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Banking Regulations Continue to Require Assessment of Risk

November 13, 2017

Ever more restrictive banking regulations are seeing a need for risk to be assessed not least in the form of distressed sales.

The level of discounting needed to dispose of aircraft on a distressed – or fire sale – has gradually eased for some more popular aircraft types but deteriorated for some aircraft that are in the process of being replaced by newer types. The older examples of those being replaced by new models are seeing greater distressed sale discounting levels. In view of the strength of the market the level of discounting to be applied for a fire sale should be comparatively low but much depends on the type and quality of the asset. An aircraft that is in poor condition or which has a high number of hours and cycles will require a higher level of discounting than an example in good condition. For some aircraft types and specific examples of even popular aircraft, there may be little interest even when a distressed sale price is applied. A decade ago discounting the values of MD80s made little difference in terms of attracting buyers in which case the scrap value may have to be used.

The ISTAT definition of a distressed value is “Distress Value, Forced Sale Value, Liquidation Value are terms to describe the Appraiser’s opinion of the price at which an aircraft (or other assets such as an engine or spare parts) could be sold in a cash transaction under abnormal conditions – typically an artificially limited marketing time period, the perception of the seller being under duress to sell, an auction, a liquidation, commercial restrictions, legal complications, or other such factors that materially reduce the bargaining leverage of the seller and give prospective buyers a significant advantage that can translate into heavily discounted actual trading prices.

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Depending on the nature of the assignment, the appraiser may be asked to qualify his opinion in terms of disposition within a specified time period, for example 60 days, 90 days or six months as the needs may be”. The distressed sale discount reflects an aircraft that has no lease attached and is sold on an “as is where is” basis. Typically, the means of expressing the distressed value is by citing a percentage discount to the current market value. The current market value already takes into account the prevailing market conditions for specific types.

The level of discounting is not a constant but changes with the strength of the market. Consequently, during a downturn the value of the B777-200ER is already depressed but selling the aircraft for cash still requires considerable incentive. While there continues to be strong demand for newer aircraft types, seeking to sell older aircraft for cash within 30 – or even 60 – days requires a considerable incentive not least because the number of buyers willing to buy unencumbered aircraft for cash is limited not least when there are no maintenance reserves available to pay for maintenance and reconfiguration.

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