Raising capital in the aircraft sector: Bermuda's jet age
Bermuda has played a significant role in the global resurgence in aviation finance, in particular aircraft lessor securitization (ABS), and is established as the offshore jurisdiction of choice in aviation finance, write Neil Henderson and Jason Piney, directors in Conyers Dill & Pearman's Bermuda practice. They discuss the role and the benefits that Bermuda's regime has for global aviation finance, as Cape Town Treaty ratification beckons for the jurisdiction in December 2014.
Offshore transactions involving aircraft leasing, lessor initial public offerings (IPOs) and innovative financings, including ABS are almost exclusively domiciled in Bermuda.
GE Capital Aviation Services’ (GECAS) June 2011 US$290 million aircraft engine securitization transaction, Rotor Ltd., saw the first pooled aviation securitized sale placed into the capital markets since 2007. Rotor Ltd. completed through Bermuda and was followed by other GECAS-sponsored deals in 2013 and 2014, including AABS Limited, Turbine Ltd. and RISE Ltd. demonstrating a renewed appetite for ABS transactions.
Jason Piney, Director, Conyers Dill & Pearman's Bermuda office.
In February 2014, Conyers provided Bermuda law advice to Castlelake, an institutional alternative investment firm, specialising in aircraft in connection with its US$515.6 million aircraft securitization, Castlelake Aircraft Securitization Trust 2014-1. The proceeds from the deal will be used to purchase 79 aircraft and associated aircraft-owning entities that are initially leased to 26 lessees located in 17 countries. Castlelake will remain as the servicer on the deal.
Conyers assisted CIT Group Inc. in July 2014 with the Bermuda law aspects of its latest aircraft securitization structure, CIT Aviation Finance III Limited (“CAF III”), involving an issue of US$640 million in Class A-1 notes backed by payments pursuant to operating leases and disposition proceeds on a portfolio of 28 aircraft manufactured by Airbus, Boeing and Embraer. CIT Aerospace International (CITAI) is the servicer of these assets, responsible for ongoing leasing activities, including remarketing and servicing of new leases, procuring maintenance and disposition of the aircraft, as directed by the CAF III board.
Bermuda’s role in past lessor IPOs and ABS deals
Historically, a great deal of aviation based equity and debt has been raised through Bermuda. Recently, we have seen this trend continue and Bermuda has become the automatic choice for ABS deals with an offshore component.
In the last wave of lessor IPOs in 2006 and 2007 Conyers assisted several ABS holding companies and issuers to establish in Bermuda, including Aircastle (AYR), Fly Leasing Limited (formerly Babcock and Brown Air Limited) (FLY) and Genesis Lease Limited, which all successfully launched on the NYSE. Conyers also assisted Genesis Lease in its US$302 million merger transaction in 2010 with AerCap, creating one of the world's largest independent aircraft leasing companies.
Neil Henderson, Director, Conyers Dill & Pearman's Bermuda office.
On the debt side, in 2008 AerCap launched its US$1 billion aircraft securitization through a Bermuda SPV, to provide long term non-recourse funding for 30 new A320 aircraft.
Each of Aircastle, Genesis and Babcock & Brown also launched several successful securitizations through Bermuda SPVs, secured on large portfolios of aircraft. Aircastle’s initial US$560 million securitization in 2006 was followed in June 2007, by a US$1.17 billion Note issuance, with an S&P AAA rating. Genesis Funding issued US$810 million of notes with an S&P AAA rating in December 2006, simultaneously with its IPO. At the same time, Babcock & Brown completed a US$853 million securitization transaction, and a US$342.9 million private debt placement. Bermuda was also the jurisdiction through which GE launched the first aircraft backed Islamic financing, a US$500m Sukuk.
Bermuda has been the venue for all of GECAS’ securitization transactions since Rotor, notably the US$650 million Bulk Sale conducted through AABS Limited, which scooped Airline Economics’ Americas Deal of the Year Award 2013 and Global Transport Finance’s 2013 Aircraft Lessor Finance Deal of the Year.
Benefits of using Bermuda SPVs
By using a Bermuda SPV, funding and leasing arrangements may obtain certain tax, regulatory and capital restriction relief through a reliable and trusted jurisdiction. As a host jurisdiction for an ABS transaction, Bermuda offers tax neutrality. As a stable British Overseas Territory, the legal framework of Bermuda is based on common law principles with English common law having a persuasive role. The involvement of a Bermuda SPV can act as a counterbalance to operator jurisdictions where such stability is less evident.
