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Aircraft Finance Review.Indd INTO THE GREAT WIDE OPEN: 2018 INDUSTRY REVIEW EETCs: A VIABLE FINANCING OPTION Financing trends As the demand for delivery financing continues to rise, FOR US AND NON-US AIRLINES ALIKE? approaching US$140bn in 2018, liquidity remains plentiful, BY MARY O’NEILL, SHARI MCFIELD AND WANDA EBANKS, diversified and generally well-priced, all of which is MAPLES AND CALDER supporting a number of emerging lessors on their path to reaching a critical mass. Access to secured bank lending is still a mainstay of delivery financing, but alternative debt capital markets products are IN SIMPLE TERMS, enhanced equipment trust certificates classes of EETCs are issued to bondholders representing increasingly making their mark. ABS issuance exceeded (EETCs) are corporate debt securities, typically issued by tiered secured claims on multiple underlying aircraft, US$6.6bn in 2017, financing 331 aircraft and 56 engines in airlines. EETCs are secured on the aircraft operated by in accordance with intercreditor arrangements in the 12 transactions. The capital markets also closed more than the airlines, and are structured through special purpose transaction documents. This effectively underpins credit US$2bn in lessor private placements during the year, with companies (SPVs) created specifically to own the aircraft and quality for senior tranche holders, pushing first loss risk new investors continuing to be attracted to the sector. “enhanced” by elements such as debt tranching, availability down to subordinated classes. of liquidity facilities and over-collateralisation. Lessors are unlikely to face a liquidity shortage in 2018, EETCs have grown in popularity since the 1990s, fuelled although economic deployment of capital will remain The airline is the “deemed issuer” of Pass-Through primarily by use amongst US airlines able to access the challenging for some. However, as interest rates continue their The A380 programme looks increasingly under threat Certificates for US securities laws purposes. Separate well-established, creditor-friendly US bankruptcy regime gradual rise, it will become increasingly difficult to sustain the with no orders in 2017 and a diminishing backlog. (“Section 1110 US Bankruptcy Code” sportier SLB terms that have been reported and that segment or “Section 1110”) in these structures. of the leasing market will, in time, revert to more measured Table 1: Basic US EETC structure Commercial banks traditionally formed the activity. Expect also to see a further increase in the levels of As a founding executive and Head of Strategy at Avolon, financing mainstay for the aviation market, assets under management for third-party investors. his responsibilities include defining the trading cycle of the however, the development of capital market business, primary interface with the aircraft appraisal and Airline products enticed new market entrants, as Fearless forecast valuation community, industry analysis and forecasting, evidenced by the burgeoning number of Looking out over the next 12 months, then, a number of driving thought leadership initiatives, setting portfolio risk Equipment Note Payments on all Aircraft asset-backed securitisation transactions and predictions can be made with a reasonably high degree of management criteria and determining capital allocation EETC issuances over the last few years. confidence: targets. Prior to Avolon, Dick was a founding executive at RBS Loan Trustees • Passenger traffic growth will continue to perform (now SMBC) Aviation Capital and previously worked with EETCs offer airlines access to a lower cost form measurably above trend, led by emerging markets IAMG, GECAS and GPA following a 20-year career in the UK of finance, and are balanced in attractiveness • OEM deliveries will get back on track and continue to airline industry. Dick has a Diploma in Business Studies and in Series A Series B to investors, offering predictability in increase in number and value Marketing from the UK Institute of Marketing is a member of Equipment Equipment recoverability in a default scenario (there is • Lessors will remain the largest funding channel, although the Royal Aeronautical Society and also a Board Director of Notes Notes a high degree of collateral coverage and SLBs will remain largely the domain of emerging, or ISTAT (The International Society of Transport Aircraft Trading). Equipment recovery expectations are good even in recently emerged, players Note Payments circumstances where the aircraft pool is on all Aircraft Advances and • Liquidity from private and fixed income investors will Reimbursements severely stressed and aircraft are rejected continue to increase, with Asian capital playing a growing Subordination (if any) Liquidity early in the airline bankruptcy), more