Advising a lender on drafting and negotiating an aircraft lease agreement
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Overview
Our client, a financial institution and asset management company based in West Africa, had significant exposure to an airline in the region. The bank had provided aircraft financing to the airline to enable it to scale its fleet, acquiring several new Boeing 737 NextGen aircraft. The airline, unfortunately, was unable to service the debt and the lender was forced to repossess the aircraft.
Challenge
As part of the repossession process, the lender was required to remarket the aircraft. They were able to source a leasing opportunity with another local airline in the same jurisdiction. However, the aircraft was not in an airworthy condition and had several major maintenance events due or falling due within the next twelve months. Given the technical condition of the aircraft and the lender’s unfamiliarity with drafting and negotiating aircraft lease agreements, the lender engaged ACC Aviation to work with their legal counsel to prepare a lease agreement, protect their interests, and mitigate their financial exposure during the lease term.
Our solution
The lender’s legal counsel provided us with a draft aircraft lease agreement. The scope of our assignment was focused primarily on ensuring that our client’s interests were protected, tailoring the lease to mitigate financial exposure to the lender throughout the lease term and ensuring the aircraft’s residual value was protected. Given the situation’s uniqueness and the aircraft’s technical condition, the standard provisions of an operating lease had to be tailored significantly.
Some of the bespoke amendments we made to the lease included:
- Delivery of the aircraft to the lessee in “As is, Where is” condition, with an obligation of the lessee to restore the airworthiness of the aircraft against which the lender would issue credit notes to the lessee, which could be applied against future rent.
- Separating the lease rental to an amount per airframe and engine so that in the case of an engine shop visit, the lease rental would adjust downwards, and the risk of sourcing a replacement engine would be the responsibility of the lessee, with no obligation of the lender to provide financial assistance towards an engine shop visit or a replacement engine.
- At the lender’s discretion, providing flexibility in the lease to allow for receipt of rent and maintenance reserve payments in local currency under a dollar-denominated lease.
Outside of these bespoke amendments, we thoroughly reviewed all lease agreement terms and conditions to align the agreement with market standards and protect our client’s interests.
Client outcomes
As a result of this work, our client was able to structure and negotiate an aircraft lease agreement, which mitigated several risks and instances of significant financial exposure to the lender. The amendments made, particularly with respect to the obligations to restore the airworthiness of the aircraft and removal of lender contributions towards engine shop visits, mitigated up to USD 10,000,000 in lender financial contributions, passing the majority of this risk and capital expenditure to the lessee and neutralising our client’s cash flow position.
ACC Aviation has been working with this lender since 2014 across various aircraft financing and lease transactions and continues to be retained by the client.
Key achievements
Experience counts.
Our achievements prove it.
- Mitigating financial risks and financial exposure to the lender
- Reducing capital expenditure and improving cash flow position for the lender
- ACC Aviation has partnered with the lender since 2014 and established a solid and trusted relationship that continues today
