Current developmentsi Recent cases
While there have been few cases relating specifically to the financing of ships or rolling stock, the English courts have been confronted by a plethora of cases in the aviation sector. These cases include:
- the Blue Sky case relating to the lex situs rule for the creation of proprietary interests in aircraft;
- the Alpstream case on the duties of mortgagees of aircraft;
- the Pindell case on remedies for failure to redeliver aircraft in the right condition;
- the Paramount case on the applicability of the doctrine of relief from forfeiture to aircraft leases;
- the ACG v. Olympic case on the risk of latent defects in aircraft at delivery; and
- the Global Knafaim case on the detention rights of the CAA and Eurocontrol.
It is an empirical fact that the aircraft finance and leasing sector is becomingly increasingly litigious.ii Developments in policy and legislationAviation
The main legal development in the aviation sector in the United Kingdom has been the ratification of the Cape Town Convention, which has already been discussed.
Export credit finance for aircraft has been largely put on hold as a consequence of political problems at Eximbank and European export credit agencies. The resulting void has been partly filled by the use of structures known as AFIC (for Boeing aircraft) and Balthazar (for Airbus products) in which the export credit agencies are replaced by commercial credit insurers.
The aviation industry is one for which Brexit poses particular challenges. The European ownership of British airlines (and British ownership of other European airlines) may no longer be viable. The access of British airlines to foreign markets – for example to North America via the open skies agreement or within Europe by virtue of European skies – is also at risk. British airlines may no longer be able to benefit from 'horizontal agreements': aircraft services agreements between third-party countries and another EU state, which have been extended to the United Kingdom. The basis for the United Kingdom's continued interaction with the European Air Safety Agency will need to be established. A host of regulations (for example, relating to compensation or wet leasing) will also need to be reconsidered.Shipping
Changes in regulation can affect a shipping company and its financiers by requiring additional capital expenditure to modify a ship to comply with new requirements (such as regulations relating to ballast water or sulphur emissions) or by restricting the economic usefulness or life of the ship (perhaps where modification is not economically or technically feasible), thus reducing its profitability and value.
Much shipping legislation in the United Kingdom derives from conventions and regulations issued by the International Maritime Organisation. However, the European Union also provides some additional regulation and legislation relating to the shipping industry. While the United Kingdom has voted to leave the European Union, the terms of its exit have not, at the time of writing, been agreed, and so it is conceivable that there may be some changes to domestic shipping legislation as a result of Brexit, but it is doubtful whether these would be significant or wide-ranging.Rail
Railway policy is politically charged and constantly changing. There are renewed threats of renationalisation against a background of continued discussion about fundamental aspects of the industry, such as:
- the adequacy of the performance of the infrastructure (whether Network Rail should be broken into regional entities to create a more competitive environment; whether operators should be able to take over the infrastructure management);
- the appropriate approach to franchising (how long franchises should last for); or
- whether foreign state operators should be allowed to take on franchises and extract the profits (the German, Dutch and French state railways all operate franchises).
A government review of the UK rail industry (the Williams Rail Review) is ongoing, and could result in major changes to the industry.
In itself, Brexit is unlikely to drive change, but it might widen the opportunity for new industry structures to be created.iii Trends and outlookAviation
The main manufacturers are forecasting a significant increase in the number of aircraft operated globally over the next 10 to 20 years. Much of the new fleet will be destined for operation in the Asia-Pacific region or Latin America, with the number of aircraft being operated in Europe remaining relatively stable.
As the financial crisis becomes more distant and banks find alternative sources of liquidity for their debt offerings, there has been a return of the commercial banks to the aircraft finance market.
As bank margins have increased, more airlines have been turning to the capital markets to finance aircraft. In particular, there has been more appetite for the Enhanced Equipment Trust Certificate, with airlines such as Air Canada, Emirates, Turkish Airlines, Norwegian and British Airways accessing the market.
Finally, the percentage of aircraft operated by airlines under operating leases continues to grow. There is a significant number of new entrants into the operating lease sector, often backed by private equity, and they too have their financing needs. There has been a significant increase in the number of operating lessors based in China.Shipping
Resumption in trade growth should gradually ease the imbalance between supply and demand for ships. Shifts in oil prices affect demand for assets involved in offshore oil and gas and changes in trading patterns or regulatory changes may affect demand, positively or negatively, for certain other categories of ship.
As with other types of economic activity, there will be some shift of emphasis in global shipowning towards the Far East (for example, as Chinese shipping companies continue to grow their fleets) and other emerging markets, which international shipping banks and English-qualified shipping finance lawyers will be well placed to serve. There has been an increase in leasing transactions (mainly in the form of a sale and related 'leaseback' of one or more vessels) in China, Japan and Norway in recent years, a trend that is expected to continue.
The impact on the shipping industry of the United Kingdom's decision to leave the European Union remains to be seen. If trade to and from the United Kingdom is significantly affected by Brexit, then this could have implications for shipping. However, given the global nature of the industry, the Brexit vote may have little impact and may offer new opportunities to some sectors.
There will, however, always need to be ships, and finance for them. While it is likely that banks and export credit agencies will also continue to have the major role in ship financing, there is likely to be a growing role for debt and equity capital markets and other specialised forms of finance.Rail
Investor interest in the United Kingdom passenger railway industry remains strong. Apart from the continuing need to replace old rolling stock there are continuing and developing opportunities coupled with new infrastructure and its associated need for rolling stock, arising from planned new large-scale rail developments (e.g. HS2), opportunities in the light rail sector and technological advances (e.g. hydrogen cell powered locomotives and improvements allowing more services on existing lines). This positive environment is supported by buoyant passenger numbers (despite a slowing of growth in this respect) and a government determination to create the best structures and operating environment for the railway. In particular, developments might be expected as a result of the opportunities afforded by the United Kingdom leaving the European Union and the ongoing government review of the industry. The major threat to the investment opportunities is that, should there be a change of government, the industry could take a radical turn towards becoming a nationalised industry again.