Diploma In Aviation Leasing And Finance, Assignment, UOL, Ireland

Part A

Question 1

Freddy Leasing Limited (“Freddy”) is an aircraft leasing company that is incorporated and tax resident in the Republic of Ireland and has been in business for just over 10 years. Freddy has a portfolio of forty aircraft leased to commercial airlines across the globe. All the aircraft are subject to secured debt financing with European banks. Several of the operating leases are due to expire in late 2024 / early 2025. Freddy’s commercial team is focused on finding new lessees for these aircraft as soon as possible, but competition with other lessors is fierce.

Freddy is in the early stages of negotiating a non-binding letter of intent (“LOI”) with an airline in Australia, Gili Airways (“Gili”) for the operating lease of two used A320 aircraft for 12 years. These aircraft are due to return from the current lessee in 6 months. Gili is a very profitable airline with consistently strong financial results over the past 15 years and is part of a hugely successful Australian travel services conglomerate. Freddy’s commercial team are very keen to add Gili as a lessee customer.

Freddy also leases one A330 and one A320 aircraft to a small airline in Greece, MoveOver Air (“MOA”), pursuant to standard operating lease agreements. MOA is reliant on strong passenger demand during the summer months to generate enough revenue to pay lease rentals and is often in arrears during the winter months. This year, due to forest fires in Greece, passenger demand is very weak, and MOA’s financial condition is deteriorating quickly. Each operating lease provides for (i) fixed monthly rental ($220,000 for the A320 and $420,00 for the A330), (ii) typical events of default, (iii) monthly maintenance rent, and (iii) security deposits ($440,000 cash for the A320 and $840,000 in a letter of credit for the A330).

(a) The draft LOI provides that Gili will pay (i) $500,000 cash security deposit at delivery of the aircraft, and (ii) monthly cash maintenance rent throughout the lease term. Gili does not agree that it should pay these amounts and instead has suggested (i) it will provide a security letter of credit of $250,000 from a domestic retail bank in Australia, and (ii) it will pay end of lease compensation instead of monthly maintenance rent. Gili states that other lessors have agreed to these conditions. Advise Freddy on what to consider when assessing these proposals.

(b) Freddy typically sets up Irish incorporated special purpose companies (“SPCs”) to lease aircraft to lessees. Freddy’s tax team has advised that Ireland does not have a double-tax treaty with Australia. Explain how this will affect the leasing structure with Gili and propose an alternative structure.

(c) In the LOI negotiations, Gili is refusing to accept that the lessor should have inspection rights over the aircraft. Gili states that it should have rights to quiet enjoyment over the aircraft at all times, as it takes all operational risk during the lease term. Explain whether Freddy should accept this position.

(d) Freddy recently received a notice from an insurance broker that MOA has not paid its insurance premium for July 2024. As a result, the broker states that the insurance policy cover for the leased aircraft will be cancelled in 30 days. MOA subsequently confirms to Freddy by email that it intends to pay the insurance premium next week, before the cancellation is effective, but that to save costs, from July 2024 it intends to amend the insurance coverage by reducing the aggregate limits and increasing the deductibles. Advise Freddy on (i) what provisions of the operating leases it should review now, and (ii) what contractual remedies may be available to it under the operating leases if the insurance policy is cancelled.

(e) MOA’s financial condition continues to deteriorate over the summer. To reduce operational costs, MOA decides to stop operating the A330 aircraft for the rest of the year and subsequently stops all payments of rent and maintenance rent. Arrears of $1,200,000 have accumulated. MOA continues to operate the A320 aircraft daily, and it has become a key revenue generator for the airline on domestic routes. MOA is making all the rent and maintenance rent payments under that lease. MOA’s legal team has advised it to rely upon the cross-default and cross collateralisation clauses in the leases. Explain (i) the difference between cross-default and crosscollateralisation in the context of operating leases, and (ii) how these clauses can be used by Freddy in this situation to improve its position.

Part B

Question 2

Freddy has entered into a letter of intent with another leasing company for the purchase of one Boeing 737 aircraft on lease to Clear Sky Airways (“Clear Sky”), a Saudi Arabian low-cost carrier which specialises in “desert-hopping” short haul flights around the Arabian Peninsula.

