04 Create interest-free capex financing
AirlineCo is an investment grade multinational and one of the world’s largest global airlines. It is embarking on an ambitious fleet modernisation and expansion programme but has concerns about cost of financing. One hundred wide-body aircraft are on order, worth in the region of US $15 billion dollars. Approximately half of these will be delivered by one of the two leading global manufacturers, AirframeMakerCo.
AirlineCo utilises a variety of methods to finance the acquisition of its aircraft including cash reserves, bank loans, capital market instrument and leases. AirlineCo is actively seeking the lowest cost source of financing for this major capital expenditure.
Because AirlineCo represents a significant portion of AirframeMakerCo’s order book, it is keen to strengthen its partnership with AirlineCo. AirframeMakerCo is willing to consider innovative customer financing solutions, provided there is a net economic benefit.
Given its investment grade credit status, AirlineCo is eligible for an ECO equivalent US $2.0 billion zero interest loan from the ECOWorld Alliance, which it uses to pay AirframeMakerCo for 12 of the wide-body aircraft.
AirlineCo reduced its cost of capital through its 0% interest loan, diversifying its source of funding and conserving cash on its balance sheet. This was achieved without adversely impact its credit rating because outstanding ECO loans are not considered financial indebtedness.
* For simplicity, ECO & US$ are considered parity in this example.