Welcome to AERIAL 2016 Training & Development Conference Nairobi, March 15 and 16

Transcription

1 Welcome to AERIAL 2016 Training & Development Conference Nairobi, March 15 and 16

2 A (brief) overview David Bartlett, GECAS Antony Single and Karina Oates, Clifford Chance AERIAL 2016 Day One, Tuesday 15 th March 2016 Ole Sereni, Nairobi, Kenya

3 Executive summary What makes aviation different? How airlines buy, lease or finance equipment Aviation conventions and treaties what do they cover and when do they apply? Aviation insurances Key issues and documentation Involvement of local counsel; legal opinions 3

4 What makes aviation different? 4

5 What makes aviation different from e.g. project finance? A movable and constantly moving asset! Operator, owner and any financier often in different locations (and time zones) Aircraft registration vs. operation; operator s home base; aircraft location on default/enforcement Leading to cross-border, multi-jurisdictional considerations at outset and throughout deal Corporate, including insolvency, law due diligence Property and security law analysis conflict of law Jurisdiction and enforcement (remedies, court procedures) assessment International Conventions / Treaties Operational matters Specialist insurances and practices Regulations e.g. operational certification, safety and airworthiness Restrictions e.g. sanctions Fleet management - sub-leasing, maintenance and repair, engine pooling Specialised industry Capital intensive; long order times; cyclical elements and profits highly sensitive to e.g. fuel prices, currency fluctuations, global epidemics, conflict and political risk Asset valuation US$ denominated; residual, LTV, collateral and income/cash flow calculations; secondary trading Airline competition and consolidation; state supported vs. privatised operators, new entrants, low-cost market; geographical growth Environmental and safety regulation; technical developments; fleet replacement 5

6 Why do financiers provide the money? Size of financing: scale - deploys large amounts of capital (hopefully efficiently). Aircraft / Engines mobile asset; offers flexibility with repossession and remarketing / redeployment if default. Generally can be operated globally (contrast e.g. with rail). Typically $ funded (continuing?) Reasonable returns : risk / reward balance Growth industry with track record and ongoing demand; from airlines and investors Asset values (net of financed amount) generally hold up and fairly predictable; opportunity to sell or refinance with leases attached. Airline profitability relevance? ECAs and manufacturers - push product

7 Common Risk Focus Areas for Financiers Some overlap Counterparty Asset Type Deal Structure Regulations Credit Model Financial terms Aviation Reputation Age Loan to value Financial Business Jurisdiction (legal and operational) Limited or full recourse? Engine type Specification Number in service Number of operators Manufacturer Support Repayment profile Balloon risk LTV Test Covenants Syndication and transfer rights Good Security over asset and cash flows Sanctions Insurance Political Risks State of Registry Cape Town Convention Investment treaties Enforcement 7

8 Principal funding sources for airlines Commercial bank debt (including PDP financing) Operating Lessors Capital markets - debt and equity Manufacturer support Export Credit Agencysupported financing Tax leasing 8

9 Operating Lessor considerations Credit exposure on airline (or other borrower/obligor e.g. airline parent) Credit protection/enhancement e.g. guarantees, L/Cs Lease income, IRR Maintenance reserves, lease security deposit Credit risk Asset risk lease term Residual value - maintenance and repair covenants, subleasing, engines Registration - asset and ownership interest Liability operational, regulatory; general indemnity Insurances, manufacturer warranties Quiet enjoyment covenant Bankruptcy/consolidation Structural costs/risks e.g. taxes, increased costs Change in Law Structural Risk Asset risk - lease end Residual value return conditions, remarketing Lessee purchase option? Tradeability Financing requirements Default and repossession/enforcement 9

10 Lender considerations Credit exposure on airline or operating lessor (or both), any guarantor Collateral package Other credit protections Lease cashflows and other amounts e.g. security deposits, maintenance reserves/contributions Credit risk Asset risk Aircraft as security Or limited asset risk position? e.g. limited recourse operating lease financings Liability operational, regulatory Insurances, manufacturer warranties Bankruptcy/consolidation Structural costs/risks e.g. taxes, increased costs Change in Law Capital adequacy requirements Structural Risk Other Transferability Default and enforcement Inter-creditor issues 10

