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The Commercial Aircraft Finance Handbook

Ronald Scheinberg

Deal Types, Structures and Enhancements

Publication details https://www.routledgehandbooks.com/doi/10.4324/9780203713303-3 Ronald Scheinberg Published online on: 08 Dec 2017

How to cite :- Ronald Scheinberg. 08 Dec 2017, Deal Types, Structures and Enhancements from: The Commercial Aircraft Finance Handbook Routledge Accessed on: 24 Sep 2021 https://www.routledgehandbooks.com/doi/10.4324/9780203713303-3

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The publisher does not give any warranty express or implied or make any representation that the contents will be complete or accurate or up to date. The publisher shall not be liable for an loss, actions, claims, proceedings, demand or costs or damages whatsoever or howsoever caused arising directly or indirectly in connection with or arising out of the use of this material. Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 will haveahandintheoperator’s decision. determined bytheoperator inits‘leaseversusown’analysis.Thefollowingcriteria (ECA). be subjecttoairlineorlessorriskhavethesupport ofanExportCreditAgency market; theymayinvolveasingleAircraftAsset,ormany ofthem;andtheymay pricing; theymaybeplacedinthecapitalmarketsor thecommercialbank/loan regimes; theymayinvolvepublicorprivatelyplaced securities toachievethebest Financings mayinvolvemultiplejurisdictionstotake advantageofdifferenttax schematic depictionofaMortgageFinancing. is treated,notasanowner,butratheramortgagee. SeeExhibit3.2fora of therelatedloan.AMortgageFinancingincludesaFinance Leasewherethelessor the lendersreceiveaSecurityInterestinthatassetascollateral tosecurerepayment from lenderstofinanceorrefinancethepurchaseprice (orvalue)ofthatassetand The ownerofanAircraftAsset(whetheralessororairline/operator)borrowsmoney Mortgage Financing of aLeaseFinancing. Operating LeasecriteriadeterminantsandseeExhibit3.1foraschematicdepiction ‘Finance/Capital Lease’,foranextensivediscussionoftheFinanceLeaseversus the lessoristreatedastrueownerofAircraftAsset;thatis,see ‘Lease Financing’asafinancingwiththecharacteristicsofanOperatingLease,where disguised MortgageFinancings),forthepurposesofthisbookwearetreatinga to thelessor.WhileleasesmaybeOperatingLeasesorFinance(whichare for rent,andattheendofleasetermairline/operatormustreturnthatasset which thelesseewillhaverighttopossessionanduseofsuchassetinexchange it fromathirdpartywhodoesown(lessor)forperiodoftime(leaseterm)during The airline/operatorofanAircraftAsset(lessee)doesnotowntheassetbutborrows Lease Financing thereof). Thesetwofundamentalprototypescanbesummarizedasfollows. they areeitheraleasefinancingormortgage(orsomecombination Aircraft Financetransactionscomeinmanyshapesandsizesbut,fundamentally, Introduction: basictransactiontypes Ultimately, thestructurechoice ofLeaseFinancingorMortgageis The variationsonthesetwoprototypeskeepAircraft Financiersratherbusy. DEAL TYPES,STRUCTURESAND 1 ENHANCEMENTS PART 3 19 Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 Source: Exhibit 3.1 Source: Exhibit 3.2 Mortgage Author’s own Author’s own Security trustee/agent Operang lessor Lease Financing Mortgage Financing SPV/lessor Aircra Debt service$ (borrower) Airline Aircra DEAL TYPES,STRUCTURES&ENHANCEMENTS

Waterfall Loan distribuons$ Lease $rentals Benefits ofmortgage 20 Lease Loan $(day1) A B C Airline Lenders Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 operator, theothersideto these mattersismakingsuretheneedsofpurchaser While thepreviousdiscussion largelyrevolvedaroundtheneedsofairline/ The Purchaser the natureofplacementitself. two considerationshere:(i)theidentityofpurchasers ofthefinancing;and(ii) the Prior todelvingintothevarioustransactionstructures, awordshouldbesaidabout Placement be reviewedaswelldifferentfeaturesthatmayappended ontothesestructures. Corporatepolicy: • In thisPartoftheHandbook,variousstructuresused tofinanceAircraftwill Tax: • Accesstocapital: • Technologicaladvancements: • Residualrisk: • Cost: Operationalflexibility. • • placement º º º º º º º º º º º º º º º º º º º accounting policytominimizeon-balancesheetdebt. the onetobearburdenofdebtfinancing);and interest inde-leveraging(inaLeaseFinancing,thelessorwouldbe keep fleet‘young’; deliveries generally. Original EquipmentManufacturers(OEM)orderbookforfuture perceived futureavailabilityofassetmodelfromothersources;and future maintenancecosts; example, depreciation). ability totakeadvantageoftaxbenefitsavailableanowner(for lessor markets. equity markets;and debt markets; Winglets). ability toretrofittheseadvancementsonoldermodels(forexample, better fuelburnfornewermodels;and cheaper maintenancefornewermodels; consideration itsownorderbook); view oncurrentandfutureaircraftneeds(‘lift’)gaps(takinginto view onemergenceofnewaircraftmodelsandtechnology; risk appetite; long-term viewofassetvalueappreciation; ability totakeadvantageoftaxbenefits. lease ratesversusdebtrates;and of AircraftFinancetransactionsinthefinancialmarkets. Thereare DEAL TYPES,STRUCTURES&ENHANCEMENTS 3 21 2 4 Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 investor poolisconstantly expanding asinvestorsfromallofthesectorsdescribed 40 percentofnewAircraft deliveries arefundedbyOperatingLeaseFinance.The a tremendousbearingonriskassessment(and,accordingly,returnrequirements). Risk Factorsmightsurfaceintoaproblem,thusthetenoroftransactionwillhave transaction (‘RiskFactors’). following (non-comprehensive)setofrisksassociatedwithanyAircraftFinance ments basedonthesethreecriteriamustbesatisfied,takingintoaccountthe (ii) currentcashflow(rent);and/or(iii)taxbenefits.Itseconomicreturnrequire its interestintheoperatingbusinessofleasingandobtaining:(i)residualreturns; the personwhowouldbecomelessor/ownerofAircraftAsset,isdrivenby In leasefinancings,therewillbeanequitycomponent.Thepurchaserofthemetal, E down intotwogroupings: of theAircraftFinancesecurityaresimilarlysatisfied.Thesepurchaserscanbebroken QUITY The longertermtrendsshow Aircraftleasingtobeontherise.Approximately pension plans. banks (for example,SMBC);and • financecompanies(for example,SiemensCredit); • • hedgeandprivateequity funds(StrategicValuePartners,Fortress,Wayzata, tax-playinvestors(forexample,MetLife); • • specializedoperatingleasingcompanies (Vx,Apollo,CompassCapital,and • traditionaloperatingleasingcompanies (AerCap,GECAS,ACG,andso • Investors inAircraftAssetequityinclude: Of course,thelongerleaseterm,greaterchancethatanyofthese Change-of-law/accountingrules. Fuelcosts. • • Airlineregulatorydevelopments(airworthiness directives(ADs),noiserules Economyperformance(localandinternational). • • Airlineindustryperformance(localandinternational;terrorism,SARS, Jurisdictionalissues(abilitytoenforce/repossess–countryrisk)(legal). • • Aircraftassetvaluestability(technologicaldevelopments,obsolescence,life Lesseeperformance(andothercreditsupportproviders)(creditrisk). • • thedebt. thethirdpartyequity,beinglessor/ownerinatransaction;and 2 1 and soon); so on); on); and soon). so on). cycle, secondarymarkets,andsoon)(residualvalue). DEAL TYPES,STRUCTURES&ENHANCEMENTS 22 - Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 primary debtplacementoptionsandtheirrelationship totheSecuritiesAct. compliance obligations)foranyofferandsaleofsuch security.Hereisalistofthe rather costlyundertakingthatrequiresbothpublic disclosureandongoing and filingwiththeSECofaregistrationstatementin respectthereof(whichisa of any,interalia,debtsecurity,and,absentanexemption,requiresthe preparation Securities Actof1933,asamended(the‘SecuritiesAct’)) coverstheofferandsale examination ofthesecuritieslaws.InU.S.,laws(primarily private contractlaw,thedistributionofdebtcomponentwillrequirean While placementoftheequitycomponentistypicallyastraightforwardmatter Distribution; securitieslaws www.boeingcapital.com/cafmo/. current trendlinesforthevariousAircraftFinancefundingsources;see Aircraft FinanceMarketOutlook,2013–2017’providesausefulsnapshotofthe fall withmarketdevelopmentsandcycles.BoeingCapital,intheirannual‘Current debt componentsinclude: bearing ontheriskassessmentsandreturnrequirements.InvestorsinAircraftAsset Risk Factorsspeltoutaboveand,similarly,thetenorofatransactionwillhave The economicreturnrequirementsofdebtproviderswillnecessarilyfactorinthe return whichisprimarilycoveredby:(i)up-frontfees;and(ii)interestearnings. for debt.Providersofdebthavemoresimplecriteriathanequityassessingtheir In Back-leveragedLeasefinancingsandinmortgagethereisarequirement D any necessaryleverage). commercial aircraftinvestmentsshouldcontinuetoattractsufficientequity(and an increasinglyvisibleopportunity.Thehistoricallystrongperformanceof above arelookingforthe‘nextbigopportunity’,withAircraftownershipandleasing EBT Rule144A Financing–Rule144Aisaruleof the SECthatallowsan • Bankfinancing–bankloansarenot asecuritycoveredbytheSecurities • The interestoftheseequityanddebtparticipantsinAircraftFinancerise OEMs. ECAs(directlyorthroughguaranteed-debt);and • publicdebt/capitalmarkets; • • non-banklenders:insurancecompanies,financepensionplans commercialbanks; • • right toobtainfromtheissuer, uponrequest,certainbankinformationabout and prospectivepurchasers ofRule144A-placedsecuritiesmusthavethe investors mustbeQualified InstitutionalBuyers(definedbelow).Holders investors previouslyacquired inaprivateplacement.Suchinstitutional exemption toregistrationforresalesofdebtsecurities toinstitutional Act, somaybeplacedwithoutaregistrationstatement. and funds(forexample,Fidelity); DEAL TYPES,STRUCTURES&ENHANCEMENTS 5 23 Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 unusual tosee,forexample,anEETCsecuritystructured asfollows: so astoappealdifferentinvestors’risk,yieldandtenor appetite.Itwouldnotbe this placementsliceanddicethesecuritiestominimize yieldsbytranchingthedebt without aspectsoffinancialengineering.Investmentbankers andotherstaskedwith Junior BTranche. • SeniorATranches: • The placementofAircraftAsset-backedsecuritiesinthe financialmarketsisnot Registeredoffering–while,asnotedabove,therearesignificantexpenses • Government-guaranteedsecurities–Section3(a)(2)oftheSecuritiesAct • Privateplacement–underSection4(a)(2)oftheSecuritiesAct, • º º registered. Trust Certificates(EETCs)issuedbyU.S.publicly-traded airlinesare securities registered.Forthisreason,manyoftheEnhanced Equipment ments, somanyoftheseissuerswilltaketheextrasteps tohavetheirdebt mechanisms fortheirinitialdisclosureandongoingcompliancerequire accordingly, regularlymakefilingswiththeSEC)havealreadyinplace amended (forexample,companiesthatarepubliclytradedandwhich, ‘reporting companies’undertheSecuritiesandExchangeActof1934,as to securitieslawsrestrictions).Issuersofdebtwhoarealready and salesofdebtsecuritiesinsecondarymarkettradesaresimilarlysubject registration significantlyenhancestheliquidityofsecurity(asofferings provide toissuerspricingbenefitsifasecurityisregistered,sincethe and ongoingcomplianceobligationsforregisteredofferings,investors subject totheregistrationrequirementsofSecuritiesAct. U.S. standingasguarantor, transactions (see‘ECAFinancings’)havethefullfaithandcreditof exempts securitiesguaranteedbytheU.S.InsofarasEx-Im-guaranteed solicitation orgeneraladvertising. of thefundmayofferorsellinterestsinbyanyformgeneral (defined below);and(ii)neithertheissuernoranypersonactingonbehalf private placementunderRule506:(i)investorsmustbeAccreditedInvestors on thedollaramountthatmayberaisedunderRule506.Tohaveavalid most Aircraft-secureddebtsecuritieswouldutilizebecausethereisnolimit under theSecuritiesActisparticularprivateplacementexemptionthat exemption dependingonthesizeofoffering.Rule506RegulationD constitute aprivateplacement.RegulationDhasvaryingcriteriafor Regulation DundertheSecuritiesActtoprovideguidanceaswhatwould transactions byanissuernotinvolvingapublicoffering.TheSECadopted obligation toregistertheofferandsaleofsecuritiesdoesnotapply there isoftendraftedanofferingmemodescribingthetransaction. the issuerandsecurities.Forthisreason,inaRule144Atransaction, A-2 –bulletmaturityinyear 7;and A-1 –amortizingover12years; DEAL TYPES,STRUCTURES&ENHANCEMENTS 6 the relatedsecuritiessoldtoinvestorsarenot 24 - Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 assets. Theneedforfinancing–the for AircraftAssetsdrivestheneedtofindmeansfinancingtheseexpensive practically speaking,drivenbythe‘lift’needsofairline/operators.Theirneed In thelightofforegoingreview,weseethatneedforAircraftfinanceis, Balance ofsupplyanddemand the marketandoptimizingyieldsforissuer. new deliveries(aswellastorefinancethoseaircraftthe financings ofwhichmature)? ‘Funding Gap’;thatis,willtherebeenoughavailable fundingsourcestofinance of thebankliquiditycrisisledtomuchdiscussionas to whethertherewouldbea the ECAsandmanufacturers The bottomlinetothe‘fundinggap’debateisusually questionastowhatdegree reduced lendingbudgets.Thisphenomenonwastheresultofanumberfactors: teams andleftthesectorwhileotherbankswentonalending‘hiatus’orhadvastly market crash,anumberofmajorinternationalbanksdisbandedtheiraircraftfinance Lehman Brotherscrashandresultingfinancialtailspin.Intheaftermathofthat market developments,muchastherewasin2008,2009and2010followingthe On theotherhand,theremaybeanoveralllackofliquidityinmarketsdueto competitive pricing(oratall). Importantly,theECAfinancingscanonlysupport issue loansonadirectbasis ifECAbanksarenotwillingtostepuptheplate at cutback thanbanksthatare asset-basedlenders).Second,someoftheECAscan as totapthepoolofECA banks (whichseemtohavefacedalesssevereliquidity they cansupportwithbankguaranteesanincreasingnumber ofaircraftexportsso and noFundingGapmaterialized.ECAsfillfundinggaps inoneoftwoways.First, 2009 fundingcrisis,theECAsandremainingmarket participantssteppedup deliveries, theprospectofwhitetailsindesert.In fact,intheaftermathof and lessorsmaybepaying(gasp!)cash Financiers arebemoaningthefactthattherenotenoughdealsoutthere;airlines (and lessors)–isnotalwaysassured.Ontheonehand,therearetimeswhenAircraft and whetherthereisenoughavailablefinancingtomeettheneedsofairlines balance –whetherthereisenoughproducttosupplytheneedsofAircraftFinanciers, satisfied byasupply Each Tranche,then,istargetedtotheneedsofparticularinvestors,thusexpanding The withdrawalofbankliquidityintheaircraftfinance sectorintheaftermath bankswerehavingdifficultyaccessingcapitalwithwhichtomakeloansin • bankswerebeingcajoled,orevenforced,bytheirnewtaskmastersand • bankswerelookingtopreservecapital,soasminimizetheadditionof • counterparties. the lightofrestrictivecreditexposurelimitationsimposedbytheirfunding liquidity tolocalbusinessesandindustries; owners (thatis,nationalandstategovernments)toredirecttheiravailable stressed; further liabilitiesatatimewhentheirbalancesheetsarealreadyrather DEAL TYPES,STRUCTURES&ENHANCEMENTS of financingsources.Whetherthesupplyanddemandarein 8 10 will stepuptofillthegapsoasavoid,fornew demand 7 or turningtothecapitalmarketsforfunding. 