The seller has provided Freddy with copies of the operating lease and related documents for review before the sale & purchase agreement is executed. Freddy observes the following: (i) the legal owner of the aircraft is a trust company incorporated in Ireland (the “Trustee”), (ii) the Trustee leases the aircraft to Clear Sky, (iii) Clear Sky does not pay monthly maintenance rent but instead has provided a maintenance letter of credit of $1,000,000, (iii) Clear Sky has paid a cash security deposit of $200,000, (iv) the operating lease is governed by English law, (v) Clear Sky has executed a Deregistration Power of Attorney, Assignment of Insurances and Air Traffic Control Letter in favour of the existing lessor.

Freddy has informed the seller that it does not wish to lease the aircraft using an owner trust structure, and that it would prefer to purchase and lease the aircraft using an Irish incorporated special purpose company (the “New Lessor”).

Freddy will obtain financing for the aircraft from a group of lenders, led by a German bank who will act as security trustee (the “Security Trustee”). The term sheet for the financing provides that (i) the New Lessor will be the borrower under the Loan Agreement, (ii) the New Lessor must be a newly incorporated orphan special purpose company, (ii) Freddy will issue a guarantee in favour of the Security Trustee of the New Lessor’s obligations as borrower under the Loan Agreement, (iii) the New Lessor will execute a mortgage and lease security assignment in favour of the Security Trustee, (iv) the loan will be governed by English law.

(a) The aircraft will be sold to the New Lessor with the operating lease to Clear Sky attached. Explain what documents and other arrangements will need to be made in connection with the transfer of the lease? How would these arrangements differ if Freddy decided to retain the trust structure?

(b) What is meant by the terms ‘limited recourse’ and ‘full recourse’ and explain whether you would expect recourse to the New Lessor and Freddy in this transaction to be limited or full recourse and why.

(c) Clear Sky has complained to Freddy’s commercial team that the maintenance rent rate for the engine performance restoration shop visit is very high and they would like the rate to be reduced in connection with the transfer of the lease to Freddy. Explain what factors the seller may 5 have taken into account when deciding on a high maintenance rent rate when the operating lease was first negotiated.

Question 3

Freddy executed a purchase agreement with Airbus S.A.S., a French manufacturer of aircraft (the “Manufacturer”) in 2019 for the purchase of 10 A320 aircraft. One of the aircraft is due to be delivered in August 2024. The aircraft will be leased to Addis Air Limited (the “Lessee”) an airline incorporated in Ethiopia. The lessor will be a special purpose company incorporated in Bermuda and tax resident in Ireland, with a registered office in Ireland (the “Lessor”). The lease will be governed by English law and the aircraft will be registered in Ethiopia at delivery.

The acquisition of the aircraft will be financed by way of a loan from a bank incorporated in Germany (the “Lender”). The security package required by the Lender includes (i) an English law governed security assignment over the lease, (ii) an Ethiopian law governed aircraft mortgage, (iii) an English law governed security assignment over the lease, and (iv) an IDERA issued by the Lessee in favour of the Lender. Freddy’ lawyers have also explained that a Lessee Notice & Acknowledgement of the Lease Security Assignment & Quiet Enjoyment Letter will need to be prepared in connection with the financing of the aircraft.

Please assume that (i) the airframe and engines constitute “aircraft objects” for the purposes of the Cape Town Convention, (ii) each document which may constitute an international interest meets the requirements of the Cape Town Convention, and (iii) each document which may constitute an assignment of associated rights meets the requirements of the Cape Town Convention.

Please obtain an up-to-date list of Contracting States from https://www.unidroit.org/status-2001capetown-aircraft and please advise Freddy on the following:

(a) Specify who the “debtor” is for the purposes of the Cape Town Convention with respect to

(i) the operating lease,

(ii) the bill of sale, and

(iii) the Ethiopian law governed mortgage, and

(iv) the lease security assignment, to be entered into in the scenario outlined above.

(b) Outline the registrations that would be carried out on the International Registry based on the scenario above, specifying:

(i) the type of registration in each case;

(ii) the aircraft object(s) to which each registration relates; and

(iii) the likely order of priority of the registrations.

(c) Outline if you would make any changes to your answers at (b) above if the
Lessee was not situated in a Contracting State but the aircraft remained
registered in Ethiopia.

(d) Outline the purpose of (i) the IDERA, (ii) the Ethiopian law governed
aircraft Mortgage, (iii) the English law governed security assignment over
the lease, and (iv) the Lessee Notice & Acknowledgement and Quiet
Enjoyment Letter in the context of the secured aircraft financing
described above.