Funding Mechanisms for Aviation infrastructure

 

Funding Source for Aviation Infrastructure

The aviation infrastructure has proven to be a motivator for sustainable economic development. Mapping out funding for aviation infrastructure will impact tourism and trade. It serves as the main mode of transportation to deliver humanitarian relief and response to crises and public health emergencies. It generates socio-economic benefits which help eradicate poverty by creating jobs and enhancing air connectivity.

The Aviation infrastructure sector is forecast to grow from 36 million departures in 2015 to 60 million by 2030. Its global economic impact is estimated at $2.7 trillion, equivalent to 3.5% of world gross domestic product (GDP). Apart from being a major global source of employment generating 62.7 million jobs globally, the air transport industry invests substantially in vital infrastructure with $37 billion allocated to aviation infrastructure projects in 2014.

Havelet Finance Limited posed as a source of funding for aviation infrastructure. We are ready to provide with 30–50% funding for the sector. Kindly contact us.

Funding aviation infrastructure and building the capacity in States to ensure it meets minimal international standards initiatives and improve navigational efficiencies (with resultant economic and environmental benefits) merit significant support from public and private sources. Usually, the sources of financing aviation infrastructure are public financing, Public and Private Partnerships and its variant models, development banks and ODA. Financing is sometimes made available at rates lower than the market rates and or for durations longer than the norm, with an element of grant embedded in the financing and/or with an equity element embedded in the financing.

Aviation Infrastructure Projects

Funding Mechanisms for Aviation infrastructure

Undermining the economic gains of air transport, development banks allocate a small portion of financial flows for the development to this sector. That simply put, has given rooms to invite other funding mechanism for aviation the industry as discussed below;

Debt Financing: This mechanism deals with borrowing money from an outside source with the promise to return the principal, in addition to an agreed-upon level of interest is debt financing. Commercial banks has been the most pronounced and common method of financing for medium to long term financing requirements. Loans lasting eight to fifteen years are used to either provide bridging loan or financing for a six to ten year project. For short-term working capital or bridging finance bank overdrafts, floating lines or in some cases short-term loans could be used. As most of the Air Navigation Service Providers (ANSPs) are government backed the loans are treated as sovereign loans and attract discounts from market rates.

Banks and other financial Institutions like Havelet Finance Limited are other examples of sources for borrowings. Such institutions have provisions to lend with specialized terms, conditions and rates. Financial institutions like European Investment Bank (EIB), European Bank for Reconstruction and Development, Hermes of Germany, EXIM Bank of USA often lend for well-constructed capital projects. The interest rates are comparable to or competitive with commercial banks.

Advantages and Disadvantages of using debt financing for Aviation Projects

Using debt financing for aviation projects makes it obligatory to remit the agreed payment earlier enough. Borrowers can decide to run their businesses in whatever way they intend without the outside interference.

Debt Financing as a source of funding the aviation infrastructure is associated with a lot of demerits. That being said, If business fails, there is still an obligation to make payments. If bankruptcy is forced upon, lenders will have claim to repayment before any equity investors. It also attracts high rates of interest. Upon calculating the discounted interest rate from the tax deductions there is still the possibility of facing a high interest rate. Interest rates will vary with macroeconomic conditions, individual or corporate history with the banks, business credit rating and credit history. Debt financing attracts cash collateral. it is important to make sure that business will be generating sufficient cash flows by the time loan repayment starts. Collaterals are used in case of payments default.

Financing Aviation Infrastructure by Bond

A bond is an income securities or a fixed-income instrument that represents a loan made by an investor to a borrower. In this type of funding, there severalties of advantages and disadvantages associated to it. for instance, Bond financing provides a number of benefits to projects including lower interest rates, longer maturity (which can be very helpful given the duration of most of these projects) and more liquidity. while on the other way round, portrays a many disadvantages which includes,

“Negative carry”: financing via bond draws all at once, up front, and therefore interest is charged on the entire amount from day one. The borrower will have to bear the “cost of carry”, being the interest paid on the bond proceeds, from the date of receipt to the date it is used to invest in capital expenditure.
Certainty: bond financing has less certainty in the underwriting process due to the volatility in the securities market.

Flexibility: bond flexibility is less during project implementation (e.g. to approve waivers and amendments), given the diversity of bondholders and the difficulty of getting approval for changes. Administrative processes: more time and cost, due to more extensive disclosure processes and the
rating process.

Limits: Bond financing is equal to limited usage for initial project financing, but is commonly used for refinancing, once construction risks have been largely mitigated.

