Opinion

Iberia’s use of structured finance capital markets could herald a new era for airline finance

On Christmas Eve 2004, Iberia, Spain’s flag carrier air line, successfully closed its latest enhanced equipment trust certificates (EETC) transaction and took delivery of the first four aircraft subject to Japanese operating leases (JOLs) under the new transaction structure.

With the closure of US tax-based leasing and German operating leases and the imminent implementation of the newly announced restrictions which will apply to Japanese operating leases, airlines will inevitably start to look for other sources of finance. Traditionally, European airlines have not needed to tap the capital markets for finance, but that may all be about to change following Iberbond 2004.

Iberbond 2004 is Iberia’s third foray into the structured finance capital markets and continues its trend of using innovative solutions to finance its fleet renewal and expansion programme. Proceeds from the transaction are being used to acquire up to 20 new Airbus A319, A320 and A321 aircraft, which have an appraised value of approximately $933m (£502.6m). As of 22 April 2005, 15 aircraft have been successfully delivered into the structure.

The transaction was arranged by BNP Paribas, advised by Clifford Chance, with Iberia using Morgan Stanley as financial adviser and Allen & Overy as its legal adviser.

This transaction is more complicated and innovative than Iberia’s previous European EETC transactions. It incorporates US dollar and euro capital markets bonds, tranched bank loans and tax-driven leases spanning a number of jurisdictions. The transaction enabled Iberia to implement a number of strategic goals, such as the diversification of funding sources and strengthening of its corporate brand in the capital markets.

The senior capital markets dollar and euro notes ranked pari passu with each other and were issued by an Irish special purpose company. A major achievement was that the notes were rated AAA by Fitch and Aa2 by Moody’s – two notches above the previous Iberbond transaction of 2000. The pricing was also extremely competitive. That this was achieved without the transaction being wrapped by an insurance provider, which is a feature of all other post-9/11 EETC aircraft transactions, is particularly impressive.

Royal Bank of Scotland (RBS) and Morgan Stanley acted as Bookrunners for the Class A Notes, with Banco Bilbao Vizcaya Argentaria, BNP Paribas, Morgan Stanley and RBS serving as joint lead managers. Two fixed-rate dollar facilities were provided by a syndicate of banks led by RBS, in respect of the senior facility, and Banco Popular Espanol on the junior facility.

The application of the liquidity facility was innovative in terms of it being ranked subordinate to the capital markets principal and being for a shorter duration than previous Iberbond transactions. The transaction has the flexibility for different Japanese equity providers to participate and for the aircraft to be leased to Iberia by a special purpose Irish finance lessor or, subject to certain criteria, for other tax advantaged structures to be implemented.

Iberbond 2004 was well received in the markets, indeed the euro tranche was twice oversubscribed. It was also the first time Iberia placed an EETC in the Spanish market on a primary basis, with 40 per cent of the A tranche placed in Spain.

The greatest challenge in the transaction was reconciling the innovative elements with the varying interests and requirements of the various parties, including Iberia, the rating agencies, the mezzanine and junior debt, the liquidity facility provider and the Japanese equity investors. With those challenges met, it might not be overegging it to say Iberbond 2004 marks the start of a new era.

Mario Jacovides was assisted on this article by senior associate Paul Nelson Earlier in the year, Samantha Roberts, the widow of the first UK soldier to die in action in Iraq, won her long campaign to force the Ministry of Defence (MoD) to accept liability for her husband’s death.

“There were lots of things happening in Iraq that were avoidable, even in a wartime situation,” comments Geraldine McCool, a partner who specialises in claims against the military at Manchester-based law firm McCool Patterson Hemsi & Co (MPH). She is currently representing seven families of Iraqi servicemen with similar claims. “They’ve been gathering evidence for a long time and initially I was told that, because of combat immunity, there would be no question of any admission of liability,” she adds. “But I kept pressing the MoD and now combat immunity has been waived.”

MPH split from claimant firm Leigh Day & Co a year ago this month. It claims it has had 358 new clients since it demerged and has seen considerable cost benefits from going it alone. McCool says the firm’s expenditure on outsourcing, IT and accounts has been cut by 28 per cent, primarily by relying on local providers.

The firm is based around the expertise of its three main equity partners. McCool specialises in aviation crashes, product liability and claims against the MoD. She has acted for claimants in high-profile cases such as Piper Alpha, Lockerbie and that of the 25 anti-terrorist experts who died when an RAF Chinook crashed in fog in 1994.

Frank Patterson heads up the clinical negligence team and acts for clients such as the Communication Workers Union. Prior to Leigh Day, both McCool and Patterson headed the personal injury practice at Manchester firm Pannone & Partners at separate times.

Dominic Hemsi specialises in work-related claims, industrial disease and road traffic cases. The three lawyers share managing partner duties. There is a total of 19 staff at the newly-formed firm, including three assistant solicitors, a legal executive, five paralegals and one house nurse.

“We’re a firm that isn’t afraid of litigation after all the options are explored,” McCool says. “We don’t have a mission statement, but we do accept that litigation can be difficult for our clients. We try and get them to buy into that process and work hand-in-hand with them. Also, we have some extremely knowledgeable clients, whether they’re members of a trade union who know all about their equipment or soldiers who know all about that particular manoeuvre.”

McCool’s best-known client lost her husband, Steve Roberts, a 33-year-old sergeant from the 2nd Royal Tank Regiment, when he was shot by ‘friendly fire’. Hours earlier he had been told to hand over his flak jacket to a soldier who was not equipped with one. His wife, Samantha, hit the headlines when she clashed with Defence Secretary Geoff Hoon after she released tapes of her husband talking of his concerns over equipment shortages. McCool reports that it is “a question of working out the figures” in that case. “We’re pressing the MoD as to whether the other cases are combat immunity,” she adds. Last week the firm agreed a £7m settlement with the MoD on another action.

Mario Jacovides, partner at Allen Overy was assisted in this article by senior associate Paul Nelson