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Aircraft Financing (US): Overview

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Aircraft Financing (US): Overview Resource ID: W-001-5042 Aircraft Financing (US): Overview PRACTICAL LAW FINANCE WITH RICHARD FUREY, HOLLAND & KNIGHT LLP, BASED ON AN ORIGINAL ARTICLE BY MARA ABOLS, DARCY BINDER, JAMES HAYDEN AND CHRISTIAN HANSEN OF WHITE & CASE LLP Search the Resource ID numbers in blue on Westlaw for more. An overview of aircraft financing and the The different national and sub-national laws and regulations and challenges posed by these transactions. international treaties and conventions that must be taken into account when structuring and documenting aircraft financing This Note also discusses the parties typically transactions. The interrelationship among these different laws, involved in aircraft financing transactions and regulations, and treaties create significant complexity that must be considered when negotiating these transactions. For more their roles, including manufacturers, owner information on these issues, see Practice Note, Aircraft Financing: trustees, lessees, export credit agencies, and US and International Laws, Regulations and Registration Requirements (W-001-6310). development banks. The potential liability for participants involved in aircraft financing transactions in case of an accident or other loss event. The illiquid nature of the aviation market. There are not many Aircraft or aviation financing is the financing of the purchase and potential buyers of the aircraft if there is a default under the loan operation of one or more aircraft and related assets, by an airline, agreement, indenture or lease, as applicable. Even if a buyer can aircraft lessor or other entity using one of a variety of financing be secured: structures. Depending on the needs of the participants, the financing zthe cost of transferring ownership to that buyer may be may be structured as a secured loan, a debt offering, or a lease significant; and (whether an operating lease or finance lease). Unless specified otherwise, references to aircraft in this Note should be read to zthe transfer of ownership is a time consuming process. include helicopters. Aircraft are expensive to maintain with high variable operating costs. This limits the number of participants that have the requisite AIRCRAFT FINANCING CHALLENGES expertise to participate in these projects and may put significant pressure on aircraft operators’ cash flows. Aircraft financing presents unique challenges that may not exist in the financing of other types of assets. These challenges include: DOMESTIC AND INTERNATIONAL EFFORTS The high cost and mobility of aircraft. Commercial airplanes can TO REDUCE THESE CHALLENGES cost hundreds of millions of dollars and often travel in multiple There are efforts in both the US and internationally to address some jurisdictions during the term of a financing transaction. These of these challenges and complexities and to ensure that lenders factors raise important issues for financiers including: remain willing to participate in aircraft finance transactions, and zthe amount they are willing to commit in the transaction airlines and leasing companies are able to finance their aircraft given the large amounts of capital required to purchase fleets. These domestic efforts include: aircraft; The Bankruptcy Code (11 U.S.C § 1110). zhow to structure their investment and participation in the The Transportation Code (49 U.S.C. § 40101 to § 50105). aircraft financing transaction to minimize their credit exposure The Uniform Commercial Code. and risk; and zhow to protect their investment and enforce their security These international efforts include: interests in the aircraft and related assets in the different The 1948 Convention on the International Recognition of Rights in jurisdictions where the aircraft is expected to be located from Aircraft (19 June 1948, 4 UST 1830, TIAS 2847, 310 UNTS 151) (the time to time. Geneva Convention). © 2019 Thomson Reuters. All rights reserved. Aircraft Financing (US): Overview 2001 Convention on International Interests in Mobile Equipment HELICOPTER MANUFACTURERS (Nov. 16, 2001, S. Treaty Doc. No. 108-10, 2001 WL 34360428) Bell, Sikorsky, Airbus Helicopters, and Leonardo Helicopters (the Cape Town Convention and the Protocol on Matters Specific (formerly, Augusta Westland) have the largest share of the to Aircraft Equipment (S. Treaty Doc. No. 108-10, 2001 WL helicopter manufacturing market. 