On 27th July 2007, the OECD published a revised Sector Understanding on Export Credits for Civil Aircraft or “Aircraft Sector Understanding” (ASU), which forms part of the OECD Arrangement on Officially Supported Export Credits. This replaced an earlier Sector Understanding, agreed in 1987, which used to regulate Export Credit financing.
Under the new ASU, OECD member states and, for the first time, Brazil have entered into a gentlemen’s agreement setting out the parameters under which export credit support can be made available for financing civilian aircraft.
The ASU applies to financing for new and used aircraft, spare engines and parts, maintenance contracts, conversion contracts and other modification work and engine kits. It does not apply to financing military aircraft or to flight simulators. As with the previous ASU there are separate terms for large and other aircraft.
For new aircraft, the main developments include:
- Specified minimum levels of insurance or guarantee premia that should be charged by the participating Export Credit Agencies (ECAs) for providing cover. These are calculated by reference (amongst other things) to the credit rating of the airline.
- A discount for premia charged by ECAs to airlines in countries, which have ratified the Cape Town Convention in a satisfactory manner. The maximum permitted discount will also depend on the credit rating of the airline.
- For large (Category 1) aircraft repayment terms remain at 12 years. For “Category 2 Aircraft”1 terms can be extended to fifteen years, with ten years maximum repayment allowed for smaller aircraft (“Category 3”).
- For Category 1 aircraft, one or more “risk mitigants” are required for riskier airlines. These include lower than 85 per cent advance rates, 10 rather than 12 year repayment terms and straight line rather than mortgage repayment profile.
- Financings for all Boeing and Airbus aircraft (other than Category 2 Aircraft) should amortise at least quarterly.
- Financings for other aircraft will continue to amortise semi-annuall
- Financings for most aircraft will continue to amortise, either on a straightline or mortgage-style amortisation curve, to zero. However, there is more flexibility for smaller aircraft.
- Fixed Rate financing is not available for Category 1 aircraft – Pure Cover fixed rates are allowed.
- ECA-backed support for an aircraft may be put into place at any time within 18 months of its delivery from the manufacturer with the prior agreement of the ECA (but the maximum term of the financing should be calculated from that original delivery date).
- Any extension of the repayment term by way of sharing of rights in the security on a pari passu basis with the commercial lenders (by way of mismatch or SOAR loans) is no longer permitted.
- Cover is available for a maximum of 85 per cent of the net price of the aircraft (i.e. net of airframe/engine manufacturer credits), plus the cost of BFE.
- Fees must be charged on the undrawn amount of any support to which an ECA commits, if the commitment persists for longer than six months.
- Financing may be made available in Yen.
- For large aircraft transitional arrangements are in place for existing export contracts notified to the OECD by 30 June 2007 (for deliveries to occur on or before 31 December 2010 in respect of firm contracts concluded no later than 30 April 2007).