Norton Rose Fulbright
33 Experts
19 Contributions by Norton Rose Fulbright
PRACTICE NOTES
In aircraft finance transactions, lenders take security as a means of credit enhancement to raise the likelihood that their loan will be repaid in full if the borrower becomes insolvent or falls into payment default.
Important considerations for lenders taking security are:
the validity and enforceability of the security in whichever jurisdiction the aircraft is situated at the relevant time
the security ranking in priority ahead of the borrower’s other creditors, with the aircraft ring-fenced for the secured lender’s benefit
the charged assets not being susceptible to claw-back in any insolvency proceedings of the borrower
Another reason lenders take security over aircraft is the Basel framework (implemented by the EU Capital Requirements Regulation (Regulation (EU) 575/2013) (EU CRR)), which requires in-scope banks to have legally effective and enforceable security over the aircraft in all relevant jurisdictions if they wish to use that security to reduce the risk
Banking & Finance
PRACTICE NOTES
When a lessor places an aircraft on lease, it is concerned to make sure the aircraft is run in a way that does not unduly undermine the market value of the aircraft, and therefore its value as quasi-security, over the term of the lease. As a bare minimum, the lessee will be asked to give an undertaking to the lessor that it will operate the aircraft as follows:
in full accordance with all applicable laws (which includes the laws of the state in which the aircraft is registered as well as those of any jurisdictions in which the aircraft is physically located)
in accordance with all permits or licences which are required by the lessee to operate the aircraft in question
in a way which will not invalidate any warranties granted by a manufacturer in respect of the aircraft
in accordance with the
Banking & Finance
PRACTICE NOTES
Aviation finance is well suited to tax leasing across multiple jurisdictions. Such leases are generally used to defer tax. From a tax viewpoint, they can be beneficial for equity investors who have taxable profits arising from their ordinary business activities. These arrangements can be executed in jurisdictions including Japan, Germany and France. The primary risk with tax leasing emerges if the transaction ends early, as this may prevent equity investors from deferring their tax exposure to the extent and for the period they had planned.
What is a tax lease?
Most tax leases operate as tax deferral structures. They occur when certain entities (equity investors) enter a transaction with the specific aim of creating an immediate tax loss, which they can offset against taxable profits from their normal course of business. At a later point, the transaction is expected to generate profits and, at that stage, the
Banking & Finance
PRACTICE NOTES
There are two main types of aircraft finance structure:
secured lending, under which the lender advances funds to the purchaser to acquire the aircraft and takes security over the asset, and
leasing, which in many cases provides greater flexibility to financiers in many instances
Difficulties with secured lending
Secured loan structure
Under a conventional secured loan arrangement, the lender will lend money to the prospective owner of the aircraft to fund its purchase or acquisition by the borrower. In return for making the finance available, the lender will typically then take first‑priority security generally by way of a mortgage over, and in respect of, the aircraft (see Practice Note: Taking security over aircraft in aviation finance transactions). Once the loan has been paid in full, together with any other sums due under the transaction documents, the lender will release the aircraft from the mortgage, with
Banking & Finance
PRACTICE NOTES
Non-compliance with emissions trading schemes may lead to civil penalties, operational prohibitions or the detention of aircraft. Accordingly, financiers need a clear grasp of the duties imposed on aircraft operators (and, in some cases, owners) by the applicable schemes and of the accompanying enforcement tools, so that these risks are properly catered for in their finance documentation. This Practice Note sets out the principal components of the leading emissions trading regimes relevant to aviation finance deals. It addresses:
the EU emissions trading system (EU ETS)
the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) (and its integration into the EU ETS)
the UK emissions trading system (UK ETS)
Introduction to the key emissions trading schemes
The EU ETS, CORSIA and the integration of CORSIA into the EU ETS
The relationship between these regimes, including how CORSIA is integrated into the EU ETS, is
Banking & Finance
PRACTICE NOTES
The core of aviation finance is a lender advancing funds to a borrower to finance, or refinance, the purchase of an aircraft. If the borrower defaults under the loan, the contractual documents and transaction structure are designed to give the lender prioritised access to the aircraft, or its sale proceeds, to recover outstanding sums...