25 side oftheequation–must,then,be 9 Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 While anumberofEuropeanbanks(especiallyGerman 2008–2009, thecommercialbankmarkethasbecomeincreasinglyrobustinappetite. With anumberofyearsnowhavingpassedsincethebankliquiditycrisis Bank Financings usage forthisfinancingsource. more closelyapproximateprivatemarketpricing,therewilllikelybeatail-offof with theAircraftSectorUnderstanding(ASU)rulesrequiringECAfinancingsto fund these(primarilyU.S.Ex-Im)financingsforbothairlinesandlessors.However, percent ofnewAircraftFinancings.Theincreasingusagethecapitalmarketsto product remainsanimportantsourceofAircraftFinancing,coveringsome23 As discussedin‘ExportCreditAgency(ECA)Financing’,theECA-guaranteedloan ECA Financings debt fundingsources? In thelightofforegoing,then,whatareindustryprospectsforthesevarious Prospects airlines inthesejurisdictionsaremoreapttoturnthecapitalmarkets. Understanding’). ThislackofavailabilityECAfinancingpartiallyexplainswhy the U.S.,France,Germany,SpainorUK(seePart7,‘AircraftSector financing isnotavailableforpurchasers/usersofcommercialaircraftlocatedin exports. So,duetothatfactandagreementsexistamongtheECAs,ECA for internationalEETCsrelyingontheCapeTownConvention. airlines totheefficienciesofcapitalmarketsfinancing andshapingthemarket criteria foraircraftlessors.Ratingagenciesalsohavea roleinintroducingnon-U.S. of theaircraftleasingbusinessanddevelopment rational andconsistentrating will needtocoincidewithanevolutionofthecreditrating agencies’understanding (CLO) typestructures.Theexpansionoflessorpenetration intothecapitalmarkets evolve theiruseofthecapitalmarketsthroughCollateralized LeaseObligations (who areaccessingthecapitalmarketswithEETCs), lessorsshouldcontinueto liquidity andimprovingpricingremainsanimportantfeature. Inadditiontoairlines is similarlypositive.TheEETCmarketcontinuesto be strong,andthatmarket’s The prognosisforcontinuedavailabilityofAircraftFinancing inthecapitalmarkets Capital Markets 28 percentofnewAircraftdeliveries. financing Chineseairlines)China.Commercialbankscurrentlyfundapproximately from commercialbanksinJapan,Australia,theMiddleEastand(incaseof banks andtheU.S.arebeingjoinedbynew(orreturning)marketentrants manently exitedthemarket,remainingEuropean(primarilyFrenchandGerman) deliveries. a growingrole.Thecapital marketsfundapproximately14percentofnewAircraft and syndicationofaircraft public debt,regionalcapitalmarketsmaystarttoplay capital marketsareexpected tocontinuebetheprimarymarketfororigination 13 DEAL TYPES,STRUCTURES&ENHANCEMENTS 11 26 landesbanks) haveper 12 While theU.S. - Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 of value: or isnotabletofinancetheAircraftatdesiredcommercialterms. on specifiedconditionsifthepurchaserisnotabletosourcefinancingitsown deliveries. ThismeansthattheOEMwillagreetofinanceitsAircraftondelivery many purchasersdorequireOEMstoprovide‘back-stop’financingforneworder OEM financingsupporthasnotplayedasignificantroleinrecentyears,although Original EquipmentManufacturers Assets canbesoldonacurrent orforwardbasis.Mindyou,theabilitytobein a be backleveragedorsold; the DeficiencyClaimscanbetraded;andAircraft stabilizes; (ii) tocashinontheDeficiencyClaimaspectsthese securitiesasthemarket 1110(b) agreements(seePart8,‘Section1110’)soas torestructureatransaction; As well,theseinvestorsmaybuythesecurities:(i)tonegotiate withthedebtorSection these times,lookingtomaximizevalueoncetheairline’s exitstrategysettlesdown. tolerance (anda(hopefully)savvymarketview)oftensnapupthesesecuritiesat may sellatadeepdiscount.Hedgefundsandotherinvestorswithhighrisk uncertainty abouttheultimateexitorstrategyforairline,thesedebtsecurities bankruptcy. Attheearlystagesofabankruptcy,whenthereistremendous securities. TheobviousexampleofthisiswhenaU.S.airlineissuerenters the exits,sincemanyinvestorshaveinternalpoliciesonholdingofdistressed However, ifthereare(usuallybad)marketdevelopments,isoftenarushto investors areusuallymakingtheirinitialacquisitionstofillaneedinportfolios. securities hashistoricallybeenratherlightfollowinginitialplacement,sincethe of theexemptionstouchedonabovewouldneedtobeutilized.Thetradingthese securities issubjecttothelawsrules,so,absentaregisteredsecurity,one complete withoutsayingawordaboutsecondarymarkettrading.Tradingthese The conversationonplacementofAircraftAsset-backedsecuritieswouldnotbe Secondary markettrading markets (post-delivery)andwithused should continuetoattractnewinvestorsthissector,especiallyinthesecondary opportunity. Thehistoricallystrongperformanceofcommercialaircraftinvestments is constantlyexpanding,withAircraftFinanceinvestinganincreasinglyvisible on aprivatebasisforimprovedyieldsandpalatablerisklevels.Thisinvestorpool of capitalmarketsproducts.However,theyareincreasinglylookingatthissector Non-bank debtinvestorsinAircraftFinancearemostprevalentthepurchasing Non-bank Financing The buyerofthesedistressedsecuritiesmay,accordingly, endupwiththreeitems Each oftheseitemsissubject tomonetizationindifferentways:theLeasescan theresidual valueofanAircraftAssetatitslease termination. deficiency claims;and • arestructuredleasewiththedebtor (withassociatedrentcashflow); • • 17 16 and (iii)toacquireAircraftAssetsonthecheap. DEAL TYPES,STRUCTURES&ENHANCEMENTS 14 Aircraft (whichwillprovidestrongeryields). 27 15 Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 to U.S.dollar-denominatedassetsorobtainfundingfromdollarsources. normally fundthemselvesinnon-U.S.dollarsmustlikelyeitherhedgetheirexposure this policyisassumingcredit riskofeachtheunderwritinginsurancecompanies These underwritingarrangements areonaseveralbasis.Thus,aninsuredtaking insurance companiesthat are affiliatesofAllianz,AxisandSompoInternational. payments whendue.TheAFIC insurancepolicyisunderwrittenbyinternational insured financieriftheobligorunderrelatedaircraft financingfailstomake over mattersofU.S.Eximbank’sroleintheeconomyand corporatewelfareconcerns. freezing ofU.S.Eximbank’sexportsupportprograms becauseofpoliticaldisputes reasons, toprovideanalternativeU.S.Eximbank financing supportduetothe for Boeing-manufacturedaircraft.Thisproductwas launched,foramongother the creditsupportprovidedbyU.S.Eximbankinitstraditional supportarrangements acquiring Boeing-manufacturedaircraft.AFICisintended toreplicate,inlargepart, Companies, forfinanciersprovidingfinancingtooperating lessorsandairlines developed byMarshAviationAerospacePractice,anaffiliate ofMarsh&McLennan Aircraft FinanceInsuranceConsortium(AFIC)is a creditinsuranceproduct AFIC and otherrisksassociatedwithdefaults. rights inrespectofthefinancedAircraft.SeePart8foradiscussionrepossession EETC marketislargelyowingtotheavailabilityfinanciersofSection1110 that jurisdictionandacquiringanyassociatedsecurities.TherobustnessoftheU.S. will, therefore,greatlycolortheviewofAircraftFinanciersondoingbusinessin The availabilityoftheselegalrights(orlackthereof)inanyparticularjurisdiction are highlyimportantfeaturesforAircraftFinanciers’assessmentofrepossessionrisk. of theU.S.Bankruptcy,andcomparableprovisionsunderCapeTown,accordingly, Aircraft Asset,then,isofutmostimportanceinadistresssituation.Section1110 behind theobligationofadebtoriscritical.Theabilitytorepossessfinanced about asset-basedfinancingwherethefactthatthereisavaluableassetstanding Finally, awordaboutrepossessionrisks.AircraftFinanceisnecessarilydiscussion Repossession risks liabilities suchasleasesandmortgagefinancings; dollars) needtotakeintoconsiderationcurrencyrisksonU.S.dollar-denominated non-U.S. dollarenvironments(andwhoserevenueisearnedinotherthanU.S. U.S. dollars.Withtransactionspricedinthisfashion:(i)airlineswhichoperate primary reasonforthisisthatAircraftAssetsarepricedandtradedexclusivelyin Aircraft FinancetransactionsarealmostuniversallydoneinU.S.dollars.The U.S. dollarsupremacy under Part8,‘Foreclosure’)andthetakingofotherenforcementaction. position tosomonetizetheseassetsmayrequireForeclosure(discussedindetail The AFICproductisanon-paymentinsurancepolicy; thatis,itwillpaythe DEAL TYPES,STRUCTURES&ENHANCEMENTS 28 18 and (ii)financierswhowould 19 Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 workouts ormanagementof Aircraftreturnsmightyieldadifferentresultthanwith business partnerwithwhom ithasalargerrelationshipandforwhichwaivers, from theoperatinglessor.As aresult,theairlinemayloseoperatinglessoras a In eachcase,thelendermay betakingmanagementoftheleaseandAircraftaway defaults, iftheairlineorlessordoesnot refinancethedebtballoon. lessor andtheairlineremainsunaltered.However,that couldchangeifthelessor amendments totheinsurancecertificates,relationship betweentheoperating cause fortoomuchconcernas,otherthanaredirection ofrentalpaymentsand payment undertheFinanceLease),andthereisno‘equity cushion’. things, therecanbenoBalloonexposure(unless isamatchingballoon-type ‘lessor’ (borrower)hasnoequityinterestintheasset; accordingly,amongother recourse). AFinanceLeaseisnotwellsuitedforaback-leveraging insofarasthe off anyresultingBalloon(andmostBack-leveraged LeasefacilitiesareNon- sufficient torepaysuchloan,therelatedAircraftAsset mayneedtobesoldpay under suchOperatingLease,seeExhibit3.3.Insofarasrentalsmaynotbe for aloan.TheDebtServicerequirementsundersuchloanareservicedbytherentals collaterally assigned/mortgagedbyalessorinfavorofanAircraftFinancierassecurity This isanOperatingLeasewhich,togetherwithitsrelatedAircraftAsset, Back-leveraged Lease in thecargomarket. operator/lessor providesACMIforthelessee.Thisarrangementismostprevalent Aircraft, Crew,MaintenanceandInsurance(ACMI)isaformofWetLease.The Aircraft, Crew,MaintenanceandInsurance(ACMI) collateral security). are highlyreliantonthesingleissuercredit(inadditiontoAircraftAsset Debt Obligations(CDOs).EETCsarenottypicallycharacterizedasABSsincethey realm ofAircraftFinancingaretransactionsstructuredasCLOsandCollateralized by assetsandlease(ordebt)cashflows.ThepredominantformsofABSinthe Asset-backed Securities(ABS)areissuedintheprivateandcapitalmarketssecured Asset-backed Securities(ABS) supported financingtransactionsforAirbusaircraft. Airbus willseektoreplicatethisproductasanalternativeEuropeanECA- difficult toascertainhowsuccessfulitwillbeatthisstage.Wewouldanticipatethat transaction. may haveagreaterinterestintheaircraftcollateralthantheydoU.S.Eximbank government, combinedwiththeriskinherentin‘severalliability’,insureds other underwriters.InsofarasthecreditofinsurersisinferiortothatU.S. – theindividualunderwritersdonotbackstopunderwritingobligationsof From anairline’sperspective,back-leveragingof Aircraftshouldnotbe At thetimeofthiswriting,AFICproductisfairlynewtomarket,soit DEAL TYPES,STRUCTURES&ENHANCEMENTS 29 Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 to havetheoperatinglessorguaranteeobligationsoflessor. that certain‘bankruptcyremote’protectionsmightconflictwiththeairline’sinterest for otherbilateralorcapitalmarketstransactions.Finally,airlinesshouldbemindful leveraging ofAircraftmayabsorbcreditcapacitythatthesameairlineswishtouse positions. Inaddition,tappingbankfinanciersorthecapitalmarketsforback- of alessorisneverfixedaslessorsalwaysretaintherighttotradetheirAircraft a newlessor(thelender)whichhasdifferentagenda.Ofcourse,theultimateidentity Source: Exhibit 3.3 of equity). proof protections(especially inthelightoffactthatbankruptcycourtsare rather thanbankruptcyproof sincethereisnowaytoensure100percentbankruptcy- that ownsthefinancedassets. TransactionsarecharacterizedasBankruptcyRemote servicer ofthefinancedassets(see‘Securitization’)or entitythatownsthe manner toprotectthefinancingfrombankruptcy oftheoriginator,sponsoror This isatransactionusingSpecialPurposeVehicle (SPV) thatisstructuredina Bankruptcy Remote Lease rentals$ for potentialrepossessionandremarketingatLeasematurity. manner ifitiswalkingawayfromtheassetsothat financiercanprepare to takeovertheassetandlessorshouldbeadvising the financierinatimely Financiers takingBalloonriskinBack-leveragedLease dealsmustbeprepared PRACTICE NOTE Author’s own Pledged account Back-leveraged LeaseFacility Airline (lessee) Lessor/owner Lease DEAL TYPES,STRUCTURES&ENHANCEMENTS Aircra lease assignment Mortgage and Debt service$ 30 trustee/agent Security

Waterfall Benefits ofmortgage distribuon Loan $ A B C Lenders Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 to anSPV(theissuer),atax-exemptcompanyortrustformedforthespecificpurpose Once asuitablylargeportfolioofassetsisassembledor‘pooled’,theyaretransferred Source: Exhibit 3.4 the assignedequipmentnotes.Exhibit3.4displaysatraditionalCDOstructure. underlying thesecurityispaidbacktoinvestorsregularlyfromcashflowof secured loans/bondsintoasinglefacility.Theprincipalandinterestonthedebt service) andtheCLOsecuritizes being thattheCDOsecuritizesdebt security, substantiallysimilartoaCLOdescribedbelow,withtheprimarydifference Collateralized DebtObligations(CDOs)areatypeofstructuredasset-backed Collateralized DebtObligation(CDO) Debt service$ In aCDO,theoriginator An AircraftFinance-relatedCDO,then,istheSecuritizationofmultipleAircraft- absolute inconclusion),dozensofpageslongandveryexpensivetoprocure. consolidation’). Theseopinionsarereasoned(meaningthattheynot originator intheeventoforiginator’sbankruptcy(seePart8,‘Non- Bankruptcy RemoteentitywillnotbesubjecttoConsolidationwiththe Remote requirefromthelawyersoforiginatoralegalopinionthat or restructuring/reorganization.ManytransactionsstructuredasBankruptcy directors toagreeanybankruptcyfilingandothersignificantcorporateevent organizational documentsthatrequireindependentmanagers/members/ employed: SPVs,OrphanTrustStructuresandinclusionofprovisionsin In ordertominimizebankruptcyrisk,anumberoffeaturesaretypically PRACTICE NOTE Author’s own CDO Structure Equipment Mortgage Aircra note Airline/ lessor Pledged account Equipment otaeMrgg Mortgage Mortgage Mortgage Aircra (registered holder note DEAL TYPES,STRUCTURES&ENHANCEMENTS Airline/ lessor SPE Issuer of debt) Equipment Aircra note Airline/ lessor assembles thedebtsecuritiesthatitwishestosecuritize. Equipment Debt service$ Aircra note Airline/ lease lessor obligations (thatis,principalandinterestdebt obligations (thatis,rent). Pledge, mortgage note assignment and equipment trustee/agent 31 Security

Waterfall Benefits ofmortgage distribuon Loan $ Loan $ A B C Lenders Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 payment risk.Insomecases, thisisaspecialtypeofinstrumentwhichretained losses exceedtheentireamount oftheSubordinatedTranches. Subordinated Tranches,and theupper-levelTranchesremainunaffecteduntil service tomakepaymentsonthesecurities,loss isabsorbedfirstbythe Waterfall. Intheeventthatunderlyingloanpool generatesinsufficientdebt after themoreseniorclasseshavebeenrepaid.Thiscascade iseffectedthroughthe that theSPVreceives,andmorejuniorclassesonly startreceivingrepayment on thecash(includingproceedsfromliquidation ofAircraftAssetcollateral) that functionasprotectivelayersforthe‘A’class.The senior classeshavefirstclaim class ofsecuritiesandoneormorejuniorsubordinated (‘B’,‘C’andsoon)classes of creditprotectionorriskexposurethananother:there isgenerallyasenior(‘A’) categorized intovaryingdegreesofsubordination.Each Tranchehasadifferentlevel seek toprotectthisdiversity. are reflectedinConcentrationLimits(seePart13,‘ConcentrationLimits’)which Facility. CDOs useexternalcreditenhancementprovidedbythirdparties,suchasaLiquidity to haveahighercreditratingthansuchunderlyingobligor(s).SomeAircraftFinance ment oftheirprincipalinvestmentonfinalmaturity,andthuscausesthesecurities investors willreceivecashflowstowhichtheyareentitledor,ataminimum,recoup features describedbelow.Suchenhancementsincreasethelikelihoodthat the Aircraftcollateral,relatedLoantoValueratios(LTVs)andother or theunderlyingassetpool.Thisenhancementisachievedbyavailabilityof of theunsecureddebtobligor(s)underlyingbundledobligations in aCDOare‘creditenhanced’,meaningtheircreditqualityisincreasedabovethat Unlike conventionalcorporatebondswhichareunsecured,securitiesgenerated Credit enhancementandtranching the natureofcashflows(interestdebtservice)thrownoffbyrelatedloans. which willlargelybedrivenby:(i)investorappetiteforoneortheother;and(ii) make amoreinformeddecision. provide anexternalperspectiveontheliabilitiesbeingcreatedandhelpinvestor a matterofcorporatepolicy(orregulatorynecessity)foraninvestor,aswellto Credit ratingagenciesareoftenrequiredtoratethesecuritieswhichissuedas performance ofthesecuritiesisthendirectlylinkedtoassets. Alternatively, thisstructurecanbefundedbybanklendersintheloanmarket.The a privateoffering(targetinginstitutionalinvestors)orontheopenmarket. securities tofundthepurchase.Investorspurchasesecurities,eitherthrough To beabletobuythedebtsecuritiesfromoriginator,issuerissuestradable Issuance no recoursetotheoriginator.TheissuerisdesignedbeBankruptcyRemote. of fundingtheassets.Onceassetsaretransferredtoissuer,thereisnormally The mostjuniorclass(often calledtheequityclass)ismostexposedto Individual securitiesissuedbytheCDOSPVareoften splitintoTranches,or Many AircraftCDOsbenefitfromasset/obligor/geographicdiversification,which The securitiescanbeissuedwitheitheraFixedRateorFloatingcoupon, DEAL TYPES,STRUCTURES&ENHANCEMENTS 32 20 - Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 ‘pooled’, theyaretransferred toanSPV(theissuer),atax-exemptcompanyor trust that itwishestosecuritize. Once asuitablylargeportfolioofassetsisassembled or assigned leaserentals.Exhibit 3.5displaysatraditionalCLOstructure. lying thesecurityispaidbacktoinvestorsregularly fromthecashflowof leases packagedintoasinglefacility.Theprincipaland interestonthedebtunder service) andtheCLOsecuritizes being thattheCDOsecuritizesdebt security, substantiallysimilartoaCDOdescribedabove, withtheprimarydifference A CollateralizedLeaseObligation(CLO)isatype ofstructuredasset-backed Collateralized LeaseObligation(CLO) thereby minimizingredeploymentrisks. a CLOsincetheunderlyingdebtsecuritiestypicallyusedarefullpay-outinstruments, termination situations).AServicermaybelesslikelyinaCDOascomparedwith services iftheAircraftaresubjecttoreturn(duescheduledorearly(default) are thesubjectofsuchSecuritizationandtoprovideremarketingre-deployment income. are accumulated,andcanbeusedwhendebtserviceontheCDOexceedsSPV’s as principalandinterestpayments,charge-offsotherfeeshavebeenpaid-off enhanced throughareserveaccount,inwhichfundsremainingafterexpensessuch all theotherTrancheshavebeenpaid.InadditiontoSubordination,creditmaybe no coupon(eitherfixedorfloating),butonlytheresidualcashflow(ifany)after by theoriginatorasapotentialprofitflow.Insomecases,equityclassreceives In aCLO,theoriginator,typicallyleasingcompany, assemblestheAircraftAssets An AircraftFinance-relatedCLO,then,istheSecuritization ofmultipleAircraft A CDOmayemployaServicer are availableinconnectionwiththeunderlyingdebtobligations. acceptability ofthatproduct,especiallyifSection1110orCapeTownremedies to EETC).Infact,CDOsareoftenmasqueradedasEETCstapinvestor diversity ormayinvolvejustasinglecredit(and,therefore,lookmoresimilar have adiversityofunderlyingcredits/lessees,CDOsmayeithersuch Aircraft collateral. whose debtisincludedintheCDOentitledtokeepallofequity serving ascollateralvis-à-vistheissuerthereof;withairlineoroperatorof those assets,theCDOinvestoriscappedatvalueofunderlyingdebt value fromtheAircraftAssetsservingascollateraluptoentireof and LTVtests. Securitizations mayemployTurbo,DebtServicesCoverageRatio(DSCR) PRACTICE NOTE Another differencewiththeCLOisthatwhilewouldmostlikely In contrasttoaCLOwheretheinvestorshaveanopportunityobtain DEAL TYPES,STRUCTURES&ENHANCEMENTS lease to collectpayments,monitortheassetsthat obligations (thatis,principalandinterestdebt obligations (thatis,rent). 