The Irish Minister for Transport, Tourism and Sport and the Minister for Jobs, Enterprise and Innovation have jointly announced approval and publication of the State Airports (Shannon Group) Bill 2014. The Bill will include draft legislation to amend the International Interests in Mobile Equipment (Cape Town Convention) Act 2005 to enable the Government to make an order giving the Cape Town Convention Alternative A insolvency remedy force of law in Ireland.
The Cape Town Convention creates an international uniform body of law applicable to interests in aircraft assets for the protection of financiers, lessors and conditional sellers and to establish basic remedies available to them under agreements relating to the aircraft assets.
Ireland demonstrated its commitment to the aviation industry in 2005 when it was the first EU member state to ratify and implement the Cape Town Convention and to become the home of the first international registry. In line with EU rules, it did not make a declaration in respect of insolvency remedies. Nor did it amend its national insolvency laws to adopt those remedies. As a result Ireland has been one step short of effective implementation of the Cape Town Convention.
It is expected that the draft legislation shall be passed into law and the requisite order shall be made before the summer recess.
What is it?By giving force of law to "Alternative A", Ireland will apply a regime substantially similar to the long established Chapter 1110 insolvency remedy in the US to aircraft assets the subject of a lease, a security agreement or a conditional sale agreement registered on the international registry such that:
- within 60 calendar days of an insolvency or threatened insolvency of a lessee, mortgagor or conditional purchaser, the lessor, financier or conditional seller it will either get the aircraft asset back or all defaults (other than the default occasioned by the insolvency itself) will have been cured and an undertaking given as to future obligations;
- the aircraft will be preserved and its value will be maintained during the 60 day period;
- the Irish administrative authorities will co-operate in the exercise of remedies subject to aviation safety requirements.
Why it is important?
- confirms Ireland's commitment to the aviation industry
- gives Irish leasing companies and airlines access to reduced cost funding
- augments Ireland's legal and fiscal regime and enhances Ireland's position as a leading location for financing and leasing aircraft
- non-US EETCs
- bond issuances
- other capital market and structured finance transactions
CommentEETCs are commonplace in the US. Last year, within weeks of Canada's ratification and implementation of the Cape Town Convention (including a declaration in respect of Alternative A), we saw Air Canada do a EETC with highly competitive pricing (4.125% on the Class A certificates). There were three key elements:
- established adherence to the rule of law;
- structure and liquidity profile identical to a US EETC;
- adoption of Alternative A insolvency remedy with a waiting period of 60 days.
In June of last year British Airways did the first double EETC in Europe in 10 years with competitive pricing of 4.625% on the Class A certificates. While the United Kingdom is not a Cape Town Contracting State, it has an established rule of law.
Query: If the UK had been a Contracting State under the Cape Town Convention with Alternative A, would BA have achieved even better pricing?
Emirates followed BA in July last year with its second EETC with competitive pricing of 6.125% on the short term smaller Class A certificates and 5.25% on the longer term Class B certificates. UAE is a Cape Town jurisdiction which has made a declaration on Alternative A with a waiting period of 60 days.
Following today's news and upon the legislation being passed and the order being made, Ireland will meet all of the key elements to Air Canada's success.
- it has an established rule of law;
- it is a Cape Town contracting state which will have adopted Alternative A;
- its fiscal and legal regime is sufficiently flexible to support the structure and liquidity profile of a US EETC to optimise the investor base.
While EETCs are airline based, the change in Ireland will not just benefit the Irish airlines but will potentially benefit other airlines based in Europe, Asia and the Middle East (particularly those which have ratified and implemented the Cape Town Convention including Alternative A) by providing the opportunity to locate the issuer vehicle in Ireland to avail of our legal and fiscal regime and to maximise the pricing and return to investors.
Looking forward, as the capital markets evolve and the investor base expands and becomes more comfortable with non-US airlines and the non-US legal environment, we would hope to see more non-US EETCs through Ireland and perhaps even non-US dollar denominated issuances.
If you have any questions or would like to discuss anything in this paper, please contact any member of the A&L Goodbody Aircraft Finance team.
Date published: 17 April 2014