attractive role Principal, Make- Agent Provider rates of returns on investments and shorter DICK FORSBERG Whole Amount • Further modest increases in interest rates will have little Head of Strategy (if any) and term commitments. EETCs are also well suited Interests immediate impact on aircraft supply and demand. Distributions to repeat issuances, allowing carriers with AVOLON established histories in the market to achieve The Oval, Building 1, Shelbourne Road, About the author: Class A Class B more attractive terms on subsequent issuances. Ballsbridge, Dublin 4 D04 E7K5, Ireland Depositary Dick Forsberg has over 45 years’ aviation industry experience, Trustee Trustee working in a variety of roles with airlines, operating lessors, Tel: +353 1 231 5825 In this article, we will examine some of the Interest Payment arrangers and capital providers in the disciplines of business Email: [email protected] on Deposits key features underpinning the success and strategy, industry analysis and forecasting, asset valuation, Website: www.avolon.aero popularity of EETCs. We will consider in Class A Class B Escrow portfolio risk management and airline credit assessment. Certificate Certificate Agent particular the applicability and attractiveness holders holders of these features to non-US investors and airlines and how Cayman Islands and Irish Disclaimer: This document and any other materials contained in or accompanying this document (collectively, the “Materials”) are provided for general information purposes only. The Materials are provided without any guarantee, condition, representation or warranty (express or implied) as to their adequacy, correctness or completeness. Any opinions, estimates, structures are well placed to be utilised in commentary or conclusions contained in the Materials represent the judgement of Avolon as at the date of the Materials and are subject to change without notice. The Materials are not intended to amount to advice on which any reliance should be placed and Avolon disclaims all liability and responsibility arising from any reliance placed on the Materials. these transactions. 8 9 EETCs: A VIABLE FINANCING OPTION FOR US AND NON-US AIRLINES ALIKE? EETCs: A VIABLE FINANCING OPTION FOR US AND NON-US AIRLINES ALIKE? Table 2: EETC advantages and disadvantages asset quality, business risk, diversity (both geographic and revenue), and regimes supportive of creditor rights. EETC Advantages Also relevant is the lessor’s legal jurisdiction, the reliability of its • Exist in a reasonably liquid market legal system, confidence in its country’s bureaucracy to enforce • Section 1110 / Alternative A certainty around timeframes for repossession and remarketing the legal framework, existence of legal precedent and political • Aircraft are strategically important to the airlines as central to their business factors. All can impact the ability of lenders to repossess and • Assets are inherently mobile (so sales not restricted by geography) deregister the aircraft and fly it out of the country if an airline • Newer production models are relatively resilient to market stress rejects aircraft after entering administration. • Availability of repossession/remarketing agents • Even at end of life, value in the parts Non-US EETCs and brief overview of LATAM EETC structure • Part of a highly regulated industry LATAM is the only airline in Latin America to successfully complete an EETC transaction. • Existing operating processes and safety frameworks Traditionally, the criticism of non-US EETC issuances is that creditors are not afforded the same level of certainty and EETC Disadvantages predictability in terms of recourse to the aircraft equipment • Depreciation, difficulty in selling certain models equipment note default and a potential shortfall post-rejection as with its US counterpart. • Market subject to sudden shocks (e.g. 2011) for a particular aircraft. The inclusion of cross-default provisions • Significant maintenance requirements for older aircraft limits an airline’s ability to choose which aircraft financings and Successful non-US EETC transactions have however utilised • Risk that bankruptcy filed at time when maintenance costs are at their highest meaning significant cost leases to retain or reject in a bankruptcy scenario. alternative means to allow for quick access to the collateral implication for preparing aircraft for remarketing. Repossession and remarketing costs can be large following an airline insolvency. Alternative A of Article XI of (between 5% and 10% of the market value of an aircraft). There are risks associated with the condition and With earlier EETCs, cross-collateralisation provisions were the Protocol to the Cape Town Convention (“CTC”) serves as maintenance status of pool aircraft not included,
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