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Distressed Values Start to Lose Relevance – At Least for Some Types

March 29, 2021

The market is far from an imminent recovery and as such financial institutions still need to consider the previously unimaginable implication of selling aircraft during the Covid Event but at least some types have edged away from the abyss.

The level of discounting needed to dispose of aircraft on a distressed – or fire sale – had achieved a measure of stability in the pre-Covid era but even then, there was a measure of deterioration for some aircraft that were in the process of being replaced by newer types. In view of the continued weakness of the market, the level of discounting to be applied for a fire sale should be comparatively high but much depends on the type and quality of the asset as well as the prevailing level of reduction to the pre-Covid market value. 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 there may be little interest even when a distressed sale price is applied. Two decades ago, post 2001, discounting the values of MD80s made little difference in terms of attracting buyers in which case the scrap value may have to be used, and today the A380 and B747-400 are in that position.

There will be a number of financial institutions and airlines that will be under pressure to dispose of their aircraft as illustrated above with LATAM. This may because the board has decided to exit aircraft financing or because of the need to raise capital in the short term and mitigate their asset exposure. This may require the sale of the aircraft at any price. 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. 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 market has experienced previous downturns and many players learnt that the most efficient means of circumventing the crisis has been to lease the aircraft at a low rental for a year or so or even to contemplate storage until the market improves. This has been preferable to accepting a 20-30 distressed sale discount on values that have already been reduced by similar amounts. This scenario is predicated on aircraft that have some expectation of improvement when the recovery occurs, however. There are a number of types that will not experience a recovery phase. While demand for newer aircraft types may occur that much sooner, 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 where reconfiguration is required. There will be lesser need to consider distressed sale discounting for the A320neo and B737MAX families but even though the A320ceo and B737NG families may be held in some regard, there attraction is relative with the older examples more exposed to distressed discounting even after suffering a near 20 percent fall in market values.

 

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