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Aviation Finance & Leasing 2020 Aviation Finance & Leasing 2020 A practical cross-border insight into aviation finance law First Edition Featuring contributions from: Blum&Grob Attorneys at Law Ltd Jurvneshservice MV Kini Camilleri Preziosi K&L Gates LLP Vedder Price P.C. Cox Hallett Wilkinson Limited Kartal Law Firm Veirano Advogados Han Kun Law Offices LIFT Consulting Group Waselius & Wist Herbst Kinsky Rechtsanwälte GmbH Maples Group IBA Group – Aviation Consultancy Mori Hamada & Matsumoto Table of Contents Expert Chapters Aviation Finance & Leasing – A Perspective in 2020 1 Philip Perrotta, K&L Gates LLP Aircraft Repossession Planning – Practical Considerations 6 Phil Seymour, IBA Group – Aviation Consultancy Q&A Chapters Austria Japan 9 Herbst Kinsky Rechtsanwälte GmbH: Dr. Christoph 72 Mori Hamada & Matsumoto: Taro Omoto & Makoto Wildmoser Sakai Bermuda Malta 17 Cox Hallett Wilkinson Limited: Janice Gutteridge & 79 Camilleri Preziosi: Steven Decesare & Krista Ellul Ernest Morrison Switzerland Brazil 87 Blum&Grob Attorneys at Law Ltd: Michael Eitle 26 Veirano Advogados: Marcela Alves Corrêa, João Turkey Paulo Servera & Maria Eduarda Mendonça 96 Kartal Law Firm: Ali Kartal China 35 Han Kun Law Offices: Wang Shu & Ding Yi Ukraine 103 Jurvneshservice: Dr. Anna Tsirat Finland 44 Waselius & Wist: Maria Lehtimäki & Ann-Marie United Kingdom 113 Eklund K&L Gates LLP: Philip Perrotta India USA 124 52 MV Kini: Ravi Kini & Khushboo Jain Vedder Price P.C.: Adam R. Beringer, Michael J. Edelman, Melissa W. Kopit & Matthew P. Larvick Ireland 60 Maples Group: Donna Ager, James Kinsley, William Vietnam 134 Fogarty & Robin McDonnell LIFT Consulting Group: Dr. Michael Loc Pham & Julien Tran Chapter 1 1 Aviation Finance & Leasing – A Perspective in 2020 K&L Gates LLP Philip Perrotta A. Introduction i) Original Equipment Manufacturer Finance The manufacturer of the aviation asset stimulates the purchasing of its products through a variety of financial support instru- Aviation finance leasing – A perspective in a new decade ments, ranging from a form of ‘backstop’ loan, providing guar- antees to third-party financiers as regards the ongoing value Aviation finance and leasing, more specifically the economic of the asset itself, or in more extreme circumstances agreeing activity of providing funds for the purpose of acquiring and to re-purchase at a specified fixed price subject to certain utilising aviation assets (in particular, aircraft), is at this stage a conditions. mature and sophisticated business activity. The maturity comes from the lessons learned from multiple ii) Commercial Bank Debt cycles in the industry going back over several years now, during This form of financing is supplied by a specialist lender on either which significant ‘boom’ and ‘bust’ periods (and all points in a secured or (less commonly) unsecured basis, and is applied by between) of demand for aircraft and other aviation assets have the airline (or an operating lessor often in conjunction with a been experienced, and to sometimes painful degrees. The specific airline) to pay its purchase price obligations on delivery sophistication is a product of the collision of many factors in a of the aircraft and/or its milestone payments to the manufac- single business activity, ranging from the phenomenal amounts turer prior to the delivery of the aircraft during its production of capital involved, the associated multi-layered attitude to risk, a programme. On a secured basis, recourse is to the underlying highly-regulated operating environment worldwide, the impact aviation equipment usually by way of a mortgage or other form on local and global economies, and both ongoing macro-eco- of ‘in rem’ right in the same. nomic and socio-political developments, all wrapped up in a package which is necessarily focussed on assets representing iii) Securities/Capital Markets some of the most advanced engineering and design technologies Often subject to additional scrutiny due to additional security on the planet and indeed beyond. exchange and other compliance regulations (particularly in the As we stand now at the beginning of a new decade, one which case of asset backed security, or ABS, transactions), this type already has the sense of structural uncertainty and an increased of financing is heavily structured and therefore costly and the pace of change as a result of world events such as climate change, domain of the larger players such as the leasing companies. the US/China politico-trade war, and as we go to print an unprec- Tradable loan notes are issued to investors representing a repay- edented attack on the way the planet lives by a hitherto unknown ment right which is then collateralised against a revenue stream virus named COVID-19, it is interesting to take stock of aviation such as that of a substantial aircraft lease portfolio, while the finance both as a discipline and as an economic enabling tool. capital contribution finances the aircraft acquisition. Today, both those aspects benefit from, and are indeed probably enhanced by, a robust and developed international legal frame- iv) Export Credit Finance