Aircraft non-payment insurance is being used in some aircraft financings.

An insurance company guarantees payment of debt service on a loan. The basic concept is similar to a loan guarantee provided by a government export credit agency, according to Bob Haken in the Norton Rose Fulbright London office. The lender relies on the credit of the insurance company when deciding whether to extend the loan. The insurers have the equivalent of at least a single-A credit rating from Standard & Poor’s.

The lender enters into a loan agreement and advances funds that are used to buy the aircraft. Insurance cover protects the lender against a borrower default.

The premium for the insurance is paid in full on the drawdown date for the loan and can be financed as part of the loan amount, like an ECA guarantee premium, says Haken.

The insurer agrees to make any missed payment on the loan. There is an assumption once the borrower misses one payment that it will continue to skip others, so the insurer continues making payments until the earlier of a set period — for example, 18 months — or the date the aircraft is sold. If the aircraft sale fetches too little money to repay the loan balance and accrued but unpaid interest, then the insurer makes up the shortfall.