The Convention on International Interests in Mobile Equipment, 2001, and the related Protocol specific to Aircraft Equipment, commonly known as the Cape Town Convention (CTC), remains a hot topic in aircraft finance.
For transactions to which it applies, it has been lauded as a means of minimising cross border transactional risk. On the other hand, it has also been criticised for the way in which it allows contracting states to pick and choose the CTC provisions they wish to implement in domestic law - for a number of implementing states, accession has been half-baked, or at best, à la carte.
Generally speaking, the CTC has brought, and is expected to continue to bring, increased legal certainty to aircraft financing transactions and greater cross border security protection for financiers, lessors, and airlines.
By way of reminder, the general aims of the CTC are to afford greater security and enforceable rights in aircraft by providing for:
- a uniform set of rights for creditors on default;
- an electronic internet based international registry of interests; and
- the “International Interest”, an interest in aircraft recognised by all CTC contracting states.
These provisions are aimed at encouraging lessors and lenders to transact in more exotic jurisdictions.
Implementation of the CTC has a further consequence: borrowers in jurisdictions that have ratified the CTC can access discounts of up to 10% on the minimum premium rates required to be charged for officially supported export credit financings¹ (known as the ‘Cape Town Discount’). The discount is only available where the relevant contracting state has made all of the qualifying declarations, including the adoption of the preferred CTC insolvency regime, into domestic law.
Some transactional highlights
The EETC (Enhanced Equipment Trust Certificate) structure, which is used to access alternative sources of finance, such as the capital markets, has traditionally been the preserve of US aircraft finance transactions. The strength of investor appetite for EETCs in the US is based on the knowledge that, if something goes wrong, US laws support the repossession of the aircraft and the repayment of investors.
The CTC has allowed EETCs to spread more extensively beyond US borders. The launch by Goldman Sachs of the Doric Emirates A380 fund illustrates that the CTC is effective in capturing investor appetite for jurisdictions (Emirates is based in Dubai) that would have otherwise been regarded as high risk due to the absence of a local creditor friendly legal regime. According to Goldman Sachs², the CTC addressed issues surrounding the risk of retrieving an aircraft and selling it to get investor's money back:
… we now that framework because of the Cape Town Convention, a treaty that bound countries that signed to a similar set of rules. Because the United Arab Emirates had signed, there was no reason we couldn’t use EETCs – or that investors wouldn’t be interested. But that was yet to be tested.
The launch proved to be a huge success.
However, we have also seen that the CTC is not the be all and end all for facilitating an EETC. In the UK, the existing English insolvency regime gave sufficient comfort to investors in the $927m EETC financing of 14 aircraft for British Airways. Regarding this transaction, Moody’s commented³:
“We believe that UK courts typically respect ownership rights in leasing transactions, which implies that under a payment default scenario by British Airways, the Trustee would likely be able to repossess in a timely manner.”
It can perhaps therefore be said that the more sophisticated legal systems, such as New York and England and Wales, have the luxury of a “take it or leave it” approach to the CTC but that that CTC is critical for the growth of aircraft financing in jurisdictions without such evolved legal landscapes. It is, of course, in these latter jurisdictions that much of the insatiable demand for aircraft finance and aircraft assets arises.
The Kingfisher Airlines and more recent Spice Jet (India) and VarigLog (Brazil) defaults brought into sharp focus certain serious issues in India and Brazil vis-à-vis deregistration regulations and other practical matters. In both these cases, the court process and the local aviation/customs authorities caused substantial delays in the recovery of aircraft. However, these aircraft were not subject to the CTC regime.
Both countries have in the meantime elected to permit the use of irrevocable deregistration and export request authorisations (IDERAs). The IDERA, granted to a lender or a lessor, is the standardised CTC instrument used to overcome existing impediments to deregistration and export. It contains a standing direction by a debtor (borrower or lessee) to its aviation authority to honour a request for deregistration made by the holder of the IDERA. An executed and submitted IDERA is binding and irrevocable, and the IDERA process is documentary, dispensing with the need for the aviation authority to investigate external facts. Where an IDERA is used, an aviation authority is expected to co-operate expeditiously with, and assist the holder of the IDERA in carrying out, the deregistration and export of the aircraft. The next contentious enforcement and repossession “work out” under the CTC in either India or Brazil will therefore be closely watch by the international aircraft financing community.
Absent non-consensual work outs made pursuant to the CTC regime, confidence can, in part, be drawn from two recent decisions in Ireland’s Commercial Court. Pursuant to the CTC and local Irish implementing legislation, the Irish Commercial Court has sole jurisdiction to award damages or make orders to the registrar of the International Registry established by CTC, Aviareto Limited.
The judgments in (i) PNC Equipment Finance LLC v Aviareto Limited and Link Aviation LLC, and (ii) TransFin-M Limited v Stream Aero Investments S.A. and Aviareto Limited (both unreported) illustrate the Irish Commercial Court’s ability to make orders directing that registrations made on the International Registry be removed. These cases will help deter registrations that should not be made and, although relatively minor in the context of the CTC overall, serve to demonstrate to the international aircraft financing community the robustness of a registration regime that is now increasingly globalised.
¹ Pursuant to the 2011 Aircraft Sector Understanding
³ See Moody’s ratings report: British Airways, Plc Series 2013 – 1 Enhanced Equipment Trust Certificates, June 25, 2013