This is a classic asset finance model (see Practice Note: Introductory guide to asset finance): the lender accepts the borrower’s credit risk, supported by security over the aircraft. Yet aviation finance has evolved distinct legal and structural features that differentiate it from other financing techniques...
Specificities of aviation finance
These can be summarised as follows...
Future value
Aircraft are generally regarded as retaining future value better than many other asset classes. While much turns on the specific aircraft type and the engines fitted, lenders can usually forecast an aircraft’s likely market value over the life of the
Banking & Finance
PRACTICE NOTES
Cape Town Convention
The Convention on International Interests in Mobile Equipment (the Convention), alongside the related Protocol to the Convention on Matters Specific to Aircraft Equipment (the Protocol), together more widely known as the Cape Town Convention, entered into effect on 1 March 2006. This Cape Town Convention sets out a harmonised body of rules that govern the creation, safeguarding, ordering and enforcement of specified rights relating to aircraft and aircraft engines. A central feature is the establishment of the International Registry for aircraft objects, through which certain classes of interest can be registered, including the recording of a security interest in an aircraft. It also affords protection to creditors in circumstances of default or where insolvency may then arise...
Banking & Finance
PRACTICE NOTES
Residual value agreements are a practical mechanism for apportioning an aircraft’s residual value risk.
The main purposes for deploying residual value agreements are:
to deliver added protection for financing parties within a specific aviation finance transaction
in operating leases, to minimise a lessor’s exposure to residual value risk
to give an airline reassurance about the worth of its investment in a fleet of aircraft
There are multiple forms of residual value agreement. Each allocates risk in different ways and to different parties within the transaction. Such arrangements appear in several variants, each designed to apportion residual value risk differently between stakeholders.
What is a residual value agreement?
Within aviation finance transactions, residual value agreements distribute the residual value risk in an aircraft among various parties, or transfer that risk to a third party, such as an insurer...
Banking & Finance
PRACTICE NOTES
Commercial aircraft can be funded through a variety of channels, including backing from governmental or quasi-governmental bodies known as export credit agencies (ECAs). The extent of ECA involvement in aircraft financing generally shifts with the supply of commercial funding available in the market. During periods of financial stress, when private finance is harder to secure, the share of aviation transactions supported by ECAs typically rises, and the reverse applies in stronger conditions. In recent years, the level of ECA support has moved more sharply than usual. Historically, the principal ECA-backed aircraft finance transactions related to Airbus and Boeing fleets. As many Airbus models are partly produced in the UK, France and Germany, the ECAs most commonly involved in financing Airbus aircraft have traditionally been:
Export Credits Guarantee Department (ECGD), a department of the UK government trading as UK Export Finance (for further
Banking & Finance
PRACTICE NOTES
ARCHIVED –
This archived practice note sets out information on EU competition law as it relates to big data and algorithms, reflecting the state of play at publication on 11 November 2017 and the position applicable. It is not maintained. As ‘big data’ becomes increasingly pivotal for uses across sectors, authorities, academics and practitioners have, in recent years, intensified their scrutiny of the antitrust consequences for policy and enforcement arising from big data and the algorithms used to analyse it. In September 2016, EU Competition Commissioner Margrethe Vestager pledged to ‘keep a close eye on how companies use data’, and several European competition authorities have undertaken, or in some instances continue to undertake, inquiries and studies on big data matters within jurisdictions. Two principal categories of concern have been highlighted by authorities and commentators:
the deployment of algorithms processing big data may
Competition
PRACTICE NOTES
The Islamic finance sector has expanded swiftly in recent years, as financial institutions and their customers look to explore alternative ways of financing and raising funds. It is an asset‑based system, and Islamic finance has seen rising deployment for both full and partial funding of aircraft—assets regarded as permissible investments under Islamic law (Shariah).
