Nedbank’s Aircraft Finance head James Geldenhuys answers Guy Leitch’s questions about the state of post Covid aviation finance in Africa.
GL: Has Covid and finance defaults made it harder for sub-Saharan African airlines to finance aircraft?
JG: The Covid pandemic and associated fear has certainly damaged the industry on a global scale and we have seen many airlines failing, especially in jurisdictions where no support from government was received by the industry. The demise of so many airlines in a short period has negatively impacted on the risk rating of airlines in general which results in the reduced credit worthiness of airlines. But this is not unique to the African continent.
GL: Does African aircraft finance have its own unique challenges – if so, what are they?
JG: No, African aircraft finance does not have unique challenges. Challenges which we see on the African continent are the same the world over: Sovereign risk, low capitalisation, continuity in management and shareholder support.
GL: What percentage of an airline’s fleet do you think should be leased?
The accepted norm has been 50% for a number of years and it works well. In the current markets it might be attractive to lease more aircraft as there are very attractive lease opportunities available due to many aircraft having been returned to lessors as a result of the difficult market conditions caused by Covid. It might be worthwhile to lease more than 50% of your fleet in the short term, however airlines should be careful not to lose the benefits of owning some aircraft and having a substantive balance sheet.
GL: Do lenders prefer state-owned airlines to private ones?
JG: There is no preference; lenders prefer certainty, continuity and shareholder support, all backed by a healthy balance sheet.
GL: Would you like to see a higher ratification/ operationalisation of the Cape Town Convention (CTC)?
JG: Full ratification of the CTC would certainly be beneficial to the country and citizens as it will allow a reduced premium when Export Credit Agency (ECA) backed funding is raised on new aircraft, and furthermore provides certainly to lenders as to the legal process, especially in the event where an aircraft need to be repossessed.
GL: Does the CTC unfairly favour the original equipment manufacturers (OEM) and lessors at the expense of other creditors?
JG: No, it does not favour the OEM. In fact the OEMs do not benefit at all from the CTC. Once an aircraft is sold, it is sold. The CTC benefits airlines and passengers as it provides certainty on how the aircraft as secured assets under secured loans will be dealt with from a legal perspective in the event of a default and therefore more funding is available to airlines.
GL: Is the 6% expected African GDP growth ever going to happen?
JG: I am not an economist, but I am an optimist and I do believe if we all work hard and do more than what is expected of us, we might just make it happen.
GL: If the Single African Air Transport Market (SAATM) liberalisation made sub Saharan airlines even less viable/sustainable, that would be bad for the lenders – so you are opposed to open skies?
JG: No, I am not opposed to open skies. I don’t think that liberalisation makes airlines less viable, it has the opposite effect as it forces airlines to be more efficient in a more competitive environment providing passengers with more route options at more competitive pricing.
GL: What are the current and future roles of the ECA banks likely to be?
JG: ECA funding remains a powerful funding instrument on the African continent as it can be used to credit enhance the weaker credits. With regards to the wider role of development banks such as Afrexim Bank and AFDB, aviation is clearly part of the infrastructure required on the African continent as it can be considered the same as building a bridge – just an air bridge. These entities are able to step in as Junior Lenders making it more attractive to Senior Lenders to provide aircraft finance.
‘many attractive lease opportunities and buy opportunities’
GL: Has SAA emerged from business rescue as a lendable institution? Is it still creditworthy?
JG: Difficult question and definitely dependent on the outcome of the privatisation deal currently being implemented. The usual parameters such as capitalisation, revenue generation, operating efficiencies and affordable debt obligations will determine the credit worthiness.
GL: Are there new opportunities post Covid?
JG: Yes. We have seen a lot of start-up airlines emerge since traveling opened up again. This is due to many airlines restructuring their fleets in terms of the impact of the pandemic and therefore there are many attractive lease opportunities as well as buy opportunities available in the market.
The important points to remember in order to raise commercial funding are: A track record of several years; a steady cashflow stream; a solid sustainable business plan and a strong well capitalised balance sheet are all required.
A start-up cannot offer this and needs venture capital which is raised on the back of a sustainable business plan backed by strong management with the relevant track record which the investors can believe in and therefore invest. This is clearly more risky than commercial funding and therefore also requires a higher return. Costs and efficiencies are the most important factors to manage at all times as it will be difficult to find the required funds from investors.