11 Lease structuring - commercial debt financing example Base case assume an airline is seeking financing for purchase of an aircraft from lender (bank) Lender requires security for repayment of loan Lender Loan Mortgage over Aircraft Secured loan direct to airline Borrower = Airline Sale of Aircraft Seller 11

12 Lease as secured financing device Bankruptcy-remoteness and ring-fencing of asset Ownership as security concept Lessor Sale of Aircraft Seller Lease Lease financing to airline Lessee = Airline 12

13 Finance Lease vs. Operating Lease (UK) accounting term SSAP21 (IAS 17): Finance lease = substantially all risks and rewards of asset ownership transferred from lessor to lessee, whether or not legal title transfers Operating lease = any lease other than finance lease Note new IFRS 16 Lease Accounting Standard will apply from 1 st January 2019 removal of operating lease vs. finance lease distinction for lessee accounting; all leases over 12 months on balance sheet Economic/ commercial term: Finance lease = full payout of lessor s investment (plus interest) no equipment risk Operating lease = rentals will pay portion of lessor s investment remainder will come from residual 13

14 Finance Lease vs. Operating Lease (continued) Operating Lease Indicators Shorter term (use agreement), may have several lessees during useful life of asset Rentals plus residual (lessee may terminate w/o full payout liability), payment for usage, rentals usually fixed Lessor s focus on maintenance, insurance & operational provisions, sometimes lessor shares responsibility for maintenance, insurance & property taxes security deposits, maintenance reserves, cost sharing Finance Lease Indicators Longer term (useful life of asset) Full payout rentals (loan amortisation) not linked to usage, termination value payments, rentals may be adjustable Triple net lease (maintenance, insurance & property taxes), less restrictions on operational provisions, operational and tax indemnities Risks of ownership with lessor Lessee takes risk of loss, destruction & obsolescence Return usually with specific return conditions (and upseys-downseys) Lessor takes upside (residual position) May include fixed/nominal purchase option or sales rebate procedure (remarketing) or even automatic title transfer (full pay-out concept). Plus less restrictive/detailed return conditions. 14

15 Use of Lessor SPVs in aircraft lease financing structures Example commercial debt financing Lender (Bank) Example Operating Lease Operating Lessor Lessor SPV Loan / other form of financing (Finance) Lease In both examples, Lessor SPV is owner of aircraft, borrower under financing and provides aircraft to airline operator under lease Lessor SPV Investment/ ownership/loan (Operating) Lease Lessee Airline Lessee Airline 15

16 SPCs reasons for use Bankruptcy Risk SPC is owner of asset, lender lends into SPC as borrower under the loan and not direct to the operator Security SPC grants security over asset, lease rentals and rights to lender; lender also has security over SPC itself = control Tax exclusion or mitigation of any withholding taxes on lease rentals, loan payments, deposit payments or other amounts (e.g. CSA instalments) Asset registration e.g. aircraft nationality registers Cash Flows e.g. separation of loan cash flows Accounting e.g. non-consolidation requirements Liability re. Ownership separate financiers from owner and operator of asset Enforcement through SPC as owner 16

17 SPCs key features Special purpose, bankruptcy-remote: Newly set-up, no other business ( clean ) (so no other creditors likely), separate legal entity Limited recourse borrowing (see later) also links to solvency of SPC SPC can give security e.g. aircraft mortgage ring-fencing of asset May be orphan SPC or may be backed by leasing company or another transaction party, depending on deal May be special purpose trust (e.g. statutory trust) or another special purpose vehicle Tax neutral jurisdiction, favourable jurisdiction for creation, registration and enforcement of security and possibly for asset registration (e.g. owner registers) N.B. a transaction may be structured with multiple SPCs e.g. one SPC per aircraft financed/leased; e.g. head-lease and sub-lease structures/chains 17

18 SPCs Security Security over SPC and other control rights Share charge SPC covenants in documentation No other business No prejudice to asset and other collateral No liens over asset No change to constitution Independent directors or professional trustees; constitutional documents/trust terms; resignation letters Direct cash flows or charges over SPC accounts Legal opinion Clifford Chance 18

