How to ensure funding always has a happy landing

One of the fastest-growing global marketplaces for new and used commercial aircraft and glitzy biz-jets is The Gulf and parts of the Middle East.

This has prompted international finance organisations and legal practices to concentrate on the region like never before – simply because that’s where the business is.

From the outside, the world of international aviation finance may seem complex – but in reality it’s extremely simple. It’s all about drawing up watertight legal documentation to transfer large sums of money from one place to another and to specify how it’s paid back. Straightforward?

If you’re the finance director of an airline (or a mega-corporation or maybe even a global celebrity) and you and/or your company is sufficiently mega-cash-rich – and has a stable balance sheet with predictable results year-on-year – to go out and buy the latest all-singing, all-dancing, super-duper passenger airliner or biz-jet, straight from the makers, without any advice or guidance, then the world of global aviation finance isn’t necessarily for you.

If, however, your company’s balance sheet is affected by seasonal fluctuations, government/regulator interventions, interest rates, natural disasters, the global recession and a raft of issues that are nothing whatsoever to do with you or your business, then you’ll undoubtedly want to talk to specialist financiers and lawyers who are totally au fait both with your business and the industry.

Why? Because the world of international aviation finance may appear pretty simple in essence – but it’s far too easy to make catastrophic mistakes that could adversely impact both balance sheets and even future solvency.

International South African-based banker Nedbank has been involved in financing aviation deals for years and the head of aviation finance at Nedbank Capital is James Geldenhuys, who’s based in Johannesburg. He explained that although his company serves a global market, there is a specific focus on Africa and the Middle East, where it has been a part of a number of major deals.

Recently, he said, Nedbank Capital acted as security and facility agent for the sale and leaseback (a particular speciality) of two Boeing 777-200ER airliners between Mauritius-based lessor Veling and Dubai’s Emirates Airlines. “This is our second transaction with both parties,” he continued, “and it’s therefore a testament to the very positive relationship we have built with both companies.

“Each set of clients is unique and so we tailor our advice specifically depending on all the circumstances. We tailor-make pricing and structuring, taking into account the risk profile and specific aircraft type being financed, through to secured lending, operating leasing, finance leasing and, if required, any large aircraft sector understanding (LASU) for export credit finance.”

But, of course, any major finance deal needs a well-informed specialist legal practice to ensure that everything’s in order for lenders and borrowers and even third-parties.

One such company is the internationally renowned legal firm Clyde & Co, which has a specialist aviation and aerospace group. 

Based in the practice’s Dubai office since earlier this year, although with the firm since 2009, Oliver Tebbit focuses primarily on the biz-jet market, where he works mainly for business jet financiers, but also some owners and operators, advising on a range of loan and lease financing structures. 

Tebbit also provides advice regarding wider business jet-related matters, including those relating to sale and purchase transactions, aircraft management and operating agreements, charter agreements and outfitting contracts. He also has experience of working for clients in the commercial aviation and engine leasing sectors.

Tebbit was recently named in Airfinance Journal ‘s legal supplement as a ‘rising star’.

He explained that there are some potentially huge legal pitfalls to trap the unwary and said that he has frequently been responsible for saving clients many millions of dollars – as well as potential embarrassment.

It’s all about partnerships, he said, as most agreements are between an owner, an operator and a lending institution.

Tebbit continued: “Since the global financial crisis, many major banks are trying to minimise or even completely divest themselves of their biz-jet finance portfolios. Some owners, who have borrowed large sums based on an aircraft operator business plan formulated before the global financial crisis, have found to their dismay that making alterations to these agreements is very difficult, especially if the part that specifies management and operation of the aircraft isn’t rock solid and with a company that didn’t expect to obtain disproportionate revenue from chartering.

“Some agreements were mistakenly based on the receipt of huge charter revenues rather than taking cognisance of maintenance, hangarage and insurance costs. And it’s in that situation that the owner needs our advice – urgently – on which way to turn and how to appease an unhappy lender.”

Since joining Clyde & Co, Tebbit has advised several international banks in connection with biz-jet financing transactions to a value in excess of US$1 billion, while he and his team have also acted for a regional airline (a subsidiary of Air France) in connection with the sale of four Embraer 190 regional jets to a South African operator. He has also advised the owner of a Boeing BBJ about financing and delivery issues.

Other aspects of the legal role include acting for biz-jet owners regarding pre- and post-delivery loans of aircraft; advising biz-jet operators about management and operating agreements; and – specifically – liaising on behalf of a buyer regarding the purchase and VIP outfitting of a new Airbus A340-600 aircraft.

So whether you are a newbie biz-jet owner/operator or a major internationally-renowned airline like Emirates Airlines, there’s a need for expert financial and legal advice and woe betide the unwary who jumps into an agreement without ensuring that all the loose ends are secured.