Behind the Deals: Q&A With a Leading Aviation Financier

Global Aviation Round-Up from Aircraft Value Intelligence (AVN)

Chris Pannacciulli, National Senior Director of Aerospace, Defense & Government Contracting (AD&G) banking group for Western Alliance Bancoporation.

Chris Pannacciulli occupies the nexus of finance and aerospace, helping direct the capital that fuels aircraft investment, fleet growth, and industry expansion.

Editor’s Note: This week, John Persinos interviewed Chris Pannacciulli, National Senior Director of Aerospace, Defense & Government Contracting (AD&G) banking group for Western Alliance Bancoporation.

Western Alliance Aerospace, Defense & Government Contracting is a national banking group within Western Alliance Bank, Member FDIC, providing financing solutions to aerospace, defense and government contracting companies across North America.

The group is part of Western Alliance Bancorporation, which has approximately $90 billion in assets and has been recognized by American Banker and Bank Director among the nation’s top-performing banks since 2016. Serving businesses throughout the AD&G sector, the group offers industry-focused banking expertise and financing tailored to the needs of companies operating in these markets.

John’s questions for Chris are in bold.

Aircraft valuations have been unusually resilient in some market segments despite higher interest rates. From the lender’s perspective, what financial metrics are you watching most closely today to determine whether current aircraft values are sustainable or vulnerable to correction?

From a lender’s perspective, the primary focus is whether collateral values are being supported by recurring cash flow or by temporary scarcity of assets.

Our bank looks at utilization levels, operator profitability, borrower debt service coverage, current appraised value versus orderly liquidation value, and secondary market depth by aircraft type.

We also focus on whether values are being supported by broad demand or by a lack of available aircraft due to OEM delivery delays and engine/MRO bottlenecks.

Equipment financing has become more expensive over the past several years. How are changing credit conditions influencing fleet acquisition strategies for commercial operators, business aviation companies, and aerospace suppliers, and what does that mean for future aircraft residual values?

Our bank typically prices based on floating rate SOFR or treasury swaps, both of which have actually moved down recently. Coupled with a tightening of spreads, the market has of late become less expensive for borrowers.

Typically, however, higher borrowing costs will change both capital allocation and customer behavior. Suppliers likely would be more selective about investments in new equipment, automation, tooling, and inventory because financing costs are greater and working capital remains tied up for longer periods due to production delays, labor constraints, and less-than-perfect OEM build schedules.

When credit conditions get tighter, it becomes harder for smaller suppliers to carry excess raw material, fund long lead-time components, or absorb delayed payments from larger customers.

As a result, well-capitalized suppliers with strong backlog visibility, sole-source positions, and the ability to pass through inflation are better positioned, while highly levered or working capital-intensive suppliers are more exposed. For aircraft residual values, we actually utilize third-party experts to best assess the values, so we’re not able to speculate on future aircraft value.

Are lenders beginning to place a financing premium on technologically advanced aircraft, and do you expect these features to become increasingly important in aircraft appraisals?

Newer-generation aircraft with better fuel efficiency, lower emissions profiles, modern avionics, and stronger reliability generally support better credit terms. In appraisals, these features should become more important because they affect operating costs and remarketing potential.

That said, seasoned lenders in this sector, including Western Alliance Bank, will still be careful not to overvalue technology that is unproven, expensive to maintain, or limited to a narrow buyer base.

The aerospace supply chain continues to experience production bottlenecks and extended delivery schedules. How are these constraints affecting financing decisions, lease structures, and the valuation of mid-life aircraft that operators are keeping in service longer than originally planned?

Supply chain constraints are keeping older and mid-life aircraft in service longer, which has supported values for many assets that might otherwise have been retired or transitioned out.

From a financing standpoint, lenders are spending more time on maintenance status, availability, remaining useful life, and the borrower’s ability to fund maintenance. Mid-life aircraft can be attractive collateral when they have strong operator demand, clean maintenance records, and near-term cash flow visibility.

Older freighter aircraft, particularly 747 cargo aircraft, may retain value better than typical aging widebody assets because they provide payload, range and outsized cargo capabilities that are difficult to replace economically.

You’ve worked extensively in acquisitions, recapitalizations, and equipment financing. Looking across today’s aerospace market, where do you see the greatest opportunities for investors and lessors, and which market segments do you believe are currently being mispriced?

We see strong opportunities in the lower and middle tiers of the aerospace supply chain, particularly where companies support high utilization platforms, recurring maintenance demand, or hard-to-replace components.

Tier 2 and Tier 3 suppliers with sole-source or limited-source positions, long-standing OEM or Tier 1 relationships, and meaningful content on commercial, business aviation, or defense platforms can be very attractive.

These businesses may not always look as compelling on the surface because they can be working-capital intensive and exposed to production timing, but the stronger platforms often have good backlog, pricing power and significant customer switching costs. This is where it pays to work with an experienced bank with proven expertise in the aviation segment, such as Western Alliance, which understands these dynamics.

On the MRO side, we see opportunity in businesses tied to engine, component, avionics, and specialty repair work, especially where capacity is constrained and demand is supported by operators keeping aircraft in service longer.

Extended delivery timelines for new aircraft and limited availability of replacement parts are increasing the value of repair capability, technical labor, DER repair development, rotable inventory, and certifications.

The market is efficient overall, but niche MRO and scarce-certified component suppliers may be underappreciated, while weak suppliers with poor pricing power may be overvalued.

Do you foresee lenders and appraisers incorporating real-time aircraft performance and maintenance analytics into financing decisions, potentially changing how aircraft collateral is valued over the next decade?

We expect real-time performance and maintenance analytics to become increasingly relevant in aircraft finance and valuation work.

For the aviation sector, as well as a wide range of other industries, access to more and better data will continue to inform financing proposals from experienced lenders.

Better data can help appraisers inform lenders of utilization, component health, maintenance discipline, fuel efficiency, and the probability of unplanned downtime.

Thanks for your time.

John Persinos is the editor-in-chief of Aircraft Value Intelligence.