Flexible Financing Solutions – Global Jet Capital

Tony Kioussis (00:33):

Welcome to another Asset Insight Podcast, covering the aircraft ownership lifecycle. I am Tony Kioussis, President of Asset Insight and your host.

Tony Kioussis (00:43):

With more than 5 billion invested in business aviation and a unique asset-based securities program, or ABS, that has attracted over 3 billion into the sector, Global Jet Capital provides a wide array of financing solutions for the business aircraft market. The firm is capitalized by Carlisle FS/KKR Advisor, LLC, a partnership between FS Investments and KKR Credit, as well as by AE Industrial Partners, all world-class private investors with expertise in the global aviation industry.

Tony Kioussis (01:19):

The company’s management team has served the business aviation community for a combined 300 plus years, and has completed over 3,500 aircraft transactions. With expertise, financial strength, industry relationships, and the required infrastructure, Global Jet Capital is able to offer a variety of flexible financing solutions and at the speed the market requires.

Tony Kioussis (01:44):

Vivek Kaushal serves as chief executive officer for Global Jet Capital. He joined the firm in 2015 and has been part of the management team throughout, first as chief risk officer, and most recently as president and chief operating officer. Vivek has nearly 30 years of leadership experience in various financing businesses and was chief risk officer for GE Capital Business Aviation Finance prior to its purchase by Global Jet Capital. Thank you for joining me today, Vivek. How about we start with your general impressions of overall business aviation market conditions?

Vivek Kaushal (02:24):

Well, first of all Anthony, it’s a pleasure and thank you for the opportunity. In terms of market conditions, I’d say with confidence we’re looking at a market that has managed COVID-related disruptions really well. It’s on a positive, long-term trajectory, and most people don’t realize this, that trajectory now stretches back several years, even before COVID. But specifically in the post-COVID world, when you think about the value proposition of business jets, it could not be clearer.

Vivek Kaushal (02:51):

And it’s not just healthcare. It’s about convenience. It’s about airline industry that is struggling to return service back to a semblance of what it used to be in the past. When you look at our industry, the OEMs are in great shape. The backlog is now exceeding 40 billion. The order books now run out to 2024 and they’re book-to-build ratios have been excellent throughout the last 12 to 18 months.

Vivek Kaushal (03:15):

When you think about transaction activity, Q1 has been solid, both on the new and pre-owned side. Inventories are low, but our marketplace has been remarkably efficient. Buyers have found sellers and sellers have found buyers. We had only 700 to 800 planes in inventory throughout last year, but we had 3000 pre-owned transactions. So that just tells you that this is a market that’s been very efficient, generally speaking.

Vivek Kaushal (03:40):

When I think about values, values have improved generally to pre-COVID levels, a little bit above that, but there is no dynamic of values going beyond rational levels, as was the case back in ’06 to ’08. Back then when you looked at the depreciation curve, it was essentially flat. A 10-year-old plane sold for about the same as a brand new plane. And so even as we see some volatility in the market and generally with interest rate increases on the horizon, specifically to our industry, we see that demand continuing to be solid. We see that supply dynamic continuing to be solid because of discipline from OEMs. And really when I reflect on it, those factors have been in place for many years now. And we expect that it support that stable industry going forward as well.

Tony Kioussis (04:28):

Can you elaborate a little more on values?

Vivek Kaushal (04:31):

So prior to COVID, like I said, the market was demonstrating solid supply and demand and pricing dynamics. Of course, COVID caused values to wobble a little bit, and then values came back. And of course, with the favorable supply-demand dynamic, in some cases they have improved and gone beyond pre-COVID levels. But the context for all of this is OEMs that have planned their production ramp rate deliberately. They’re building to their backlog. They have strong control over their order book. They, as you know, since 2009 have put an end to speculation and delivery positions, so you don’t have a brisk trade in delivery positions that used to happen prior to the last recession.

Vivek Kaushal (05:13):

And so all of that is driving what I alluded to earlier, that healthy balance between supply and demand, and the inventories from their lows are starting to tick up again. Something that we think is very good is going to make the market more healthy, and it’ll create a nice pool of assets for prospective buyers to choose from. And it’ll bring some balance and health back into the market. From a values perspective, I expect stability. I expect some modest increases here and there. I think the sharp uptick that you saw really was the market coming off some technical lows that were set because of COVID that disrupted the market and really wasn’t reflective of the true value of these assets or the underlying dynamic of demand and supply.

