Aircraft Financing – What you should know

The Cayman Islands aircraft registry is known to be the
registry of choice for many private aircraft owners. The majority of aircraft
registered in the private category in the jurisdictions include all of the most
commonly seen aircraft manufacturers including Dassault Falcon, Gulfstream,
Bombardier, Embraer, Airbus and Boeing aircraft. There are now over 150 private
aircraft registered in the Cayman Islands, the majority of these registered to
multinational companies or high-net-worth individuals.

Legal
and administrative service providers in the Cayman Islands such as Appleby are
able to offer aircraft owners and financiers much more in the way of financing,
leasing, securitisation and ownership structures not limited to Cayman
registered aircraft.  ‘

A
common component to these structures is the use of a Cayman Islands special
purpose vehicle through which funding and leasing arrangements may allow for
certain tax, accounting and regulatory relief.  

SPV
formation

In
a typical structure using a bankruptcy remote Cayman SPV, the company is
incorporated as an exempted company, the shares of which are issued to a Cayman
Islands trustee (usually a licensed trust company) for the benefit of a
charitable or purpose trust. The aim is to ensure that the SPV’s shares are
vested in a third party so that the SPV is an “orphan” and not regarded as a
subsidiary of the originator or financier.

In a charitable trust the
beneficiary of the trust is a charity. With a purpose trust, the object of the
trust is the commercial purpose of holding the shares in the SPV and there is
often a charitable beneficiary as well. Although the main duty of the trustee
of a charitable trust is to maximise the benefits for the charity, this is the
type of structure used most regularly to facilitate a particular commercial
arrangement. A purpose trust with charitable beneficiaries can also be used but
this alternative is complicated by the need to have a separate enforcer.

If
a charitable trust is determined to be the beneficiary of the trust, any
potential profit upon an eventual sale of the aircraft must be considered as
such profit could become payable to the charity upon termination of the trust
arrangements at maturity of the transaction. It is usual for the SPV to receive
a small profit for entry into the transaction such as US$1,000 (helpful for
commercial benefit issues of the SPV) and this is also ultimately paid to the
charity. Because recourse to the SPV is normally limited, the small profit can
usually be justified by the minimal risk involved.

These
SPVs can be incorporated in as little as a day if necessary and no licences or
regulatory approval is required. Given the speed at which these transactions
develop this is an attractive solution for transaction parties. 

The
SPV will also appoint an administrator to provide directors and officers to the
SPV and day to day administration of the SPV. The issue of who pays the
administrator’s bills in its capacity as administrator and trustee in relation
to the SPV comes down to the onshore tax analysis.

Either the originator or
financier can make these payments annually without bringing the SPV onto its
balance sheet or these payments can flow through with the cash flow of the
transaction or the payments can be made upfront for the life of the deal as
part of the acceptance fee. Appleby, through its various service companies and
subsidiaries, can simplify this process by providing the trustee, administrator
and independent directors. 

Independent
directors are essential to ensure the “off-balance-sheet” effect of the SPV, to
avoid the risk that the directors of the SPV may not be able to discharge their
fiduciary duties to act in the best interests of the SPV and any resulting
consolidation of the SPV with the financier, originator or trustee or the
collapse of the structure.

The
SPV enters into contractual arrangements with the original owner of the
aircraft (“originator”), to effect a “true sale” of the aircraft from the
originator to the SPV to transfer ownership to the SPV. The SPV can obtain the
monies to purchase the aircraft from the originator by issuing asset-backed
commercial paper in the form of debt notes to chosen investors. 

The
goal of any contractual arrangement which is set up in these circumstances is
to: 

  • achieve
    an off-balance sheet structure which does not affect the accounting position of
    the financier, the airline, the trustee, or the originator; 
  • achieve
    bankruptcy remoteness from the originator – particularly where there is a
    connection with the jurisdiction of the United States bankruptcy courts, which
    have a power to consolidate groups of companies in certain circumstances, it is
    essential that the aircraft be insulated from the risk of insolvency of the
    originator; 
  • the
    SPV is not part of the assets available to creditors of the trustee or
    originator if either were to become insolvent; and 
  • achieve
    limited recourse – the recourse of the financiers will be limited to the
    aircraft and any other supporting security provided by the SPV over its
    ancillary assets. In order to provide the best possible security to the
    financiers, the aircraft can be ring-fenced by comprehensive security taken by
    the financiers over the aircraft so that in the event of insolvency of the SPV
    the aircraft will not form part of the insolvent estate of the SPV.   