33 - Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 loans. and (ii)thenatureofcashflows(interestdebtservice)thrownoffbyrelated coupon, whichwilllargelybedrivenby:(i)investorappetiteforoneortheother; the investormakeamoreinformeddecision. well astoprovideanexternalperspectiveontheliabilitiesbeingcreatedandhelp issued asamatterofcorporatepolicy(orregulatorynecessity)foraninvestor, the assets.Creditratingagenciesareoftenrequiredtoratesecuritieswhich part ofaloan(notsecuritization)facility. Alternatively, thisstructurecanbefundedbybanklendersintheloanmarketas private offering(targetinginstitutionalinvestors)orontheopenmarket. securities tofundthepurchase.Investorspurchasesecurities,eitherthrougha To beabletobuytheAircraftAssetsfromoriginator,issuerissuestradable Issuance related securities. bank (thearranger)insettingupthestructureoftransactionandplacing of thesestructuralissues,theoriginatortypicallyneedshelpaninvestment financing, theassetsareconsideredtoremainpropertyoforiginator.Because originator isallowedtoremovethetransferredassetsfromitsbalancesheet;ina sale, afinancing,partialorpart-saleandpart-financing.Inthe to beBankruptcyRemote.Accountingstandardsgovernwhensuchatransferis to theissuer,thereisnormallynorecourseoriginator.Theissuerdesigned formed forthespecificpurposeoffundingassets.Onceassetsaretransferred Source: Exhibit 3.5 Lease rentals$ The securitiescanbeissuedwitheitheraFixedRateorFloating The performanceofthesecuritiesisthendirectlylinkedto Author’s own CLO structure Aircra Lease Lessee SPE1 Pledged account Aircra Lease Lessee SPE2 (lessor/owner) DEAL TYPES,STRUCTURES&ENHANCEMENTS SPE issuer Aircra Lease Lessee SPE3 Debt service$ Aircra Lease Lessee SPE4 trustee/agent lease assignment 34 Mortgage and Security

Waterfall Benefits ofmortgage distribuon Loan $ Loan $ A B C Lenders Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 Agreement. of thisrole).Theprovision oftheseservicesiseffectedthroughaServicing originator maybeinterested intheservicingfeeincomeitchargesforitsundertaking because theservicerneedsverysimilarexpertise to theoriginator(and or early(default)terminationsituations).Theservicer isoftentheoriginator, deployment servicesiftheAircraftaresubjecttoalease return(duetoscheduled that arethesubjectofsuchSecuritizationandtoprovide remarketingandre- when debtserviceontheCLOexceedsSPV’slease rentalincome. charge-offs andotherfeeshavebeenpaid-offareaccumulated, andcanbeused in whichfundsremainingafterexpensessuchasprincipal andinterestpayments, residual valueoftheAircraftAssetsafterallother Trancheshavebeenpaid. coupon (eitherfixedorfloating),butonlytheresidualcashflow(ifany)and the originatorasapotentialprofitflow.Insomecasesequityclassreceivesno ment risk.Insomecases,thisisaspecialtypeofinstrumentwhichretainedby until thelossesexceedentireamountofSubordinatedTranches. first bytheSubordinatedTranches,andupper-levelTranchesremainunaffected insufficient debtservicetomakepaymentsonthesecurities,lossisabsorbed effected throughtheWaterfall.Ineventthatunderlyingleasepoolgenerates receiving repaymentafterthemoreseniorclasseshavebeenrepaid.Thiscascadeis Asset collateral)thattheSPVreceives,andmorejuniorclassesonlystart on thecashleaserentals(includingproceedsfromliquidationofAircraft that functionasprotectivelayersforthe‘A’class.Theseniorclasseshavefirstclaim class ofsecuritiesandoneormorejuniorsubordinated(‘B’,‘C’soon)classes of creditprotectionorriskexposurethananother:thereisgenerallyasenior(‘A’) categorized intovaryingdegreesofsubordination.EachTranchehasadifferentlevel seek toprotectthisdiversity. are reflectedinConcentrationLimits(seePart13,‘ConcentrationLimits’),which enhancement providedbythirdparties,suchasaLiquidityFacility. such underlyingobligor(s).SomeAircraftFinanceCLOsuseexternalcredit on finalmaturity,andthuscausesthesecuritiestohaveahighercreditratingthan to whichtheyareentitledor,ataminimum,recoupmentoftheirprincipalinvestment Such enhancementsincreasethelikelihoodthatinvestorswillreceivecashflows the Aircraftcollateral,relatedLTVsandotherfeaturesdescribedbelow. or theunderlyingassetpool.Thisenhancementisachievedbyavailabilityof of theunsecureddebtobligor(s)underlyingbundledleaseobligations a CLOare‘creditenhanced’,meaningtheircreditqualityisincreasedabovethat Unlike conventionalcorporatebondswhichareunsecured,securitiesgeneratedin Credit enhancementandtranching In aCLO,Servicer In additiontoSubordination,creditmaybeenhanced through areserveaccount, The mostjuniorclass(oftencalledthe Individual securitiesissuedbytheCLOSPVareoftensplitintoTranches,or Many AircraftCLOsbenefitfromasset/obligor/geographicdiversification,which DEAL TYPES,STRUCTURES&ENHANCEMENTS is oftenengagedtocollectpayments,monitortheassets 35 equity class)isthemostexposedtopay - Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 ever, theseoptionsmaynot meetaparticularlender’sneeds. sell (thatis,assign)theloan outrightorbringinotherbanksasparticipants.How key customerortootherborrowers. of default.Thisfreesresourcesthebankcanusetomake otherloanstothesame credit risk,abankisnotrequiredtoholdasmuchcapital inreserveagainsttherisk underlying debt. goes intodefault,theproceedsfromCDScontract canceloutthelosseson on aloanbyenteringintoCDScontractasthebuyer ofprotection.Iftheloan holding debt.Abank,forexample,mayhedgeitsrisk thataborrowermaydefault rating. to pay,restructuringandbankruptcy,orevenadropin thereferenceentity’scredit although settlementmayalsobebycash. buyer theparvalueofbondinexchangeforphysicaldeliverybond, against acreditevent.Ifthereferenceentitydefaults,protectionsellerpays seller, thepremiumamountsconstituting‘spread’chargedbysellertoinsure is notapartytothecontract.Thebuyermakesregularpremiumpayments obligor’, usually(inourcontext)anairlineoroperatinglessor.Thereferenceentity a payoffiftheloandefaults.ACDSislinkedto‘referenceentity’or series ofpayments(theCDS‘fee’or‘spread’)tothesellerand,inexchange,receives in theeventofaloandefaultorothercreditevent.ThebuyerCDSmakes swap agreementpursuanttowhichaselleroftheCDSwillcompensatebuyer A CreditDefaultSwap(CDS)isacreditderivativetransactionthatfinancial Credit DefaultSwap(CDS) There areotherwaystoeliminate orreducetheriskofdefault.Alendercould A bankcanalsouseaCDStofreeupregulatorycapital. Byoffloadingaparticular Credit defaultswapsareoftenusedtomanagetherisk ofdefaultthatarisesfrom A defaultisoftenreferredtoasa‘creditevent’andincludessucheventsfailure advantage ofthedeepmarketforEETCsecurities. may bepackagedandmarketedasEETC-typeproducts,therebytaking lease obligorsaresubjecttoSection1110orCapeTownremedies,thenthey they couldbestructuredwithasinglelesseeobligor.Eitherway,ifCLO’s the CLO‘equity’investor. Aircraft AssetssubjecttotheCLOmaybeasubstantialvaluecomponentfor debt servingascollateralvisàtheissuerthereof.Theresidualvalueof to aCDOwheretheinvestoriscappedatvalueofunderlying Assets servingascollateraluptotheentirevalueofthoseassets,incontrast In aCLO,investorshaveanopportunitytoobtainvaluefromtheAircraft PRACTICE NOTE CLOs mayemployTurbo,DSCRandLTVtests. While CLOswouldmostlikelyhaveadiversityofunderlyingcredits/lessees, DEAL TYPES,STRUCTURES&ENHANCEMENTS 36 - Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 primary ECAsinvolvedin Aircraft Assetsupportare: billions ofdollarssupportannuallyforAircraftand Engineexportsalone.The aircraft, enginesandothermanufacturedgoodsfromthe homecountry.ECAssupply financing, orgovernmental-basedguaranteestolenders, tosupporttheexportof This isafinancingsupportedbyanExportCreditAgency (ECA).ECAsprovide Export CreditAgency(ECA)Financing ACMI arrangements. provisioning necessarytooperatetheasset.Incontrast, therearetheWetLeaseand equipment itself,anddoesnotextendtopersonnel, maintenance,fueland A DryLeaseisanOperatingthatprovides lease financingonlyforthe Dry Lease issuer. Aircraft fromtheOEM.Suchfundsondepositarenotintendedtobeassetsof available totheEETCissueronlyupondeliveryandfinancingofearmarked deposited withtheDepository,areevidencedbyescrowreceiptsandmade scheduled futuredeliveriesforspecifiedAircraft.Theprefundedamountsare current interestratesandtakeadvantageofmarketliquidityinanticipation such asinapre-fundedEETC.Loansaresothatanissuercanlock the proceedsofloansinafinancingtransactionwhensucharepre-funded, This isafinancialinstitution(typicallybankwithhighcreditrating)thatholds Depository jurisdictions haveshiftedawayfroma‘form’to‘substance’analysis. as definitive.Cross-borderTaxLeaseshavelargelydisappearedbecausemany guiding principleandthelessee’sjurisdictiontreats successful wherethelessor’sjurisdictiontreats ownership intheirrespectivejurisdictions.Suchdealstructurestypicallyare respective jurisdictions,bothpartiesareabletoobtaintax/accountingbenefitsof jurisdictions andwhere,duetodifferentaccountingand/ortaxtreatmentinthe This isaFinanceLeasewherethelesseeandlessoraredomiciledindifferent Cross-border TaxLease there aremany‘captains’toco-ordinate. borrower. ClubDealsare,bytheirnature,somewhatmoredifficulttoclosesince agent butareonrelativelyequalfootingwhennegotiatingafinancingwith This isafinancingwherethedebtparticipantsarenotledbysinglearrangeror Club Deal Brazil–BancoNacionaldeDesenvolvimento EconomicoeSocial(BNDES) • (supporting Embraeraircraft); DEAL TYPES,STRUCTURES&ENHANCEMENTS 37 form substance of thetransactionas of thetransaction Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 improving itsefficiency. bond structureisexpected toevolvefurther,expandingthemarketbreadthand that werecomprisedofU.S. Ex-Imguaranteedloans.ThisU.S. transaction structuresallowing fortheissuanceofsecuritiesincapitalmarkets supported byU.S.Ex-Im;Ex-Imwasinstrumental inthefacilitationof access forECAguaranteedfinancingshasbeenprimarily availabletofinancings the loansareconvertedtothesepublicinstrumentsand soplaced.Capitalmarket there isasufficientsizedpoolofloanstosupportplacement inthepublicmarkets, a bankfundseachAircraftasandwhentheAssets aredelivered,andonce and areincreasinglyfactoringintoexportfinancingsintheAircraftAssetspace. not subjecttotheASUrules.TherolesbeingplayedbytheseECAsareexpanding arrangements. However,itisworthnotingothersubstantialECAs,asfollows,are applied totheAircraft’spurchasepriceondelivery.In thecaseofa closing, placedwithaDepositoryandwouldberepresented byescrowreceiptsuntil all ofthefundsnecessarytofundAircraftwould bedrawndownataninitial prefunded; or(ii)fundedonapreliminaryprivatebasis. Inthecaseofa offering. Inatypicalpublic-styleissuancetheguaranteed loanswouldeitherbe:(i) funded (primarily)bybanksorsecuritiesplacedwith investorsinapublic-type of thearrangementsnotedinExhibit3.6. TheECAitselfprovidesthefinancingtoallowanowneroroperator 2 GuaranteesissuedbytheECAtolenders,whoseloansallowanowneror 1 ECA Financingscomeprimarilyintwostructures. ServiziAssicuratividelCommercioEstero(SACES.p.a.)(Italy). ChinaEx-Im. • Nexi(Japan). • • ECA FinancingsbytheECAsdescribedabovearecurrentlyregulatedASU U.S.–Ex-Im(supportingBoeingaircraftandCFM,IAE,GE • UK–HerBritannicMajesty’sSecretaryofStateactingthroughtheExport • Germany–EulerHermesAktiengesellschaft(EulerHermes)(supporting • France–BpifranceAssuranceExport(formerlyknownasCOFACE) • Canada–ExportDevelopment(EDC)(supportingBombardier • ECA guaranteedfinancingstructurescansupportbothprivatelyplacedloans Most ECAFinancingsusingtheguaranteestructureareconstructedonbasis acquire theexportedasset. operator toacquiretheexportedasset. Pratt &Whitneyengines,amongothers). (supporting AirbusaircraftandRollsRoyceengines,amongothers); Credits GuaranteeDepartment(ECGD),operatingasUKExportFinance Airbus aircraft,amongothers); (supporting AirbusandATRaircraft,amongothers); aircraft); DEAL TYPES,STRUCTURES&ENHANCEMENTS 23 22 38 21 private prefunding, funding, Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 of remediesunlessanduntil theECA-supportedloansarepaidinfull. financed Aircraftandsuch commercial lendershavenopowertodirecttheexercise lenders’ loansaresubordinate totheECA’sguaranteedloansinrespectof ASU haslargelyeliminated thisparticularfinancingstructure.Allsuchcommercial Amortization Repayment(SOAR)loans,or‘mismatch loans’;however,thelatest time astheECAsupportedloansarerepaid.Thelatter arecalledStretchedOverall loans maybeeffectedatthetimeofinitialborrowing and/ormayaccreteover to airlinesorlessorsside-by-sidewithlendersthatare receiving ECAsupport.Such guaranteed debt.Basedontheseeconomics,certain financiers arewillingtolend extending commercial/non-guaranteeddebtsecured bytheotherwiseECA- LTV advanceratesandrapidpaydownrequirements, opportunitiesarecreatedfor secure debtinanECAguaranteedfinancing.Inthelight oftheECA’sratherstrict funding byfinancierssecuredAircraftonatransaction whensuchAircraftalso ECA Co-commercialFinancingistheprovisionofcommercial (non-guaranteed) ECA Co-commercialFinancing of financingslessadvantageoustoAircraftAssetpurchasers. impose market-levelfeesandratesonthesefinancings,therebymakingtypes collapse) islikelytoreduceovertimeinthelightofASU’srequirements Source: Exhibit 3.6 (manages trust) Manufacturer ECA guaranteedfinancing(absentsomeglobalshockakinto9/11ortheLehman Trustee Author’s own ECA GuaranteedFinancingFacility Aircra tle purchase Aircra price DEAL TYPES,STRUCTURES&ENHANCEMENTS Orphan SPV Charity Aircra Trust Finance lease Lease rentals$ Pledges shares SPV Assignment of security Lessee 39 Directs Guaranteed loan(85%)+fee$ SPV Debt service $ Debt service (holds securityon Security trustee behalf of ECA) Directs Guarantee Lenders ECA Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 may adoptsimilarormore stringentorrelaxedintercreditorterms. commercial lenderisbased onatypicalU.S.Ex-Imtransaction.TheotherECAs standard waterfall. documents, that: the ECAhasanyexposureorisowedamountsarisingoutoftransaction an ECAguarantee,provided,solongastherelevantguaranteeisineffector against theairlineorlessorforanyamountsowedtothemthatarenotcoveredby collateral, thecommerciallendersoftenhaverighttopursueclaimsdirectly mercial lenderswouldbetheinstructingparty. after theoccurrenceofaneventdefault.Ifneither(i)nor(ii)applies,com the transactiondocuments,including,withoutlimitation,exercisinganyremedies transaction; theECAwillhavesolerighttodirecttakingofanyactionunder is ineffect;or(ii)thereareanyamountsowingtotheECAunderrelated for thatairlineorlessor. proceeds priortotheapplicationofamountstowardotherECA-supportedfinancings such Aircrafthavebeenpaidinfull.However,thecommerciallendersreceive amounts dueandowingtotheECAguaranteedlenderswithrespect Aircraft-by-Aircraft basis,onlyaftertherelatedguaranteedloanandallother