Ireland is a key location for aircraft financing and leasing structures and is the headquarters for many leading aircraft and engine lessors worldwide. In addition to a very attractive tax regime, availability of highly educated and experienced aviation professionals and many other advantages as a jurisdiction, many Chinese leasing companies and airlines chose Ireland as their preferred aircraft financing and leasing jurisdiction structure transactions through Ireland because of the ease and cost efficiency of establishing a company in Ireland and the business friendly environment in Ireland. Use of an Irish structure assists in attracting lower cost financing and the company can benefit from the Ireland's excellent network of double tax treaties. Usually finance and leasing transactions are structured using a newly incorporated Irish company referred to regularly as an SPV (Special Purpose Vehicle) or SPC (Special Purpose Company).
WHAT IS AN SPV?
An SPV is a newly incorporated company and is usually a private limited liability company which is the standard company under Irish law. It is incorporated specifically for a particular transaction and will often own or lease a small number of aircraft or engines. An SPV is used to give the lender comfort that the company has no pre-existing obligations or liabilities. An SPV is usually either a subsidiary of the borrower/lessor or is established as an orphan company.
WHAT IS AN ORPHAN COMPANY?
The Irish orphan company is established as a usual limited liability company however its shares are held by a nominee share trustee company on trust for Irish charitable purposes pursuant to a Declaration of Trust. There are a number of professional share trustees in Ireland who usually offer the service through a corporate services provider. The Declaration of Trust creates a bare trust over the shares of the company in favour of the Irish charity which means the share trustee is the legal owner and the charity is the beneficial owner of the orphan company.
Although the ultimate beneficiary of an orphan company is an Irish charity the transaction is structured to provide adequate control and protection over the company and the assets to the lender or lessor as required through covenants in the documents. Due to the way the transaction and documents will be structured the assets of the company such as the aircraft will not go to the charity and instead only the residual amounts following liquidation of the company will go to the charity at the end of the transaction. The following are examples of some of the ways in which the Chinese airline or leasing company can extract the assets from the orphan company:
a) an option over the aircraft is put in place such that the Chinese leasing company can acquire the aircraft at the end of the transaction.
b) the aircraft is finance leased to the airline such that the airline purchases the aircraft at the end of the transaction.
c) a loan agreement is put in place with the Chinese leasing company to extract principal and interest.
Corporate service providers in Ireland will offer the services of a company to act as share trustee. The directors of the company are also usually professional non-executive directors provided by a corporate services provider as part of the general administration services provided under the corporate services agreement entered into by the Company.
The orphan SPC will require two directors (which must be individuals) and a company secretary (which may be a corporate). The minimum capitalisation is EUR1/US$1.The capital can be in any currency denomination (including RMB) and there must be at least one issued share held by the share trustee. The secretary should be a person or company familiar with the duties of a company secretary in Ireland in order to ensure the Company is in compliance with Irish company law and usually a professional secretary is appointed. The directors can be Chinese directors but it is important to note that under Irish company law at least one director must be resident in Ireland or a bond will need to be filed with the Companies Office and for tax reasons usually the majority of the directors need to be resident in Ireland.
WHY/WHEN IS AN ORPHAN COMPANY USED?
Orphan structures are growing in popularity and are no longer just required on export credit agency backed or rated transactions. Export credit agency transaction involved government backed support for the financing of an aircraft such as when the European export credit agencies like CoFace or Euler Hermes support the purchase and financing of Airbus aircraft. The structure is used where a lender requires the borrower to be bankruptcy remote from the rest of the group e.g. the aircraft lessor. In simple terms bankruptcy remoteness works to protect the orphan borrower from getting dragged into the insolvency of the main operating group. An orphan SPC is not connected with any of the other parties to the transaction and as a result should not be affected by the insolvency of any of the other parties.
When the orphan SPC is liquidated at the end of a transaction the proceeds will go to the charitable purposes specified which is why the structuring of a transaction where orphan SPCs are used is very important. It will be necessary to ensure that the assets of the orphan SPC are transferred from the orphan SPC at the end of the transaction. For example the orphan SPC will acquire the aircraft and finance lease the aircraft to the airline such that at the end of the financing the title to the aircraft will transfer to the airline. The orphan SPC will be protected from insolvency in a number of ways including covenants which restrict the company's business to the particular transaction, limited recourse and non-petition covenants, separateness covenants and ensuring that the transaction is structured such that the orphan SPC should always be in a position to pay its debts as they fall due. Ensuring that the orphan SPC is always solvent protects the company from entering into an insolvency process such as examinership under Irish law which would disrupt the structure.
SPECIAL PURPOSE COVENANTS
Usually the transaction documents will provide that the orphan SPC is restricted by special purpose company covenants which will provide for example that:
a) the business of the company is limited to that required by the transaction documents;
b) the company may not incur any further indebtedness other than what is contemplated by the documents;
c) the company may not take certain actions without the approval of the security trustee/lender.
The orphan SPC will also be subject to separateness covenants whereby it will covenant that it will conduct its business as a separate entity from the other parties to the transaction and that it will make clear at all times that it is not connected with any other party in the transaction. The following are examples of some of the usual separateness covenants which will be inserted into the documents:
a) To maintain books and records separate from any other person or entity;
b) To maintain its accounts separate from any other person or entity;
c) To conduct its own business in its own name;
d) To maintain separate financial statements;
e) To pay its own liabilities out of its own funds;
f) To observe all organisational formalities;
g) To allocate fairly and reasonably any overhead for shared office space;
h) To use separate stationery, invoices and checks;
i) To hold itself out as a separate entity; and
j) To correct any known misunderstanding regarding its separate
LIMITED RECOURSE AND NON PETITION
In order to protect the solvency of the orphan SPC all creditors of the company in the transaction will agree to limit their recourse against the orphan SPC to the assets of the orphan SPC and will agree not to petition for the liquidation, winding up, receivership or examinership of the orphan SPC.
TYPICAL ORPHAN TRUST STRUCTURE
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