and we’ve really been talking with them over the whole COVID-19. How is this impacting your business? And for those that aren’t involved in city properties or metropolitan properties, they’re saying they’re doing quite well. Their rents are being paid or might be reduced a bit for a period of time, but their cash flow is strong. So the bigger the airplane, you really got to dive into the cash flow, the programs, the values, and manage expectations. We use a lot of outside people in the industry to help us work with clients so the clients really understand where this is going.
Tony Kioussis (07:14):
I know you do a lot of work in trying to help your clients with their specific aircraft requirements. Is that something that you focus on, as you said, through the use of outside firms, or do you just normally go along with what the client wants to acquire?
Jim Simpson (07:33):
The client is the customer here, and what they want to acquire, that’s what they’re going to do. We’ll oftentimes ask them about how they’re going to use the airplane, how many people are flying and do they really think that’s the right model for them? But again, we rely on the outside brokers, and there is a number of very good brokers out there who are very good and really can figure out what is the best model of aircraft for the client and then go find the correct serial number.
Tony Kioussis (07:57):
First Republic’s become a really well-respected entity within the aircraft finance community. Is there anything specific that you want people to know about First Republic?
Jim Simpson (08:08):
One, it’s a great place to work. It’s a wonderful bank. It’s based in San Francisco. It’s growing leaps and bounds. We’ve got a great team of people. The biggest thing, Tony, is we ask questions and we listen to the clients and listen to what they want and try and structure with that in mind. But manage expectations so they understand the aircraft isn’t going to go up in value over a period of time. I’ve seen that happen in very few occasions. I can’t even count five of those.
But the biggest thing, I think, is just getting people the right education to understand what’s going to go on, what it costs to own these aircraft and operate the airplanes. That can oftentimes be a surprise for people. We see a number of first-time buyers of aircraft buying big airplanes: G450s, G550s, Globals, Falcon 7Xs. And those are very, very complex machines that require a lot of maintenance. We also suggest people really entertain using an aircraft management company.
Tony Kioussis (08:59):
Do you see people reaching for larger aircraft because of the cost to acquire an aircraft these days? Which has gone down, admittedly. Do you see people reaching for larger airplanes, as opposed to what they would normally look to acquire?
Jim Simpson (09:16):
At times, yes. A big airplane coming out of a corporate environment, not on programs, sells at a tremendous … I’ll call it discount to what an aircraft on a program would sell for, and it becomes attractive to people. I’ve heard prospective owners say, “This is my last airplane. This is going to last me a lifetime. I’ll keep it for 15 years.” Which is all possible.
Jim Simpson (09:37):
Again, understanding the maintenance costs and the engine overhauls and all the things it’s going to take to keep it airworthy and keep it in good condition. It just takes people some time to digest all those facts and figure out.
Tony Kioussis (09:48):
We spend a lot of time trying to explain to people the difference between a low-priced aircraft and a good value aircraft, and I think that’s what you’re talking about, as well.
Jim Simpson (09:57):
Yes, you’re exactly right. A low-priced airplane is not always the best aircraft to get. A fair value-priced aircraft is perhaps a better aircraft to get. Might be in better condition. It might have lower times on it. Might have different features on it. People are often surprised, when we get into the big aircraft, about what a paint job costs. A G550 … Or I’ve saw some numbers recently quoted: 350 to $450,000 for just the exterior paint. An interior upgrade with carpets and seat skins and sidewalls and headliners can often be $250,000 to $500,000. You throw in a new wifi system, you can easily put a million, million-and-a-half into an aircraft.
Jim Simpson (10:38):
And both the paint and the interior work, while they’re great and they really modernize an airplane, are not dollar-for-dollar adds to value, and that’s the other thing that people need some time to work through. So if you put a new paint job on an aircraft, it’s good for seven to 10 years, roughly, depending if the aircraft is kept in a hangar and how often it’s flown on an annual basis. But it’s only good for seven to 10 years, and paint is not a visual object. It’s a protective coating on the aluminum, so you need to have good paint.
