Boeing signs $5 billion vendor funding deal with Castlelake

Investment firm Castlelake LP signed an agreement with Boeing Co. to provide as much as $5 billion of financing to airlines and other companies looking to buy planes from the aerospace manufacturer.

Boeing Capital Corp., the company’s finance arm, is reluctant to lend to customers as the planemaker’s debt levels have swelled, first because of its 737 Max jet being grounded, and then because of the pandemic. Boeing’s debt totaled around $60 billion as of the end of September, more than double its level at the end of last year and four times the amount at the end of 2018.

“We prefer to use third-party financing rather than Boeing’s balance sheet, certainly at today’s time where we’ve leveraged up over the course of the last 18 months,” said Tim Myers, president of Boeing Capital. Castlelake will finance the 737 Max among other aircraft, he said.

Meanwhile, airlines increasingly need financing as the pandemic has resulted in sharp drops in demand for air travel, and some traditional lenders are retrenching. Steep losses are expected to continue into 2021, according to the International Air Transport Association.

That creates an opportunity for alternative investment firms to step in. Castlelake, which has invested in aviation for 15 years, launched a new aviation lending program in November.

“There’s huge disruption in this industry and the well-managed airlines right now are focused on managing cash burn and maintaining liquidity,” said Evan Carruthers, chief investment officer and co-founder of Minneapolis-based Castlelake.

Under the agreement, Castlelake will supply senior-secured and mezzanine financing as well as high loan-to-value finance leases for Boeing customers to purchase aircraft, the companies said in a joint statement. Financing will be offered at terms of eight to 12 years under the partnership, which lasts until the end of 2022 but can be extended for two years after that.

Debt Dash

Global airlines have flocked to borrow since March, pledging their brands, loyalty programs and aircraft as collateral to secure funds as the pandemic erased revenue. Despite the availability of bank loans, bonds, or government financing, there’s still not enough financing available to meet airlines’ demand, according to Carruthers. Both Carruthers and Boeing Capital’s Myers pointed to many banks having retrenched from the space.

“A lot of banks today are having difficulty with their aviation portfolios and may not be as strong in the marketplace as they have been,” Myers said.

Boeing has been battered by its troubles with the 737 Max and the coronavirus outbreak, but hopeful signs have emerged in recent weeks. U.S. regulators cleared the new 737 for flight in November following a 20-month hiatus. The plane also won a tentative nod from Europe’s aviation safety regulator.

The company’s shares surged in November on the impending return of the 737 Max and promising vaccine trials that would help restore global travel.

“The Max is going to be a desired product,” Myers said. “It is coming out of very rigorous review of over 20 months with the different regulators. It’s going to be back up and running and will become a mainstay in many fleets around the globe—and investors are waiting for that.”