commercial lenderswillreceiveproceedsfromtheexerciseofremediesonan between thepurchasepriceofanAircraftandrelatedguaranteedloan, The abovedetaileddescriptionoftherelativerights betweenanECAanda Any amountrecoveredbyanylenderisrequiredto beappliedthroughthe theECAhasnotsentanoticethat suchactionmateriallyinterfereswith • suchcommerciallendermaynot initiate anybankruptcy,suspensionof • suchactiondoesnotinterferewith,orotherwiseadverselyaffect,any • norecoverymaybehaddirectlyfrom,andsuchsuitshallassertany • Even thoughthesecommerciallendershavelimitedrightswithrespecttothe As longaseither:(i)therelatedECAguaranteeinfavorofguaranteedlenders If anairlineorlessorelectstouseacommercialloanfinancethedifference ECA. by orthedirectionofECA,otherwisematerially adverselyaffectsthe the enforcementorremedialactionswhicharebeingtaken orcouldbetaken airline inconnectionwithsuchrecovery;and payment orotherinsolvencyproceedingsagainsttheborrower orthelessor/ involving theECA); running toorforthebenefitofotherwiserelatinganytransaction of thecollateralorpartsecuringanyotherobligation person butonlytotheextentenforcementisonassetsnotconstitutingpart the ECA(otherthanbyrequiringpaymentofmoneysthenduetosuch restructuring, enforcementorothercollectioneffortsby,onbehalfof, rights orclaimsagainst,thecollateralborrower; DEAL TYPES,STRUCTURES&ENHANCEMENTS 40 - Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 interest. Asforprincipal, Facility’) thatwillensure payment ofinterest(only)iftheborrowerfailstopay to ensurecurrentpaymentofinterestisemployaLiquidity Facility(see‘Liquidity interest paymenteveniftheborrowerisindefaultorbankruptcy. Theprimarymeans est tobepaidcurrently treats interestandprincipaldifferently.Asforinterest, therequirementisforinter and timelypaymentofinterestultimate ofprincipal’.Thisanalysis An EETCRatingisaratingthatassessesthelikelihood thataborrowermakes‘full EETC Rating risk-sharing protocols. arrangements asamongalltheparticipatingECAsbehind thecurtaintoaddress a singleoftheseECAsmayactas‘fronting’ECAintransaction,withinternal financings. Infact,inmanyEuropeanECA-supportedfinancingsofAirbusAircraft, Hermes inGermany)useco-financingarrangementsfrequentlysupportingAirbus the Europeanexportcreditagencies(ECGD,COFACEinFranceandEuler as manyBoeingaircraftcomponentsaremanufacturedinthesecountries.Similarly, Export andInvestmentInsurance(NEXI)Korea’sExport-ImportBank,insofar the UK’sHMExportCreditGuaranteeDepartment(ECGD),Japan’sNippon a transaction. involved agreetoinsuretheleadECAforsuchotherECA’sproportionateshareof service atransaction.Aspartoftheco-financingarrangement,otherECAs ECA whoistypicallygivenbroadauthorityundertheco-financingarrangementto edies. Withrespecttotheairline/lessorborrower,itssoleinteractioniswithlead negotiations, documentation,disbursements,administrationandexerciseofrem a co-financingarrangement,thereisnormallyleadECAwhichco-ordinatesall the aircraftbyallowing‘one-stopshopping’foritsexportcreditfinancing.Under ments withotherECAs.Thiscreatesrealvaluefortheairlineorlessoracquiring process, U.S.Ex-Imhasenteredintoanumberofso-called‘co-financing’arrange other agency.Toaddressthisparticularsituationandstreamlinethefinancing from anotherECA,thenitmaybepossibletoarrangeseparatesupportsuch limited tothisamount.Ifthebalanceofcontentwouldbeeligibleforsupport for example,only50percentU.S.content,thenEx-Im’ssupportwouldbe strict eligibilityrequirementsforU.S.Ex-Imfinancing.IfaparticularAircrafthas, airframe inBoeing’sStates-sideplants.Thiscananddoessignificantlyaffectthe manufactured outsidetheU.S.beforetheyareshippedto,andinstalledon,an of example,fortoday’sBoeingAircraft,moreandthecomponentsare jurisdictions. Themanufactureoflargecommercialjetsisaglobalbusiness.Byway supply creditsupportforAircraftwithcomponentsmanufacturedinmultiple ECA Co-financingarrangementsaremadebydifferentECAsto ECA Co-financing Date’) whichisadate,typically 18months(inU.S.airlinetransactions),afterthe to bepaidinfullbytherelevant FinalLegalMaturityDate(see‘Final U.S. Ex-Imhasactiveco-financingagreementsforlargecommercialAircraftwith DEAL TYPES,STRUCTURES&ENHANCEMENTS . Thismeansthattherecannotbeanyinterruptionof the ultimate payment ofprincipalmeans thattheprincipalneeds 41 - - - Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 perspective aremanyfold: utilized thisproductaswell. TheattractionofEETCsfromtheairlineissuer’s Airways, VirginAustralia,Turkish Airlines(THY)andNorwegianAirShuttlehave non-U.S. airlinesasdiverse asAirCanada,DORIC/Emirates,LATAM,British developed in1994.Whilepredominantlyafinancing vehicle usedbyU.S.airlines, privately) issued,ratedsecuritythat: An EnhancedEquipmentTrustCertificate(EETC)isapublicly(butsometimes Enhanced EquipmentTrustCertificate(EETC) and certainotheraircraft-secureddebtsecurities. of principal.ThisratingmethodologyisutilizedbytheagenciesEETCs and liquidateafinancedaircraftassetapplytheproceedstooutstandingbalances rating agenciesperceiveisthemaximumlengthoftimeitshouldtaketorepossess underlying debtisscheduledtomature.Thisextraperiodthethat Over $90billionofEETCsecuritieshavebeenissued sincetheproductwas asacollateralsecuritymatter,the AircraftAssetsserveascollateraland, • asacreditmatter,thereissingle full-recourseairlineissueronwhosecredit • Exhibit 3.7highlightsthefollowingprimaryfeaturesofanEETC: Exhibit 3.7isaschematicthatboilsdowntheprimarycharacteristicsofanEETC. maintainsaconstantlevelofover-collateralization. isratedbasedonanEETCRating;and • • reliesonthecertaintyofremediesaffordedbySection1110U.S. • utilizesstructuralenhancementstoprovideimprovedLTVratiosforthe • utilizesaLiquidityFacilitytoprovideup18(or,insomecases,24) issecuredbyAircraftAssetsascollateral; • reliesonthecreditofasinglecorporateissuer; • • collateral (orbegivenassurancesofcontinuedperformance). or locallaw),whichprovidescertaintyastotheability torepossessthe 1110 oftheU.S.BankruptcyCode(orequivalent underCapeTown a matterofsupremeimportancetothestructure,have benefitofSection the financingrests;and under CapeTown(orotherlocallaw); Bankruptcy Codeor,inthecaseofnon-U.S.airlines,comparablerights º º º º ments include: more seniorlevels,orTranches,ofdebtsecurities;thesestructuralenhance months ofmissedinterestpayments; cross-subordination cross-collateralization cross-default tranching DEAL TYPES,STRUCTURES&ENHANCEMENTS 42 - Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 a Depository);prefundedtransactions arenotuniversaltoeveryfinancing). this indicativetransactionincluding afinancingdoneonprefundedbasis(utilizing Source: Exhibit 3.7 • Big • Easeoftracking Markets(global) • Secondary • Valueretenon Exhibit 3.8providesastructural overviewofatypicalEETCtransaction(with Pricing:Thestructural enhancementsprovidedbyanEETCallowthe • Financingdiversification:Theaccess tothecapitalmarketsmaybeavery • Easeofexecution:Whilebynomeanssimpletodocument(andrather • Fixedrate:EETCsaretypicallyissuedatafixedinterestratewhichisoften • Size:GiventhecapacityofcapitalmarketsintowhichEETCsareissued, • collateral Value Aircra Author’s own Collateral security Corporate (singleissuer)bond pricing advantagesassociatedwithsuchratings. senior-most Tranchestoberatedinvestmentgrade, withtheattendant ruption, IncreasedCostsandothercosts). bank market(withthatmarket’sdifficultiessuchas risk ofMarketDis attractive optionforairlinesconcernedwithrelyingexclusively, say,onthe negotiations inprivatetransactions. tion appliesaswelltointercreditorterms,whichcan involvelaborious will beentirelyuniformacrossitsEETC-financedfleet. Thisstandardiza- to airline)and,asanysingleairlineissuer,itstransaction documentation largely standardizeddocumentationacrosstheboard(thatis,fromairline detailed offeringmemorandumissuedtoinvestors),EETCsaresubject expensive todosogivendisclosurerequirementstypicallysubsumedina desired byairlines. institutions tofinanceayear’s-worthofdeliveries. treasury staffthetroubleofneedingtohit-uplargenumbersfinancial debt inonefellswoop,whichcancoverdozensofaircraft.Thissavesairline airlines mayfinanceinasinglefinancingupwardsof$1.5billionaircraft EETC Schematic + DEAL TYPES,STRUCTURES&ENHANCEMENTS * Or Cape* Or Town ______realise value Timing to §1110* + 43 realizaon period Keeping ‘current’ during Value (18 months) Liquidity facility + cross subordinaon Debt tranchingand collateralisaon Default risk cash flow Credit risk/ Over 24 - Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 aircraft basis,andaresecuredbythatintheairline’sfleet. ahead ofthe‘C’noteTrancheandsoon.Theequipmentnotesareissuedonaper- being rankedaheadofthe‘B’noteTranche,Tranche (commonly knownasequipmentnotes)inTranches,withthe‘A’noteTranche Mortgage Financing.Inthistypeoffinancing,theairlinewillissuepromissorynotes underlying obligationoftheairlinetomakeitsscheduledpayments.Thefirstisa base). TherearetwoprimaryfinancingstructuresforEETCsthatcreatethe investor takesdefaultriskofasingleairline(andnotdiversifiedborrower/lessee In thistypeoffinancing,anequityinvestor,actingthroughownertrustee,will Source: Exhibit 3.8 For pre-funded EETC only The secondtypeofunderlyingfinancingisaU.S.LeveragedLeaseFinancing. The EETCisfundamentallyasecuredcorporatecredit,notsecuritization. leased aircra Lessors for Lessors Author’s own EETC Overview Excess rentalpayments Interest payments on deposits Depositary Escrow agent DEAL TYPES,STRUCTURES&ENHANCEMENTS equipment notes Indenture trusteeforleased aircraandowned Series A Equipment notepaymentsonallaircra mortgage paymentsonownedaircra Holders ofClass Lease rentalpaymentsassignedby A cerficates Pass through Class Atrust trustee for lessors onleasedaircraand Principal, premium(ifany) and interest distribuons Subordinaon agent equipment notes Series B Airline 44 Holders ofClass Pass through B cerficates Class Btrust trustee for equipment notes reimbursements Series C Advances and (if any) Holders ofClass Pass through C cerficates Class Ctrust trustee for Liquidity provider 25 Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 notes. Forexample,ifthecontrolling partyweretosellalloftheequipmentnotes through theWaterfall,even those attributabletothemostjuniorclassesofequipment Tranches ofPTCshaveabsolutely nodirectclaimatall.AllDeficiencyClaimsflow on thedollar(orequityin the reorganizedairline),holdersofmorejunior debt. Whereastheholderofabankruptairline’sunsecured debtmayreceivepennies position vis-à-vistheairline-issuerworsethanholder ofthatairline’sunsecured are situationswheretheholdersofmorejuniorTranches ofPTCsmaybeina and CreditSubordination.Aninterestingfeatureofthis subordinationisthatthere varying inter-creditorrights.AnEETCwilltypicallyfeature: since theyareoftenTranched.TheTranchedinvestorsofdifferentclasseswillhave be fairlystandard,thetransactiongetssomewhatcomplicatedamonginvestors, 1110(a) oftheBankruptcyCode(seePart8,‘Section1110’). Bankruptcy CodeifitwantstokeepthestrongerAircraftAssetsunderSection not beabletocompelthereturnofAircraftAssetsunderSection1110(c) will besupportedbythestrongerones.Puttingitdifferently,airlineissuer younger collateralpooledwitholder,lessliquidaircrafttypes,sincetheweakerassets allow issuerstocombinediversepoolsofAircraftAssetcollateralsuchassuperior collateralization acrossalloftheAircraftinfinancedpool. inroads withthisproduct;seePracticeNotebelow. the needforassuredrepossession),non-U.S.airlineshavebeenmakingsignificant the domainofU.S.airlineissuers,butwithadventCapeTown(whichsatisfies at eithertheclassA,BorClevel.EETCshavehistoricallybeenalmostexclusively then, issuesPTCstoinvestors.Eachinvestorcanthenpurchasethatareissued aircraft areheldbyaclassBpassthroughtrust,andsoon.Each held byaclassApassthroughtrust,alloftheBequipmentnotesfor Thus, alloftheAequipmentnotesforAircraftinaparticularEETCare trust foreachclassofnotespursuanttoaPassThroughCertificate(PTC)structure. with respecttoeachaircraftwillbeaggregatedandheldbyaseparatepassthrough be entirelyservicedbytheleasecashflows. equipment notesareissuedbytheownertrusteeonanon-recoursebasisandwill note holdersamortgageontheaircraftandassignleasetoholders.The As collateralfortheequipmentnotes,ownertrusteewillgrant as describedabove.Theownertrusteewillthenleasetheaircrafttoairlineissuer. be obtainedbytheissuanceownertrusteeofequipmentnotesinTranches (FMV), withthebalanceprovidedbyequityinvestor.Theborrowedfundswill purchase anAircraft,borrowingupto80percentoftheAircraftFairMarketValue In addition,multi-TranchedEETCs,alsofeature,through theWaterfalls,Asset Buyoutrights. Minimumsalesprices;and • Waterfalls; • ControllingPartyrightstransitions; • • While theMortgageFinancingorLeasefacinganEETCissuancemay Since 2005,EETCtransactionshavebenefitedfromtheCross-defaultandCross- An EETCfinancingmayinvolve30ormoreAircraft.Theequipmentnotesissued DEAL TYPES,STRUCTURES&ENHANCEMENTS 45 27 28 These twofeatures 26 Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 interest Waterfall providesthattheholdersofjuniorclassesPTCsreceive‘adjusted’ feature ofEETCintercreditortermswhichisratheruniquetoEETCsthatthe would havethebenefitofDeficiencyClaim),beensold.Anotherinteresting since theequipmentnotes,whichrepresent‘direct’claimagainstair line (and more seniorTranchesleavingtheholdersofclassCcertificateswithnofurtherclaim ment notes,theproceedsofsuchsalewould,asperWaterfall,beappliedto in anEETCfor,say,60percentoftheoutstandingprincipalbalanceequip investors toparticipateinsuchatypeoftransaction. and liquidity,allowtheissuertoobtainadvantageouspricinginstitutional particular EETCissuance,ofcourse,providethewithimprovedmarketability see ‘EETCRating’and‘LiquidityFacility’. the otherstructuralfeaturesofEETC)toprovideenhancedratingsforEETC, the AircraftAssetssubjecttoanEETC–enablesratingagencies(togetherwith agencies perceiveasthemaximumperiodrequiredtorepossess,marketandliquidate This continuedpaymentofinterestforsuchperiod–beingtherating of certainnon-U.S.jurisdictions)iftheissuerceasedmakingdebtservicepayments. with continuedpaymentsofinterest(only)forupto18months(ormoreinthecase terms inatraditional(2017)EETC. 9.3summarizestheprimaryintercreditor maximize recoveriespost-default.Exhibit of PTCs.ThisfeatureisintendedtoincentivizetheholdersseniorPTCs The enhancedratingsprovidedbytheratingagenciestaskedwitha All EETCshavethebenefitofaLiquidityFacility,whichassuresEETCinvestors ‘International EETCs’. more expensiveasASUrequirementsarereflected inloanpricing.See attention paidtothismarketbynon-U.S.carriersasECA financingsbecome Emirates andBritishAirwaysaslessees).Oneshould expectincreasing aircraft leasingcompany,hasissuedEETCsonatleast twooccasions(with 1 (and AlternativeA). the EETCmarketonbasisoftheirjurisdiction’sadoption ofCapeTown adopted AlternativeA.Infact,bothAirCanadaand Emirateshaveentered product to(theoretically)workforairlinesinContracting Statesthathave Section 1110equivalentforContractingStates,onewould expecttheEETC Code intheU.S.,withadventofCapeTown’sAlternativeA,whichis airlines byreasonoftheavailabilitySection1110U.S.Bankruptcy While EETCshavetraditionallybeenafinancingvehicleenjoyedbyU.S. PRACTICE NOTE structure. creditor-friendly insolvencyregime andstructuralenhancementsofferedbytheEETC Contracting State,onthebasisthat ratingagenciesbecamecomfortablewiththeUK’sgeneral British Airwayshasalsoutilized the EETCmarkets,notwithstandingthatUKisnota 29 on theirPTCsaheadofdistributionstotheholdersseniorclasses DEAL TYPES,STRUCTURES&ENHANCEMENTS 1 As well,DoricNimrodAirFinanceAlphaLimited,an 46 - Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 to accountforthosetwotypes ofleasesdifferently(seeIAS17). continue toclassifytheirleases aseitheranoperatingleaseorafinancelease,and on leaseliabilitiesinthe income statement;providedthatlessorswillneed to asset isoflowvalue);and(b) depreciationofleasedassetsseparatelyfrominterest liabilities forallleaseswithatermofmorethan12months (unlesstheunderlying howsoever characterized–isrequiredtorecognize(under GAAP):(a)assetsand much significancefordisclosurepurposesinsofaras the lessee,underanylease– respectively), thedistinctionbetweenoperatingleases andfinanceleaseshaslost accounting rulesunderbothGAAPandIFRSstandards (ASC842andIFRS16, Aircraft, FAAfilingpurposes.Asforaccountingpurposes, inlightofnewlyadopted for tax,UniformCommercialCode(UCC)or,in the caseofU.S.