The Commercial Aircraft Finance Handbook

Ronald Scheinberg

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351364218
• Edition: 2
• Topic: Commerce
• Subtopic: Industrie des transports

The book offers a comprehensive overview of the multifaceted matters that arise in the process of financing commercial aircraft. It reviews the different topics on a high-level basis, and then explains the terminology used for each particular area of specialization.

PART 1

INTRODUCTION

‘Aircraft Finance’ is the art of financing aircraft. The Aircraft Finance market is in excess of U.S.$100 billion per year for the financing of new deliveries.¹ Insofar as commercial aircraft (and related assets) are highly expensive (the smallest in-production Boeing aircraft, the Boeing 737-700, has a list price of some U.S.$75 mil lion; the largest Airbus aircraft, the A380 has a list price of almost U.S.$390 million; and the GE-90 engine that powers the Boeing 777 aircraft list at approxi mately U.S.$24 million each),² they often need to be financed. With inherent demand for financing on the operator side, there is similarly a pool of financiers ready, willing and able to supply financing to meet this demand.

Aircraft are perceived (especially by aircraft lenders and operating lessors – those who are putting the money in (‘Aircraft Financiers’ or ‘Finance Parties’)) to be assets that are highly desirable to finance: they hold their value, earn a decent return, are relatively easy to find and, in many jurisdictions, are subject to beneficial legal regimes that allow timely recovery in default situations. The world of Aircraft Finance is dominated by three principal actors: the aircraft operator/airline, the aircraft lessor and the aircraft lender.³ Aircraft Finance transactions may have all three of these actors involved in a single transaction, such as one would find in a Back-leveraged Operating Lease, or any sub-combination:

• airline/operator-lessor, in a leasing transaction;

• airline/operator-lender, in a mortgage financing (reliant on the operator’s credit); and

• lessor-lender, in a mortgage financing (reliant on the lessor’s credit).

Each of these three parties brings a very different perspective to an Aircraft Finance transaction.

• The operator wants the cheapest possible cost (rent and return conditions or fees and interest charges).

• The lessor (vis-à-vis the operator) wants the maximum return (rent and return condition) and least amount of risk to its Aircraft Asset.

• The lessor (vis-à-vis the lender) wants the cheapest possible cost and maximum flexibility for use of the Aircraft Asset.

• The lender (vis-à-vis the operator and lessor) similarly wants the maximum return (fees and interest income) and least amount of risk to the Aircraft Asset.

Those different perspectives can be summarized, then, by the following relationships.

• Return versus Cost.

• Risk versus Flexibility.

Of course, these two categories are themselves linked: the greater the risk, the greater the required return. Risk tolerance and required levels of return, therefore, necessarily dictate different approaches between lessor and lenders, and between lessors and lenders, on the one hand, and the airline/operator on the other.

Exhibit 1.1 summarizes these primary risk/reward categories.

A further, and critical, overlay to this dynamic between the parties is the debtor-credit relationship among them. One of the very essential elements of the risk component is that obligations are largely uni-directional: the operator has the ongoing obligation to pay the rent/debt service and, in the case of a lease, return the Aircraft Asset,⁴ while the Aircraft Financiers satisfy their obligations on day one by delivering the Aircraft and/or financing.⁵

Efforts to balance all these various rights and risks in the case of any given financing require a broad skill set. Participants are required to have, or have access to, investment banking structuring skills, legal analysis, technical (metal) comprehension, insurance expertise, tax and accounting expertise and loan pricing know-how, to name but a few of the skill sets in which Aircraft Finance practitioners of all professions must have some level of working knowledge proficiency. Take an airline bankruptcy, for example. Finance parties holding lease or debt financing of an aircraft operated by the bankrupt airline must be able to analyze their contractual rights under the transaction documents (with the airline and the other finance parties), their rights under law, their rights in respect of the aircraft, the value and operational condition of the aircraft, their sale/lease remarketing options if they were to repossess the aircraft, their financing and refinancing (or exit) options and their risks of ownership and insurance needs on a repossession (among others!). That is quite an interdisciplinary understanding. While no professional is expected to be an expert in all these areas, any Aircraft Finance professional worth his salt will at least know the questions that need to be asked outside his personal area of expertise so as to be able to build a sufficient knowledge base to respond to developments and opportunities.

Exhibit 1.1 Primary risk/reward categories

	Primary risk vs flexibility issues	Primary reward/return vs cost [economic] issues
Operator (vs lessor or lender)	• Manner in which maintenance (for example, deferrals) is conducted • (Sub)-leasing rights • Re-registration rights • Insurance deductibles/ self-insurance	Lessor: • Rent • Term • Term renewal options • Purchase options • Security deposits • Maintenance reserves • Return conditions Lender: • Amortization profile (average life) • Maturity • Security deposits • Maintenance reserves • Interest rate • Prepayment premium/make whole • Breakage costs
Lessor (vs lender)	• Limit restrictions on re-leasing: jurisdiction economic terms contractual terms • Cure rights • Remarketing rights • Buy-out rights • Equity squeeze protection • Recourse versus non-recourse	• Amortization profile • LTV coverage • Maturity • Security deposits • Maturity extension options • Interest rate • Prepayment premium/make whole • Breakage costs

Source: Author’s own.

This Handbook is an attempt to provide Aircraft Finance professionals – bankers, investment bankers, appraisers, lawyers, insurance brokers, airline and lessor treasury-types and hedge fund, private equity and rating agency analysts – with resources, not to make them experts in an area outside of their particular expertise, but to provide a framework for knowing what questions and issues may be coming into play in a given situation.

Accordingly, this Handbook touches on the various disciplines with which profess...