Behind A $1.7B USD Aircraft Deal

"Aircraft financing is a major challenge for a number of reasons," former Bombardier chief executive Paul Tellier said in an interview. Bombardier doesn't just make and sell planes. Like all aircraft manufacturers today, it must find financing for its customers, which generally prefer to keep planes off their books and merely make lease payments. The company arranged more than US$3-billion in financing for airlines in each of the past three years, while limiting interim financing to 60 planes and US$1-billion. In some cases, single lenders buy the planes, and lease them to the airlines. Sometimes, one party will make an equity investment, while another will fund the debt payment. Sometimes the manufacturer pools many leases, backed by the planes themselves, into an entity that distributes the lease payments to investors. This is called a securitization. That's what Bombardier is attempting with its latest financing, according to the document. A special purpose trust will buy, lease or own about 70 Bombardier regional jets and turbopropeller planes delivered between June, 2004, and last month. They had previously been carried largely by Bombardier and Charlotte, N.C.-based Wachovia (which is underwriting the securitization) in an interim credit facility. The unnamed airlines that received the jets are believed to include Delta Air Lines, Northwest Airlines and the U.K.'s FlyBe. Michael Kraupp, Skywest Inc. finance vice-president, said his U.S. regional airline is also in the deal. According to the document, the trust, to be 55% owned by Wachovia and 45% by Bombardier, will sell US$1.24-billion worth of certificates and US$260-million worth of notes. Holders of the securities will receive distributions as lease payments come in. "This is a complex transaction," said Mr. Kraupp. Rejean Bourque, Bombardier's vice-president of investor relations, refused to discuss any details of the offering, which has yet to go to market. "We're pretty good at putting financing structures together," he said. "This is third-party financing.... Is it leaving the books? Absolutely." Securitizations typically establish a hierarchy among investors. The certificates will probably be split into different classes that pay different levels of return; holders of the lowest risk certificates will be paid first, but also make the lowest return. Notes holders will have the greatest risk, and thus highest potential reward, but they get paid last. "If you're in the last tranche, you don't get paid five cents until everyone else gets their dollar," one investment community observer said. That means if, for example, one or two airlines in the securitization go bankrupt and stop paying their leases, the noteholders could see their distributions dry up first. That's a real risk considering Delta and Northwest have both warned they could file for bankruptcy. Before that happens, however, investors have a few protections. There's the collateral value of the planes. In addition, Bombardier and Wachovia say they will put up US$317-million "available as liquidity to support the program" -- cash that would presumably be used to cover any shortfall in distributions. Also, the certificates will be guaranteed by an unnamed insurance company, a backstop Bombardier has likely paid for. The higher-risk notes, meanwhile, will be guaranteed by Quebec's investment arm, Investissement Quebec. That rankles Bombardier rival Embraer, which charges the government help gives Bombardier an unfair advantage. "Once it becomes a state affair, it brings a huge distortion to the market," said Henrique Rzezinski, Embraer's senior vice-president of external relations. But one aircraft leasing specialist, who asked not to be named, said "there's nothing Bombardier is doing here that's surprising or inappropriate or unusual," adding Quebec and Ottawa have financed the company's jet deals for years. If anything, the source said Quebec's exposure to the jet deals will probably fall with the securitization, compared with the guarantees it probably put up on the original plane sales. http://www.canada.com/national/nationalpost/financialpost/story.html?id=e13babe5-9482-403e-a083-a7d50313513f [Proofreader's note: this article was edited for spelling and typos on August 22, 2005]

Note: http://www.canada.com/n...