-registered Finance Leasewill,inthefirstinstance,dependonwhether thedeterminationis purpose. Thecriteriaforascertainingwhetheraparticular leasetransactionisa This isaleasetransactionthattreatedasMortgage Financingforanyparticular Finance/Capital Lease issued aspartofapublicofferingthepromissorynotestoinvestors. related lease.Thistermwasprimarilyusedasthenamegiventodebtsecurities that aresecuredbyAircraftAssetsand,inthecaseofaU.S.leveragedlease, U.S. LeveragedLeaseequityOwnerTrustthatevidencetheloansmadebylenders Equipment TrustCertificates(ETCs)arepromissorynotesissuedbyanairlineor Equipment TrustCertificates(ETCs) level documents.Thesewouldinclude: include: addressed. Thefirstcategoryistheaircraftfinancingdocuments.Thesewould EscrowAgreement(s)(forpre-fundedfacilities) DepositAgreement(s)(forpre-fundedfacilities) • IntercreditorAgreement • RevolvingCreditAgreements(LiquidityFacilities) • PassThroughCertificates(PTCs) • TrustSupplements • PassThroughTrustAgreements • UnderwritingAgreement • • The secondcategorycoversthedocumentsassociatedwithPTCsortrust- EquipmentNotes TrustIndentureandSecurityAgreement(oneperAircraft) • ParticipationAgreement • NotePurchaseAgreement • • EETC documentationissomewhatvoluminous,withtwobroadcategories DEAL TYPES,STRUCTURES&ENHANCEMENTS 47 Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 for federalincometaxpurposes. investor) leasesmaydeviate fromtheGuidelinesandstillqualifyastruetaxleases if thefollowingGuidelinescriteriaaresatisfied. for singleinvestortransactions. structure worksforthemorecomplexleveragedleases,shouldwork servatively structurealeaseinvolvinglessorandlessee.Thetheoryisthatifthe leases, whileuseful,haslargelyservedasavoluntaryconstructonwhichtocon advance incometaxrulings.TheapplicationoftheGuidelinestosingleinvestor by whichtheIRSdecidescharacterofatransactionforpurposesproviding The Guidelinesarenotcontrollingasamatteroflaw,butprovidesetcriteria in structuringsingleinvestorleases,whichinvolvetwoparties–alessorandlessee. lessee/user andalendertothelessor.However,Guidelinesarealsousedaid for ‘leveragedlease’transactions,whichinvolvethreeparties:alessor/owner, federal incometaxpurposes. a guidelineofcriteria(the‘Guidelines’)forclassifyingleaseastrueU.S. Under U.S.taxrules,RevenueProcedure2001–28(Rev.Proc.2001–28)setsout Tax criteria. Importantly, theGuidelines arejustthat,guidelines.Leveraged(andsingle Thelessor mustshowthatitexpectstoreceive aprofitapartfromthetax • Thelesseemaynotlendanymoney tothelessorbuypropertyor Withexceptions,thelesseemaynot investintheleasedproperty. • • Lesseeleaserenewaloptionsmust beatfairrentalvaluethetimeof • Thelesseemaynothaveacontractual righttobuythepropertyfrom • Thelessormustmaintainaminimumunconditional‘atrisk’equity • A lessorunderaU.S.LeveragedLeaseshouldqualifyasthetaxownerofproperty The U.S.InternalRevenueService(IRS)developedtheGuidelinesspecifically Each ofthetax,UCCandFAAdisciplineshasitsownsetdetermination benefits. the leasedproperty. guarantee theloanportionofaleveragedleasethat lessorusestobuy renewal. lessor atlessthanfairmarketvaluewhentherightis exercised. called the‘20/20tests’. original usefullife(oratleastoneyear).Theserequirementsaresometimes have ausefullifeattheendofleasenotlessthan20percentits The lessormustalsodemonstratethatitexpectstheequipmentwill to haveafairmarketvalueequalatleast20percentofitsoriginalcost. lessor mustshowthatitexpectsthepropertyatendofleaseterm the property)duringentireleaseterm.Withinthisgeneralconcept,a investment inthepropertybeingleased(atleast20percentofcost DEAL TYPES,STRUCTURES&ENHANCEMENTS 48 - Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 respect towhich: 2A oftheUCC.UnderSection2.A-103(1)(g),a‘FinanceLease’isleasewith mortgage financing–doesnotcomportwiththedefinitionofthattermunderArticle Lease’ –thatis,aleaseintendedforsecurity,whichissubstantivelyequivalentto further elaborationontheabove. sideration uponcompliancewiththeleaseagreement. the ownerofgoodsfornoadditionalconsiderationornominalcon upon compliancewiththeleaseagreement;or(iv)lesseehasanoptiontobecome life ofthegoodsfornoadditionalconsiderationornominal goods; (iii)thelesseehasanoptiontorenewleaseforremainingeconomic the remainingeconomiclifeofgoodsorisboundtobecomeowner remaining economiclifeofthegoods;(ii)lesseeisboundtorenewleasefor by thelessee,and:(i)originaltermofleaseisequaltoorgreaterthan of thegoodsisanobligationfortermleasenotsubjecttotermination if theconsiderationlesseeistopaylessorforrightpossessionanduse determined bythefactsofeachcase;however,atransactioncreatessecurityinterest provides guidance:whetheratransactioncreatesleaseorsecurityinterestis Under theUniformCommercialCode(UCC)inU.S.,§1–201(37)ofUCC UCC/Commercial law oneofthefollowingoccurs: • thelessoracquiresgoodsorrighttopossessionanduseof thelessordoesnotselect,manufacture,orsupplygoods; • • Importantly, thecommon‘commercial’understandingofterm‘Finance See ‘AppendixC-2A’forthecompletetextofUCC§1–201(37)whichincludes º º º º in connectionwiththelease;and the righttopossessionand use ofthegoodsfromthatperson,(b) selected thatpersonanddirected thelessortoacquiregoodsor of thepersonsupplying goodstothelessor,unlesslesseehas signs theleasecontract,informs thelesseeinwriting(a)ofidentity (D) iftheleaseisnotaconsumerlease,lessor,before thelessee of thegoods;or which thelessoracquiredgoodsorrighttopossession anduse supplying thegoodsinconnectionwithoraspartof the contractby manufacturer ofthegoods,providedtolessor by theperson or liquidateddamages,includingthoseofathirdparty, suchasthe any disclaimersofwarranties,limitationsormodifications ofremedies, and completestatementdesignatingthepromises warranties, and (C) thelessee,beforesigningleasecontract,receives anaccurate to effectivenessoftheleasecontract; the goodsorrighttopossessionanduseof isacondition (B) thelessee’sapprovalofcontractbywhichlessoracquired before signingtheleasecontract; acquired thegoodsorrighttopossessionanduseof (A) thelesseereceivesacopyofcontractbywhichlessor DEAL TYPES,STRUCTURES&ENHANCEMENTS 49 - Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 Aircraft shouldberegistered.In1990,pursuanttotheso-called‘LeiterLetter’, The U.S.FAApaysattentiontoidentifyproperlytheentityinwhosenamean FAA most likelybedeterminedbyreferencetotheUCCtests. Under U.S.bankruptcysituations,thematteroftrueversusfinanceleaseswould Bankruptcy Lease forthepurposesofthisHandbook,itshouldbeignoredourpurposes. it isprudenttoconsultwith theFAAandobtainanopinionfromAeronautical in threespecificscenarios. owner forAircraftregistrationpurposesunderaleasewithanoptiontopurchase FAA purposes.Accordingtothatopinion,thewillrecognizelesseeas the FAA’sChiefCounselissuedalegalopinionsettingoutrelevantcriteriafor Insofar asthisparticulardefinitiondoesnotcomporttoourusageofFinance As theLeiterLetterdoesnot havethebindingnatureofastatuteorregulation, thelease mustnotpermitthelesseeunilateral righttoterminatethe • thelesseemusthave theobligationsofmaintenance,insurance,taxes, • In additiontooneoftheabove,bothfollowingfactors mustalsobepresent: Thepurchaseoptionpriceishigherthan10percent andthereisno 3 Thepurchaseoptionpriceisabovethe10percentbrightline,butcontains 2 Thepurchaseoptionpriceis10percentorlessofthevalueAircraft 1 lease withoutaneconomic penalty. operations andriskoflosswithrespecttotheAircraft; and lease iftheoptionisnotexercised. less thanthelessee’sreasonablypredictablecostofperforming underthe mandatory fullpayoutiftheoptionisnotexercised,but theoptionpriceis the purchaseoptionprice. obligated topayaresidualvalueorterminationsumequalexceeding a requirementthatiftheoptionisnotexercised,lesseenevertheless determined atthetimeleaseisexecuted. and limitationsofthemorremedies. statement ofthosepromisesandwarranties,includinganydisclaimers supplying thegoodstolessorandreceiveanaccuratecomplete of thegoods,and(c)thatlesseemaycommunicatewithperson which thelessoracquiredgoodsorrighttopossessionanduse supplying thegoodsinconnectionwithoraspartofcontractby including thoseofanythirdparty,providedtothelessorbyperson the lesseeisentitledunderthisArticletopromisesandwarranties, DEAL TYPES,STRUCTURES&ENHANCEMENTS 50 31 32 30 Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 registering anAircraftinthenameofalessee. Center Counselinadvanceofaclosingordertodeterminethepropriety Consequences oflosingatrueleasechallengeincludethefollowing. lessor’s true-leasecharacterizationandrightsunderapurportedlease. for theimputed‘interest’paidbylesseeonfinancing. applicable usurylawandshouldsufferthepenaltiesofovercharginglessee be aloan,forusurypurposes,thelesseemayarguethatlessorviolated a substantialeconomicdownsideloss.Inaddition,ifleaseisconstruedto tion wouldeliminateanyresidualrecoveryandpotentiallyleavethelessorwith penalties. in recoupmentbytheIRSoftaxbenefitspreviouslytakenplusfinesand fications. have haditbeenclassifiedasamortgage). financier toamorebeneficialstatusintheexerciseofremediesthanitwould local lawinoverseasjurisdictions(whichalmostuniversallyentitlesthe Cross-border TaxLeaseorforthefinanciertoachieve‘lessor’statusunder rather thanmortgages,formanyreasons,includingtoobtainbenefitsofa ultimately restwiththelessee.TransactionsarestructuredasFinanceLeases, as thetrueownerofassetinsofarbenefitsandburdensownership is akintohavingamortgageinterestintheassetwithlesseebeingtreated While thelessorinaFinanceLeaseholds‘title’toasset,holdingsuchtitle PRACTICE NOTE • • • In thecontextofalesseebankruptcy In thecontextof In thecontextoftax The mischaracterizationofaleaseastruecanhavemajorrami ownership) interest,thelessor maynotachieveexpectedprioritywith UCC orotherpriority-creating statutetoperfectasecurity(versus make atimelyandcorrect filingoffinancingstatementsunderthe Potential lossoflienand/or priority transaction asfinancinginsteadofatruelease. A lessordoesnotenjoythisrightifthecourtcharacterizes the non-monetary defaultsbeforethedebtor-lesseecanassume thelease. of theBankruptcyCode,adebtor-lesseemustcureall monetaryand No requiredcureofdefaultsunderSection365(b).Under property . . . until suchleaseisassumedorrejected’. relief ina. . . Chapter11 . . underanunexpiredleaseofpersonal of thedebtor. . . firstarisingfromorafter60daystheorderfor requires debtors-in-possessionto‘timelyperformallof theobligations 365(d)(10) ofthefederalBankruptcyCode.Section 365(d)(10) lessor hasmeaningfulrightstopaymentonleases under Section Loss ofSection365(d)(10)payments(if1110notapplicable) DEAL TYPES,STRUCTURES&ENHANCEMENTS commercial matters,failuretoobtaintrueleasecharacteriza- matters, amischaracterizationforlessorwouldresult 51 proceeding, alesseemaychallenge . Ifforanyreasonalessor failsto . A - Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 following reasons: in theAircraft.Thisfinancingstructureissohighlyfavored for,amongothers,the suffice; thatis,thefinanciersareprovidingdebtfinancing withnoresidualinterest of Aircraftworld-wideinthesituationwhereamortgage financingwouldotherwise Aircraft. TheutilizationofFinanceLeasestructuresis ubiquitousinthefinancing Financing, insofarasthe‘lessor’hasnoupside(ordownside) riskinthefinanced Procurement ofamortgageinthelocaljurisdiction maybeprohibitively • Thelaws, andthecourts,oflocaljurisdiction oftheairlinemayprovide • A FinanceLeasefinancingis,asnoted,theeconomic equivalentofaMortgage 1 • transactions’, Mayer, DG,‘Trueleasesunderattack:lessorsfacepersistentchallengestotruelease expensive (byreasonof,for example,stamptaxesonrecordedmortgages). (notwithstanding thesubstantive equivalentofthetwostructures). greater rightsinanairlinedefaultsituationtolessors overmortgagees with respecttothesameproperty. provide severaladvantagestoalessoroverthoseofsecuredparty or accuratelycalculated).Theremediesavailableunderatruelease estimate ofdamages,includinglostresidualvalue,thatcannotbeeasily and evenrequirethepaymentofliquidateddamages(agenuinepre- can cancelalease,recovertheequipment,collectdiscountedrents called the‘lessee’).Thetruelessorisnotboundbytheserules.Lessors reasonable manner,payingtheexcessproceedstodebtor(evenif closure ofcollateral,andtosellthecollateralinacommercially if calleda‘lessor’)togivereasonablenoticeofdispositionfore example, Part6ofArticle9theUCCrequiresasecuredparty(even of remediesasasecuredpartyunderArticle9theUCC.For ‘lease’ asatruelease,thelessorobtainsremediesanowner,instead Loss offavorablelessorremedies.Whenaproperlystructures º º º of asecurityinterest,theinterestmaystillbesubjectto: bankruptcy. Evenifavalid,securedclaimexistsduetopropergrant may takepriorityandleavethelessorwithlittleornorecoveryina respect totheleasedproperty.Inthatinstance,anothersecuredparty the BankruptcyCode. lien ofthelessoragainstleasedpropertySection544(a) the ‘strong-arm’powersoftrusteeinbankruptcytoavoida Section 506oftheBankruptcyCode;or a reductionofthevaluecollateral(leasedproperty)under contractual rent); ruptcy Code(producinglowerpaymentstothelessorthan the ‘cramdown’provisionsunderSection1129ofBank Journal ofEquipmentLeaseFinancing23(3),Fall2005/PartB. DEAL TYPES,STRUCTURES&ENHANCEMENTS 52 1 - - Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 collateral. based ontheirassessmentof thetimeitmighttaketorepossessandliquidateaircraft Rating methodology,rating agenciesmayassesslongerperiodsinotherjurisdictions starting onthelastpossibledaysecuritycanbein default. be thelongestlengthoftimeitshouldtaketorepossessand liquidateaircraftcollateral determined bytheratingagencyprovidingEETC Rating onagivensecurityto security. This18-monthperiod(orotherperiod,asexplained below)istheperiod 24 or36months)afterthedatethatiseconomicmaturity dateoftheunderlying the FinalLegalMaturityDateisdatethat18 months (or,incertaincases, In anEETCorotheraircraft-securedfacilitythatisrated usingtheEETCRating, Final LegalMaturityDate Aircraft. is aschematicillustrationofstandardFinanceLeasestructureutilizedtofinance Exhibit 3.9 Security Trustee/Agent While 18monthsisthenorm indealsforU.S.airlinesthatutilizetheEETC In fact,nearlyallECAfinancingsutilizetheFinanceLeasestructure.Exhibit3.9 Finance LeaseStructure Pledge of Borrower Lease Assignment Mortgage & DEAL TYPES,STRUCTURES&ENHANCEMENTS Borrower/Lessor Del. Stat.Trust 100% Member Finance Lease Beneficiary Del. LLC Charity Lessee Aircra Title 53 Loan $ Lenders Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 its jurisdictionofoperationchanges. This isanarrangementwherebyAircraftchangesoperatorsandRegistrationwhen Interchange lessors. historically beentheinvestorsinthesetransactions,withtheirsubsidiariesactingas into whethertheseamounttoanillegalsubsidy.Frenchcommercialbankshave types ofleasesareincreasinglydifficulttoarrangeinthelightEUinvestigations This isaCross-borderTaxLeasewherethelessordomiciledinFrance.These French Lease a discountfromtheminimum premiumrateinrespectofexportfinancingsupport appendix identifiestheCape Towndeclarationsnecessaryforacountrytoreceive criteria. adopted CapeTownwillsatisfytheRatingAgencies will dependonthefollowing that theprecedingsentenceusesword‘may’.Whether ajurisdictionwhichhas jurisdictions mayprovidethenecessarysupportfornon-U.S. carriers.Youwillnote 1110 isthelynchpintothisinU.S.Theadoption ofCapeTowninnon-U.S. certainty tothereturnofAircraftAssetcollateralin adefaultsituation.Section exclusively onthebuilt-inrequirementofEETC tohavelegalandpractical The RatingAgencies’willingnesstoratenon-U.S.airline issuerswillturnalmost requirements, structuredintheidenticalfashionasthoseissuedbyU.S.airlines. issuers. EETCsissuedbynon-U.S.airlinesare,absentanyparticularlocalorissuer Practice Notein‘EETCs’,EETCsarenolongerthesoledomainofU.S.airline This istheissuanceofanEETCbyanon-U.S.airline/issuer.Asdiscussedin International EETCs on theother. rules, ontheonehandanddesirebyoperatorstomaximizeAircraftutilization, especially inCentralandSouthAmerica.ThereisthetensionbetweenCabotage increasing interestwiththeconglomerationofairlineoperatorsacrossjurisdictions, A guidetowhatthe‘right’ declarationsareisinAppendixIItotheASU.That Howdo theRatingAgenciesevaluaterule of lawinthatjurisdiction? Hasthe jurisdictionadoptedthe‘right’CapeTown Declarations? • • arduous andcomplex. in Part7,‘Re-registration’.Documentationtodealwiththiscanberather jurisdiction hascriticaleffectsonAircraftFinanciersforallthereasonsnoted The changeofRegistrationanAircraftasitbouncesfromjurisdictionto PRACTICE NOTE DEAL TYPES,STRUCTURES&ENHANCEMENTS 33 Interchange arrangementsareamatterof 54 Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 Accordingly, foratransaction tobeSharia’acompliant,itcannotemploythe