Recent developments in aircraft finance and leasing – AFIC, Balthazar and GATS

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Aircraft Finance Insurance Consortium (AFIC)

AFI launched in 2017 and supported more than US$1 billion of new aircraft deliveries in that year. AFIC grew out of the recent drying up of export credit support for Boeing and Airbus financings. Developed by Marsh LLC (as exclusive broker) in collaboration with Boeing, AFIC is a non-payment insurance product for aircraft financings, covering lenders for airline credit and jurisdictional risks. AFIC allows lenders to rely on the credit of the insurers who offer it (Allianz, Fidelis, AXIS Capital and Sompo International) – all of whom have a credit rating of at least "A" (Standard & Poor's).

Balthazar

Meanwhile, Marsh S.A.S – a different team from Marsh LLC with separate reporting lines and appropriate barriers in place – has been working as exclusive broker with Airbus, certain lenders and a pool of highly rated insurers to launch Balthazar.

Balthazar is a non-payment insurance product for lenders and investors funding new Airbus aircraft under which insurers will typically provide 100 per cent cover for up to 12 years. Balthazar is to be flexible:

  • allowing parties to use their own transaction documents; and
  • covering a range of structures, including tax leases. 

At the time of writing, Airbus is working on its first Balthazar deal.

What is non-payment insurance?

Non-payment insurance (NPI) is similar to export credit support for commercial lenders via insurance cover rather than a guarantee. The lenders finance an aircraft acquisition in reliance on the insurers covering the risk of non-payment by the airline. The insurance is several, with each insurer liable for its own share of the default risk only.

However, there are differences from export credit financing: commercial or intercreditor issues (given the use of multiple corporate insurers), a different bank capital regulatory analysis and a risk analysis based on a corporate insurer credit rating rather than sovereign risk. With NPI, the OECD restrictions on the percentage of national content in the aircraft and the invoice price applicable to an aircraft do not apply. Nor does the informal "home country" rule apply to NPI, allowing its use by US, UK, German and French airlines.

The end of export credit?

Despite the immediate popularity of NPI, export credit is likely to remain an important funding option. NPI insurers' focus will tend to be middle-tier airline credits. In contrast to export credit agencies, their appetite for covering default risk on lower-rated airlines may be limited – especially in downturns, when export credit agencies have traditionally proved invaluable in financing otherwise non-bankable transactions.

How great will GATS be?

Novation frustration

Lease novations are frustrating for lessees and lessors alike, often involving protracted negotiations and a seemingly disproportionate amount of time and energy. As trading between lessors has increased, this has become a bigger issue for the market. But why the difficulty?

While the starting point on novations is to cause as little disruption to the lessee as possible, changes to the lease to reflect the change of ownership are inevitable. These changes must be documented and reviewed. Well-drafted leases should ensure there will be "no increased obligations" for the lessee on a transfer. In reality, buyers frequently require confirmations, representations and further changes to the lease.

GATS

Partly in response to these issues, in May 2018, the Aviation Working Group (AWG) announced plans for a global electronic aircraft trading system (GATS). 

Under GATS, aircraft will be owned by trusts in the US, Ireland or Singapore. Instead of using lease novations and selling legal title to aircraft, the beneficial interests in those aircraft trusts will be traded electronically. The legal owner of the aircraft and the parties to the lease stay the same. Only the beneficiaries of the trust change. In theory, this should reduce lessee involvement. 

GATS is intended to use standardised documents and blockchain technology, including an "e-ledger". Using blockchain technology should give beneficial owners a permanent record of their ownership that can be added to (e.g. on a sale), but not deleted or amended. 

Is GATS the solution?

If GATS can simplify transfers, "bake-in" the principle of "no increased obligations" for lessees and minimise lessee involvement, this should be a good thing for everyone. But until the AWG publishes more detail, it is difficult to assess GATS fully. Issues to be considered include:

  • Tax – there may be jurisdictions with withholding tax issues on lease rentals to lessor trusts based in the US, Ireland or Singapore. Parties may also want to consider tax consequences in jurisdictions that "look through" the trust to the beneficiary.
  • Recognition – aircraft trusts have been used for years and have proven to be effective, but they are not universally recognised, particularly in civil law jurisdictions.
  • Insolvency – will the AWG provide legal opinions on the insolvency treatment of these structures in the US, Ireland and Singapore?
  • Formalities – GATS will need to comply with all relevant trust law formalities arising under applicable laws despite using a purely electronic trading system.

What next?

Some lessors have attempted to make their leases GATS-compliant, with an upfront lessee consent for the lease to be put into the owner trust required for trading on GATS. With appropriate lessee protections, this seems a sensible step.

Watch this space. The market is moving towards a more efficient (and lessee-friendly) approach to aircraft transfers and GATS, or something like it, seems likely to be part of this.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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