Aviation Finance – Part 4:Optional elements in an aircraft finance transaction
Export credit financing
Sometimes export credit financing is used in an aircraft finance transaction.
In export credit financing, the relevant Export Credit Agency (or ECAs) usually issue(s) a guarantee or insurance policy to the lending bank which guarantees or insures the repayment of the loan to the bank if the airline defaults. This reduces the risk for the bank and, therefore, enables the bank to provide financing to the airline which might otherwise not be possible because of factors such as the airline’s financial position or liquidity issues in the financial markets.
Tax efficient leasing structures
The purpose of a tax efficient leasing structure is to benefit from applicable tax allowances for aircraft. These vary from jurisdiction to jurisdiction and change continuously.
The precise nature and structure of tax efficient leasing structures also vary from jurisdiction to jurisdiction, but usually involve an SPV created by equity investors and the purchase price being funded either solely by equity from those investors or by a combination of debt (from banks) and equity.
Asset value support
If a party other than the airline, for example, an equity investor, is taking the economic risk of an aircraft (that is, the risk that the value of the aircraft falls below a certain level), asset value support is sometimes arranged with a third party such as an insurance company.
Asset value support tends to be bespoke and tailored to a specific transaction. Asset value support may take the form of a guarantee, an insurance policy or a put option agreement under which the equity investor can require the asset value support provider to buy the aircraft for a fixed price.
In a sale and leaseback transaction, an airline sells a second-hand aircraft, or its right to purchase a new aircraft from the manufacturer, to a leasing company or equity investors, and leases the aircraft back from the purchaser. An airline may consider this option if it wishes to raise capital or only needs the aircraft in the short term.
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