Considerations Specific to ABS Transactions
Experience indicates that the rating agencies take particular notice of the following factors in assigning a credit rating to aircraft securitization transactions:
- whether the securitized assets can be sufficiently separated from the transferor so that an insolvency of the transferor will not affect the creditworthiness of the assets;
- the overall creditworthiness of the asset pool being securitized;
- and whether any legal issues may affect the cash flow of the transaction.
Bankruptcy remoteness. As in many finance transactions, an aircraft SPV must generally be a bankruptcy remote vehicle. The SPV, as owner of aircraft assets, issues loan notes to investors to finance the purchase of these assets. The repayment of principal and interest on the notes is then secured by the asset and the accompanying cash flow, and investors get comfort from the company’s limited operations. The SPV will be a clean company with no operating history and will be subject to restrictions that reduce the risk of bankruptcy of the issuer. The use of an SPV also reduces concerns in connection with the creditworthiness of the airline.
Bermuda has legislative bankruptcy and corporate schemes which are amenable to establishing the bankruptcy remoteness of an SPV. Corporate activities can effectively be restricted to those contemplated by the financing, such as aircraft owning, leasing and financing. Under Bermuda law it is only in very rare cases (usually where there is evidence of fraud) that the separate corporate personality of an SPV will be ignored to allow creditors of the SPV to commence proceedings against its shareholders or to allow creditors of shareholders or of an originator to proceed against the SPV.
Historically, a great deal of aviation based equity and debt has been raised through Bermuda. Recently, we have seen this trend continue and Bermuda has become the automatic choice for ABS deals with an offshore component.
In the case of rated transactions, SPVs incorporated in Bermuda to own aircraft assets have been able to achieve the highest credit ratings, particularly where the asset pool in question is otherwise creditworthy.
Off balance sheet transactions. Although many ABS transactions involve an SPV that is directly owned by a parent, often a transaction will require an “orphan” SPV, meaning that it is not part of the originator’s corporate group. By selling the asset to the orphan SPV, the asset is removed from the originator’s balance sheet. When an orphan structure is required, the SPV is incorporated with all the shares issued to a trustee (also offshore) pursuant to a charitable or purpose trust. A Bermuda purpose trust is of particular benefit in an ABS transaction structured in this manner, as the purpose trust is established to fulfil purposes rather than in favour of beneficiaries, while a charitable trust has charities as the beneficiaries (where, depending on circumstances, a conflict of interest may arise).
Security. Taking security over the shares of an owing or leasing SPV is often required in asset based financial transactions. In most cases, the secured party does not wish to have the shares registered in its name and prefers to have a charge granted over the shares. If a default occurs, the secured party then has the shares transferred to itself or its nominee. To ensure this outcome, special provisions can be added to the charter documents of the SPV, blank share transfer forms are executed and held by the secured party, as are undertakings by the directors of the SPV to transfer the shares (by updating the register of members of the SPV) upon demand of the secured party. In such cases it would be usual for the existing directors and officers to resign and their signed, undated resignations are obtained at the time the share charge is executed with a permission to date such resignations upon an identified default occurring.
It is anticipated that the UK will ratify the Cape Town Convention in December 2014 and Bermuda intends to request that UK ratification be extended to Bermuda at such time. We expect that a creditor or secured party engaged with the Bermuda SPV will soon be afforded all the rights, benefits and protections afforded to creditors under the Convention.
The Bermuda Registrar of Companies maintains a public register of mortgages and charges and the Bermuda Department of Civil Aviation (the “BDCA”) a separate aircraft and engines mortgage register. Generally, the details of any such security interests would be filed on the relevant register. Registration constitutes notice to the public of the interest of the secured party in or over the charged assets and any registered charge will have priority over any subsequently registered charge and unregistered charge, to the extent that Bermuda law governs the priority.
It is anticipated that the UK will ratify the Cape Town Convention in December 2014 and Bermuda intends to request that UK ratification be extended to Bermuda at such time. We expect that a creditor or secured party engaged with the Bermuda SPV will soon be afforded all the rights, benefits and protections afforded to creditors under the Convention. For certain export credit agencies and lenders engaged in the aviation industry this is an important factor.
Disclaimer of lease. Where aircraft are financed through a Bermuda SPV, Bermuda law provides comfort to a lessee airline. Unlike the laws of many jurisdictions which empower liquidators (or their equivalent) to unilaterally disclaim onerous property (such as a lease), Bermuda law only allows such a disclaimer with the leave of its Supreme Court. This allows any interested party, such as an airline, the ability to be heard before such a step is taken.
Conclusion
As the market continues its resurgence Bermuda has maintained its position as the preferred jurisdiction in lessor IPOs and ABS transactions. Aircraft lessors continue to use Bermuda vehicles in acquisition financing relating to aircraft. Bermuda offers the aircraft industry a commercially flexible approach with considerable expertise.