34360428) (the Aircraft Protocol, and together with the Cape Town Convention, the Cape Town Treaty). AIRLINES The 1933 Convention for the Unification of Certain Rules Relating to the Precautionary Attachment of Aircraft (the Rome There are hundreds of airlines operating in the world today occupying Convention). different parts of the market, from global to regional carriers to charter and cargo airlines, all of which need aircraft. They are involved in all For a discussion of these efforts, see Practice Note, Aircraft types of aircraft finance transactions in a variety of roles, including as: Financing: US and International Laws, Regulations and Registration Aircraft owners. Requirements (W-001-6310). Lessors. PRINCIPAL AIRCRAFT FINANCING PARTICIPANTS Lessees. Borrowers. Aircraft financing structures often involve several parties, including airlines, manufacturers, leasing companies and lenders. The parties Equity and debt issuers. involved in any given transaction, however, depend on the financing Sellers. structure used. Purchasers. MANUFACTURERS LEASING COMPANIES OR OPERATING LESSORS Airframe, helicopter, and engine manufacturers play a role in Many companies have as their primary, if not exclusive, focus the different types of aircraft financing transactions. For example, in owning and leasing of aircraft. These companies purchase new transactions involving: aircraft direct from the manufacturer or used aircraft (either with or New assets, manufacturers must ensure that the required aircraft without a lease already attached) from an airline or other seller and are delivered to the right parties and that they meet the agreed lease them principally to airlines. The term of the lease depends on requirements and specifications. To do so, they: the airline lessee’s operational needs. zTypically enter into asset sale and warranty agreements; and While airlines may choose to own aircraft, the leasing structure is zMay also finance their customers’ purchase of their airframes, beneficial to them because: helicopters, and engines. They must commit less upfront capital to secure access to aircraft. Assets previously placed into service, manufacturers may be It may give them access in the short-term to aircraft which are required to transfer the warranties granted to the initial purchasers subject to manufacturer production backlogs. to the subsequent purchasers. The manufacturers may, therefore, It gives them more flexibility in managing their fleets over the still have a role to play at some point during the term of these medium to long-term. transactions (for example, correcting defects under the terms of the warranty). Some of the principal leasing companies active in today’s market include AerCap, BBAM Aircraft Management, GE Capital Aviation CIVIL AIRCRAFT MANUFACTURERS Services (GECAS), SMBC Aviation Capital, Avolon, Aviation Capital Today, the principal manufacturers of large civil aircraft are US- Group, Air Lease Corporation, BOC Aviation, Dubai Aerospace, Nordic based Boeing and Europe-based Airbus. The manufacture and Aviation Capital, and ICBC Leasing. sale of smaller, regional jets has become increasingly competitive, however, as Bombardier (Canadian) and Embraer (Brazilian) OWNER TRUSTS AND OWNER TRUSTEES introduce new product lines and continue to compete. Russia-based United Aircraft Corporation/Sukhoi, Japan-based Mitsubishi Aircraft Owner trusts are established by, and owner trustees act on behalf Corporation and China-based COMAC have also entered the market of, one or more equity investors, also known as owner participants with products of their own. (see Owner Participants) in a variety of aircraft financing structures, including leveraged leases, finance leases, and operating leases. In While the companies discussed above are primarily active in the these structures, the owner trust: manufacture of commercial aircraft, there are also many companies Borrows the majority of the funds (typically 80% to 85%) needed (for example, Gulfstream, Beechcraft, Cessna, and Dassault Falcon) to finance the acquisition of the aircraft. that produce a significant number of corporate aircraft each year. Leases the aircraft to the airline. ENGINE MANUFACTURERS Holds legal title to the aircraft for the benefit of the equity investors. Among the largest aircraft engine manufacturers are Pratt & The owner trust structure is used to ensure that the entity holding Whitney, General Electric, and Rolls Royce, as well as joint ventures title to the aircraft is bankruptcy remote from the equity investors. in which some of these participate. 2 © 2019 Thomson Reuters. All rights reserved. Aircraft Financing (US): Overview Lenders and lessees do not want the bankruptcy or insolvency of the ADVANTAGES TO THE LENDERS equity investor to jeopardize their interests in the aircraft. Lenders are willing to extend financing to owner trusts because: In many transactions, the owner trust is also established in a tax- The loans are secured by a security interest in the aircraft. neutral or tax-friendly jurisdiction to reduce transaction costs. Any The lease payments the airline lessee must make are typically taxes that must be paid (including any gross-up
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