19 Use of limited recourse debt in lender/airline lease financing Lessor SPV essentially structured as a look through entity Limited recourse debt = Lender looks only to Lessee (e.g. airline) and collateral for repayment; Lessor/Borrower (e.g. SPV) is not liable for loan payments, save in certain events Lender s rights to recover amounts payable by the Lessor/Borrower are restricted to particular assets/claims so that the Lender does not have the full remedies provided by law to enforce or claim such payments, generally in return for security being granted over such assets Non-petitioning language in respect of Lessor/Borrower Lender agrees not to sue/bring action or proceedings against Lessor/Borrower in relation to limited recourse obligations, subject to recourse events and other exceptions Typical recourse events: Failure to account Lessor does not pass up payments from Lessee owed to Lender Breach of (SPV) covenants Material misrepresentation Fraudulent or wilful misconduct 19

20 Typical lender/airline lease financing structure Lessor Parent Share Charge over SPC Lender(s) Loan Payments Loan = limited recourse to Lessor Lessor/ Borrower SPV Mortgage and Security Assignment of Lease Rentals Finance Lease Lessee (Airline) 20

21 Example commercial debt financing Lessor Parent Share Charge over SPC Lender(s) Loan Advance Seller (e.g. manufacturer or airline (sale & leaseback)) Sale Purchase price Loan Loan = limited Payments recourse to Lessor Lessor SPC Mortgage and Security Assignment of Lease Rentals (match loan payments) Full pay-out Finance Lease Lender takes credit risk on Lessee (Airline) Lessee (Airline) 21

22 Overview of Aviation Conventions David Bartlett, GECAS AERIAL Conference 15 March 2016

23 Warsaw to Montreal 1929 to 1999 Warsaw Montreal Cover liability for accidents to passengers, luggage and cargo during international air carriage Warsaw Convention for the Unification of Certain Rules Relating to International Carriage by Air Subsequent amendments e.g. Hague 1955 and Guadalajara Montreal Convention for the Unification of Certain Rules for International Carriage by Air Montreal: 120 Contracting States 25 African: 0Parties/Mtl99_EN.pdf Which applies in a given case? Art 1(2) Montreal How do they work? Impose some liability without fault but financial limits. Limits vary. Breaking limits? Limit actions to circumvent Convention (e.g by suing carrier agents and under national law remedies). Art 29/30 Montreal Limit time for notifying and bringing claims Art 31/35 Montreal Provide for and limit jurisdictions in which to claim Art 33/46 Montreal

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25 1933 Rome Conventions Rome Two 1933 Rome Conventions for Unification of Rules Relating to: Damage Caused by Foreign Aircraft to Third Parties on the Surface; and Precautionary Arrest of Aircraft. The first treaty ineffective. Replaced by 1952 Rome Convention and more recently proposed Montreal 2009 Convention on Compensation for Damage Caused by Aircraft to Third Parties. Precautionary Arrest Convention Pre-judgment arrests of aircraft Disruption to state services (e.g. post) or commercial traffic. Restricts rights of creditors and owners Limited acceptance (African states Algeria, Mali, Mauritania and Niger) Cape Town usually prevails in CTC states but only ref those aircraft which Cape Town Protocol covers (see e.g. airframe / helicopter in Art I and Art XXIV)

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27 1944 Chicago Convention Chicago CONVENTION ON INTERNATIONAL CIVIL AVIATION The Framework of International Civil Aviation 191 Contracting States arties/chicago_en.pdf Establishment of ICAO (International Civil Aviation Organisation) Rules of the Air Aircraft Registration and Safety Rights of Contracting States Freedoms? Standards and Recommended Practices (SARPs) Annexes examples: Annex 1 Personnel Licensing 2 Rules of the Air 6 Operation of Aircraft 7 Aircraft Nationality and Registration Marks 8 Airworthiness of Aircraft 13 Aircraft Accident and Incident Investigation 19 Safety Management

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29 1948 Geneva Convention Geneva Convention on the International Recognition of Rights in Aircraft Covers transfer of title to aircraft and international recognition of rights in aircraft ownership, possession and security 89 Party States rties/geneva_en.pdf 29 African states. Note Cape Town Protocol Art XXIII applies for 11 of those countries Angola, Cameroon, Ethiopia, Kenya, Madagascar, Nigeria, Republic Congo, Rwanda, Senegal, South Africa and Togo but Geneva still applies in some instances there. Aimed at encouraging financing of aircraft to expand industry: Registration of security and affording priority and recognition internationally Transparency as to liens / security over aircraft Nationality of aircraft important to establish rights and method / place of registration, perfection and enforcement under local law - Art I Engines Articles X / XVI; Compare CT Protocol Arts I and XIV(3) See further resource pack materials AERIAL March 2016