Principles of Islamic finance
The principles of Islamic finance are drawn from Shariah as prescribed in the Quran, the sacred scripture of Islam believed to record the Word of God revealed to the Prophet Mohammed, together with the Sunnah, the traditions and practices of the Prophet Mohammed. These sources set out the principles applied to finance. Islamic finance is established to ensure that wealth remains pure and is utilised justly, in accordance with these overarching principles, safeguarding fairness in application and conduct:
No unjust
Banking & Finance
PRACTICE NOTES
Such agreements are concluded between an aircraft manufacturer (the seller) and a customer (the purchaser). In the majority of situations, the customer will be an airline or an operating lessor, although the purchaser can equally be a different entity, such as a governmental body. The terms and conditions of aircraft purchase agreements are commonly kept confidential as between the aircraft manufacturer and the customer and are seldom made public. The bulk of those provisions will typically not be disclosed to any financier of the customer, even where that financier is providing the customer with funding in relation to an aircraft to be acquired pursuant to the terms of that purchase agreement.
An aircraft manufacturer will generally have a standard form purchase agreement that it enters into with all of its customers. Nevertheless, particular commercial terms are negotiated between the parties, and letter
Banking & Finance
PRACTICE NOTES
Pre‑delivery payment financing (PDP financing) has become a widely used funding tool for airlines and lessors. However, as the number of PDP transactions has risen, aircraft manufacturers have applied closer scrutiny to the industrial and commercial matters that arise when a financier participates in aircraft purchase arrangements.
As a result, any PDP financing may involve significant commercial points to negotiate, together with, at times, complex legal questions, particularly in relation to security.
PDP financing, and the protections open to any lender, differ substantially from other forms of aviation finance. Funding is supplied while the asset is still under construction, and security cannot be taken in the same way as for a completed aircraft. Therefore, the provisions setting out the steps to be taken on enforcement are of fundamental importance to the manufacturer, the purchaser and the lender.
PDPs and purchase agreements What are
Banking & Finance
PRACTICE NOTES
Contracts for the sale of second hand aircraft are concluded between an aircraft owner (as the seller) and, in the majority of situations, an airline or an aircraft leasing company (as the buyer). The parties usually keep the terms of such agreements confidential; however, where the buyer has a lender, certain provisions will be revealed to that lender if it is providing the airline with funding in relation to an aircraft to be acquired pursuant to the purchase agreement. There is no single standard form of agreement for second hand aircraft, though some sellers maintain a preferred form of purchase agreement that they seek to use with customers. The requirements of different participants in respect of second hand aircraft sales and purchases, as well as the commercial particulars of these transactions, vary markedly, and are considered in greater detail below.
Key
Banking & Finance
PRACTICE NOTES
Types of special purpose vehicle and orphan trust
The deployment of special purpose vehicle structures is widespread in aviation finance. They offer lenders several advantages, including tax benefits and a bankruptcy-remote platform for the financing. A special purpose vehicle (SPV), also known as a single purpose company (SPC), is a legal entity established for a limited aim; in aviation finance this is commonly to own an aircraft for a particular transaction. There are numerous forms of SPV used in aviation finance, with the principal categories being:
subsidiary companies
orphan trusts
limited partnerships
Each of these is considered below. The type of SPV selected will vary on a transaction-by-transaction basis.
Subsidiary companies
Subsidiary companies are typically limited liability companies incorporated in a tax-friendly jurisdiction...
Banking & Finance
PRACTICE NOTES
Operating leases are widely used across the airline sector. Because aircraft have long service lives, a mature marketplace for trading pre-owned aircraft has emerged. For a lessee, the essentials are that the leased aircraft is airworthy and that it can operate it without interference from the lessor. For a lessor, the fundamentals are being paid for the lessee’s use of the aircraft and avoiding any loss arising from the lessee’s operation of the aircraft.
This Practice Note sets out what an operating lease is, how it contrasts with other leasing structures, and the core concepts underpinning the business of operating lessors. It highlights the principal clauses typically found in operating leases, including delivery condition, quiet enjoyment, rent and deposits, and operational indemnities. It also addresses key provisions on subleasing and events of default.
The business of operating
Banking & Finance
PRACTICE NOTES
To operate an aircraft across borders, the owner must register it with an aviation authority. While international conventions exist, the form of the register, the procedures for registration and deregistration, and the criteria for keeping a registration valid differ between countries, so the chosen state of registration requires careful consideration by any aircraft owner.
Why do you register aircraft and where do you do it?