Legal
framework

Depending
on the nature of the contractual arrangements to be put in place, the SPV will
enter into the transaction documents which are typically UK or US law governed.

In
a common scenario, an airline will contract with the aircraft manufacturer to
purchase the aircraft. Prior to delivery of the aircraft the airline will
assign that purchase agreement to the SPV pursuant to which the SPV will
purchase the aircraft and register it on delivery in the registry of choice to
be agreed by the financier. By use of this structure, any incidental borrowing
costs are reduced with the issuance of notes and the airline does not need to
be concerned with incorporating the aircraft (and related debt) into its
balance sheet. Once it owns the aircraft, the SPV will then enter into a lease
arrangement with the airline. The lease documentation will provide for payment
of lease rentals and covenants in favour of the lessor in default of which the
SPV shall have available a number of remedies including repossession. 

There
will be security documents which secure the obligations of the SPV which might
include an aircraft mortgage, a debenture, a security assignment (usually
assigning the insurances and the rights of the owner under the lease agreement
and any related lease documents etc). There is often also an equitable mortgage
over the shares of the SPV granted by the trustee. This final document enables
financiers, as mortgagees, to assume control of the SPV in the event of default
in a financing or leasing arrangement which can be a straightforward and quick
solution. 

An
aircraft mortgage, which can be governed by UK, US or Cayman Islands law, will
enable a financier, as mortgagee, to assume control of the aircraft and by
taking the necessary steps on enforcement to ultimately transfer registered
ownership of the aircraft into its own name. 

A
share mortgage and aircraft mortgage have been found to be most beneficial when
used together in the suite of security documents as this provides the financier
with additional protection over not only the aircraft as an asset but the SPV
itself. 

There
will also often be a deregistration power of attorney which enables the
financier, in an event of default, to deregister the aircraft from its existing
registry and take ownership. 

Cape
Town Convention

It
should be noted that, although the United Kingdom has not yet ratified the Cape
Town Convention on International Interests in Mobile Equipment and the Protocol
to the Convention on International Interests in Mobile Equipment on Matters
Specific to Aircraft Equipment, the Cayman Islands has enacted domestic
legislation to recognise the Convention. As a result of this legislation, a
structure which involves a Cayman Islands entity owning an aircraft which is
leased to an operator in a Convention state will provide financiers with the
additional comfort of having Convention-type remedies against the Cayman SPV.

The law now enhances the existing status of the Cayman Islands and addresses
the concerns of financiers objecting to any entity in the structure not
recognising the Convention by providing them with access to the benefits of the
Convention. Financiers can now rely on the certainty of the International Registry
and of international enforcement.

Conclusion

As
a creditor friendly jurisdiction, with the expertise of the service providers
present in the Cayman Islands, the sophistication of the financing and leasing
structures available in the Cayman Islands lends itself to transactions capable
of being structured in such a way to meet the requirements of the leading
aircraft lending institutions free of unnecessary risks as well as meeting the
unique requirements of airlines in their home jurisdictions. 

  

 

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Caroline Barton

Caroline is an Associate at Appleby and a member of the Banking and Asset Finance Team within the Corporate and Commercial Practice Group. Her practice includes banking and asset finance, corporate finance, syndicated loans, project finance, property finance, and general aspects of banking and finance law.

 

Caroline Barton
Associate
Appleby
Clifton House
75 Fort Street
PO Box 190
Grand Cayman KY1-1104
Cayman Islands

T: +1 (345) 814 2056
E: cbarton@applebyglobal.com
W: www.applebyglobal.com 

Appleby

The Cayman office of Appleby, Appleby (Cayman) Ltd., traces its origins back to 1945 and as such is the oldest legal practice in Cayman. The office now has over 150 partners and staff and is widely recognised for providing first class litigation and insolvency legal services as well as corporate and commercial advice.

The Cayman Islands have branches of 40 of the world’s 50 largest banks. It is the leading offshore jurisdiction for the registration of investment funds and is the second largest captive domicile in the world with more than 700 captives. The jurisdiction is also recognised in providing trusts, structured finance, company and partnership formation and vessel and aircraft registry services.

The availability of expert professional advice and the reputation for being a respectable and well-regulated financial centre with a stable and business-friendly government, have contributed to the success of the islands’ financial services industry. Listed on the OECD’s white list, service providers adhere to all relevant international compliance standards and are committed to supporting global efforts to fight financial crime. 

Clifton House
75 Fort Street
PO Box 190
Grand Cayman KY1-1104
Cayman Islands


T: +1 345 949 4900
F: +1 345 949 4901
E: info@applebyglobal.com
W: applebyglobal.com