What a lovely financing technique

Amid a battle for orders between Boeing and Airbus, Monarch secured a cut-price deal for 30 new planes — which later rose to 45. The market value of the aircraft was greater than Monarch’s agreed price, so creating a paper profit.

Greybull was able to persuade Boeing to release more than £100m of this trapped equity as cash, pumping it into the airline through Petrol Jersey.

Buy something you can’t afford at a discount, claim the discount as capital. Actually, they managed to go up one notch, manage to persuade the seller to give you the discount as capital.

That really is innovative.

10 thoughts on “What a lovely financing technique”

  1. I can’t see the article (paywall), but is this (and forgive the syntax):

    Instead of “Purchase planes for £8”.

    Monarch buys planes for £10, and Monarch’s (separate off-shore) HoldingCo gets £2 as a cash discount.

    No difference to the seller. But Monarch is carrying planes in the balance sheet at market value (rather than discounted). The benefit of the negotiation is taken at HoldCo level?

  2. This is not unusual in aircraft finance. I don’t think the aircraft were actually on Monarchs balance sheet. ATOL protected airlines usually take their aircraft on operating leases that they arrange for themselves.

    The deal would be for Monarch to initially agreed a price of say £40 million per plane instead of the advertised price of £50 million. Meanwhile Monarch finds a lessor who agrees that the market price at delivery of an individual plane is £50 million, and agrees a lease that amortised the value to maybe 75% of that after 10 years.

    Rather than tell the lessor that they are only buying the planes for £40 they get Boring to sell the planes to the lessor for £50 and rebate the £10 cash. I don’t remember it happen infrastructure exactly that way before, but it is fairly common for the airline to buy planes at a discounted price and resell them at a market price on delivery. Probably didn’t happen that way to achieve operating lease treatment.

  3. Heinz sells a pallete of baked beans to a supermarket for less than the market value of the beans (retail, as individual tins) as well.

    Aside from the general rule that the more of something you buy the less per unit you pay, this is pretty much how the entire economy works, isn’t it?

    If Monarch did what Alex did and took the cash for a higher lease price this close to going under, it looks remarkably like delay of insolvency (it’s probably not called that in English) to me. In Germany, the lessor could well be on the hook for aiding that.

  4. BiG

    In Germany, the lessor could well be on the hook for aiding that.

    Assuming a lessor (per Alex), then I’m not sure that the lessor would even need to know about a separate discount transaction between the seller and the operator (lessee)?

    Lessor pays seller £50m, market value / eveyone is happy, seller separately pays offshore HoldCo £10m as an introduction / agents’ fee?

  5. ‘The market value of the aircraft was greater than Monarch’s agreed price’

    Wut? A willing buyer and a willing seller. Would Boeing not make the same deal with someone else? How about “the market value of the individual aircraft?”

  6. @Gamecock: “Would Boeing not make the same deal with someone else?”

    Possibly not. Aircraft sales by Boeing and Airbus are often negotiated as complex deals involving multiple aircraft, options on additional aircraft, spares packages and maintenance programs. The price tag on the aircraft may be only 70% of the total value. Also, while aircraft values are robust, the market isn’t very liquid and a seller might have to drop their price significantly compared to the unit price to sell multiple units.

  7. Social Justice Warrior

    According to reports at the time, the deal last year between Boeing and Monarch was that Boeing would buy its own planes and lease them to Monarch. I suppose because no third-party lessor was willing to take the risk.

    Which suggests that Boeing would do almost anything to keep afloat the deal by which Monarch defected from Airbus to Boeing.

  8. If Monarch were switching from Airbus to Boeing then they would have been buying a lot of spares, so effectively the price reduction on the plane/cash finance will effectively be a reduction in the cost of spares.

  9. Interestingly enough I am (half) looking at an aircraft leasing deal that is financed by a company. A credit rating is assigned and adjusted based on the resale value of the aircraft. Only trouble is no-one knows what this will be as no-one has ever resold one, or whether anyone would even be interested in buying said aircraft type.
    Monarch is slightly easier as they have all short haul stuff which can be used pretty much anywhere and demand is high. This makes the higher market value than they paid concept credible as the aircraft could be used immediately after a paint job as opposed to waiting for a slot in a production queue. That has value which in this case was monetised in the favour of the airline. What bugs me is that money is only realised if the airline goes bust and the aircraft are repossessed but the airline has been paid any upside already. Hmmm

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