Equity Financing for funding Aviation infrastructure Projects

Equity financing is distinct from debt financing, which refers to funds borrowed by a business. Equity financing involves not just the sale of common equity, but also the sale of other equity or quasi-equity instruments such as preferred stock, convertible preferred stock and equity units that include common shares and warrants. The advantages of this type of financing is that if on an event where your business did not yield profits, you are not required for repayments. Investors or partners will only provide equity if they have faith in the earning power of your business, you don’t necessarily need the pristine financial history that is required for a loan.

The disadvantages of equity financing revolves around controlling your business by the investors. What that means is that the investor also partakes in the business share and also an integral part of the business.

Public-Private Partnerships (PPP)

The most pronounced development in funding projects over the past 10–20 years has been in the increase in private sector participation for infrastructure. The term “public-private partnership” (“PPP”) has been in general use since the 1990s. However, there is no widely agreed, single definition or model of a PPP. The use of PPPs has now spread to most EU member countries and depending on the country and the politics of the time, the term can cover a spectrum of models. These range from relatively short term.

The advantages of PPP remains that procurement is only one of several options for procuring infrastructure. Consideration must be given as to whether a project is suited to a PPP structure, and whether there is strong political support for a PPP solution. The principal reason for using PPPs is that, where the project is suitable, they can deliver better value for money than the alternatives. The following are key advantages for using PPP procurement:

Make projects affordable
The use of private sector skills is maximized
Private sector takes life cycle cost risk, which can be passed on to captive users in monopolistic situations
Risks are allocated to the party best able to manage or absorb each particular risk Deliver budgetary certainty
Force the public sector to focus on outputs and benefits from the start
The quality of service has to be maintained for the life of the PPP
The public sector only pays when services are delivered
Encourage the development of specialist skills, such as life cycle costing
Allow the injection of private sector capital
Transactions can be off balance sheet

The disadvantages of using PPP for project funding is that PPP may appear more expensive and if the project run into difficulty, risk has tendency to revert on the taxpayer. Overall, PPP contracts balance the short term political imperatives and long term investment priorities. Getting PPP requires adequate resources on both sides of the partnership. Some of the disadvantages of this financing mechanisms are:

Insufficient private sector expertise exist to warrant the PPP approach
Insufficient public sector capacity and skills to adopt the PPP approach
Not always possible to transfer life cycle cost risk. Do not achieve absolute risk transfer, especially in monopolistic situations where the risk can be
transferred to captive users. Imply a loss of management control by the public sector

INSTITUTIONAL LENDING OR SUBSIDY BASED FINANCING

Capital projects with public grants, any additional loan based investment not covered by state reimbursement will have the same need of capital cost repayment in future license or service charges like any other financing project.

Leverage Lease: A leveraged lease is an agreement where the lessor finances the lease by taking a loan from a lender. The party leasing the asset pays the lessor monthly. The lessor, in turn, remits the payments to the financing company. This allows the lessor to provide a lease and profit from the lease even if the individual leasing the asset does not have the income to obtain the lease outright. In the perfect leveraged lease, all parties benefit from the arrangement.

AIRLINE/AIRCRAFT OWNER FINANCING SCHEMES

Airlines typically use one, or a combination, of the following techniques to pay for their fleet:

Cash: It is still the cheapest way to finance aircraft but only an option for profitable airlines (like Southwest) or state-owned ones with rich owners. Even then, the cash can usually be used for better purposes. The other problem with financing all of the fleet with cash, is that during the downturn, when you need to release the cash, financing terms are much worse.

Bank loans: Banks lend money to airlines with the loan guaranteed by the aircraft. The bank can repossess the aircraft if the airline stops paying its loan. Banks need to manage their risk so they often sell part of loans on to other banks. This is known as syndicating a loan. Loans are usually 12 years long.
A finance lease is similar to loans, except the bank then buys the aircraft from the airline (another sale/leaseback). The airline then makes monthly lease payments and at the end of the lease it owns the aircraft. Finance leasing is just like hire purchase. Banks typically lend 85% of the aircraft’s value with airlines paying 15% in cash. This 15% is known as equity.

Havelet Finance Limited provides provide funding through our High Net worth Angel investors to both startups and existing businesses. Our funding includes business expansion or to accelerate company growth and alongside working capital loans. We are also currently structuring a convertible debt and loan financing and other project financing and international loans at of 2% interest repayable annually with no early prepayment penalties.

Website: https://www.havelet-finance.com
Email: credit@havelet-finance.com