7 November 2011
Aircraft financing is taking off again. David Cooke and Jason Piney say Bermuda is well placed for a resurgence
With the successful listing of Air Lease Corp on the New York Stock Exchange (NYSE) earlier this year and several other aircraft leasing companies reportedly in the process of making preliminary filings, industry experts and commentators report encouraging signs for initial public offerings (IPOs) in the aircraft sector.
Commentators also speculate that other lessors, including both established players and start-ups, are contemplating going public. And with renewed interest in the equity markets, the same experts and commentators project the return of the aviation asset-backed securitisation (ABS) market.
Bermuda has long been the offshore jurisdiction of choice for public companies. The jurisdiction also continues to be an offshore leader in aviation finance, particularly innovative financing, and many in the know predict that Bermuda will be at the fore of a revival of the capital markets in the aviation sector.
Indeed, the recent $290m (£181m) aircraft engine securitisation carried out by GE Capital Aviation Services, completed through Bermuda, suggests that the process has already begun. This is the first aviation securitisation that has closed since 2008.
In light of this, it is helpful to consider Bermuda’s role in past lessor IPOs and ABS deals, the benefits of establishing in Bermuda and matters specific to ABS deals, including bankruptcy remoteness.
Historically, a great deal of aviation-based equity and debt has been raised through Bermuda. In the last wave of lessor IPOs in 2006 and 2007, many of the issuers were established in Bermuda. These included Aircastle, Fly Air Leasing Limited (formerly Babcock and Brown Air Limited) and Genesis, which all successfully launched on the NYSE.
On the debt side, in 2008 AerCap launched its $1bn aircraft securitisation through a Bermuda special purpose vehicle (SPV) to provide long term non-recourse funding for 30 new A320 family aircraft.
Each of Aircastle, Genesis and Babcock and Brown also launched several successful securitisations through Bermuda SPVs, secured on large portfolios of aircraft. Aircastle’s initial $560m securitisation in 2006 was followed in June 2007 by a $1.17bn note issuance, with a Standard & Poor’s (S&P) AAA rating.
Genesis Funding issued $810m of notes with an S&P AAA rating in December 2006, simultaneously with its IPO. At the same time, Babcock and Brown completed a $853m securitisation transaction and a $342.9m private debt placement. Bermuda was also the jurisdiction through which GE launched the first aircraft-backed Islamic financing, a $500m sukuk.
There are many reasons that Bermuda is preferred for IPO entities and SPVs. Many of the principal factors overlap.
Bermuda is, of course, tax neutral. There are no income, profit or capital gains taxes in Bermuda. Recent legislative amendments in Bermuda have extended until 31 March 2035 the period for which the Minister of Finance will grant an assurance to Bermuda companies that they will not be liable to pay any such taxes in the future.
This is particularly attractive to holding companies with subsidiary operations in, or significant income arising from, more than one country, such as aircraft lessors. With the ultimate parent incorporated in a tax-neutral jurisdiction, it is difficult for a particular taxing authority to assert its right to tax all of the group’s operations or profits.
The absence of withholding taxes is also attractive to a Bermuda company’s shareholders. However, tax advantages can also be found in other offshore jurisdictions, and it would appear that tax alone is not the deciding factor for the desirability of Bermuda public companies.
Bermuda’s corporate law is flexible and is largely based upon the corporate law of the UK. The principal corporate legislation, the Companies Act 1981, is amended regularly to keep pace with international commercial developments. Where the securities of a Bermuda company are listed on an overseas exchange, the regulatory regime in the Companies Act will often defer to the relevant onshore regulation.
Bermuda’s geographical location further contributes to its popularity. The island is 90 minutes by air from New York and there are regular direct flights to other major US cities, Canada and the UK. The island also has a sophisticated infrastructure and a long history of accommodating international businesses. Approximately 75 per cent of Fortune 100 companies maintain a corporate presence in Bermuda.
Telecommunication services are very well developed and there is a high level of professional services available, including representation on the island by all of the big four international accounting firms. Bermuda has a stable political and social environment, reflecting its status as an internally self-governing British territory with a tradition of parliamentary government dating from 1620. Bermuda’s legal system is based on that of England, with a final appeal to the Privy Council of the House of Lords in England.
Bermuda’s government and business community have traditionally worked together to ensure that the reputation and integrity of the jurisdiction are preserved without the need for overly burdensome regulation. This system of light, but effective regulation is generally characterised by a significant level of cooperation between the business community and the government, and has complemented Bermuda’s historical emphasis on quality rather than quantity of business.
In addition to (and, to some extent, as a result of) these other factors, there appear to be certain intangible benefits of establishing in Bermuda. Among other things, onshore investors seem to be more comfortable with Bermuda and its reputation for quality than other offshore jurisdictions.
Similarly, organisations such as the US Securities & Exchange Commission and the major stock exchanges are now dealing with Bermuda companies on a regular basis and appear satisfied with the island’s legal system and regulatory environment. Bermuda companies are listed on most major stock exchanges around the world.
Investors, lenders, rating agencies and many service providers are familiar with the legal system in Bermuda and are willing to participate in such a structure with little added due diligence. In the case of rated transactions, SPVs formed in Bermuda have the opportunity to achieve the highest credit ratings, particularly where the asset pool in question is otherwise creditworthy.
As in many finance transactions, an aircraft SPV must generally be a bankruptcy remote vehicle. The SPV, as owner of an aircraft’s 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 various 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 in place legislative bankruptcy and corporate schemes that are particularly 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.
In addition, under Bermuda law it is only in very rare cases (for the most part, where there is evidence of fraud) that the separate corporate personality of an SPV will be ignored so as 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.
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 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 a trust designed to fulfil purposes rather than one for beneficiaries, while a charitable trust has charities as the beneficiaries where, depending on circumstances, a conflict of interest may arise.
Security is paramount in an asset-backed financing and Bermuda provides a statutory framework that ensures certainty of security interest priority.
The Registrar of Companies maintains a public register of mortgages and charges, and registration in the register ensures that under Bermuda law the interest of the secured party in the charged assets will have priority over any subsequently registered charge and any unregistered charge.
Where aircraft are financed through a Bermuda SPV, Bermuda law also provides comfort to a lessee airline. Unlike the laws of many jurisdictions which empowers liquidators or their equivalent to unilaterally disclaim onerous property, such as a lease, Bermuda law only allows such a disclaimer with the leave of the Supreme Court of Bermuda. This allows any interested party, such as an airline that is leasing the aircraft, the ability to be heard before such a step is taken.
With markets opening up, the signs are that Bermuda will again play an important role in lessor IPOs and ABS transactions. In the meantime, aircraft lessors continue to use Bermuda companies in acquisition financing relating to aircraft.
Bermuda offers the aircraft industry a commercially flexible approach with considerable expertise.
David Cooke is a director and Jason Piney is an associate at Conyers Dill & Pearman