•  Jason Skelton 

     Sector focus

     

    Aerospace & Defence

    Publication date: 1 August 2010

     
    As the defence sector is intrinsically linked to government spending, it is no surprise that the recent headlines about record budget deficits have caused consternation within the sector. The new UK coalition government has already signalled that some of the current major programmes will be under threat. Things will become clearer after the government completes the strategic review of defence and security, due to be published in the autumn at the same time as the comprehensive spending review. Equally in the US, the biggest defence market, there are pressures to cut budgets. However, with continued geopolitical instability, a major conflict in Afghanistan and an urgent need to modernise fighting forces, the pressure to commit to defence spending will continue for the short to medium term. Also there is optimism about increased defence spending in markets like Asia and the Middle East, where growth in military expenditure is being driven by economic expansion and a range of strategic threats. The aerospace and defence sector will be watching developments in domestic and international markets with interest.

     
    With long-term and visible cash flows stemming from multi-year contracts, aerospace and defence lend themselves to Private Finance Initiative (PFI) structured finance, asset financing, capital markets financing and longer-term hedging solutions.

     
    Larger firms set to benefit in the fight for funding 

     
    As the economy recovers from the downturn, it is the largest defence companies – those with access to a wider range of markets, and those that can offer longer-term visibility for banks considering lending to them – that are likely to fare best; size lends itself to supportive funding. Bigger companies can withstand internal and external shocks better too.

     
    The appeal of larger organisations was evidenced by their attractiveness during the liquidity issues in the wider economy over the past two years. The international footprint of larger operators provides – to some degree – a ‘natural hedge’ against currency movements. Such protection has been increased by the strong cross-border M&A activity of the last decade (notably inwards investment into the US).

     
    In addition, the nature of the bulk of the defence trade (ie, the sale of goods within a country from an in-country base to the purchasing government) lends itself to just such a ‘natural hedge’ – currency variations are arguably less relevant than in adjacent areas such as civil aerospace. The prevalence of government-to-government contracts is also notable in this regard, while the insertion of clauses in procurement contracts to take into account the potential for disadvantageous exchange rates is also apparent.

     
    Civil aerospace 

     
    The civil aerospace sector depends on the health of the world economy and correlates closely with the economic cycle, although it generally lags behind the wider economy, both into the downturn and into recovery. We are already seeing good recovery in the emerging markets of Asia-Pacific and Latin America, while there is slower recovery in North America and Europe. However, liquidity and cash preservation, along with tight working capital management, are absolutely critical to the original equipment manufacturers and the airlines.


    What Lloyds can offer 

     
    As a relationship-focused bank with specialist sector expertise, we take time to understand the issues facing our clients, and build mutually beneficial partnerships that support their objectives and ultimately help them prosper, whatever the economic environment. With a product suite tailored to client needs, we have been successful in delivering for our customers through the cycle. Areas in which we excel and can provide innovative ideas and bespoke solutions include: Private Finance Initiative (PFI) structured finance, asset financing, capital markets financing and longer-term hedging solutions.

     
    I have been a Relationship Director within the aerospace, defence and transport sectors since 2003, when I moved from an acquisition finance role. As such, I understand the issues faced by the sectors very well and can originate innovative solutions to address our clients’ needs.

     
    We have recently appointed Tulsi Narayan as Relationship Manager for the bank’s Wholesale Banking & Markets Defence, Aerospace & Transport division. Tulsi will be responsible for strengthening relationships with existing customers across the sector and the further development of this important business. A key part of her new role will be working in close co-operation with product groups such as Corporate Asset Finance, Capital Markets and Financial Markets, in order to provide tailored and value-added financing solutions to existing and future clients.

     

    This article was first published in Lloyds Banking Group - Perspective Magazine, Edition 2.

     

     

2/25/2018 1:43:12 AM