welcome to aerial 2016 - aerial …€¦ · · 2016-04-19aerial 2016 day one, tuesday 15th march...

Welcome to AERIAL 2016 Training & Development Conference

Nairobi, March 15 and 16

Aviation Law and Practice

David Bartlett, GECAS

Antony Single and Karina Oates, Clifford Chance

AERIAL 2016

Day One, Tuesday 15th March 2016

Ole Sereni, Nairobi, Kenya

A (brief) overview

http://www.aerial.aero/

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

Executive summary

3 Aviation Law and Practice



What makes aviation different?



• 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

A movable and constantly moving asset!

• Corporate, including insolvency, law due diligence

• Property and security law analysis – conflict of law

• Jurisdiction and enforcement (remedies, court procedures) assessment

• International Conventions / Treaties

Leading to cross-border, multi-jurisdictional considerations at outset and throughout deal

• 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

Operational matters

• 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

Specialised industry

What makes aviation different from e.g. project finance?



• 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”

Why do financiers provide the money?


Counterparty

Credit

Reputation

Business

Jurisdiction (legal

and operational)

Limited or full

recourse?

7

Asset Type

Model

Age

Engine type

Specification

Number in service

Number of

operators

Manufacturer

Support

Deal Structure

Financial terms

Loan to value

Repayment profile

– Balloon risk

LTV Test

Covenants

Syndication and

transfer rights

Good Security

over asset and

cash flows

Enforcement

Regulations

Aviation

Financial

Sanctions

Insurance

Political Risks

State of Registry

Cape Town

Convention

Investment

treaties

Common Risk Focus Areas for Financiers

Some overlap


Principal funding sources for airlines


Commercial bank debt

(including PDP financing)

Capital markets - debt

and equity

Export Credit Agency-

supported financing Tax leasing

Operating Lessors

Manufacturer support


Operating Lessor considerations


Credit risk

Asset risk –

lease term

Asset risk

- lease

end

Structural

Risk

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

Residual value - maintenance

and repair covenants, sub-

leasing, engines

Registration - asset and

ownership interest

Liability – operational,

regulatory; general indemnity

Insurances, manufacturer

warranties

Quiet enjoyment covenant

Residual value – return

conditions, remarketing

Lessee purchase option?

Tradeability

Financing requirements

Default and

repossession/enforcement

Bankruptcy/consolidation

Structural costs/risks e.g. taxes,

increased costs

Change in Law


Lender considerations


Credit risk Asset risk

Other Structural

Risk

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

Aircraft as security

Or limited asset risk

position? – e.g. limited

recourse operating lease

financings

Liability – operational,

regulatory

Insurances, manufacturer

warranties

Transferability

Default and enforcement

Inter-creditor issues

Bankruptcy/consolidation

Structural costs/risks e.g. taxes,

increased costs

Change in Law

Capital adequacy requirements


“Base case” – assume an airline is seeking financing for purchase of an aircraft from lender

(bank)

Lender requires security for repayment of loan

Lease structuring - commercial debt financing example


Lender

Borrower = Airline

Mortgage

over Aircraft Loan

Seller Sale of Aircraft

Secured loan direct to airline


Bankruptcy-remoteness and “ring-fencing” of asset

“Ownership as security” concept

Lease as secured financing device


Lessor

Lessee = Airline

Seller Sale of Aircraft

Lease

Lease financing to airline


(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 1st 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

Finance Lease vs. Operating Lease



Finance Lease vs. Operating Lease (continued)


Operating Lease Indicators Finance Lease Indicators

Shorter term (use agreement), may have several lessees

during useful life of asset

Longer term (useful life of asset)

Rentals plus residual (lessee may terminate w/o full

payout liability), payment for usage, rentals usually fixed

Full payout rentals (loan amortisation) – not linked to

usage, termination value payments , rentals may be

adjustable

Lessor’s focus on maintenance, insurance & operational

provisions, sometimes lessor shares responsibility for

maintenance, insurance & property taxes – security

deposits, maintenance reserves, cost sharing

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.


