What Ship Finance Can Learnfrom Aircraft Finance

Marine Money – Ship Finance Forum – NYC 2018

Richard FureyNovember 14, 2018

Financing Aircraft vs Financing Vesels

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» High asset value˗ Capital intensive

» Mobile

» Regulated (operations, safety)

» Subject to law of the flag and financing parties’ chosen law

» Highly volatile market environment

Key Similarities» Greater asset uniformity with

Aircraft

» Differences in Repossession

» Treaties (eg, Cape Town)˗ Stronger protections for aircraft

creditors

Key Differences

Mortgaged-Backed Loan Example

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Charterer

SPV/ BorrowerSPV Owner

Lenders/ Facility Agent/ Security Trustee

Time CharterHire

Loan Debt Service & Fees

Ownership

Trust

Security:

• Mortgage• Assignment of earnings • Assignment of insurance

Share pledge

Loans; in essence simple: - Lender advances loan to a borrower - Borrower repays with interest- Similar for Vessel Finance and Aircraft Finance

Aircraft Portfolio Securitizations

» Financing option for an aircraft lessor or investors that seek to finance a diversified portfolio of aircraft on lease to various operators

» Creation of a bankruptcy-remote SPV

» Issues notes or borrows funds

» Proceeds used to purchase or finance a diversified pool of aircraft subject to leases

» Obligations of the issuer or borrower are collateralized by the underlying aircraft and leases

» Lease cash flows are used to service the repayment obligations

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Aircraft Portfolio Securitizations

» Credit enhancements:

• Debt tranching

• Liquidity support

• Overcollateralization

• Accelerated pay-down for failure to meet performance triggers

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Aircraft Portfolio Securitizations

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Aircraft Owning Entity

SPV/ Buyer/ IssuerOriginator

Indenture/ Security TrusteeInvestors Servicer

100%Ownership

PurchasePrice

Service Agreement

Notes (tranches)

&Repayments

Purchase Price

Security Interests in Assets/Leases(Trust/Security Deed)

Assets

Trustee acts forinvestors

AOE 2 AOE 3

Lessee Lessee Lessee

Leases / Rent Payments

Harley Marine Service Securitization

$455 million transaction - Harley Marine Financing 2018-1

Two tranches of debt:$405 million senior tranche of Class A-2 notes initially rated BBB $50 million subordinate tranche of Class B notes initially rated BB

Whole business securitization˗ sale-and-leaseback transaction˗ 122 tugboats and barges sold to a securitization trust˗ trust will pay Harley Marine Services to operate or manage them˗ Harley’s charters, contracts of affreightment, towage agreements, ship assist

and management contracts, leases relating to the vessels, interests in terminal assets and license to use certain IP contributed to the securitization trust

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Aircraft EETC Financing

Enhanced Equipment Trust Certificate (EETC) Ø Publicly (sometimes privately) issued

Ø Credit of a single airline

Ø Secured by multiple aircraft as collateral

Ø Liquidity facility

Ø Tranching and other structural enhancements to provide improved LTV ratios for the more senior tranches, of debt securities

Ø Certainty of remedies afforded by Section 1110 of the U.S. Bankruptcy Code or, in the case of non-U.S. airlines, comparable rights under Cape Town (or other local law);

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Aircraft EETC Financing

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Airline

Owner Trustee

Investors

Liquidity Provider

Rental payments

Liquidity Facility

Owner Participant

TrustAgreement

Indenture Trustee

Debt paymentsIndenture

Subordination Agent

Payments

A Eq. Notes B Eq. Notes

Pass Trough Trustee for

Class A Trust

Pass Trough Trustee for

Class B Trust

Class A payments Class B payments

Series A & B Eq. Notes

Class A PTCsand payments

Class B PTCsand payments

Security

Security

Bankruptcy Code Section 1110

Relief from Automatic Stay» Right of Lessor/Lender to Recover Aircraft 60 days after US Airline

Chapter 11 filing unless airline cures defaults

Embodied in Cape Town Convention’s “Alternative A”

Section 1110 does not practically apply to vessels

Cape Town Convention not applicable to vessels

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Vessel Securitization

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Vessel Owning Entity

SPV/ Buyer/ Issuer

Indenture/ Security TrusteeInvestors Servicer

100%Ownership

PurchasePrice

Service Agreement

Notes (tranches)

&Repayments

Security Interests in Assets/Leases(Trust/Security Deed)

Trustee acts forinvestors

VOE 2 VOE 3

Originator Originator Originator

Sale & Leaseback/ Rent Payments

And finally…

Questions?

Thank you!

Practice Education Bar Admission

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Richard Furey

» Richard Furey

» Partner

» 212.513.3439

» richard.furey@hklaw.com

» New York, NY

Richard Furey is a partner in Holland & Knight's New York office. Mr. Furey focuses his practice on international and United States domestic asset and infrastructure finance including significant experience in the aviation and maritime sectors. In the maritime sector, he regularly represents vessel owners, lenders and charterers in a wide range of leasing and finance transactions.

• Structured Finance• Maritime

Transactions• Aircraft Finance • Commercial

Lending

• Syracuse University College of Law, J.D.

• Georgetown University, B.A.

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