Tony Kioussis (05:56):

Any thoughts on the impact of the Russia-Ukraine crisis on business aviation?

Vivek Kaushal (06:02):

That’s a great question, because first and foremost, Global Jet Capital has no exposure to Russia or to the former Soviet states. It’s the result of a discipline in terms of what jurisdictions we targeted that has been in place for many years. When you think about the business jet fleet that is affiliated with Russia, it’s very modest. It’s about 1% of the global install base. And even when you include planes associated with Russian individuals that are not registered in Russia, even that’s a relatively small number.

Vivek Kaushal (06:32):

The reality, unfortunately for a lot of these business jet owners, is that with the sanctions that are currently in place, these are not marketable aircraft. They are neither adding nor subtracting to the inventory. As sanctions ease or there’s clarity on sanctions, could provide a little bit of additional input into the fleet of available aircraft, which again, like I said, is going to be a positive for the industry.

Vivek Kaushal (06:55):

Of course, the crisis has had a significant impact on fuel, but as you know, Tony, business jets are really not that sensitive to fuel prices. They don’t get flown nearly as much as commercial jets. And if anything, rising fuel prices does create wealth in certain parts of the world and drives some higher demand for business aviation.

Tony Kioussis (07:16):

I share your view on the fuel price impact on business aviation. And I’m very pleased to hear that you have no exposure to the Russia Ukraine issue. That’s smart planning on your end, for sure. Let’s discuss Global Jet Capital’s value proposition. How do you see that?

Vivek Kaushal (07:35):

This is a company that has proven itself over the last seven years, and the way I would best describe it is that we are a highly differentiated financier that is dedicated to the business jet industry. We offer the full array of products, but we specialize in operating leases. And what operating leases do is they allow our clients to minimize their investment in what’s typically a non-revenue generating asset for them. It also gives them a path to seamlessly transition to their next aircraft by returning the plane at the end of the lease.

Vivek Kaushal (08:05):

And so, of course, what that does is it protects them from the costs and hassles of selling the plane and the market risk associated with that. So why do clients come to us? They come to us because we know the market, we know the asset and that results in an ability and a willingness to structure complex transactions that many mainstream lenders really aren’t capable of. We’re streamlined. We’re focused on speed. We’re nimble, flexible, and we are really driven by our clients’ needs. We want to put together a solution for our client, not force fit or jam a product into that need, but at the same time, we’re very thoughtful about working with the right obligors with financing high-quality assets.

Vivek Kaushal (08:44):

And when you look at the result of this philosophy, it really has served us well in the securitization market. Our EBS program has now gone through six different issuances, over $3 billion in bonds, and it’s a major component of our funding strategy. And the reason why it’s been so successful is that our investors really understand how well this portfolio has performed, including through COVID.

Tony Kioussis (09:07):

I want to go through some of this in more detail. Why don’t you tell me more about the operating lease product?

Vivek Kaushal (09:14):

Absolutely. The operating lease is a very, very simple proposition. You pick the plane. We finance it for you through a long-term lease. So all you do is pay us a fixed rent over that period of time. At the end of the lease, you can return the plane and get into your next one. There’s no need to worry about the value of the plane or the hassle of selling it. That’s something we take on. The rents are typically fixed, as I mentioned. So you have 100% predictability on your capital costs, and rents are tax-deductible in most circumstances if the plane is used for business.

Vivek Kaushal (09:45):

In contrast, when you look at a traditional loan offering, that absolutely leaves you with the risk of asset value. It leaves you with the work of selling the aircraft before you can get into your next one. Loans also need you to make significant down payments for something that’s constantly depreciating, and isn’t typically generating revenues for the vast majority of our client base.

Vivek Kaushal (10:05):

With operating leases up to 100% of the cost can be financed. There may be a security deposit, but it’s typically nowhere near the amount that you need to put down in a traditional loan. And what that means is that more of your money is freed up to invest at higher returns. As far as the market risk is concerned, you’ve offloaded all that market risk to us in exchange for that set of lease payments that won’t change over time.

Vivek Kaushal (10:28):

I’d encourage folks to think about it this way. These days nobody has any hesitation, whether it’s owners or operators, to put their engines or their avionics or their APUs on a program plan, because they don’t want to take the risks of these valuable components breaking. And just in that similar way, our operating lease protects your capital. You never have to worry about losing money on the value of your plane. So think about an operating lease as akin to an engine program, protecting the value of your aircraft and insulating you from the vagaries of the market.