matters ofaircraftfinanceis theprohibitionagainstchargingorreceiptofinterest. teachings ofMohammed,the Prophet).TheparticularitemintheSharia’aimpacting to Mohammed,theProphet) andSunnah Muslims –theKoranandHadith forming partoftheIslamictradition.Thislawisderived fromtheholybookof Assets incompliancewithSharia’arequirements. isthereligiouslaw Islamic FinanceinthecontextofAircraft is thefinancingofAircraft Islamic Finance are assuredofrepossessingtheirAircraftAssetsinatimelymanner. enough toallowapositiveratingassessmentbecausecreditorsinthatjurisdiction jurisdiction, evenabsentCapeTownorSection1110likelaws,iscreditor-friendly the applicableRatingAgencieshaveconcludedthatlegalsysteminrelevant in aBritishAirways(England)andVirginAustralia(Australia)EETCissuance, qualifying, declarationsisnotdispositivefortheRatingAgencies.Astheyhavedone ‘Country Risk’. authorities. ThisanalysisfollowstheCountryRiskdiscussedinPart7, attendant repossessionlawswillbeenforcedunderlocallawandbyenforcement however. AnanalysiswillbemadebytheRatingAgenciesastodegreethat declarations butonwhichthereareimplementationissues. adopt thequalifyingdeclarationsandthosecountriesthathaveadopted currently underrevieworsubjecttofuturereview,thosecountrieswhichdidnot That listdetailsthosecountrieseligiblefortheASUdiscount, credits/ctc.htm, providesastatuslistofcountriesqualifiedfortheASUdiscount. under AppendixIItotheASU.TheOECDwebsite,www.oecd.org/tad/export that haveadoptedCapeTowntheproper‘qualifyingdeclarations’ of EconomicCo-operationandDevelopment(OECD)assesseswhethercountries usually must-havesforRatingAgenciesaspartoftheiranalysis.TheOrganization IDERA, self-helpandtimelyremediesaremust-havesundertheASUrules from theapplicableECAs.KeydeclarationslikeAlternativeA,choiceoflaw, Finally, itshouldbenotedthatCapeTown,andtheadoptionofallright, The adoptionofCapeTownwithalltherightdeclarationsmaynotbeenough, transaction (withEmiratesAirlinesastheunderlying credit). the DORIC20131EETCwhichwasaUnited Arab Emiratesbased recovery period.Thus,24monthLiquidityFacilities havebeenrequiredin may addonmoretimetotherequisiteLiquidityFacilitycoverlonger recovery ofanasset,ratherthanexcludingthatjurisdictionaltogether,they legal framework,wouldnotallowatimely(forexample,60to90days) If RatingAgenciesconcludethataparticularjurisdiction,evenwiththeproper PRACTICE NOTE DEAL TYPES,STRUCTURES&ENHANCEMENTS (the bodyofstatementsoractionsascribed 55 (the verballytransmittedrecord ofthe Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 The lessee’sexerciseofthe fixedpricecalloptionmustnotbeeconomically cost ofthefinancedaircraft, togetherwithdebtcostsandothersuchasfees. during thelifeoftransaction cannotexceed90percentofthelessor’sacquisition for anyJOLCOisthe‘90percent test’.Thismeanstheoverallleaserentalspayable of assetriskformosttransactions,theJOLCOwasdeveloped. Akeyrequirement investor musttakesomeactualassetrisktoreceivethis taxbenefit. benefits associatedwiththeownershipanddebtfinancing oftheAircraft.Thetax minority portionofequityfunding(thebalanceisdebt) inexchangeforthetax years oflow-costaircraftfunding.AninvestorwithJapanese taxliabilityputsupa lease. Aircraft atafixedpurchasepricedatepriorto theexpirydateofrelated the lessee.Suchcalloptionprovidestolessee right topurchasethesubject lease withacalloptionintheformofanearlybuyout optionforthebenefitof A JapaneseOperatingLeasewithCallOption(JOLCO)isalongtermoperating Japanese OperatingLeaseCallOption(JOLCO) Japanese investororequitysourcedfromJapan. A JapaneseOperatingLease(JOL)isanoperatingleasefullyorpartlyfundedbya Japanese OperatingLease(JOL) analysis ofAircraft‘ownership’.JLLsarenolongerafinancingoption. the Japanesetaxauthoritiesshiftedtoamoresubstance-basedapproachintheir financing mechanisminthe1980sand1990s,butbecamelargelyuntenablewhen MOST COMMONLYdomiciledinJapan.Thisstructurewasafrequentlyused A JapaneseLeveragedLease(JLL)isaCross-borderTaxwherethelessor Japanese LeveragedLease(JLL) commercial aircraft,threetypesstandoutasworthyofmention: a panelofexpertsinIslamiclaw. particular transactioniscompliantwithSharia’apreceptsoftenpasseduponby payment ofinterestasareturnfactorforinvestors.Thematterwhether When theJapanesetaxauthoritiesrequiredthataninvestor takesomeportion The JOLCOisatax/financingstructurethatcanprovide airlineswith10to12 Sukuk Murabaha Ijarah While therearemultipleformsofSharia’acompliantfinancingfor ownership. investor forhavingtakentitletotheasset–andassociatedriskof for areasonableprofit.Suchprofitelementservesascompensationtothe be overtime.Therepaymenttotheinvestormayincludeacomponent take titletoanassetandthensellthatitscustomer–whichmay – Ijarahis,inconcept,akintotheleasingofanaircraft. – See‘Sukuk’herein. – Murabahaisafinancingmethodwherefinancialinstitutionwill DEAL TYPES,STRUCTURES&ENHANCEMENTS 56 Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 Kommanditgesellschaft Kommanditgesellschaft and theairlinegetsananswerwithintimeframeit needs. handled quitecarefullyinordertomakesuretheinvestors fullyunderstandtheissues their consentfromtimetodovariousthings. Thatprocessneedstobe Over thelifeofatransaction,anairlinemayneedtogothoseinvestorsandseek an operatinglessorinthetraditionalsense;itisreallydealingwithJapaneseinvestors. to revisitthetermsofaJOLCOifanythingchanges.Anairlineisnotdealingwith structures canberelativelyinflexible–oncetheyareupandrunningitdifficult commitment –typicallythetransactionsareofabout10years’duration.JOLCO Japanese companythatisprivatelyheld. recourse debt.ThetypicalequityinvestorinaJOLCOissmallandmedium-size extent oftheirinvestedequityamountifthetransactionispartlyfundedbynon- the leaseexpiry.TheseinvestorscanonlytakedepreciationofAircraftto income duringtheleasetermandmakecapitalgainsbydisposalofAircraftat by monitoringthemanagement ofthegeneralpartner.ThepurchaseAircraft trustee. TheKGmayhave anadvisoryboardrepresentingtheinvestors’interests (GmbH)). Thelimitedpartners maybeparticipatingintheKGdirectlyorvia a German KGisalimited company (thatis,Gesellschaftmitbeschränkter Haftung one orseverallimitedpartners.Inthemajorityofcases, thegeneralpartnerofa partnership (thatis,a purpose companieswhichareorganizedinthelegal formofaGermanlimited participating aslimitedpartners(directlyorbyemploying atrustee)insingle to avoidJapanesewithholdingtaxes. materialized. lease expiry).Inpractice,theriskofanon-exercisecalloptionhasnot payment ofmaintenanceaccrualsbythelesseewhenaircraftisreturnedat Japanese taxpurposescombinedwithmorestringentredeliveryconditions(e.g. recovery totheextentthattransactionisnotclassifiedasafinanceleasefor asset risk).Thisriskcanbeminimizedbymaximizingthelessor’sinvestment and, ifapplicable,financierswithaballoonontheirfinancing,theconcomitant will notexerciseitscalloptionfortheleasedAircraft(leavingJapaneseequity of thefinancedAircraft. at thefinalmaturityofJOLCOlease,balloonwouldberepaidfromsale prior tothematurityofrelatedJOLCOlease.Ifithasaballoonpaymentdue repaid fromtherentsunderaJOLCOlease.Thedebtmayamortizetozero debt andprovideareturntotheequityinvestor. purchase priceinaJOLCOwouldbeanamountsufficienttorepaythe that purchaseoptionpriceissupportedbythirdpartyappraisals.Thecall compulsory. Todemonstratethatthelessee’spurchaseoptionisnotcompulsory, There aresomedisadvantagesassociatedwiththeJOLCO.Itisalong-term Debt ofaJOLCOleaseisinprinciplebookedbythelessordomiciledJapan From aninvestors’perspective,thereistheriskthatlesseeunderaJOLCO The debtcomponentoftheJOLCOistypicallybankdebt. DEAL TYPES,STRUCTURES&ENHANCEMENTS Kommanditgesellschaft). TheKGhasonegeneralpartnerand (KG) isanAircraftAssetfinancingbyindividuals (KG) 34 The Japaneseequityinvestorcanearnfixed 57 35 Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 Asset repayment ofprincipal. the LiquidityFacilityprovider fromcollateralliquidationproceedsahead of current, timelyreceiptofprincipal, sincetheinvestorwillultimatelyhavetorepay therefore, isofvalueonlyif theinvestor(orRatingAgency)placesavalueon a financingcostpayabletotheLiquidityFacilityProvider. ALiquidityFacility, ment ofinterestforfutureoffsetstorecoveriesinthe amount ofsuchinterestplus of amountsithaspaid.Effectively,then,thebeneficiaries aretradingtimelypay the LiquidityFacilityaresubordinatedtorecoveryby LiquidityFacilityprovider larger financing.Assuch,principalandotheramounts owingtothebeneficiariesof would typicallyhaveasuper-prioritypositioninthe AircraftAssetssecuringthe (typically) 18monthsofinterestcoverage.Theprovider oftheLiquidityFacility Letter ofCredit(SBLOC).LiquidityFacilitiesareutilized inEETCstoprovide Facility isusuallyarevolvingcreditfacility,butcould bestructuredasaStandby entity iftheunderlyingobligordefaultsinmaking of suchpayment.ALiquidity payment ofdebtservice(typicallyinterestonly)bya bankorothercreditworthy A LiquidityFacilityisafacilityappendedtolargerfinancingthatprovidesfor Liquidity Facility A Lease-inLease-out(LILO)structureisakintoaLease/HeadLeaseStructure. Lease-in Lease-out(LILO) lessee/lessor subleasessuchAircraftAssettotheoperator/lessee. lessor) leasesanAircraftAssettointermediatelessee/lessorandthat This istheleasefinancingofanAircraftwherebyowner(head Lease/Head LeaseStructure See introductoryprovisionstoPart3. Lease Financing sold. Asset toalessee.TheKGisliquidatedafterthefinancedAircraftAssetshavebeen and partlyleveragedbybankloans.TheKGreceivesincomefromleasingtheAircraft the jurisdictionofoperator/lesseeandintermediatelessee. taxes onthenetpayments,takingadvantageoffavorabletaxtreatiesbetween payments totheintermediatelessee/lessorwithouthavingpaywithholding These structuresareusedtypicallytoallowtheoperator/lesseemake PRACTICE NOTE 36 acquired bytheKGispartlyfinancedequityprovidedinvestors DEAL TYPES,STRUCTURES&ENHANCEMENTS 58 - Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 none ofitsotherassetsareatrisk. otherwise personallyliableforthedebt(except,perhaps,RatsandMice), leased Aircraftandotherpledgedcollateral.Inwords,thelessorisnot recourse foritsdebtisexpresslylimitedtotherelatedLease,mortgageon This isanarrangementinaBack-leveragedLeasewherethefinancieragreesthat Non-recourse See introductoryprovisionstoPart3. Mortgage Financing not renewthefacilitybyitsrenewaldate. provider hasitsCreditRatingsdowngradedtoaspecifiedthresholdleveloritdoes Assets mayexceedthatintheU.S.LiquidityFacilitiesbedrawnifliquidity is locatedinajurisdictionwhichtherepossessiontimeframeforfinancedAircraft subject toanEETC.However,thisperiodmaybelengthenediftheEETCissuer rating agencies)maximumperioditshouldtaketoliquidatetheAircraftAssets Trust Structuresareemployed toprovideBankruptcyRemoteprotectionandas a This isafinancingstructure wheretheultimateownerofassetisacharity.Orphan Orphan TrustStructure lessee withanoptiontoterminatetheleasepriorits scheduledterminationdate. benefits andrisksofassetownership.OperatingLeases donotusuallyprovidethe of theequipment(theoperatinglessor),ratherthan lessee,retainsmostofthe criteria in‘Finance/CapitalLease’.Thiswouldcapture the structurewhereowner Finance Leaseundertherulesofsuchdiscipline.See a detaileddiscussionofthese or bankruptcy),thisisaLeaseFinancingwhichdoes notmeetthecriteriaofa Relating toanyparticulardiscipline(forexample,tax, accounting,commerciallaw Operating Lease The coverageperiodof18monthsisusedinEETCsasthistheperceived(by the transaction. (exclusive) controloveranyBack-leveragedLeasethatservesassecurityfor as towhichthereisfullrecourse,thatlessormaybeableretainmore broader lenderpool.Also,inthecaseofanespeciallystrongoperatinglessor an operatinglessorwithbetterpricingandotherterms,aswellaccesstoa lessor, butthoseareatypical.Allowingforsomelevelofrecoursemayprovide Some Back-leveragedLeasefinancingsdoprovideforrecoursetotheoperating PRACTICE NOTE DEAL TYPES,STRUCTURES&ENHANCEMENTS 59 Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 relationships inanOrphanTrustStructure. or regulatorylending-limitpurposes.Exhibit3.10isaschematicshowingtheparties’ method forcertainbankstoavoidaggregatinglessor/borrowerexposureinternal Source: Exhibit 3.10 2 1 ______Equivalent toequityinvestment. repaid. interest inBorrower/Lessor Bargain PurchaseOpon is engineeredawayfromthecharity. financed AircraftAssetsattransactionconclusion,allupsideandresidualvalue Assets) orabargainpurchaseoptiongrantedtoanoperatinglessorofthe entitle theholdersofsuchcertificatestoresidualvalueinterestinAircraft accommodation fee).BymeansofresidualinterestcertificatesinaCLO(which never (intentionally)benefitsfromsuchownership(otherthanbyearningan Assets withacharityforthereasonsoutlinedabove,truth-be-told, While theideabehindOrphanTrustsistoplaceultimateownershipofAircraft PRACTICE NOTE trustee/agent Security Author’s own Pledge of borrower Mortgage and Orphan TrustStructure assignment lease to purchasemembership exercisablewhenloan DEAL TYPES,STRUCTURES&ENHANCEMENTS borrower/lessor Del. Stat.trust 100% member purchase opon assignment of Beneficiary Del. LLC Charity Collateral Lessee Lease Aircra Purchase price Purchase opon 60 Sub loan$ Sub 1 2 Operang lessor Aircra seller Loan $ Lenders Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 the U.S.,Aircraftmayberegisteredinnameofanownertrust. This isagrantortrustestablishedbylessor(asbeneficiary)toownanAircraft.In Owner Trust encumber theAircraftwithoutpriorconsentofbeneficiary. for theinterestsofbeneficiaryandagreenottosell,mortgageorotherwise language isnormallysubjecttotherequirementthattrusteeexercisedueregard operation oftheAircraft.Toprotectnon-U.S.citizen’sinterests,thislimitation the trustee’sabsoluteandcompletediscretionconcerningownership effect thatthebeneficiarywillhavenorightsorpowerstodirect,influencecontrol ordinarily accomplishedbyaddinglimitationlanguagetothetrustagreement more than25percentoftheaggregatepowertodirectorremoveatrustee.Thisis the trustinstrumentitselfmustprovidethatthosepersonstogethermayhaveno exercise ofthetrustee’sauthority. would havemorethan25percentoftheaggregate‘power’toinfluenceorlimit the resultofwhichwouldbethatthosepersonswhoarenotU.S.citizenstogether affidavit statingthatthetrusteeisnotawareofanyreason,situation,orrelationship trust maystillregistertheAircraftinU.S.providedtrusteealsofilesan either aU.S.citizenorresidentalien.Ifanybeneficiaryisnotcitizen,the The trusteeofsuchatrust(oftenthedepartmentU.S.bank)mustbe grantor trustsarenotatypeoflegalentitythatissusceptibletobankruptcyfiling. lessors toownU.S.-registeredAircraft.Inaddition,underU.S.bankruptcylaws, comparable tootherSPVs,withtheaddedbenefitthattheywillenablenon-U.S. and formanyotherU.S.transactions.ThebenefitsofusinganOwnerTrustare Trust hashistoricallybeentheownershipvehicleofchoiceinU.S.LeverageLeases, to holdlegaltitletheAircraftonbehalfofoneormorebeneficiaries. accomplished byhavingthetrustcompany/departmentofabankestablish If thebeneficiariesofatrustconsistnon-U.S.citizensthatdohavesuchpower, carrying outtheabove-described obligations,normallyshouldbeableto including investigationsof alleged violationsofFAAregulations. a timelymanner,andto obtain informationresponsivetoFAAinquiries, allowing thatownertoprovidetheoperatorwithsafety criticalinformationin Aircraft andlocationnatureoftheoperationonan ongoingbasis,thereby information abouttheidentityandwhereaboutsof actualoperatorsofan information’. Tomeettheseobligations,anowner must maintaincurrent ficiaries, haveobligations‘tocommunicate[tothe FAA]criticalsafety whether ornotOwnerTrustsandregardlessofonshore oroffshorebene the FAA.ThisNoticemadeclearthatallownersofU.S.