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Cloudy Skies:The Aircraft Lessor’s checklist for storms ahead

3 November, 2020

Cloudy Skies

The Aircraft Lessor’s
checklist for storms ahead

The increasing likelihood of insolvencies or defaults on lease payments have led to aircraft lessors reconsidering their short, medium and long term strategies to manage their potential exposure. This may involve possible repossession and enforcement scenarios. The recent enforcement actions taken against Air Asia X and BOC Aviation in UK may signal the first of many similar actions.

As payment holidays or lease rental deferrals have been agreed or may be soon coming to an end, aircraft lessors should consider the below non-exhaustive checklist of steps to take in order to protect their positions and to maximise their potential outcomes from any necessary enforcement or repossession strategies.

Legal & Security
Review

• Carrying out a security review / gap analysis to ensure all relevant security documents have been filed and perfected and that all original contractual documentation is available as required;


• Monitoring the existence of any liens on the airframe and/or engines by airport authorities, Eurocontrol or mechanics’ liens by MRO facilities as they can present challenges in repossession scenarios including possible detainment;


• Ensuring IDERAs have been filed where required and locating any original IDERAs or Deregistration Powers Of Attorney or other documents which may be required when seeking to repossess or deregister an aircraft (liaising with local counsel in the lessee’s jurisdiction if necessary);


• Carrying out searches on the International Registry against the relevant aircraft objects to ensure no non-consensual rights or interests have been filed unilaterally;


• Applying to the Commercial Court in Dublin, Ireland to remove any unlawfully registered non-consensual interests (which will be the subject of our next update);


• Ensuring Registration of Rights Agreements are in place in respect of any engines off-wing;


• Ensuring all security deposits are paid and up to date as per the lease;


• Reviewing all Letters of Credit, locating the original “wet ink documents” and considering whether these can be substituted for cash in the short to medium term;


• Planning for worst case scenarios including early redeliveries from bankrupt lessees and repossessions from struggling lessees and obtaining local law advice in each relevant jurisdiction;


• Considering what additional enforcement steps need to be taken in tandem with repossession steps and what unencumbered assets might be available for enforcement / attachment (if relevant) and, if so, whether other creditors may also be seeking to enforce.

Financial /Asset
Protection Considerations

• Running up to date pricing models based on reduced rents to determine best and worst case scenarios on a per lease or per lessee basis;


• Making information requests for up to date financials and insurance certificates;


• Seeking constant updates in respect of the technical records of the aircraft and/or engines;


• Availing of inspection rights under the lease(s);


• Seeking confirmation of the location of each aircraft and titled engines and confirmation as to what storage and security arrangements have been put in place (these will become extremel important in any repossession scenario);


• Carrying out a maintenance review analysis, determining whether this will lead to a shortfall in funding for upcoming maintenance events, particularly where lessee contributions are calculated on a utilisation basis.

Consequences of Defaults/Possibility
of Renegotiating Terms

• Understanding the specific lease default events provided for under the terms of the relevant lease as these can often be triggered before the lessee becomes insolvent;


• Understanding which lessee rights are suspended in a lease default event, e.g. whether in the event of damage to the aircraft the terms of the relevant lease provide a threshold for insurance proceeds to be payable directly to the lessor;


• Reviewing matters which lessees may wish to negotiate should the downturn persist for longer than the initial payment holiday or payment deferral period, for example lease extensions, agreements to repay deferred rent over time with interest or renegotiation of redelivery conditions;


• Understanding the grounds for loan default events under the terms of the relevant security documents and whether they differ from the applicable lease default events (as they often can).

For Irish
based lessors,

certain corporate governance
responsibilities should also be closely
monitored and documented, including:

• Recording all discussions of the board by way of accurate and up to date minutes which make note of Covid-19 and the related economic backdrop;


• Ensuring up to date financial information is provided to the directors and that the impact of all decisions taken to date are reflected in the updated financial information;


• Investigating all financial supports that may be available to the company; and


• Continuously assessing, on an ongoing basis, the ability of the company to pay its debts as they fall due and the options available to it in the event of insolvency.

Flynn O’Driscoll’s cross departmental team comprising aviation, insolvency and dispute resolution professionals are ready to assist.

Further details of our team can be found here.

Legal
Professionals

Deep Industry Knowledge

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This note is for general information purposes and does not constitute legal advice. Legal advice must be obtained for all individual circumstances. Each case must be assessed on its own merits.

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