February 2005 
Volume 03, Issue 9 
Focus on Finance

The Loan Arranger rides again

BCC acts upon its new mission: help Boeing corral more business


The Loan Arranger rides againAfter being ambushed, the legendary Lone Ranger, a crime fighter, didn't just recover; he came back—more capable and focused on a mission. So did Boeing Capital Corporation: In late 2003, with its business still affected by the Sept. 11, 2001, terrorist attacks, BCC reshaped itself and took on a new mission as a sort of "loan arranger" for Boeing businesses. Its new focus was to support Boeing's business units by developing customer financial solutions to help capture new business. At the same time, BCC focused on using third-party financing, reducing portfolio exposures and performing well financially.

In meeting these new objectives, 2004 was a banner year for Boeing Capital, said Walt Skowronski, who became president of BCC in late 2003. First BCC realigned its portfolio. In May 2004, BCC sold its $2 billion Commercial Financial Services business—which provided financing for commercial assets such as business aircraft, marine vessels and construction equipment—so it could concentrate on supporting only Boeing products. Its $10 billion portfolio includes about 500 aircraft.

Next BCC consolidated: It relocated all of its major Long Beach, Calif., infrastructure activities (such as its Tax, Treasury and Legal functions) to its Renton, Wash., headquarters, reducing costs and generating greater overall operating efficiency.

In working more closely with Boeing business units, Boeing Capital supports both Boeing Commercial Airplanes and Integrated Defense Systems, but its primary customer is Commercial Airplanes, which it serves through its Aircraft Financial Services (AFS) group.

"AFS success is measured by how we support BCA," said Scott Scherer, AFS vice president and general manager. In 2004, BCC provided comprehensive financing support for Commercial Airplanes' deliveries, and campaigns, and placed or sold 56 portfolio aircraft, reducing the net asset value of inventory aircraft by 84 percent.


Fastest feedback in the West—and worldwide

Boeing Capital Corporation is actively cultivating strategic alliances with bankers and investors, and finding new ways to exchange information with them.

For instance, BCC regularly brings together 100 to 200 top international financiers and investors at financial summits in New York, London, Seattle and Hong Kong to share-and collect-information. This year, Boeing introduced an innovative group-feedback technology. The attendees press one of five buttons on handheld keypads to vote their preferences and opinions on key questions. Instantaneously, they see the whole group's answers graphed on a large screen.

Boeing wants these leaders to understand its offerings well, especially the new ones. It also wants to know how they rate these Boeing products in comparison to rival Airbus-and what they like in the upcoming highly efficient mid-size 7E7. "We've asked," BCC President Walt Skowronski said, "about interest in the industry, interest in the 737 versus the [Airbus] A320, interest in or perspectives on the 7E7 ... and the response is just overwhelming-especially on the 7E7."

It was an eye opener for financiers to see their peers' feelings displayed on the screen, resulting in instantly improved attitudes about lending money for Boeing products, he added. In turn, some industry analysts upped their rating opinions of Boeing after the meetings.

Skowronski said it's important to know not only what sort of planes airlines would like to buy, but also what sort of planes financial institutions want to finance. It may sound good, for example, to offer the various airlines many different options for things such as seating, interior decoration, and cargo space. But, as it turns out, financial institutions would rather lend money for airplanes with fewer available options. With fewer options, if resale is required, airplanes are more interchangeable among airlines. Reconfiguring is minimized-so a new carrier can simply take possession, make sure the plane is clean, well-maintained and safe, paint a new logo, and start earning money.

"We also learned," Skowronski said, "that not only the airplane, but also the service is important to the financial community." An airplane that's been well maintained and has all its records up-to-date is clearly more desirable to own-and therefore to finance. This dovetails with the integrated service programs that Boeing is offering on the 7E7.

Using the feedback keypad, Boeing also was able to gauge financing experts' attitudes as to which manufacturer's product is likely to change the airplane-market game. The 7E7 is not only "a technology game changer," Skowronski said, it makes investors feel more comfortable about their investments.

- Walter Polt

BCC expertise in creating the most suitable "financial structures" (the many, often-complicated forms loans take) is in demand to enable aircraft sales and to help troubled airlines through necessary restructurings.

The events of 9/11 illustrated the need for major structural changes to the then-most-often-used form of aircraft financing, Skowronski said. In these transactions, investors are tiered into senior and junior segments, with the junior investors accepting greater risk for theoretically greater returns, he said. Unfortunately, if an airline were to default, the junior investors were more likely to incur a loss. That did indeed happen after the 9/11 attacks, and it adversely impacted investment values.

Skowronski said the BCC team's stock-in- trade is structuring (and restructuring) complex financial transactions. "We've worked very hard to put together some interesting proposals that have both helped the company win key business and helped our customers through some turbulent periods," he said.

A major element of the BCC strategy for supporting the Boeing business landscape is to use other people's money—to have the financial markets and their investors supply the funds—as opposed to BCC funding the loan or lease. While this third-party financing allows other lenders to share the risk of the loans—and lessen the loans required for Boeing's portfolio—it also shares with them the related returns and potential for upside gains. This helps ensure that a wide array of investors will be there for Boeing when it needs them.

