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Feature: When bank debt becomes a cash trap
15 February 2011
Non-recourse loans can be attractive to the borrower because they are less risky to the overall asset portfolio.
can be a way of protecting a lessor’s business. In
the case of default, either by the lessor or one of its
customers, the bank will seize the collateral. However, the
bank can only seize the particular portfolio of aircraft
pledged in the loan.
collateral is not enough to cover the outstanding balance
â for instance, if aircraft values have
dropped â then the loan becomes a loss for
the lender. From this perspective, a non-recourse loan can be
attractive to the borrower because it carries less risk to the
overall asset portfolio.
The lender, however, certainly has ways to ration the risk
that, in turn, can become cash traps for borrowers, most
notably lessors. Airlines are less susceptible because they
tend to do recourse borrowing, which gives lenders full
recourse to an airline’s assets should it default
on a loan....
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