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31 2001 Cape Town Convention Cape Town To create, record, enforce and regulate priority in interests in high value mobile equipment Convention is not aviation equipment specific. Separate Protocols for each type of equipment. Aircraft, engines and helicopters, railway rolling stock and space assets. [Others?] Protocol prevails over Convention if conflict in terms for that equipment Protocol on Matters Specific to Aircraft Equipment took effect 1 March Convention States 62 for Aircraft Protocol Greater security and certainty = Reduced country risk = more financing at less cost for operators. Which aircraft / engines? Art I Protocol Creation of international interest not dependent upon national law; International Registry on line Default remedies (including in insolvency); public notice of interests When Does the Convention Apply? System of declarations Initial and Subsequent declarations Declarations - effect and benefit can vary hugely country to country.

32 Further reading and information.

33 Aviation insurances - introduction In a typical aircraft financing transaction, the aircraft is security for repayment of the financing (usually secured by way of a mortgage or equivalent security interest over the asset) If there is a default under the financing, there is an opportunity to enforce the mortgage sell aircraft & apply proceeds of sale to the outstanding debt But aircraft, especially as movable assets, are at risk of destruction/ disappearance loss In such a case, financiers (whether banks, leasing companies or investors e.g. bond-holders) want to look to insurance for loss coverage (i.e. to meet debt repayments (and other amounts)) In addition, the owner/lessor/any financier may have claims brought against them by third parties for aircraft-related incidents during the operation of aircraft by the airline require insurance cover for such liability Contrast with house / car policies Insurance on indemnity basis (cover loss suffered) Look at then market value of insured asset pay out on this basis Aviation insurances (hull) Market has developed to reflect the financing requirements of these specialist assets Agreed value insurance N.B. difference between finance leases (loan outstanding) and operating leases (agreed value, subject to depreciation formula) Background marine insurance and London market A contract under which the parties agree, in return for a certain premium, that the insurer will make payment if a stated event of loss occurs Similarities to gaming contracts = in return for a premium (placed), payment made on occurrence of chance event Certain legal regimes impose restrictions on agreed value insurances 35

34 Aviation insurances - key features Parties are typically the insured (airline) and the insurers (insurance companies) Brokers arrange to place the insurance with the insurers in the relevant market Broker is the agent of the insured Broker s letter of undertaking (to hold insurance slips, notify of cancellation or material change, non-payment of premium, change in brokers) N.B. Certificates are only a summary of the main contractual terms of the insurance contract/ policy (fleet basis) unusual to see whole policy of the airline Insurance (aka Primary Insurance ) vs. Reinsurance (insurer is the insured party) Captive insurers; State insurers Cut-through clause Total Loss definition Beyond economic repair, permanent deprivation from insurers perspective vs. Lease (and Loan) definition Possession and recovery periods should be noted Lease and Loan insurance provisions Minimum requirements, international aviation insurance market standard Review by financier s insurance department or external advisor Principle of utmost good faith Duty of disclosure, standard of knowledge N.B. renewals 36

35 Hull and liability insurances Hull Insurances (Agreed Value) Hull all risks Hull war risks N.B. 50/50 clause (AVS 103) Deductibles Exclusions Movables/spares/parts/engines Liability Insurances (Indemnity basis) Passengers Baggage and Mail Third Party Persons or Property ( Ground Losses ) Limits 37

36 AVN 67B Contract Parties Endorsement Framework Contract Parties and Contracts Insurable interest Stand-alone endorsement Loss Payee (hull insurances) Total Loss payment to order, otherwise to repairer Additional assureds (all insurances) joint insurance Other protections Breach of warranty provision (cover not invalidated by action of another Contract Party if no knowledge) Waiver of insurers set-off or counterclaim rights (excluding outstanding premium) No liability for payment of premium Airline assignment? Hull insurances Step in the shoes rights, not just proceeds (e.g. right to negotiate/settle, right to sign release, right to claim refund) N.B. ECA supported aircraft financings 38

37 Commercial debt financing documentation - overview Flow-through indemnity in Lease Matching payments and periods Mirroring of Loan and Lease Co-terminous agreements Hell or high water rentals 39

