PKF probe on aircraft financing business

By Marilyn Mifsud

Aircraft financing can be said to have become simpler thanks to a globalised world which means that the client choice in terms of preferred financing partner is not restricted.

The Maltese Aircraft Registration Act of 2010 in its First Schedule clearly recognises the advantages of asset-based financing and leasing for this facilitates these types of transactions by establishing clear rules to govern them, by implementing the relevant law in respect of the Capetown convention on international interests in mobile equipment and the aircraft protocol thereto, and believing that such rules must reflect the principles underlying asset-based financing and leasing and promote the autonomy of the parties necessary in these transactions .

The Maltese legislation is drafted in a manner that affords tangible protection provisions to the creditor, seller, lessor or chargee as the case may be in the case of default, including but not limited to the power to take possession or control of the aircraft or any aircraft object, procure deregistration of the aircraft, or apply to the court for a specific order in relation to such default.

Naturally, such remedies do not run roughshod over the holders of higher ranking registered interests. Moreover, a Maltese registered mortgage is lined with several advantages such as the mortgage constituting an executive title that is automatically enforceable without the need for further court intervention.

Another salient benefit is that the mortgagee may make provision in the relevant mortgage instrument to prohibit the registration of further mortgages over the same aircraft. The mortgagee’s consent in writing is always required before a Maltese aircraft is transferred outside its registry or before its registry can be cancelled.

With regards to the Cape Town Convention that has garnered recent attention, the EU is itself a party to this Convention as a Union, making it one of 10 members including Canada and the USA. Hence, by virtue of being an EU member state, Malta is indirectly, also a party to this Convention.

Although the European Union is an Aviation Sector Unit (ASU) participant, it is so in its capacity of a supranational body and therefore not representing its individual Member States.  For this reason, there is a process that needs to be undergone in order for Malta to be acknowledged in its own name.

The 2011 Aircraft Sector Understanding (ASU) replaces the former 2007 ASU and applies to financing by Export Credit Agencies, that is, an acting intermediary between governments and exporters (the Export-Import Bank of China (CEXIM) being one example).

The CTCD (Cape Town Convention Discount) is available to an operator based in a state that ratified the CTC, made qualifying declarations and implemented the CTC with the advantage of benefiting from a reduction of minimum premium rates if Malta is added to the CTC list. But what are these discounts about?

The minimum premium rates are set out against 12-year repayment terms over asset backed transactions. The higher the risk classification of the transaction, the lower the minimum premium rate stipulated, making the minimum premium rate inversely proportionate to the transaction’s risk classification. These minimum premium rates can be reduced by not more than 10% of the stipulated rates and can be accessed if the applicant cumulatively satisfies the following three criteria:

(i)    The asset-backed transaction relates to an aircraft object within the meaning of the Cape Town Protocol on Matters Specific to Aircraft Equipment,

(ii)    The operator of the aircraft object (and, if different, the borrower/buyer or lessor if, in the view of the Participant providing the official support, the structure of the transaction so warrants) is situated in a State which, at the time of disbursement in respect of the aircraft object, appears on the list of States which qualify for the reduction of the minimum premium rates (“Cape Town List”), and where applicable, in a territorial unit of that State that qualifies under Article 38 of this Appendix, and 

(iii)    The transaction relates to an aircraft object registered on the International Registry established pursuant to the Cape Town Convention, and the Aircraft Protocol thereto (Cape Town Convention or CTC) .

Malta’s present ambition is to become a member, hence to qualify as an ‘ASU Participant’ in its own right, and therefore qualifying to its advantages. Two of these advantages are what are referred to as the Minimum Premium Rate (MPR) and the Cape Town Convention Discount (CTC discount). The impact of this ratification is that the relevant provisions of this protocol are intended to level the playing field for aircraft manufacturers, aircraft purchasers (including airlines and aircraft lessees) and governments by prescribing a set of uniform terms for aircraft-related financing transactions that are supported by a Participant’s Export Credit Agency (ECA), and by closing the pricing gap between the export credit agency and commercial financing markets.

To become a member to the 2011 Aircraft Sector Understanding (ASU), Malta has to be nominated by an existing member country/territorial unit. Having obtained the support of one such member, Malta is working hard to become itself a full member.

The efforts for this endeavour are being spearheaded by the Aviation Division of ‘Transport Malta’ which is a regulator in its own right. This initiative was tabled to cabinet for approval and every effort is being made to conclude the matter as soon as possible so that the Maltese aviation sector may start enjoying the fruits of the momentum gathered. Work on this matter has been ongoing for many months now, and it is safe to say for over a year. 

The process involves the requirement of the compilation of a dossier, the vetting of such dossier will typically be carried out by a legal firm, with international standing and expertise in the field of civil aviation. The latter will issue a legal opinion following engagement via a government mandate. 

Subsequently, the legal opinion as well as the material compiled by the competent government authorities will be fused into the final version of the dossier to be submitted to the OECD for review.

When the dossier is submitted to the OECD, it is sent to all the nine other parties to the Convention for review and comment, within a stipulated time frame (usually that of 20 days).  If no adverse comments are received, then the request to become a signatory would have been accepted.  If not, discussions with the country, in this case Malta, would take place.

As matters stand, Malta is confident in its position and looks ahead to a successful resolution of this process. If successful, Malta will become the first Member state to have acceded to such CTC discounts.

Thus, taking a cursory look at the Irish aviation success story, it is inspiring to see what our island competitors have done to come so far in attracting so many household names (such as Ryanair and Bombardier) to their jurisdiction. Excellent connectivity in short haul but also in terms of long haul flights top the list.

They also accord a lot of kudos to their Irish aviation regulator as well as to the bold move of the government in abolishing air travel tax despite much opposition. They also smugly note that the Irish are the most frequent flyers in all of Europe2. Being an island with an industry many times greater than its geographical size, Ireland speaks of a ‘hub-and spoke’ model that incorporates the most competitive prices in all Europe. They are also high achievers when it comes to aircraft leasing, private equity backed investment and up to date research and development. 

With the changing and fluid nature of Aviation Law, PKF continues to assist clients in avoiding the potential pitfalls by remaining informed and associating with true specialists in the market. PKF Malta can offer this peace of mind to its clients because we incessantly work to cultivate new relations and better existing ones with all relevant factions of the industry, while concurrently acting at grass root level as described above with a sensitivity to things ongoing that allows us to devise ideas and act on implementing the necessary measures in order to bring about the changes desired as a common good denominator by all those involved. Only in this manner and others complementary to the same can a sector such as aviation truly have an optimised chance at self-actualisation and reaching its full potential.

We have a vast network of international contacts comprising foreign financial institutions as well as financial consultants who act as intermediaries or introducers as necessity dictates. We also invest significantly into accessing other markets through travelling to key conferences and symposiums. For instance, attendance at the EBACE symposium in Geneva last May and looking forward to participating at EBACE 2016.

Dr Marilyn Mifsud is Securities and Business Associate at PKF Malta