For a number of reasons[1], aircraft financing is one of the more complex forms of corporate financing. Where the airline borrower or lessee is operating in a developing country like Nigeria, another layer of intricacy emerges. In this update, we draw some key points from aircraft financing transactions, we have advised on, in recent time.
- It may not always be strategic for a local airline company (“Airline”) to raise debt capital directly from banks. Firstly, such loans will usually be a balance sheet transaction and will be full recourse to the Airline. Existing debt arrangements may also limit the debt levels which an Airline can secure during the term of a loan facility or contain financial covenants that would be breached where the Airline attempts to exceed agreed debt levels. Loans may also be more expensive depending whether the airline is considered to be investment-grade or not.
- For an Airline looking to structure an aircraft financing transaction, it is important to appreciate the legal distinction between operating leases and finance lease, either of which may be a form of wet, dry or damp lease.[2] One key distinction, which often impacts negotiations, is that finance leases are structured so that rent payments cover all of or substantially all of the purchase price of the Aircraft and the lessee is expected to purchase the aircraft at the end of the term. Also, the risks and rewards attributable to legal ownership of the aircraft are transferred to an Airline.
- Aircraft finance leases can also be leveraged in the sense that lenders provide a lessor or an Airline, as the case may be, with loans to cover a portion of the acquisition cost of an aircraft, typically up to 80% of the acquisition cost. The balance is then covered by equity investors, usually under an owner trust structure[3]. Under this structure, lenders will want a first priority lien on the aircraft and related assets as well as clear, enforceable rights to receive regular payments.
- With aircraft operating and finance leases, it is often but not always the case that an airline leasing company may establish an orphaned special-purpose vehicle domiciled in a tax-efficient offshore jurisdiction (the “SPV Borrower”). The SPV Borrower then takes a loan from a foreign bank lender, purchases the aircrafts and sometimes, spare engines, with the goal of leasing them to an Airline.
- Lenders will want to take security in the form of a mortgage over the aircraft and, where applicable, the spare engines. It is often the case that there would be mortgage registrations in multiple jurisdictions including in the country of origin of the Airline.
- As part of the security structure of such transactions[4], lenders will want an assignment of contractual rights in related contracts. These include the insurance and reinsurance agreements, airline purchase agreements, airframe warranties agreements, aircraft lease agreements and engine warranties agreements, as well as omnibus security assignments from the Airline and the SPV Borrower, in favour lenders.
- Although parties will typically opt for English law, a review of unfair contracts regulations is prudent because international supply contracts are not specifically exempted from unfair contract regulations. In Nigeria, unfair contract regulations generally apply to all commercial activities regardless of the location of the contracting parties, the location where offer and acceptance was consummated, the location of delivery or the nature of carriage contract.
- As part of the closing documents, it is typical for an Airline to address an irrevocable de-registration and export request (the “Request”) to the Nigerian Civil Aviation Authority (the “NCAA”) in favour of lenders. The Request is typically issued pursuant to Article XIII of the Cape Town Convention[5]. The purpose of the Request is usually to recognize one or more lenders as the sole persons entitled to deregister and procure the physical export of the aircraft, which is subject of a security. It is important to note that, the provisions of the Cape Town Convention with respect to enforcement have been incorporated into the Nigerian Civil Aviation Regulations 2009 and 2012. Amongst others, the NCAA Regulations provide for the de-registration of an aircraft where (a) the holder of a valid de-registration power of attorney applies to the Authority for de-registration; and (b) when the holder of a certificate of registration, owner or lessor or his duly authorised attorney applies in writing for de-registration of the aircraft from the NCAA register. Generally, once the Request is recorded with the NCAA, the NCAA has a statutory obligation to de-register and afford assistance to the beneficiary of the Request for the repossession and exportation of the Aircraft without court action and without leave of the court.
Comments
Although the focus of lenders and lessors has always been to ensure that elaborate security arrangements are in place (and rightly so), it would be prudent for aircraft lenders and lessors focused on the Nigerian market to take into account practical and uniquely “Nigerian” issues that may impact the enforceability of their security[6] and to provision for those contingencies when negotiating the relevant financing and security documentation.
[1] These include the high acquisition and maintenance costs, cyclicality and fuel price volatilities, high mobility of aircrafts as well as the multiplicity of international, national and sub-national laws applicable to aircraft financings and to the operation of aircrafts generally.
[2] Aircraft financings can also be structured as a sales leaseback transaction or as a Japanese operating lease
[3] Owner trusts are established by owner trustees who act on behalf of, one or more equity investors
[4] There would also very likely be subordination agreements, where amongst others, the interests of lessor and other creditors will be subordinated to that of the senior lenders.
[5] That is, the 2001 Convention on International Interests in Mobile Equipment (Nov. 16, 2001, S. Treaty Doc. No. 108-10, 2001 WL 34360428) (the Cape Town Convention and the Protocol on Matters Specific to Aircraft Equipment (S. Treaty Doc. No. 108-10, 2001 WL 34360428) (the Aircraft Protocol, and together with the Cape Town Convention, the Cape Town Treaty).
[6] As an example, it is not impossible that a Nigerian court may still grant an injunction restraining the exportation of an aircraft which is subject of a security arrangement notwithstanding that the parties have expressly recognised the application of the Capetown Convention in the relevant financing and security documents.
