The UK is to ratify the Cape Town Convention and its Aircraft Protocol (together, Cape Town). This may help UK aircraft operators access cheaper capital markets funding. But that cheaper funding may require the UK, in effect, to adopt Cape Town's "Alternative A" insolvency regime. Section 1110, US Bankruptcy Code (on which Alternative A is based) has worked well in US airline restructurings. But Alternative A may not mesh well with English insolvency law. Will Alternative A hamper restructurings of UK operators of helicopters and other aircraft? And what effect might it have on helicopter repossessions in the UK?
There is a realist's rule of thumb with Cape Town. No matter how much a state may gold-plate its implementation, the more creditor-friendly that state's laws, the less impact Cape Town will have on creditors repossessing aircraft in that state. With the UK, for example, many Cape Town provisions are similar to existing English law. And it is already possible, for example, to:
- repossess a mortgaged helicopter on a self-help basis, without having to go to court;
- obtain a pre-trial court order grounding a helicopter, so it is available for repossession;
- take a valid English law mortgage over a helicopter while it is in England, or in English airspace - making the lex situs rule largely irrelevant where the mortgagor is based in the UK.
So, the case for UK Cape Town ratification is not so much about improving the position of financiers and lessors of helicopters and other aircraft, as the possibility of cheaper capital markets and other funding for UK aircraft operators.
Lower capital markets funding costs under Enhanced Equipment Trust Certificates (EETCs)
Under EETCs, the financed aircraft are held on trust for secured note holders. Traditionally, the quicker you can repossess from an insolvent operator, the better the notes’ pricing. Under Alternative A, an operator in insolvency proceedings must return its aircraft to its creditors before a “waiting period” ends. States set the length of the waiting period when ratifying Cape Town. A 60-day maximum from the start of the insolvency proceedings is desirable for favourable EETC ratings.
Is Alternative A necessary to a highly rated EETC?
Some doubt this. English insolvency law already offers robust protections to creditors. And these protections appear to have helped British Airways achieve impressive ratings on its June 2013 EETC.
Alternative A in the UK
Some have said that Alternative A in the UK might hamper operator restructurings. The main response to this is that Alternative A is based on the Section 1110 carve-out from the moratorium on creditor action under Chapter 11, US Bankruptcy Code. If the US experience is any guide, Section 1110 would appear to have made it easier to restructure many major US airlines successfully.
But Section 1110 was designed to operate within the context of the US Bankruptcy Code. In the UK, Alternative A would have to work with the pro-turnaround moratorium on repossessing leased and mortgaged helicopters under the English administration regime, for which it was not designed.
The moratorium in an English administration on repossessing leased or mortgaged helicopters is to facilitate a turnaround of the operator’s business. It lasts throughout the administration - up to a year or more. However, the English case law has led to an expectation on all sides that the administrators will pay the rentals or debt service for any helicopters they wish to retain. The threat of long-term retention of the helicopters without payment, which Alternative A addresses, is not present in the UK.
In some respects, a fixed waiting period of (say) 60 days might work against financiers and lessors of UK helicopters. It would run counter to the flexibility of the current arrangements. Under these arrangements, if the administrator plans to trade the business, he can strike new deals for the continued use of the helicopters at an early stage. And if a given helicopter is superfluous to those trading plans, the administrator would usually want to co-operate in its repossession.
UK market and regulatory conditions are such that, if the business is going to continue trading, the administrator’s trading strategy, including its helicopter requirements, will be pre-planned. Where there has been time to pre-plan, the administrator would usually want immediately to transfer the business to a new operator via a “pre-pack” administration sale. If that new operator does not require a helicopter, it would be available for immediate repossession from the original operator.
Absent some pre-planning, an unanticipated failure of the operator will most likely result in its immediate closure. Again, this would make the helicopter available for immediate repossession.
The UK insolvency profession may also be concerned that Alternative A might increase their administration expenses. These are payable out of a limited pot of assets, which may not cover all of their outgoings and would rank ahead of the administrator’s own remuneration. Among other things, Alternative A requires the administrator to maintain the aircraft during the waiting period.
This maintenance obligation (which is not in Section 1110; only in Alternative A) is problematic. It may inhibit any rescue of the operator if the exposure to increased costs deters trading on in administration.
So, if Alternative A were made part of UK insolvency proceedings, the financier or lessor of a helicopter might be able to get its aircraft back within the Alternative A waiting period. But this would be at the expense of having to remarket the helicopter, and losing potential sources of (possibly varied) rent or loan repayments, from:
- the original operator, whose business might otherwise have been turned around in the administration; or
- a new operator, who could have acquired the original operator's business via an administration sale and agreed to pay for the helicopter's use.
If lease rates are healthy and the helicopter highly marketable, an experienced lessor (for example) may prefer the certainty of a 60-day waiting period. With the operator obliged to maintain the helicopter under Alternative A during the waiting period, and the certainty of a backstop repossession date, the lessor can start to arrange the next lease of the helicopter with a degree of confidence. Where lease rates have declined or the helicopter is not overly marketable, the loss of the chance to keep the helicopter with a restructured original operator, or a new operator via an administration sale of the original operator's business, may be less welcome.