In 1944, the Convention on International Civil Aviation took place in Chicago (the ‘Chicago Convention’). It led to the creation of the International Civil Aviation Organisation, a specialised United Nations agency responsible for coordinating and regulating international air travel. Under Article 20 of the Chicago Convention, to which the UK is a signatory, every aircraft engaged in international air navigation must carry appropriate nationality and registration marks. Therefore, all aircraft must be registered with an aviation authority to fly
Banking & Finance
PRACTICE NOTES
Aircraft represent high-value assets, vulnerable to damage and capable of causing significant destruction. Securing appropriate insurance is therefore essential for financiers; policy wording and its legal impact often warrant closer scrutiny than is usual in other forms of asset finance. This Practice Note addresses insurance where an aircraft owner, as lessor, leases an aircraft to an airline as lessee. If a bank or other lender has financed the aircraft, the matters identified as relevant to a lessor will likewise apply to the aircraft financier. This is because, in many aviation finance structures, the financier will typically take security over the lessor’s rights against the lessee under the lease...
The nature of insurance contracts
An insurance contract is an agreement to indemnify against loss arising from specified perils (for example, loss resulting from damage to, or destruction of, the insured asset). The contract is formed between the
Banking & Finance
PRACTICE NOTES
Registration of aircraft mortgages at the Civil Aviation Authority (CAA)
This Practice Note explains how to record aircraft mortgages with the Civil Aviation Authority (CAA) within a typical aviation finance deal. It does not address every action that might be necessary to perfect security over an aircraft. For guidance on filing security at Companies House, and on how that filing interacts with entry on the UK Register of Aircraft Mortgages, consult Practice Note: Perfecting security over aircraft and registering security on the UK Register of Aircraft Mortgages. See also Practice Note: Aviation finance and the Cape Town Convention. The CAA is responsible for keeping the United Kingdom Register of Civil Aircraft (the ‘Register’). The Register contains entries where an aircraft serves as collateral for a mortgage or loan. It does not, however, record other categories of security interest, for example liens over the
Banking & Finance
43 Contributions by Norton Rose Fulbright Experts
PRACTICE NOTES
‘Reporting fund’
A ‘reporting fund’ is an offshore fund that has obtained reporting fund approval and has not departed the regime, whether voluntarily or by exclusion. In essence, UK investors in such funds are taxed each year on their portion of the fund’s reported income, irrespective of whether that income is paid out or retained. This allows capital gains treatment to apply when they dispose of their interest. For offshore funds that do not report income in this manner (‘non-reporting funds’), disposals by investors are taxed as income. The governing provisions are in Part 3 of the Offshore Funds (Tax) Regulations 2009, SI 2009/3001 (the Offshore Funds Regulations). For the UK tax definition of an ‘offshore fund’, see Practice Note: Tax and offshore funds—what is an offshore fund?
This Practice Note covers:
the eligibility criteria and application process for the reporting fund regime
the
Tax
PRACTICE NOTES
This Practice Note offers a concise overview of the principal features of Regulation S and the practical considerations of relying on Regulation S for English and other non‑US lawyers; it is not intended as an exhaustive discussion of Regulation S.
Background and scope of Regulation S
Adopted in 1990, Regulation S was introduced to clarify the extraterritorial reach of the registration and prospectus delivery obligations under the US Securities Act of 1933, as amended (the Securities Act).
The rule rests on a straightforward principle: any offer or sale of securities conducted within the United States of America (United States) is potentially subject to the registration and prospectus delivery requirements of Section 5 of the Securities Act (Section 5), while any offer or sale made outside the United States is not.
Putting that premise into practice for international offerings is more
Corporate
Q&As
State Aid: The Basics Guide
The Department for Business, Innovation & Skills’ July 2015 guide, State Aid: The Basics Guide, explains that state aid arises wherever public resources are used to give organisations an edge over others, potentially distorting competition and harming consumers and businesses across the EU. The concept is deliberately wide, as an “advantage” can be delivered in many ways, for example:
grants
loans
tax breaks
the use or sale of a state asset free of charge or for less than market value
Public authorities, including local authorities in England and Wales, are accountable for ensuring their policies and projects comply with these requirements. During the implementation period following Brexit, state aid rules continue to apply in the UK. The annex to the Department for Education’s November 2019 publication, Securing Developer Contributions for Education, notes that unlawful state aid can occur in
Planning
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