-registered Aircraft, Involving Non-U.S.CitizenTrustorsandBeneficiaries’ asanofficialruleof Clarification fortheRegistrationofAircrafttoCitizen TrusteesinSituations On 18June2013,theFAApublishedinFederalRegister ‘NoticeofPolicy PRACTICE NOTE The FAAexpectsthatanowner trusteeofAircraftontheU.S.registry,in DEAL TYPES,STRUCTURES&ENHANCEMENTS 61 37 This isusually 38 An Owner - Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 into play.Therearetwotypes ofParticipations:fundedandunfunded.Ina the participant,andotherintercreditor issuesasbetweenthetwopartiesmaycome negotiation astowhatinstructions thefacingbankmustcomplywithcomingfrom by thebankfromwhichit acquirestheParticipation.Also,itissubject of ingly, theparticipantisnotonlytakingborrowerrisk,but alsotheriskofperformance the sellingbanktoperformoncontractevidencing suchParticipation.Accord transactions, therefore,hasnoprivitywiththeborrower, andisentirelyrelianton with theborrower.ThepurchaserofParticipation, theparticipant,inthese the banksellingParticipationremainsintransaction asthelenderofrecord to anewlenderandisoutofthepictureonceassignment becomeseffective, compared withanassignment,wherethelenderholding theloanassignsitsinterest agree totakeontherisksandrewardsofsuchloan (oraportionthereof). and benefitsofholdingaloan(orcreditcommitment)by havingathird-partylender This isamechanismforbank(orotherdebtfinancier) tooff-loadtheobligations Participation registered ownerofanAircraftontheU.S.registry. FAA will,however,alwaysreservetherighttoseekinformationfrom inspectors) toobtaininformationabouttheAircraftanditsoperation.The through FAApersonnel(forexample,principaloperationsormaintenance information morequicklythanthetimelinesnotedabove. operations, including: request bytheFAAformoredetailedinformationaboutAircraftandits registry normallyshouldbeabletorespondwithinfivebusinessdaysa Aircraft anditsoperationwithintwobusinessdays. respond toarequestbytheFAAforfollowinginformationabout The FAAwillinmostcases,godirectlytotheaircarrierorsimilaroperator In theeventofanemergency,FAAmayrequestatrusteetoprovide thecurrentairworthinessstatusofAircraft. MaintenanceandotherAircraftrecords; • • informationabouttheoperator,crew,andAircraftoperationson • The FAAfurtherexpectsthatanownertrusteeofAircraftontheU.S. WheretheAircraftisnormallybasedandoperated. ThelocationofmaintenanceandotherAircraftrecords. • • Wherethatpersoncurrentlyresidesorhasitsprincipalplaceof • Theidentityofthepersonnormallyoperating,ormanaging • specific dates; business. operations of,theAircraft. DEAL TYPES,STRUCTURES&ENHANCEMENTS 62 39 As - Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 its loan.Inaddition,thefinancier doesnottypicallyfund100percentoftheprogress and thereafter‘flip’theAircraft atahigherpricewouldenablethefinanciertorecover this rightofthefinancierto obtaindeliveryofanAircraftatbelowmarketprices Insofar asAircraftpurchasers oftenreceivesignificantdiscountsoffOEMlistprices, crux ofthisbenefitisthepurchasepriceatwhich financiercantakedelivery. therefore, canstepintothedeliveryofanAircraftif theborrowerdefaults.The of theAircraftwhoseprogresspaymentsarebeingfinanced. ThePDPfinancier, rights ofthepurchaserinPurchaseAgreementasrelates tothedeliverypositions full recoursefinancingbythepurchasersecureda collateralassignmentofthe that canbeusedascollateral.ThisiswherethePDP comes intoplay.APDPisa maintain liquidity.Animpedimenttoafinancingisthat thereisnohardasset(yet) of cashbytheairlineorlessorAircraftpurchaser, financing isoftensoughtto Aircraft’s purchaseprice. payments. Theseprogresspaymentsmaybeforasmuch as20to30percentofthe in therelatedPurchaseAgreementforitscustomer tomakeperiodicprogress and materials.Tooffsettheseongoingpre-deliverycosts,theOEMtypicallyrequires During thisconstructionperiod,theOEMismakinglargeexpendituresforlabor Procuring partsandconstructionofaparticularAircraftcantake6to18months. the deliveryofAircraft.Aircraftproduction,forobviousreasons,haslongleadtimes. (progress) paymentsrequiredtobemadebyAircraftpurchasersOEMsprior A Pre-deliveryPayment(PDP)isafacilityforthefinancingofincremental Pre-delivery Payment(PDP) Participation ifandwhenadefaultoccurs, bank theamountofloan(orportionthereof)inwhichithaspurchased made bytheborrower.InanunfundedParticipation,participantpaysfacing receives distributionsofprincipalandinterest,atthecontractedoragreedrate, portion thereof)inwhichithaspurchasedtheparticipation,andsuchparticipant Participation, theparticipantpaysfacingbankfullamountofloan(or consent rightsonotherthanthebasiceconomicsoftransaction. related loans,restrictionsareoftenplacedontheabilityofparticipanttohave participations’. (as thesellingbankmaynotwantborrowertoknow);thesearecalled‘blind facing bank.ManyParticipationsaresoldsuchthattheborrowerisnotawareofit participant receivesaparticipationfeeoutofinterestpaymentsreceivedbythe While mostloanagreementspermitthegrantingofaParticipationinterestin fleshing outtogetintendedallocationofrightsandobligations. this contextasasimple,straightforwardterm,butactuallyitneedslotof The term‘participation’iswhatIconsideraloadedterm.Itmaybeusedin PRACTICE NOTE DEAL TYPES,STRUCTURES&ENHANCEMENTS 42 Insofar astheseprogresspaymentsrepresentalargeoutlay 63 41 and intheordinarycoursesuch 40 Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 in thisstructure.SeePart8,‘ClawBack’. concerning: financing. Aswell,thefinancierwillneedtobemindfulof,andbuildinrestrictions ‘equity’) thatthefinanciermustassessrelativetomarketvalueswhenanalyzingthis this higherOEMofferedpurchaseprice(takingintoaccounttheborrower’s purchase priceunderthePurchaseAgreement,butratherahighernumber.Itis normally co-operative,typicallydoesnotprovidetothefinancierfulldiscounted Purchase Agreementsarenotassignablewithoutconsent.TheOEM,however,while the LTVofAircraft’sdeliveryposition. payments, sothereisso-calledequityoftheborrowerinAircraftwhichimproves A furtherconsiderationforthesetypesoffinancingsistheClawBackRiskinherent OEM-requiredbuy-backoptions(andthepriceOEMwillpay). BuyerFurnishedEquipment(BFE)costsoftheAircraft;and • changeorderstotheAircraftPurchaseAgreement; • enginepricingandcredits,ifapplicable; • Aircraftpriceescalation; • • Importantly, theOEM’sco-operationinPDPiscriticalsinceAircraft summary ofitemsthePDPfinancierandOEMwouldnormallyagreeto. lack ofahardassetservingascollateral. PDPs aremorecredit-orientedthananAircraftFinancinginthelightof PRACTICE NOTE OEM will notrefundPDPstoborrower(only to PDPfinanciers). OEMwillapplyPDPsagainstPDP-financedAircraftpurchase price. • • PDPfinanciers canassignrightsunderPurchase Agreement,subject OEMwaivesset-offrights. • • OEMmaybuyout PDP financiersforthedebtbalanceof • PDPfinanciersmaystepintothe borrower’sshoes(totheexclusion • PDPfinanciers maybuyPDP-financedAircraftforanagreedpurchase • As notedabove,theOEMplaysamajorroleinPDPfinancings.Hereis ranties, customersupportand soon. to customaryconditions;theassigneewillbeentitled to certainwar within aspecifiedtimeframefollowingborrowerdefault. facility (subjecttoagreedcapsonbreakage,expenses andinterest) the Facility. financed Aircraftifarelated‘EventofDefault’iscontinuing under time framefollowingaborrowerdefaultandnotto sellthePDP- of theborrower)underPurchaseAgreementwithin aspecified purchase PDP-financedAircraftunderthePurchaseAgreement. price fromtheOEMandthereafterexerciseborrower’srightto DEAL TYPES,STRUCTURES&ENHANCEMENTS 64 43 - Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 percent withanaccelerated amortizationprofilerequired, program containsdetailed provisions onrequirementsfora‘dayone’LTVof60 monitor theprescribedcover ofthe referred toas‘theBaFin’). Themostimportantdutyofthefiduciaryagentis to Supervisory Authority( fiduciary agent(Treuhänder)andatleastonedeputyareappointedbytheFinancial as aresultofcombinationsafetymechanisms.Under a to financeaircraftloansontheirbooks. covered pool.This portfolios); theaircraft-securedloansina loans (havinglongbeenavailableforshipping,government-backed andrealestate Pfandbrief are regulatedbystatutorylaw(PfandbriefActand supporting directives).The are highlysecuresecuritiesthathavewideappealand a highlevelofliquidity.They German bankstoleveragetheiraircraftloanportfolios. This isaninternationallyrecognizedtypeofcoveredbondasusedinGermanyby Pfandbrief located intheOEM’sjurisdiction. financing becausethecollateral(thatis,PurchaseAgreement)is located inajurisdictionwithrelativelyhighrepossessionriskmayturntoPDP repayment oftherelatedPDPloanonthatAircraft’sdelivery. the financiercanrestassuredthatborrowerwillhaveaccesstofundsfor financed Aircrafttobeondeliverytheborrower.Insuchacase, PDP facilityisenteredintodefinitiveandbindingarrangementsforthePDP- Finally, PDPfinancierswishingtocreatearelationshipwithanairline Certain PDPfinanciersmayrequirethattherebeinplaceatthetime Uponrequest,theOEMwillnotifyPDPfinanciersofany • Subjecttocustomaryexceptions,OEMwillnotamendthePurchase • OEMwillnotreleasetheborrowerfromitsobligationsunder • product wasonlyrecentlyapprovedinGermanytobeavailable foraircraft Purchase Agreementoranypartthereof. notify thePDPfinanciersofanycancellationbyborrower Aircraft withinanagreedperiod.Inaddition,theOEMwillpromptly termination orcompletethepurchaseofrelevantPDP-financed opportunity toelectcurethebreachthatgaveriserightof to exerciseanysuchrightwithoutgivingthePDPfinanciers exercise anyrightofterminationitmayhave,theOEMwillagreenot to terminatethePurchaseAgreementand,ifOEMintends outstanding breachesbytheborrowerwhichwouldentitleOEM Agreement withoutPDPfinancierconsent. unless OEMrepaysPDPstoPDPfinanciers. Purchase Agreementoracceptcancellationofthe Pfandbrief DEAL TYPES,STRUCTURES&ENHANCEMENTS Bundesanstalt fürFinanzdienstleistungsaufsicht program canbeusedbyqualifyingfinancialinstitutions Pfandbrief Pfandbrief 65 Pfandbrief on aday-by-daybasis.The bonds offerhighlevelsofsecurity program areknownasthe 44 Pfandbrief-covered bonds a goingforward‘normal’ Pfandbrief , commonly program, a Pfandbrief per se Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 intended topermitinvestorsassessthecompositionof creditors. Furthermore,thetransparencyprovisionsofPfandbriefActare and ariskmanagementsysteminordertofurtherimproveprotectionfor addition, thePfandbriefActimposesdetailedspecificationsforqualifyingcollateral obligations toprovideadditionalcollateralincaseofasevereLTVdisturbance.In LTV reductionrequirementthroughtheamortizationofloanandadditional By utilizingthesetrusts,equipment notesofacomparableeconomicnaturefrom Leases, equipmentnotesof OwnerTrustsissuedpursuanttoLeaseFinancings). issued pursuanttoMortgage Financings(or,intheolddaysofU.S.Leveraged transactions arepromissory notes(alsoknownas‘equipmentnotes’)ofanairline trust. Themainassetsofthesetypestrustsas utilized inAircraftFinance trust establishedbyanissuer,thatrepresentafractional undividedinterestinthat Pass ThroughCertificates(PTCs)aresecuritiesissued toinvestorsby,usually,a Pass ThroughCertificates(PTCs) entitled towithdrawitemsfromtheagreedstock(pool)heldbyanyparticipant. costs ofSparePartsandEngines.Participantsinapoolingarrangementare arrangement. Poolingisawaytoreduce,througheconomiesofscale,thecarrying Engines intoacommonpoolforutilizationbythepartiestosuchpooling Pooling isthecontributionbytwoormoreaircraftoperatorsofSparePartsand/or Pooling 144A transaction. the not affectedbythecommencementofinsolvencyproceedingsagainstassets to SPVs.Asaresultofsuchsegregation,theclaims difference toothercoveredbondprogramswherethecoverassetsaretransferred – understatutorylawsufficienttosecurethesegregation.Thisisafundamental insolvency isachievedbytheregistrationofcoverassetsinaregisterwhich general estateofaPfandbrief checks onthecoverofPfandbrief.Theseparationpoolassetsfrom Pfandbrief on aquarterlybasis.Finally,anythingrelevantforthePfandbrief collateral. arrangements mighthaveimpactsonownershipandsecurity-interest rightsin possession oftheoperatorthatisbeneficiary the financing.Pooling since trackingandtraceabilityaregreatlyimpairedoncetheassetleaves Financiers areratherreticenttoallowPoolingoftheirAircraftAssetcollateral PRACTICE NOTE Pfandbrief bank issupervisedandmonitoredbytheBaFin,whichmakesrandom bank. DEAL TYPES,STRUCTURES&ENHANCEMENTS Pfandbrief bank (asissuer)intheeventofaPfandbrief debt maybeissuedintheU.S.capitalmarketsasa 66 Pfandbrief Pfandbrief program ofa creditors are cover pool Pfandbrief bank’s Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 to aninvoluntarybankruptcyorengageinacorporate restructuring. typically necessaryfortheSPVtoapproveavoluntary bankruptcyfiling,toconsent or transactionoriginator.Theindependentdirector’s favorablevoteorconsentis independent directorisnotoverlysympathetictothe interests oftherelatedlessor meet certainrequirementsthatprovidesomecomfort tofinancingpartiesthatthe of oneormoreindependentmanagers directorsoftheSPVwho recourse (recourseislimitedonlytothefinancedassets); and(iv)theappointment of therelatedlessorortransactionoriginator(among otherentities);(iii)Non- to bemanagedandoperatedinamannerthatisdistinctfromtheassetsbusiness financing documentsthatcontain‘separateness’covenantsrequirethesubsidiary eventually liquidatingtheAircraftAssets);(ii)organizationaldocumentsand and narrowpurpose(generally,acquiring,leasing,financing,refinancing transactional documentcovenantsthatlimittheentity’sbusinesstoasingle,specific Some ofthecustomaryfeaturesanSPVare:(i)organizationaldocumentsand into afinancingarrangement,pledgingtheequipmentandleasesascollateral. undertaking ancillaryobligations.TheSPVacquirestheAircraftAssetsandenters limited toacquiringAircraftAssets(andrelatedLeases)befinancedand involves aBankruptcyRemoteentity,thelegalentityiscreatedwhosepurpose group ofassets.InatypicalstructuredfinancetransactionAircraftAssetsthat a particularfinancing,typicallyastheowner/lessor/borrowerofassetor trust, limitedliabilitycompany)establishedforthesolepurposeofparticipatingin A SpecialPurposeVehicle(SPV) Special PurposeVehicle(SPV) This isthefinancingofanairline’sSparePartsinventory(seePart2,‘SpareParts’). Spare PartsFinancing discussed above. be LeaserentalreceivablesordebtobligationsinaCLOCDO,respectively,as obligations toinvestorswhich,inthecontextofAircraftFinance,wouldtypically This isthefinancialpracticeofpoolingvarioustypescontractualpayment Securitization equipment notesheldintherelatedtrust. Holders ofaPTChaveonlysuchrightsandbenefitsasflowthroughtoitfromthe multiple Aircraftcanbepooledintoasinglesecurity.EETCsusethePTCstructure. Assets onbehalfofanoperating lessor. There areavarietyofreasons SPVsaresofrequentlyemployedtoownAircraft PRACTICE NOTE DEAL TYPES,STRUCTURES&ENHANCEMENTS 45 is alegalentity(corporation,partnership,owner 67 Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 be acitizenresidinginthe state underwhichtheStatutoryTrustwillbeformed. If Delaware definesaStatutoryTrustasanunincorporated associationwhich: or attorney;and(v)whethertheremustbeasignature or subscription.Forexample, writing required;(iii)thepartywhomustsignorsubscribe; (iv)theuseofanagent topics of:(i)thedescriptionofsubject-matter trusts;(ii)thenatureof by statejurisdiction.Anysuchvariationswilltypicallyconcernthewordingon state law,creatingStatutoryTrusts.ThelawsgoverningTrustsvaryslightly certain circumstancesactuallyenhancethebenefits)bycodifyingbenefitsunder by trustsandprovidemorecertaintyastotheavailabilityofsuchbenefits(andin fact-specific caselaw,certainstatesfeltthattheycouldclarifythebenefitsoffered § 3801et.seq.(the‘DSTAct’)).Duetotheinherentvagariesofcommonlawand Trusts (DSTs)formedpursuanttotheDelawareStatutoryTrustAct,12Del.C. A StatutoryTrustisatrustformedbystatute(forexample,Delaware Statutory Trust due to,forexample,animpairedlesseeinaBack-leveragedLeasesituation. with aparententity,butdoespresentriskwhentheunderlyingfinancingisat the intendedpurposetoprotectanSPVfrombankruptcyasamatterofconsolidation a directorisrequiredtoauthorizethesame.Thislegalrequirementshouldnotimpair fiduciary duties.Thus,ifitisinthebestinterestofSPVtofileforbankruptcy, their appointmentistoprotectcreditors–mustbesubjectnormaldirector An additionalrequirementis thatoftrusteeresidency.Therefore,themust filesacertificateoftrustpursuant to§3810of[theDSTAct]. 