Published: May 2017Contents
i) What are the hot topics?
The transport sector continues to grow in response to rising passenger demand globally, and this, together with the impact of increasingly stringent regulation on the banking industry, has revolutionised the way the sector funds itself in recent years. Traditional asset finance, in the form of bank debt, is no longer the mainstay of the transport sector and it is now apparent that debt finance is no longer sufficient to meet the needs for the global aviation, rail and shipping industries. This has prompted a wide range of new investors to enter the market and develop their own, innovative new financial structures.
The aviation industry has been enjoying a ‘golden age’ for aviation finance, with the growth of fleets worldwide now supported by a wide range of sources including debt in the form of bonds and equity in the shape of hedge funds and private equity. However, a more cautious mood is emerging after a six-year sales boom in new aircraft and manufacturers are anticipating entering a calmer phase, which will also impact on financiers. In the rail industry, many governments are focusing on investing in new, sophisticated rail links to meet ever growing demand for rail travel. This is creating opportunities for investors to support the provision of new rolling stock for these developments, with China at the forefront of this with its ambitious Belt and Road initiative. In contrast, for most shipping companies, excluding the cruise lines where demand for cruise holidays continues to grow, there is still very little debt finance available and alternative forms of finance, such as private equity, have also reduced greatly as the industry continues to struggle with overcapacity.
While there is a marked difference in the attitude of banks and financial institutions when considering loans to the aviation and rail sectors and the shipping sector, the demand for asset finance will continue as increasingly sophisticated and more costly technology, such as fuel efficient jets, high-speed rail and high-specification cruise vessels, leads to increased funding requirements from the transport sector.
ii) Tell us about any key legal developments – recent or pending – and their international impact.
Basel III, designed to strengthen banks’ balance sheets by requiring them to hold additional capital against their loan books, is having an impact on some banks’ appetite to lend to the transport sector. Several banks have already left the market, and a number of the banks that remain are concerned about the introduction of Basel IV, which will require even more stringent capital controls, and will make the business of long-term lending even less attractive. This will have a further, unfavourable impact on both the banking and the transport sectors.
How financial services regulation within the EU develops following Brexit will also have a far-reaching impact on the transport industry, as London is currently a key centre for the financing of transport assets.
iii) What are the biggest opportunities and challenges for practitioners and clients?
The sheer range of sources of finance available to the transport sector is benefiting airlines and rail companies, and it is hoped in the medium term that this will also assist the shipping industry as the market recovers. As demand for transport assets continues and new, more efficient technology is developed, the availability of funding will be crucial to enable transport businesses to create additional capacity.
The challenge for transport finance lawyers is to build a deep understanding of the complexities of the aviation, rail and shipping industries, as well as a detailed knowledge of asset finance, with the capability to advise on new capital markets and corporate structures. The ability to field teams of New York and English qualified lawyers, supported by lawyers with an understanding of local law principles in the key jurisdictions in which transport assets are registered, is also increasingly important in today’s market.