Interiors, obviously you need the interior in the aircraft, and a modern interior is a nice thing to have, with all the technology available. Oftentimes, our clients use these as flying offices, so they need to be in contact. They need internet systems that can handle 15 or 20 devices while the aircraft is in air. And you think about that. In the cockpit, oftentimes you have pilots using iPads, and their mobile phones are on. So there’s four. And then you have people, passengers, using a laptop and have their phone on. That’s two per passenger. And you can see where you can climb to 15 or 20 devices on an aircraft, and the wifi systems needs to be able to handle that.
Tony Kioussis (11:42):
Do a lot of your clients charter out their aircraft? Is there anything specific to the financing when a client is looking to charter an airplane?
Jim Simpson (11:51):
Well, if they want to charter a aircraft to help defray some of the expenses, we always talk about what’s the aircraft charter budget look like? And really, what’s going to fall to the owner, pre-tax and after-tax? While the charter income … I’d say about a third of our owners have part 135 aircraft and are managed by an aircraft management firms charter them out. That’s about the right number. Some of the airplanes are 135-equipped, but the owners do not charter. They keep it just for their own personal use. And oftentimes, we see people buying a bigger airplane, thinking they can charter it, but it’s not part 135-equipped. Then to upgrade an airplane to make it 135 can be a very expensive venture. 350 to $700,000 are numbers I’ve heard recently.
Tony Kioussis (12:34):
Depending on the size of the aircraft and the original specification, yeah, it can really add up. And that doesn’t necessarily impact the value of the airplane, either.
Jim Simpson (12:43):
No, it doesn’t. It doesn’t. I mean, just to change out a digital flight data recorder, I’ve heard numbers 250 to $350,000, just for that. And crew seats and crew oxygen panels and all sorts of things, I’ve heard one number on a specific airplane model of about $600,000 to convert it from a 91 to a 135. And you’re right. It gets into the value proposition, and then you look at what’s the charter income going to be? And does it pay for itself? And I haven’t seen a real good case for that yet.
Tony Kioussis (13:11):
Yeah, I think the idea that you’re going to make money with charter is just a pipe dream. The idea that you’re going to defray some of your operating costs are possible, but the additional utilization to the aircraft is going to impact its value. It’s a real trade-off, and I really wonder how many people truly do the math before launching off into the charter business.
Jim Simpson (13:37):
You’re exactly right. The additional usage creates wear and tear, and does the charter income cover that or even make a profit for the owner? And I haven’t seen many cases where it works to the owner’s advantage. There’s so much to know about this business. I always tell our team, or my team tells me, too: We’re students. And we go to a lot of schools and a lot of seminars, and we’re constantly learning. We’re not necessarily the experts on each piece of this, and that’s why we bring in the outside advisors that are the experts to really help benefit the owner or the buyer of the aircraft.
Tony Kioussis (14:06):
There are a number of industry associations, and I know that you are on the board of the National Aircraft Finance Association. Are there any comments you might want to make about the associations themselves and how they might help the individual operator?
Jim Simpson (14:21):
Well, the associations are wonderful. There’s NAFA, the Aircraft Finance Association, which you mentioned. There’s IADA, the International Aircraft Dealers Association. It’s a small industry, in a sense, and many people know each other, which helps when you’re doing these types of deals, because people know who each of us are across the table and our reliability on getting a deal closed and getting it done properly for an owner.
Jim Simpson (14:42):
The organizations are good. We really try and look at the educational components that we can offer to people that can be passed on to the owners. It’s great to have the people in the organizations and compare notes about how things are going or things that haven’t gone well and how to do it better for the client.
Tony Kioussis (14:56):
This has been another Asset Insight Podcast covering the aircraft ownership life cycle. Please visit our ever-growing podcast library at AssetInsightPodcast.com and select from any number of topics discussed with business aviation industry experts. This is Tony Kioussis, and as always, thank you for listening.
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