The need for customer financing solutions and support is growing at both Commercial Airplanes and IDS. And to meet those needs, Skowronski said, BCC is ready with a presence in multiple U.S. locations and in London, Hong Kong and Moscow.

Boeing Capital also actively seeks out new alternative financing solutions. Skowronski said the BCC team currently is working with two major Wall Street banks "to create a new concept that would provide a dedicated pool of funding for the 7E7 aircraft." Instead of having to buy a 7E7 outright, an airline will be able to go to this group of lenders to strike a deal. With such a plan in place, more airlines will be able to acquire the 7E7, while the financing risk would be spread among a larger group of investors.

All the while, BCC is concerned about aircraft financing internationally. It continues its work to remove obstacles in worldwide financing, through strong support for the Cape Town Treaty.

The intent of this accord is to lower risk for lenders to overseas customers who may get into duress situations such as bankruptcy. If so, the lenders can repossess their aircraft if needed. This makes loans cheaper and easier to get, which increases sales—and reduces the difficulties developing countries face buying airplanes.


With the Boeing Capital refocusing, BCC put in place a new Risk Management organization. Risk management essentially is the same caution you use when you're feeling enthusiastic about going in with a friend on a new venture: The more eager you are—especially in a shaky market—the more you need to stop and make sure you're doing a smart thing.

"We're embedding risk management much more formally into all the processes and operations of BCC," Skowronski said, "We've created new systems to better define, manage and mitigate risk."

Skowronski said that while BCC is focusing on supporting the Boeing business units, attracting third-party financing and managing risk, it hasn't lost its focus on maintaining financial responsibility and delivering solid financial results. In 2004, he said, BCC's overall financial performance was outstanding, with delivered earnings well in excess of its commitments, risk substantially reduced, a strong cash position coupled with a strong balance sheet, and premier bond ratings.

Skowronski said he is looking forward to even more challenges in 2005.

"We have to make it easier and less expensive to finance Boeing products to enable the business units to win significant new business and grow," he said. "Our role in supporting the Boeing businesses is getting more difficult and complex. We have to be more proactive with customers in building relationships and offering financial advice, more creative and innovative in developing financing options, and more aggressive in delivering the capital markets that will expand Boeing Capital's ability to support the business units."

And just as the Lone Ranger came back and continued to take on new challenges, a recharged BCC is galloping forward supporting Boeing, attracting lending allies, guarding against risks, and running a financially responsible organization.



Talking in a Capital way

Here's a list of phrases commonly used by people at Boeing Capital Corporation.

Capital markets, capital providers or lending institutions

Any financing sources, such as leasing companies, commercial banks, investment banks, export credit agencies, private equity investors, hedge funds and insurance markets.

Credit ratings

Ratings established and monitored by rating agencies, which consider a variety of factors to determine a company's health and financial stability and its investment value. Ratings are a measure of risk—an assessment of a company's ability to repay loans in full and on time (see below for types of risk). The higher the credit rating, the higher the level of confidence in repayment—and the lower the borrowing interest rate the company has to pay on a loan.

Customer financing solutions

Tailored methods and financial structures to fund a particular Boeing product or service for a specific customer that may use third-party investors, Boeing funding or a combination of both.

Financial structures

Different types of loans or financial arrangements, such as secured lending (senior debt and subordinated "junior" debt), new aircraft delivery financing (finance leases, operating leases, export credit agency financing, debt products) and sale/leaseback arrangements (balance sheet transactions, fleet solutions, new aircraft sales, excess inventory sales).

Financing exposures

The amount of Boeing or BCC investment or financing that may be subject to a loss should a customer go into default and not be able to pay back that investment. If the investment is an airplane, for example, it would be the amount that cannot be recovered should BCC be unable to resell or lease the airplane.


The amount of available cash on hand, assets easily converted to cash or capacity to borrow on short notice.

Net asset value

The value (or book value) of a product being purchased or leased; determined by the initial purchase price minus depreciation over time.


For Boeing Capital, this includes the total value of the airplanes that BCC owns and leases, plus the value of outstanding loans or security investments.

Reenergizing capital markets

Encouraging traditional financial markets to reenter airplane financing by supporting changes or enhancements to the structural rules of investing, attracting new financiers and investors to aircraft financing, or developing new sources of funding.

Residual value

The expected value of an asset at the end of a lease or financing term.


Repackaging and renegotiating the financial structure of a loan or lease; often required for customers who are experiencing financial difficulties.

Risk management

Understanding and managing the risk or exposures within Boeing Capital's current or future customer-financing portfolio. Those risks include a customer's ability to pay, the value of an underlying asset and the current state or volatility of the market. The risk management process also can be used to decide whether to divest of an asset.

Risk, types of

Credit risk (risk of customer nonpayment), country risk (risk associated with a particular country), asset risk (value of the asset today), residual risk (value of the equipment at the end of the lease term) or interest rate risk (chances that interest rates will move in unfavorable directions).

Third-party financing

Using other sources of funding (financial markets and investors) instead of Boeing's balance sheet to finance Boeing products.

—Donna Mikov

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