Private banker warns jet buyers against funding aircraft with securities-backed Lombard loans

Oliver Scharping, a senior advisor and private banker based in Monaco, argues that Lombard loans, known in the US as securities-based lending, are a useful way to finance a business jet or its deposit, but become risky if the borrower's portfolio loses value. Such loans are quick, discreet and usually keenly priced, and place no mortgage on any aircraft register. Banks, however, ask for more collateral if its value drops.

Scharping illustrates what he calls the 'collateral illusion' with a hypothetical $60m portfolio, mostly equities. At a 60% lending value the borrower has $36m of capacity and borrows $25m for a pre-owned large-cabin jet, leaving $11m of headroom. If markets fall 30%, as they did in a little over a month in early 2020, the portfolio is worth $42m, capacity drops to $25.2m and headroom to $200,000. If the bank cuts the lending value to 50% because of higher volatility, capacity falls to $21m, requiring the borrower to find $4m in cash, typically within two or three days, or sell shares.

Family offices face a further problem: diversified equities typically count for 40-60% of their value as collateral and high-grade bonds for more, while hedge fund and private-equity fund interests often count for nothing. UBS's latest family office survey puts 42% of the average portfolio in alternatives.

The market conditions Scharping cites include JETNET data putting pre-owned jet inventory at about 6.6% of the fleet at mid-year, against 9-12% between 2014 and 2020; record highs for the S&P 500 in early October; a Bank of England warning in July that the risk of a sharp correction was 'high'; a Fed rate rise in September, the first since 2023; and the 10-year Treasury yield reaching its highest level since 2002.

As an alternative, Scharping points to asset-backed aircraft financing, which is slower and involves more lawyers, with lenders scrutinising the aircraft's age, maintenance programme, registration and operator. Some older jets cannot be financed on sensible terms.

SVB, Credit Suisse and First Republic, all active private aircraft lenders, left the market in spring 2023, and specialists are filling the gap. Three new jet lenders have launched this year, and Global Jet Capital's ninth securitisation, $659m in June, was oversubscribed.

His recommendation is usually to combine both: an asset-backed loan for the jet and an undrawn Lombard line, sized to survive a crash, as a backstop for deposits, upgrades and surprises. The two should be stress-tested together, alongside the family's private-market capital calls, as one liquidity problem. He suggests brokers and buyers' advisers ask before closing what happens to the buyer's funding if markets fall by a third.

The case shows how closely a segment of jet demand is tied to financial markets. A buyer funding an aircraft against a securities portfolio is, in effect, holding a leveraged position in equities, and the aircraft's cost does not shrink when the portfolio does. In a sharp drawdown, forced selling by owners and tighter inventory dynamics can interact, which is why the funding structure matters as much as the purchase price.

The lender landscape is also shifting. With three large lenders gone since spring 2023 and specialists and securitisation markets absorbing the demand, the supply of asset-backed credit now depends on a narrower and more specialised group. Aircraft age and operator profile determine whether that credit is available at all, so older airframes sit in a weaker financing position than newer ones.

For a transaction, the useful test is the one Scharping proposes: model what happens to the buyer's total liquidity, not just the jet loan, if markets fall by a third. The next signal is whether the rate and correction risks he cites move collateral values, since that is what would put the margin-call scenario to a real test.