Asset Finance  through peer Lending

When purchasing an aircraft for onward lease to an airline, lessors and banks typically structure the loan through a 'Special Purpose Company' or 'SPC'. These are one off companies that are set up to own the specific asset and nothing else. This is the most efficient way to structure the transaction from a tax perspective while giving all participants, such as banks, lessors and other loan holders (such as Ablrate Lenders) the security they need in the transaction.

The typical leasing structure vests ownership of the aircraft with an SPC which acquires the aircraft through funding by way of loan from a lender or lenders. The aircraft is then leased by way of operating lease to the airline. The SPC will typically be established as an "off-balance sheet vehicle" with its issued share capital held by an offshore trust company. The lender will typically take security over the aircraft, over the SPC’s rights as lessor and usually security over the issued share capital of the SPC itself.

Ownership of the SPC

The issued share capital of the SPC will typically be registered in the name of a local trust company established pursuant to a declaration of trust by the trustee. This ensures that the SPC is not consolidated on the balance sheet of the lender, the airline or the trustee. The trustee will usually be the same entity that serves as administrator.

Typical powers or discretions included in the trust would restrict any disposition of the shares in the SPC or its winding up. These tend to be drafted as provisions prohibiting the trustee from taking such actions without the consent of the lender.

Management

The SPC will enter into an administration or management agreement usually with the trustee as administrator. This agreement will set out the services to be provided by the administrator to the SPC. The principal service will be to provide directors and officers to the SPC. It may be convenient to include the lender as an additional party to this agreement to take covenants from the administrator in respect of the business and management of the SPC which the lender may then enforce directly.

Security Package

The SPC will usually grant security over the aircraft in the form of a mortgage and will always grant security over its rights under the lease with the airline, which will allow the lender to enforce directly the rights of the SPC as against the airline on a default. The SPC will typically also grant a deregistration power of attorney permitting the lender, acting in the name of the SPC, to deregister the aircraft on a default.

Frequently, the lender will also take security over the issued share capital of the SPC which will give the lender the ability to take control of the SPC on a default.

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