By Viktor Berta
Viktor Berta, Head of Aviation Finance Advisory, ACC Aviation
The main source of aircraft finance in Africa is currently Export Credit, followed by Capital Markets debt, Sales Leaseback transactions and Credit Enhanced lending. This article homes in on the challenge and potential solutions with regards to aviation financing in Africa.
As Africa, along with the world, emerges from the pandemic, the aviation industry is undergoing a transformative period of rethink and reposition. This process involves airlines, lessors, and lenders alike and should lead towards a more sustainable, balanced, and inclusive aviation industry well positioned for future growth.
Along with its huge growth potential, Africa also poses a number of unique challenges for financiers and lessors in terms of Credit, Asset and Jurisdictional risk. A vast and segmented market with numerous new and re-emerging airlines, a varying array of legal and tax environments, requires specialist local understanding for aviation finance and leasing transactions.
Export Credit
Export Credit Agencies (ECAs) play a significant role in aircraft financing on the African continent. ECAs of the Original Equipment Manufacturers’ countries such as Coface in France (for Airbus), Export-Import Bank of the United States (Boeing), Export Development Canada (EDC), BNDES in Brazil (Embraer), as well as private insurance products such as AFIC and Balthazar provide added security to financing assets in Africa making aircraft financing deals economically viable.
The main sources of aircraft financing on the continent over the past decade, Export Credit Agencies and Development Banks are expected to continue to play a major role in African Aviation Finance.
The African Export-Import Bank (Afrexim) is supporting the continent through direct lending to the continent’s airlines and financing of aviation assets as well as guarantees issued to support financing deals. Loans extended or guaranteed by Afrexim Bank benefit from local expertise of the underwriters. Other institutions such as the African Development Fund provide vital capital to the continent’s businesses and infrastructure through debt and equity financing, including but not limited to aviation and infrastructure projects.
Credit Enhanced
Not unlike the rest of the world, aviation in Africa is a vital part of national economies enabling trade, mobility, supporting supply chains as well as the export-focused industries. In this context it is of no surprise that African governments see their countries’ airlines and the broader aviation industry key to economic growth and prosperity.
Sovereign guarantees extended by governments to support the financing of aircraft purchased by local airlines can act as credit enhancement to a financing deal enabling local and international lenders to extend financing facilities. These credit enhanced facilities have been gaining popularity for years and provide for a significant portion of the continent’s aviation finance arrangements.
Each of these transactions are unique and require expert understanding of the jurisdiction. Our consultants have been advising lenders as well as governments in structuring credit enhanced deals and guarantees to enable financing to African airlines.
Sale and Lease Back (SLB)
Along with Export Credit and Credit Enhanced facilities, SLBs are a major source of aircraft financing in the region. In these transactions a lessor, regional or global, agrees to purchase the aircraft and lease it to an airline operating in the continent. The ownership of the asset remains with the lessor throughout the lease term and the aircraft is returned upon termination of the lease. SLB transactions can greatly benefit from regional presence and expertise in evaluating asset, credit and jurisdictional risk. ACC Aviation’s teams based in the Middle East and Africa assist lessors in both evaluating and monitoring their aircraft leases across the continent.
Bank Debt
Debt financing can take several shapes, some of them more suitable for the African continent than others. Loans secured over the financed aircraft extended either directly to aircraft operators or lessors are a popular form of financing globally. In the African continent predominantly South Africa-based banks such as Investec, RMB, Absa, and Nedbank are providing such facilities.
Finance leases are a type of lease where the ownership of the asset can transfer to the lessee at an agreed price and is a popular solution for airline fleet expansion plans. A key consideration for these facilities is to ensure the collateral assets are maintained and utilized in accordance with the financing or lease agreement. It is strongly recommended to the lender or lessor to engage asset managers and technical consultants with region-specific knowledge and expertise to ensure continued integrity of these financing agreements.
ACC Aviation’s lender and lessor clients benefit from up-to-date, readily available information on the physical condition and utilization of their financed and leased assets and monitoring of the compliance with the financing and leasing terms. This pro-active approach helps improve loan and lease performance in the region and instils greater confidence in the continent’s Aviation industry by the lending and leasing communities.
Allied Air B737-800 Converted Freighter ..Allied Air is one of Africa’s few world-class cargo-only airlines
With over 20 years of industry knowledge, ACC Aviation provides impartial advice and acts as a trusted advisor to aviation stakeholders worldwide. We support airlines in structuring and raising capital to finance their fleet growth plans, and support aviation lenders and lessors in monitoring and managing their investments.