38 Commercial debt financing documentation loan and lease Assume straight aircraft debt financing, no other classes of lender or equity investor Lender looking to credit risk of operator (airline); no asset risk Limited recourse loan to Lessor SPC; full pay-out finance lease (n.b. characterisation) Loan mechanics E.g. term loan, no re-borrowings, amortising to zero Principal and interest payment provisions Assignment and transfer provisions Syndicated loan on secured basis; Facility Agent and Security Trustee provisions Borrower representations and covenants (including SPC covenants) Borrower events of default Mandatory prepayment events e.g. increased costs/taxes, change in law LMA standard terms Mirrored Loan and Lease Limited recourse borrowing and recourse events in Loan Lease rentals match loan payments (principal and interest) Other amounts e.g. taxes and increased costs; flowthrough indemnity in Lease from Lessee for Borrower s obligations under Loan Operational/general indemnity from Lessee for benefit of the Lenders Co-terminous Loan and Lease Loan Events of Default Borrower fault events (e.g. insolvency) vs. Lessee default Mandatory Prepayment Events e.g. Lease illegality, Total Loss 40

39 Commercial debt financing documentation loan and lease (continued) Finance Lease terms Operational provisions including: insurances sub-leasing engine swapping and pooling, parts replacement maintenance and return conditions technical records and aircraft documentation registrations sanctions Disclaimers Quiet enjoyment covenant from Lessor and Lenders Lease expiry may have automatic title transfer or purchase option (fixed or nominal amount) Early termination, including total loss termination payment under Lease will equal outstanding balance under Loan (title transfer upon satisfaction of debt) Clifford Chance

40 Commercial debt financing typical security documentation Start with the (bankruptcy-remote) SPC borrower/owner/lessor Collateral package Asset (i.e. aircraft) mortgage or other security interest English/Irish/NY law mortgage Cape Town international interest Local law security Lease assignment (by way of security) of rentals, rights and interests, requisition proceeds Cape Town international interest and assignment of associated rights Other operative contracts (e.g. purchase contract in PDP financing ) or amounts (e.g. sale proceeds) security assignment Cash account charge/pledge/assignment/control agreement SPC share charge/pledge Warranties (and proceeds) manufacturer s e.g. airframe and engines security assignment; or manufacturer agreement (more common) 42

41 Commercial debt financing other security considerations Security trustee/agent ST holds on trust for all lenders English law beneficiaries to a trust may change without affecting the trust assets Facilitates loan syndication while preserving security package Other jurisdictions may use parallel debt structures Security agent alternative In return, lessee will require quiet enjoyment undertakings from lessor and lender(s) up the chain Perfection of security: Registration of security specialist asset and/or company registers (including property registers for ownership and/or lease interests) Notice (e.g. of assignments) Cape Town Convention and Aircraft Protocol International Registry notice-filing priority registration 43

42 Commercial debt financing - other supporting documentation Parent guarantee/comfort letter in relation to airline Local opinions e.g. for airline and SPC jurisdictions Aviation insurances Other aircraft lease financing specific items Security Deposit Cash or Letter of Credit Maintenance Reserves Strict return provisions (including upseys-downseys ) Advance lease payments Residual Value Insurance or Guarantee Remarketing Agreements De-registration Powers of Attorney / Cape Town IDERAs Letters from Eurocontrol and Aviation Authority Specialist registrations e.g. Cape Town, Asset Registers Clifford Chance

43 Involvement of local counsel Due diligence Documentation and negotiation Closing Legal opinion Jurisdictional review/advice Regulatory and corporate regime, including insolvency and tax Asset and lease registration Security and repossession advice; remedies and court procedures Liens and statutory detention rights Application of Cape Town Review of principal documents from local law perspective Corporate authorisations Execution formalities and arrangements Drafting of local law security and other agreements, e.g. guarantees Dealing with aviation and other authorities e.g. customs, local registries Local law registrations e.g. lease and mortgage Aircraft registration De-registration PoA/IDERA recording Cape Town filings Notarisations and translations Stamping and other documentary requirements Issue of legal opinion Capacity opinion Airline, guarantor and any other relevant obligor Due authorisation and execution (corporate authorisations) Enforceability opinion Legal, valid, binding and enforceable obligations No further acts (local registrations, taxes etc.) Security opinion Local law mortgage, account charge etc. Clifford Chance 45