3 [isatrust]underwhichpropertyisorwillbeheld,managed, administered, iscreatedbyagoverninginstrument; 2 1 Importantly, independentdirectorsappointedbycreditors–notwithstandingthat InsulatestheoperatinglessorfromLessorLiability. • IftheAircraftAssetissubjecttoafinancing,removingassetfrom • otherwise providedinthegoverninginstrument;and of suchpersonorpersonsasaremaybecomebeneficial ownersoras carried onorwillbeon,byatrusteetrustees . . . forthebenefit controlled, invested. . . and/oroperated, orbusiness. . . activities . . are º º º º º the operatinglessor: allows inclusionofanOrphanStructureifrequiredbyalender. a pledgeovertheSPV’sOwnershipInterests;and provides thelenderwithanotheravenueforforeclosurebyhaving assets ofanoperatinglessor; insulates thelenderfromLessorLiensthatmayspreadtoall provides Non-consolidationprotectionforthelender; makes theNon-recoursenaturemoresimpletodocument; DEAL TYPES,STRUCTURES&ENHANCEMENTS 68 Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 13). SFAS13,asmodified byvariousamendments,interpretationsandtechnical standards setoutinStatement ofFinancialAccountingStandardsNo.13(SFAS tax benefitsofowningthe financed asset. reporting oftheirasset-basedfinancing,andwhocannevertheless efficientlyusethe This structureisusedbycorporationswhomaybe seekingoff-balancesheet lease foraccountingpurposesbutasaloantaxandcommercial financepurposes. This isanoff-balancesheet(or‘synthetic’)leasefinancing structuretreatedasa Synthetic Lease tradable formandlistedoninvestmentexchanges.A asset (notafixedreturntiedtotheirfacevalue).A therefore entitlesitsholderstoreceiveaproratashareofprofitsgeneratedbythe or service.TheSukuk vides aninvestorwithownershiporpart-ownershipintheunderlyingasset,usufruct, similar waytoaconventionalsecuritization)isevidencedbycertificatethatpro ijara, sents anequity,notadebt,interest.OtherformsofIslamic financestructuresinclude to complywithSharia’aprohibitionsonthechargingof interestand,therefore,repre Sukuk Sukuk trustee orothermanager. bankruptcy proceedingsinanappropriatedecisionmaker,suchasindependent may beminimizedbyvestingthedecisionofwhethertovoluntarilycommence except asrestrictedbythegoverninginstrument.Furthermore,riskofbankruptcy power toprovideindemnificationatrustee,beneficiaryandanyotherperson, a stockholderofcorporation. beneficial ownersofaStatutoryTrusthavethesamelimitationliabilityaswould assets ofthetrust.Unlessotherwiseprovidedingoverninginstrument, to obtainpossessionof,orexerciselegalequitableremedieswithrespectto,the assets heldintrustsothatnocreditorofabeneficialownerthehasanyright the directionofowner.AkeyfeatureStatutoryTrustsisthattheyprotect aircraft onbehalfofandforthebenefitownertrustmustfollow indirectly ownsalltheassetstherein.InAircrafttransactions,trustee Trusts musthavealimitedlife. hand, theruleagainstperpetuitiescontinuestoapply,andcommonlawGrantor as aTrustAgreement).WithrespecttocommonlawGrantorTrusts,ontheother the extentotherwiseprovidedingoverninginstrument(commonlyreferredto such state.Onceformed,aStatutoryTrustwillhaveperpetualexistence,exceptto trustee isabusinessentity,suchentitymusthaveitsprincipalplaceofin the trusteeisanaturalperson,suchindividualmustresideinstate;orif To achieveoff-balancesheet treatment,a‘lease’financingmustsatisfythe A validlyformedStatutoryTrustoffersmanyotherattractivefeatures.Ithasbroad Structurally, thebeneficiaryholdsbeneficialinterestintrustandthereby mudaraba is anIslamiclaw-compliantfinancing.A or murabaha DEAL TYPES,STRUCTURES&ENHANCEMENTS represents beneficialownershipoftheunderlyingassetsand financings. 69 Sukuk Sukuk Sukuk (which worksinabroadly transaction isintended can alsobeissuedin - - Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 the asset.Thisisbecause,exceptfortitle,indiciasofownership residewiththelessee: tax andcommercial(UCC)lawpurposes,thelesseeis viewedasthetrueownerof Amount. value ofthefinancedassetsistypicallymanymultiples inexcessoftheAt-Risk In fact,attheoutsetofanoffbalancesheetsynthetic lease financing,theprojected amount onlyifthevalueoffinancedassetsareless thantheAt-RiskAmount. lessee/borrower towalk-awayfromitsassetbypaying thedeficiencyguarantee the lender/lessoriswillingtotakebecauseitwouldmake economicsenseforthe the Balloonanddeficiencyguaranteeamount(theAt-RiskAmount),isarisk nothing inreturn).Theat-riskportionforthelessor/lender,differencebetween or topayanamount(the‘deficiencyguaranteeamount’)thelessor(andreceive the leasedassetsforamountofunamortizedportionloan(theBalloon) On maturityofthesyntheticlease,lesseewillhaveoptioneithertopurchase amount oftheloan)andtenorleasemustsatisfyguidelinessetoutabove. the principalcomponentofdebtservice),back-endballoon(thatis,unamortized the borrower/lessee.Theamortization(thatis,amountof‘rent’earmarkedfor considerations). Thelender/lessorimmediatelyleasesthefinancedassetsbackto current fairmarketvalue;theapplicablepercentagetobebasedoncreditandasset of theintendedfinancing(typicallyforanamount80to100percentitsthen lessee sellstheassetstobesubjectfinancingalender/lessorforamount the nearterm.Inordertoeffectanoff-balancesheetleasefinancing,borrower/ is reflectedonitsbalancesheet.Toreachthisgoal,theleasemust: accounting purposes,suchthatneithertheassetnorliabilityfromtransaction goal ofthelesseeinasyntheticleaseisoperatingtreatmentforfinancial objective testsbetweenoperatingleases(thedesiredresult)andcapitalleases.The bulletins issuedbytheFinancialAccountingStandardsBoard(FASB),appliesfairly thelessee/borrower retainstheburdens(maintenance,insurance,riskofloss • thelessor/lender’sreturnontransactionis equivalent toaloanfinancing; • An offbalancesheetleasefinancingis,insubstance, a mortgagefinancing.For These SFASstandardsaresubjecttoongoingreviewandwilllikelychangein bepricedsuchthatthepresentvalue(typicallydiscountedatdebtrate) • haveatermoflessthan75percenttheestimatedeconomiclife • notcontainabargainpurchaseoption(thatis,priceless • notautomaticallytransferownershipoftheleasedpropertytolesseeby • and and soon),aswellthebenefits (use,upside,andsoon),ofownership; there isnoupsideavailable; of thefairmarketvalueleasedproperty. of therentalsandotherminimumleasepaymentsislessthan90percent property; and term); than thereasonableestimateoffairmarketvalueatendlease the endofleaseterm; DEAL TYPES,STRUCTURES&ENHANCEMENTS 70 Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 which iswellbelowtheprojectedvalueatendofleaseterm. The At-RiskAmountisU.S.$16million(U.S.$82minusU.S.$66million), 7 percentperannumandinterestprincipalallocatedonamortgage-stylebasis). of U.S.$82million(assumingaU.S.$700,000monthrentpayment,interestat Deficiency GuaranteeAmountofU.S.$66millionandaPurchaseOptionPayment and CompanyX).Basedonthe90percenttest,Xcanagreetoa advance U.S.$100millionontheasset(baseditsassessmentofboth in 7years(75percentof9andonethirdyears).Alessor/lendermaybewillingto economic lifeof9andonethirdyearshasaprojectedvalueU.S.$75million jet. AnappraisalshowsthattheassetisworthU.S.$110millionhasaremaining finance onanoff-balancesheetbasisasizeableassetitsbooks,suchascorporate asset simplyasecuritydeviceakintomortgage. commercial lawterms,a‘leaseintendedforsecurity’withtheholdingoftitleto corporations withincometo shelter)driedupwhentheysufferedheavylosses(and (Philip Morris,Disney,Ford MotorCredit,NYNEX,AT&Tandsoon–large filing forbankruptcyinthe 2000s,thetraditionallease-equitysourcesofcapital this structure.Intheaftermath of9/11andwithsomanytheU.S.airlinemajors 1980s and1990s,and,accordingly,billionsofdollars ofAircraftwerefinancedby structure forthemajorU.S.airlines(andanumber ofnon-U.S.airlines)inthe by thelesseeforAircraft).U.S.LeveragedLeases werethepreferredfinancing allow foranearlyterminationobsolescence(which includesthelackofaneed obligations. AscomparedwithtraditionalOperatingLeases, U.S.LeveragedLeases are factoredintherentalspayablebylesseethereby reducingthelessee’srental benefits accruingtoanownerofAircraft(depreciation and soon),suchbenefits the lender.Thelessor’seconomicreturninthesetransactions includesthetax (20 percent)whileborrowingtheremainder,usuallyon anon-recoursebasis,from lessor ownstheequipmentandwillgenerallyprovidea portionofthepurchaseprice leveraged Leasewherethelessorsourceslender) tofinanceanAircraft.The the equityinvestorowninglessorandlender(incontrastwithaBack- This isalong-termleveragedOperatingLeasewherethelesseebringstogetherboth U.S. LeveragedLease By wayofillustration,considerthefollowingexample.CompanyXdesiresto The conveyanceoftitletothefinancedassetandleasebackstructureis,under thelessee/borrowermaynotunilaterallyterminateleasewithout • untenable. a numberof‘interpretations’thatlargelyrenderedtheSyntheticLease In 2002,theFinancialAccountingStandardsBoard(FASB)promulgated PRACTICE NOTE recouping forlessor/lenderitsentireinvestment. DEAL TYPES,STRUCTURES&ENHANCEMENTS 71 Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 lease equityand,accordingly,theU.S.LeveragedLeaseisrarelyemployed. tax recapture)whentheirdealssoured.Today,onlythestrongestcreditscanobtain Source: Exhibit 3.11 lessees thatmaybepartofthe facility,andimposeConcentrationLimits,Mandatory case, thebankwillidentify theeligibleequipment,jurisdictionand to befinanced,ormay more open-endedwithnoidentifiedpool.Inthelatter who wouldthenturntolong-termfinancingatalater date. also beemployedasashort-termfacilitytoaccommodate fastacquisitionsbyalessor out and/oranalternativelong-termfinancingsolution isfound.Warehousesmay as afinancingvehicleforAircraftto‘warehouse’them until theyaretraded,parted- Aircraft AssetstoeffectaneventualSecuritizationof the accumulatedpool;or(ii) (i) toenablethelessoraccumulateasufficientnumber ofowned(andleased) A Warehouseisafinancingfacilitytypicallysuppliedby banksforanoperatinglessor: Warehouse Lease rentals$ Exhibit 3.11showstheparties’relationshipsinaU.S.LeveragedLease. Warehouse facilitiesmaybe structuredwithanidentifiedpoolofAircraftAssets sit downinaconferenceroomtonegotiatedocumentation. are), theseareamongthefewtypesoftransactionswherepartiesactually market standardsfordocumentationterms,muchinthewayECAtransactions Since U.S.LeveragedLeasesaretripartitetransactions(andnotbeholdento PRACTICE NOTE Author’s own Pledged account U.S. LeveragedLeaseStructure Owner parcipant Trust agreement U.S. grantortrust Airline (lessee) Lessor/owner DEAL TYPES,STRUCTURES&ENHANCEMENTS Debt service$ Lease Aircra Security trustee/agent lease assignment Mortgage and 72

Waterfall Benefits ofmortgage distribuon Loan $ A B C Lenders Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 7Ofcourse,ifthedebtoragreestoperformunderSection1110(a), theinvestorsimplyhasaperforming 17 AtthebeginningofAmericanAirlinesbankruptcy (filedNovember2011),therelatedDeficiency 16 Seeendnote9,forsomefurthercoloronthistopic. 15 Thankfully,nooneiscallingthem(yet)‘pre-owned’. 14 Non-U.S.airlinesaccessingtheEETCmarketwilllikelyrelyonprivate(versus publicregistered) 13 Non-U.S.airlinesaccessingtheEETCmarketwilllikelyrelyonprivate(versuspublic registered) 12 TheBCCOutlook. 11 Inabidtoobtainfinancingfromtheaircraft(andengine)manufacturers,airlines mayconditionnew 10 Notes the Aircraftitself.AnACMIisaformofWetLease. depending onthedeal,fuelandmaintenanceservices,tolessee,inaddition A WetLeaseisanOperatingwherethelessorprovidescrewand, Wet Lease due diligenceisperformedonthefinancedleases,lesseesandjurisdictions. Document TermsandMandatoryEconomicaswell.Ineithercase,significant Theanswertothisquestionhasmajorramificationsintheaircraftfinancesector.Ifthereisagap, 9 Scheinberg,R,‘Thebankliquiditycrisisandaircraftfinance:asectorreview’, 8 The‘fourletterword’inAircraftFinance. 7 SeeNicholasKatzenbach’sopinionasAttorneyGeneral,30September1966. 6 BoeingCapitalCorporation,‘CurrentAircraftFinanceMarketOutlook,2013–2017’,availableat 5 Butseediscussionon‘OperatingLease’,whereaccountingrulechangesmayresultinOperating 4 Someairlines,forexample,havearbitrarypoliciesof,50percentleasedand 3 Knownas‘interimlift’. 2 ThevastmajorityofleasingtransactionsemployanSPVstructure,butthatisnotrequired. 1 attached tothesecurity. security. And,ifthedebtorreturns theAircraftAssetunderSection1110(c),therewouldbenolease Claims weresellingat22centson the dollar.InJune2013,theyweresellingat93centson entity subjecttotheSecuritiesandExchangeActof1934. offering securitiesexemptionssuchasRule144Asotoavoidthe necessitytobecomeareporting entity subjecttotheSecuritiesandExchangeActof1934. offering securitiesexemptionssuchasRule144Asotoavoidthe necessitytobecomeareporting buy financinganditcomeswithairplanes.’ (repeatedly) asitwasnegotiatingafinancingpackageforneworder: ‘Wedon’tbuyairplanes;we aircraft ordersonnew(andimmediate)financing.Asthetreasurer of oneU.S.majortoldanOEM economic downturn. pressure onaircraftvaluesoverandabovethepressuresplacedthoseasaresultof a non-recoursefinancing).Aplethoraofwhitetailsandrepossessedaircraftwouldservetoplace bankruptcy or,ataminimum,maybeforcedtoturnoveraircraftcollateralinsatisfactionofdebt(if financing, airlinesoroperatinglessorswhoownballoonpaymentsonloanmaturitiesmayface as theyrollofftheassemblyline.Inaddition,ifrefinancingscannotbedonebecauseoflack left placing‘whitetails’inthedesertinsofarastheircustomerswillnotbeabletopurchaseaircraft then themajoraircraftmanufacturers,iftheyareunwillingtosupplyrequisitefinancing,maybe Review 24(5) www.boeingcapital.com/cafno/ (TheBCCOutlook). Lease financingtobe‘on’balancesheet. owned, andusetheshortedtermoperatingleasestorejuvenatetheirfleets. lessor operatingcompanycancertainlybethedirectownerofleasedAircraftAsset. , 2009,pp.17–23. DEAL TYPES,STRUCTURES&ENHANCEMENTS 73 Commercial Lending Downloaded By: 10.3.98.104 At: 22:24 24 Sep 2021; For: 9780203713303, chapter3, 10.4324/9780203713303-3 3Gee,CA,‘Aircraftpre-deliverypaymentfinancing transactions’, 43 Whilethisrangecoversalargeportionofaircraftorders,therearevariationsabove andbelowthe 42 Thistriggerissubjecttonegotiation. 41 Thesellingbankmayretainaskim. 40 Thistermcancertainlyhaveothermeaning,andmaybeusedtoindicatethat a partyissimplytaking 39 TheFAAhasinterpreted14CFR.§47.7(c)(2)(iii)asrequiringregistrationofthe applicableaircraft 38 14CFR.§47.7(c).IntheU.S.,Aircraftareregisteredinnameofowner, ratherthanthename 37 TheKGmarketintheshippingandrealestatesectorisfarlargerthanaircraft sector. 36 Mostoftenreferredtoas‘doctorsanddentists’. 35 SomebankswithnoJapanesebookingofficethatneverthelesswanttoparticipateinthisproduct 34 Thereareotherdefinitionsof‘InterchangeAgreement’thatusedmorelikelytobe 33 TreatmentofLeaseswithanOptiontoPurchaseforAircraftRegistration,5Fed.Reg.40,502(3 32 TreatmentofLeaseswithanOptiontoPurchaseforAircraftRegistration,5Fed.Reg.40,502(3 31 TreatmentofLeaseswithanOptiontoPurchaseforAircraftRegistration,5Fed.Reg.40,502(3 30 ‘Adjusted’interestisonjuniorclassPTCsinrespectofunimpairedpoolbalances. 29 Cross-default/collateralizationwaslackinghistoricallylargelyduetothefactthatinEETCshaving 28 Scheinberg,R,‘Aguidefortheperplexed:exogenouselementstoconsiderwheninvestingin 27 Apassthroughtrustisagrantorestablishedunderstatelawthat‘disregardedentity’for 26 AsnotedinU.S.LeveragedLeasing,thisproductislargelyunavailableduetothewidespreadlosses 25 TherewasaperiodoftimewhenmanyEETCsalsoutilized‘wrap’structure;themostseniorTranche 24 BoeingCapital Corporation,‘CurrentAircraftFinanceMarketOutlook,2013–2017’,availableat 23 WhileU.S.Ex-Im actuallyoffersbothofthesefinancingstructures,manytheotherECAsonly 22 TheseECAs are allpartiestotheASU. 21 Asanintercreditor matter,theholdersofSubordinatedTrancheswouldnottypicallyhave 20 Whenthefinancial marketsmelteddownin2008–2009,manyFrenchbanks,forexample,lostU.S. 19 Similarly,they needtotakeintoaccountcurrencyissuesthatrelatetheiroilneedssinceis 18 5Sometimesreferredtoasaspecialpurposecorporation (SPC). 45 Mortgage-styleamortizationisnotfastenough, and‘bullet’maturitiesarenotpermitted. 44 range dependingonthenatureof thepurchaser,itsorderbookandsoon. a partoffacility(butforthat,youdonotneeddefinition). in thenameoftrusteeandnottrustitself. of theoperator. JOL loan.Therearetaxrisksintakingthisapproach. may engageafrontingbankwithJapanesebookingofficeandpurchase asilentparticipationinthe in thecontextofbusinessaircraft. October 1990).ThelegalopinionwasaddressedtoPeterLeiter,GeneralCounselofBankAmerica. October 1990).ThelegalopinionwasaddressedtoPeterLeiter,GeneralCounselofBankAmerica. October 1990).ThelegalopinionwasaddressedtoPeterLeiter,GeneralCounselofBankAmerica. embedded U.S.LeveragedLeases,theequityinvestorswouldnotpermitcross-default/collateralization. enhanced equipmenttrustcertificates(EETCs)’, the holdersofPTCs. federal incometaxpurposes.Itoperatedjustlikeitsounds:allmoneyreceivedbyispassedthrough Leasing structures. because ofthelargenumberolderEETCsstilloutstandingthathaveembeddedU.S.Leveraged suffered bytheequityinvestorswhofundedthismarket.Wetaketroubletomakenoteofithere this featureisnotcurrentlyavailable. with thedemiseofmonolineinsuranceindustryinaftermath2008financialmeltdown, was, inessence,‘guaranteed’byamonolineinsurancecompany,suchasMBIAorAMBAC.However, www.boeingcapital.com/cafno/. offer oneortheother. right toacceleratethedebt,butwouldhaveaBuy-OutRight.SeePart9,generally. funding sources(orhadtopullbackonU.S.dollarlending). dollar fundingfromU.S.moneymarketfunds.Theyhadtoscramblefindalternative similarly tradedonlyinU.S.dollars. 2009, pp.11–21. DEAL TYPES,STRUCTURES&ENHANCEMENTS 74 Journal ofStructuredFinance,Winter2005,pp.46–54. Journal ofStructuredFinance,Fall