Use of Lessor SPVs in aircraft lease financing structures

Example – commercial debt financing


Example – Operating Lease

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

Lessee Airline

Lender (Bank)

Investment/

ownership/loan

(Operating) Lease

Lessor SPV

Lessee Airline

Operating Lessor


SPCs – reasons for use


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

Bankruptcy Risk SPC is owner of asset,

lender lends into SPC as

borrower under the loan

and not direct to the

operator

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


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

SPCs – key features



Clifford Chance

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

SPCs – Security



Lessor SPV essentially structured as a “look through” entity

Limited recourse debt = Lender looks only to Lessee (e.g. airline) and collateral for repay-

ment; 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

Use of limited recourse debt in lender/airline lease

financing



Typical lender/airline lease financing structure


Lessor/ Borrower SPV

Lessee (Airline)

Lender(s)

Loan = limited

recourse to Lessor

Finance Lease

Loan

Payments

Rentals

Mortgage and Security

Assignment of Lease

Lessor Parent Share Charge over SPC


Example commercial debt financing


Lessor SPC

Lessee (Airline)

Lender(s)

Loan = limited

recourse to Lessor

Full pay-out

Finance Lease

Lender takes credit risk on

Lessee (Airline)

Rentals (match

loan payments)

Mortgage and Security

Assignment of Lease

Lessor Parent Share Charge over SPC

Seller (e.g.

manufacturer or airline

(sale & leaseback))

Loan Advance

Sale

Purchase price

Loan

Payments


Overview of Aviation Conventions David Bartlett, GECAS

AERIAL Conference – 15 March 2016

Cover liability for accidents to passengers, luggage and cargo during international air carriage. 1929 Warsaw Convention for the Unification of Certain Rules Relating to International Carriage by Air Subsequent amendments e.g. Hague 1955 and Guadalajara 1961 1999 Montreal Convention for the Unification of Certain Rules for International Carriage by Air Montreal: 120 Contracting States – 25 African: www.icao.int/secretariat/legal/List%20of%20Parties/Mtl99_EN.pdf

Warsaw to Montreal 1929 to 1999

Warsaw Montreal

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

http://www.icao.int/secretariat/legal/List of Parties/Mtl99_EN.pdf
















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)

Rome

1933 Rome Conventions

CONVENTION ON INTERNATIONAL CIVIL AVIATION The Framework of International Civil Aviation 191 Contracting States www.icao.int/secretariat/legal/List%20of%20Parties/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:

1944 Chicago Convention

Chicago 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

http://www.icao.int/secretariat/legal/List of Parties/Chicago_EN.pdf














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 www.icao.int/Secretariat/Legal/List%20of%20Parties/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.

Geneva

1948 Geneva Convention

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

http://www.icao.int/Secretariat/Legal/List of Parties/Geneva_EN.pdf

http://www.icao.int/Secretariat/Legal/List of Parties/Geneva_EN.pdf

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 2006 70 Convention States 62 for Aircraft Protocol www.unidroit.org/status-2001capetown-aircraft

2001 Cape Town Convention

Cape Town

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.

http://www.unidroit.org/status-2001capetown-aircraft





Further reading and information.

www.youtube.com/user/IntlRegistry/videos

www.internationalregistry.aero

http://www.youtube.com/user/IntlRegistry/videos

http://www.internationalregistry.aero/

Aviation insurances - introduction

• 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 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)

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

• Insurance on indemnity basis (cover loss suffered)

• Look at then market value of insured asset – pay out on this basis

Contrast with house / car policies

• 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

Aviation insurances (hull)

• 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

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


35


Aviation insurances - key features

Parties are typically the insured (airline) and the insurers (insurance companies)

• 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

Brokers arrange to place the insurance with the insurers in the relevant market

• Captive insurers; State insurers

• Cut-through clause

Insurance (aka “Primary Insurance”) vs. Reinsurance (insurer is the insured party)

• “Beyond economic repair”, permanent deprivation from insurers’ perspective vs. Lease (and Loan) definition

• Possession and recovery periods should be noted

Total Loss definition

• Minimum requirements, “international aviation insurance market” standard

• Review by financier’s insurance department or external advisor

Lease and Loan insurance provisions

• Duty of disclosure, standard of knowledge – N.B. renewals

Principle of “utmost good faith”


36


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


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


Commercial debt financing documentation - overview


Flow-through

indemnity in

Lease

“Hell or high

water” rentals

Co-terminous

agreements

Matching

payments and

periods

Mirroring

of Loan and

Lease


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; “flow-

through” 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


Clifford Chance

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)

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)

Commercial debt financing – typical security

documentation



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

Commercial debt financing – other security

considerations



Clifford Chance

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

Involvement of local counsel


Due diligence

• 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

Documentation and negotiation

• 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

Closing

• 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

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.

welcome to aerial 2016 - aerial …€¦ · · 2016-04-19aerial 2016 day one, tuesday 15th march...

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