REPOSSESSING AN ENGINE AirFinance Journal Roundtable London 7 April Richard Williams

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1 REPOSSESSING AN ENGINE AirFinance Journal Roundtable London 7 April 2009 Richard Williams

2 Objectives Highlight common challenges faced when repossessing an engine. Provide a checklist of points to help establish the fact pattern when repossessing an engine. Highlight where to look for potential protections on repossessions, including the Cape Town Convention.

3 Contents The market outlook for 2009 and beyond. Legal challenges when repossessing an engine. Establishing the fact pattern. What protections are potentially available for engine financiers when repossessing engines and the Cape Town Convention. Discussions/questions.

4 Outlook for the Aviation Market in 2009 and Beyond Airline Industry expected to lose $2.5bn-$4.7bn in Mild turnaround in 2010, but at least 2011 before a significant upturn. Source: IATA 27 March 2009 FBD experience in 2008/2009: we have experienced a significant increase in aircraft and engine repossessions, aircraft/engine lease terminations and insolvency instructions; and for example, we acted on repossessions in relation to the Sterling and Silverjet (and XL). What is your recent experience and what are your expectations?

Potential Legal Challenges when Repossessing Engine Challenges faced are common on repossession of moveable equipment and the general challenges are likely to be relevant regardless of how the engine

5 Potential Legal Challenges when Repossessing Engine Challenges faced are common on repossession of moveable equipment and the general challenges are likely to be relevant regardless of how the engine is financed, e.g. through an operating lease or a loan and mortgage. Common challenges derive from: Jurisdiction of incorporation of the airline/location of your engine Recognition of your legal interest and availability of remedies. Creditor protection laws proceedings, e.g. examinorship laws and chapter 11. Local law oddities, e.g. in Norway, owner of the airframe is deemed owner of the engines installed in the airframe.

6 Potential Legal Challenges when Repossessing Engine cont. Basis of repossession and termination of relevant transaction documents. Default termination and repossession provisions of the documents. Repossession on insolvency market practice.

engine in lieu of unpaid air traffic control (e.g. Eurocontrol), landing and parking fees. Who can detain the aircraft?

7 Potential Legal Issues when Repossessing Engine cont. Liens and detention rights Universally similar concept and result for the financier: ATCs and airport authorities can detain your engine in lieu of unpaid air traffic control (e.g. Eurocontrol), landing and parking fees. Who can detain the aircraft? Your potential liability for a) the whole aircraft and b) other aircraft. Disputes between airframe owners and engine owners. Other liens, such as repairer liens? Other commercial Issues Relationship with the airline. Your reputation.

8 Protections for Financiers Terms of Transaction Documents Recognition of rights clauses Restrictions on liens Eurocontrol/ATC letters Security Letters of credit/cash deposits/maintenance reserves Parent Guarantees Cape Town Convention

Cape Town Convention and Protocol Introduction When can an international interest be registered? Only where the debtor (i.e. airline) is incorporated in a Cape Town Convention Country.

9 Cape Town Convention and Protocol Introduction When can an international interest be registered? Only where the debtor (i.e. airline) is incorporated in a Cape Town Convention Country. State of registration of aircraft/engine irrelevant. What can be registered as an international interest? Sale Mortgage Lessor in an operating lease or a finance lease transaction.

10 Cape Town Convention Advantages For You Title preservation applies - overrides local law. Priority against third parties. The key protections: Articles 8, 9, 10 and 11 (Protocol 9) default remedies gives you the right to terminate the agreement and repossess and export the engine on the occurrence of an event of default - self help remedies. Article 13 permits speedy relief such as immobilisation of the engine.

11 Cape Town Convention Potential Limitations Article 39 and 40 contracting state can make declarations with respect to categories of non-consensual rights or interests which do not have to be registered and have priority over international interests i.e. detention rights and liens for repairers. Article 54 check whether contracting state has limited the availability of certain remedies where leave of the court is required. Protocol Article 11 A and B alternative check which alternative contracting state has elected. Alternative A is the preferred (and the most common election).

12 Alternative A (mimics US Bankruptcy Code s.1110) Within specified waiting period (or any earlier date when creditor would be entitled to possession under applicable law) insolvency administrator/ debtor must: give possession of asset to creditor; or cure all defaults and agree to perform all future contractual obligations enhance prospect of full/timely recovery: improves credit rating for securitisation assists Basel II analysis (hence greater lender appetite) Alternative B Upon request of creditor insolvency administrator/debtor must notify creditor within prescribed period whether it will: cure all defaults and agree to perform all future contractual obligations; or give possession of asset to creditor subject to any condition court may impose (e.g. moratorium) greater uncertainty increases repossession risk and requires additional liquidity support to achieve same credit rating

Establishing the Fact Pattern Pursuant to what arrangement is the engine leased?

ownership or legal? What engine are we repossessing e.g. has there been a title swap?

Where is your engine and who is in possession of it? What is the basis for your repossession e.g. insolvency or breach?

13 Establishing the Fact Pattern Pursuant to what arrangement is the engine leased? For example, operating lease/finance lease or loan secured by a mortgage and what is your legal interest ownership or legal? What engine are we repossessing e.g. has there been a title swap? Who is your lessee/borrower airline and what jurisdiction is it incorporated in? Where is your engine and who is in possession of it? What is the basis for your repossession e.g. insolvency or breach? What are the terms of the relevant transaction documents? Are there any outstanding airport and/or ATC fees? Do you have registered Cape Town international interests and what declarations have been made.

14 Contacts at Freshfields Bruckhaus Deringer ( Richard Williams (associate Securitisation and Asset Finance) Robert Murphy (partner Securitisation and Asset Finance) Phillip Croall (partner Dispute Resolution)

15 Freshfields Bruckhaus Deringer LLP 2009 This material is for general information only and is not intended to provide legal advice. LON

Legal considerations for engine financiers

Legal considerations for engine financiers Daniel French Thursday 27 March Topics covered Commercial opportunities and legal challenges Tracing title Security Cape Town Convention Other issues to be covered