work emanating from conflict of laws resolution, contractual This is a historically significant form of financing which has flexibility and treaty-based law such as the International Register seen export credit agencies in the relevant countries, being established pursuant to the Cape Town Convention and the Cape quasi-governmental agencies set up to promote home product Town Protocol and Regulations made under it. trade, support aircraft sales by particularly Boeing (in the case of the US Eximbank) and Airbus (in the case of the European B. Types Of Aviation Finance (Including Export Credit Agencies in France, Germany and the United Kingdom). Support has typically taken the form of guaran- Leasing) tees of portions of commercial loans provided by third party Before looking at the various streams of aviation finance, it is worth lenders; however, for various political reasons, such overt finan- remembering always that the primary demand for it remains at all cial support has become uncertain in the last few years and has times the world’s airlines. A variety of statistics can be used to in fact been effectively superseded by insurance-based products highlight the extent of that demand but one of the most resonant such as AFIC structures for Boeing equipment and Balthazhar is an estimate that somewhere in the region of US$ 185 billion’s for Airbus aircraft where the insurance markets effectively worth of new aircraft combined at Airbus and Boeing alone are substitute the export credit agencies in order to obtain similar contractually committed to delivery in 2021. This fosters a relent- cost of funds for the airline or leasing company borrower. less search to drive down the cost of this capital resulting in the development and deployment of a variety of different financing, v) (Operating) Leasing structures and returns, best summarised below. Leasing has and will remain a popular form of aircraft financing for airlines which do not have the financial strength or the fleet Aviation Finance & Leasing 2020 © Published and reproduced with kind permission by Global Legal Group Ltd, London 2 Aviation Finance & Leasing – A Perspective in 2020 development programme to enter into on-balance sheet treat- of the regulations involved is also to preserve collateral value to ment of all its aviation assets, typically as regards new aircraft the benefit of the financiers involved, which is particularly valu- by selling to an established leasing company and immediately able where there is little involvement until such time as they may leasing back the aircraft concerned. More flexibility is avail- decide to invoke their rights to repossess the aircraft concerned. able in the leasing segment of the market as regards lease terms, Other attractive elements include a generally resilient asset rental fluctuations and required redelivery conditions at the class as regards depreciation in value, particularly the new end of the lease leading to continuing significant demand for narrow-body aircraft variants mentioned elsewhere in the the product, and the leasing companies have therefore become context of the high demand from low-cost carriers. Add to that important facilitators in the aviation market as distributors for the fact that many financing transactions can and are there- the manufacturers, financiers for the airlines and borrower fore structured to ensure that the financing exposure is actually customers for the banks. increased through the term of the financing, where the repay- Derivatives of the operating lease product have over time ments are made at a faster rate than the associated deprecia- included various aggressive tax-driven structures such as the tion, plus the stability of the aircraft collateral in a truly global German and Japanese Leveraged Lease and latterly the Japanese market, and the attraction for financiers who ‘know’ is clear. Operating Lease (including with Call Option) with the effect of further reducing the cost of the financing by utilising depreci- D. Threats ation benefits in various jurisdictions involved; however, while the JOLCO market continues to boom, most have had loopholes Having highlighted the positive aspects of the activity of aviation closed by relevant revenue authorities and the advent of the financing as the current scene is surveyed, it is even more neces- OECD’s BEPs initiative makes similar further product devel- sary in order to attempt to provide a balanced view of the market opment problematic. in that sense to give some examples of how things can be – and are being – disturbed. Some are easier to predict than others, With reference to some of the points made elsewhere, it is also while some are genuinely unexpected and threaten to materi- worth noting that the inherent need to innovate in this sector ally affect the availability of capital as we have seen in the recent and the sophistication and flexibility which is a feature of the phase. What is certain is that all of them demonstrate the down- aviation finance market give rise to the fact that any number side of the truly global nature of the market referenced above.
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