Tony Kioussis (11:00):

That’s a really good comparison from where I stand, and I appreciate you making that comparison, especially for those that might be new to the market. What other products and services do you offer?

Vivek Kaushal (11:12):

We provide standard debt and loan products, and finance leases. We finance equipment upgrades, whether for leased or loan aircraft. We do sale-leasebacks. But one thing that I want to highlight in particular is with OEM backlogs growing, we’re seeing a great deal of interest in our pre-delivery payment financing or progress payment financing. As anyone who’s acquired an aircraft or ordered a new aircraft, they know that it really isn’t like other purchases. It’s a process that requires you to start paying into a multi-year build process from day one. That’s something that the manufacturers require. It’s to fund the build of the plane. And at that point in time, there’s no plane to go finance. So there’s no asset against which you can go borrow. This is typically a need that has been met in the past by clients simply writing checks.

Vivek Kaushal (12:04):

And what we do is we step in. We take assignment of that purchase agreement. We make all those payments on your behalf. And when the plane delivers, we seamlessly roll that into the product of your choice, whether it’s an operating lease, a finance lease or a loan. To be clear, this is something that is only provided by people that really, really understand business aviation. And we are one of those folks. We really have very good relationships with all of the OEMs. We understand how the build process works. We understand how the purchase agreements work, and really what we do is we unburden you from having to tie up your money into a plane that is not yet built.

Tony Kioussis (12:45):

Yeah. As you say, these programs are not commonly offered by funding sources. It’s really interesting to hear your approach to it and very useful for the operators. You mentioned your asset-based securities program or ABS. Can you elaborate on it?

Vivek Kaushal (13:02):

Absolutely. Like I said, we recently completed our sixth ABS issuance. We’ve raised about $600 million. Over the last four years, we’ve raised over 3 billion, and we have really become established as a benchmark ABS issuer in this space. What really underpins the success of our ABS is the diverse portfolio of strong creditors that we have, which performed flawlessly through COVID-19. We didn’t skip a beat, unlike the vast majority of the commercial aviation securitizations that had to take a significant amount of pain and pass it along to their investors, unfortunately.

Vivek Kaushal (13:36):

In this process, we’ve had to work hard to educate investors on business aviation, because it’s not a market that they were familiar with, but it’s been really gratifying to see their support grow. Many investors have participated at scale in every single one of our issuances and we’re grateful for their support. And then separately from the ABS, we are continuing to make investments in all the other areas of the business to position it for the long term and as a differentiated and dedicated provider of financial solutions for business aircraft.

Tony Kioussis (14:04):

I know you just released your second annual market report. What’s that telling us about the next five years?

Vivek Kaushal (14:12):

So like you said, we just launched that business jet market outlook that provides you with a great summary of a proprietary model that we built to just that purpose, which is forecasting new deliveries and pre-owned aircraft deliveries from 2022 through 2026. And the pre-owned portion of this is unique. I believe we are the only provider in the market that actually works to put out a forecast on that. And that’s because the pre-owned market is central to how we go to market.

Vivek Kaushal (14:40):

We forecast that the market will continue to grow over the next five years as the global economy continues to expand. Overall, we expect total new and pre-owned business jet transaction unit volumes to decrease slightly in 2022 as pre-owned transactions take a step back from that all-time high we hit in 2021. But the increase in new deliveries and growing demand for larger jets should drive an increase in transaction dollar volume this year despite that increase in the unit count.

Tony Kioussis (15:08):

I really appreciate your time today. Anything else you’d like to share with our listeners?

Vivek Kaushal (15:14):

Last year we completed seven years. Since we started out, we’ve brought $3 billion in funding to transactions in the market. Since then the planes that we have are among the most modern, and we continue to invest in new assets across all the major OEMs. We’re originating really well in 2022. That value proposition we have is really resonating for folks that are looking for solutions in the current market. And our brand has become very, very strong in the business aviation ecosystem. It’s also really appreciated in the investment community, like I said, supporting that mature and large asset-based securitization program, and really enabling all of that is a team of nearly 70 people who represent some of the most seasoned talent in business aviation financing. We’re invested in them, and they in turn are invested in bringing those great financial solutions to our client base and to the industry.

Tony Kioussis (16:06):

This has been another Asset Insight Podcast covering the aircraft ownership lifecycle. 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.