BVI is attracting more commercial aircraft financing activity
As the leasing market tightens the British Virgin Islands (BVI) is becoming an increasingly attractive aviation finance jurisdiction for commercial aircraft lessors, as well as for private and corporate jet financing, writes Audrey M Robertson, Counsel in legal firm Conyers Dill & Pearman's (Conyers) BVI office. She outlines how special purpose vehicles (SPVs) operate in the jurisdiction and why she believes it stands 'head and shoulders' above its direct competitors in terms of value for money.

The BVI is an increasingly well established and respected location for a range of financial transactions involving commercial aircraft. So although such aircraft are generally not operated out of or registered in the BVI, it is playing a growing role in the structuring of international transactions to acquire, finance and lease aircraft.

Client confidentiality prevents identification of many commercial aircraft SPV projects in which we have been involved. But over recent years Conyers’ BVI office has been particularly active in structuring SPVs for export development agencies to fund the acquisition of aircraft which were in turn leased to airlines particularly in developing countries such as Ethiopia, Rwanda and Kazakhstan.
Audrey Robertson


The Ethiopia transaction, in which we acted as BVI counsel for Export Development Canada, involved the US$250 million purchase and lease of four dual class BombardierQ400 NextGen aircraft from Bombardier Aerospace. Ultimately leased to Ethiopia Airlines, it won an award as Africa's Most Innovative Deal of the Year. We also acted as BVI counsel to PK Air Finance in connection with an existing SPV structure in respect of two loans for the acquisition of two 787 Boeing aircraft which were ultimately leased to and operated by an affiliate of Norwegian Air Shuttle.

BVI's broad appeal
BVI has many attractive features, including political stability, tax neutrality and the absence of exchange control and currency restrictions, which make it an ideal jurisdiction for aircraft and other international financing transactions. From a legal perspective, it has a well- developed, English-based legal system, a bespoke commercial court and flexible, highly commercial legislation. On top of this, it adheres to international standards of compliance. These are all factors which have led to the BVI becoming a popular jurisdiction in which to establish special purpose vehicles for owning and leasing aircraft.

Other jurisdictions, such as the Cayman Islands and Bermuda, can make similar claims. But at a time of increasing price sensitivity BVI stands head and shoulders above the rest in terms of being a far more economic jurisdiction. And cost is an increasingly important consideration, particularly in respect of long term leases with significant annual costs in terms of provision of local directors and legal compliance. Recent Export Development Canada transactions in which we have acted as counsel, for example, have involved leases of 25 years, encompassing the full normal working lifetime of the asset.

It is also true to say that in the 12 years I have been in the BVI the number of lawyers working here has doubled and the jurisdiction has become widely regarded as a serious player in the international financing sector.

Security
This is how the Special Purpose Vehicle approach works in BVI. The SPV will typically own the aircraft. An SPV is so flexible it can be used to hold single or multiple aircraft. The acquisition of the aircraft by the SPV is most commonly financed by a third party lender, which in turn will take a mortgage over the aircraft.

Other security often includes granting security over the lease payments, separate security assignment(s) of the operator’s rights under the various contracts relating to the maintenance and operation of the aircraft – for example, the operating/management agreement, maintenance programs and policies of insurance and assignments of manufacturer’s warranties.

As a further protection for the lender in the context of the security provided by the SPV, a BVI business company is required to keep a register of all relevant charges created by the company.

Where a company creates a relevant charge an application to register the charge may be made to the Registrar of Corporate Affairs in the BVI under Section 163 of the BVI Business Companies Act. There is no concept of 'perfection' of a charge but, to the extent that BVI law governs priority, a charge registered under Section 163 of the Act has priority over any subsequently registered and unregistered charges. Third parties are deemed to have notice of any publicly registered charge. As part of BVI's cost competitive pricing when compared to other jurisdictions, the fee for filing a registration charge is just US$100.00.
At a time of increasing price sensitivity BVI stands head and shoulders above the rest in terms of being a far more economic jurisdiction. And cost is an increasingly important consideration, particularly in respect of long term leases with significant annual costs in terms of provision of local directors and legal compliance.

Additionally, the lender may take a charge over the shares of the SPV. As part of the share charge, the lender will also receive and retain certain ancillary 'deliverables,' all designed to facilitate and allow the lender to take control of and potentially
sell the SPV and the underlying aircraft on an enforcement.

These may consist of some or all of the following:
• the original share certificate (if any) with respect to the charged shares,
• an executed, undated blank share transfer form,
• executed but undated resignation letters from the SPV directors and accompanying letters of authority to date the same on an enforcement,
• an irrevocable proxy in favor of the lender permitting it to vote the shares in the SPV on an enforcement, and
• an undertaking from the SPV and, potentially an undertaking from the registered agent, inter alia, to co-operate with and take instructions directly from the lender on an enforcement.

The SPV articles of association may also be amended to include certain share charge related provisions. As a further protection for the lender in this context, it is standard practice for a notation that the shares have been charged to be placed on the register of members of the company and filed with the Registrar for registration, thereby putting third parties on notice that the shares of the company have been so charged.

Anybody can ask for a search to be carried out at the offices of the Registrar to ascertain whether any charges are registered over the assets of the subject company and whether a notation has been placed on the register of members of the company.

Orphan Trust Structure
In many financing transactions it is important to establish the SPV as a bankruptcy remote vehicle or 'orphan trust structure'.

The SPV is incorporated with limited objects in its memorandum of association. For example, to enter into only such transactions as are related to the purchase and lease of the aircraft. The SPV is a clean company with no operating history. In a typical BVI orphan trust structure, a purpose trust is established to hold the shares of the SPV. An offshore trust company acts as trustee and the director(s) of the SPV will also be provided by the offshore trust company.

Our own firm, for example, provides counsel on the establishment and operation of the SPV while our various affiliates provide registered office and registered agent services to the SPV, act as corporate director for the SPV and as trustee.

The SPV enters into the finance and leasing documents necessary to enable it to acquire the aircraft and lease it to the airline, as end user.

The SPV will limit its obligations both in amount and recourse to the value of the security granted by the SPV, namely the aircraft and its rights under the lease. In this way the lender is not deprived of any recourse against any significant asset.

Following payment of all obligations to the lender under the finance documents the trust property, namely the shares of the SPV, will be distributed as provided for in the trust deed and the trust terminates.

One of the main attractions of the orphan trust structure is that ownership of the
aircraft does not vest in the airline but with the SPV controlled by the trust company. Lenders, therefore, have no concerns in connection with the creditworthiness of the airline.

Vol. 7 Issue 9 of Aviation Finance