The unprecedented disruption to international travel caused by COVID-19 has created unique challenges for the aviation industry. In this note we consider how lenders can manage their exposure going forward and deal with the challenges arising from the pandemic.
Consider local insolvency regime
Lenders should anticipate the hurdles an airline’s local insolvency regime may pose to a secured creditor in the recovery of an aircraft, particularly if the relevant jurisdiction is not a Contracting State under the Cape Town Convention or has not made a declaration under Article XI of the Cape Town Convention giving effect to “Alternative A” in respect of insolvency proceedings. Court proceedings may be lengthy and protracted, if “self-help” is not permitted and enforcement may be hindered by a moratorium or stay of enforcement under the relevant insolvency regime. Additionally, in the context of any debt restructuring, lenders should consider any hardening periods that may apply and also arguments that local liquidators or insolvency officeholders may put forward to clawback prepaid amounts, or set aside any additional collateral granted under a debt restructuring as a preference.
Analysing the robustness of contractual protections
Lenders should review their loan documentation and analyse whether the relevant security and covenant packages offer the expected protection, and where required, that relevant interests are appropriately filed on local and international registers. Lenders should analyse financial triggers, consider covenant testing (for instance financial covenants or LTV covenants), and in the context of lessor financings, Lenders should analyse their rights following an airline default and during any remarketing period (if applicable). Lenders should also familiarise themselves with any pre-enforcement mechanisms such as blocking of accounts, cash trapping and claims under letters of credit.
Exercise of contractual remedies
When enforcing security, Lenders should take into account risks such as shadow directorship, particularly on enforcement of share charges and should be mindful of the duties of a mortgagee on any enforcement action. Further, on financings involving third party professional security trustees, Lenders should anticipate that the security trustees are likely to require being put in funds by the Lenders and may wish to seek independent legal advice, at the Lenders’ cost, before considering any enforcement action. Lenders should note that the application of the Cape Town Convention can vary significantly across jurisdictions and it is untested in many Contracting States. Accordingly, Lenders should anticipate encountering some hurdles with the exercise of remedies under the Cape Town Convention in a number of jurisdictions.
Over the coming weeks and months, Lenders should engage with technical advisors, appraisers and remarketing agents to plan for any future repossessions. Lenders should also consider exercising inspection rights and reviewing aircraft utilisation reports and any sub-leasing notifications to keep track of the location of secured aircraft. On club or syndicated facilities, Lenders may benefit from engaging early with club and syndicate members, particularly on matters requiring all lender consent to avoid any delays on a particular course of action.
Develop a strategy for dealing with borrowers.
Following consideration of the points above and analysis of the financial condition of the borrower and its corporate group, Lenders should be better placed to make an informed assessment of any relevant downside risks which will assist in developing a holistic strategy for discussions with borrowers.
Our team has extensive experience with the above and related issues across the globe and can assist with developing a holistic plan to navigate through the challenges posed by aviation market distress and strategically engage with borrowers. Click here to contact a member of our Aviation Finance team.