Gerard Melling

M&T Aviation USA Inc, Los Angeles

g_melling@tombo.com

Asset financing the transportation industry – Wednesday 6 October 2021

Session Co-Chairs

Gerard Melling M&T Aviation USA Inc, Los Angeles

Sybille Rexer Arnecke Sibeth Dabelstein, Hamburg

Speakers

Dr Donal Hanley McGill University, Montreal

Ajay Kumar RNC Legal, Delhi

John Wessel Reederei Nord, Hamburg Philipp Wünschmann Berenberg Bank, Hamburg

The panel was introduced by Dr Marco Remiorz, Arnecke Sibeth Dabelstein (ASD), Chair of the Maritime and Transport Law Committee, and Serap Zuvin of Cakmak, Chair of the Aviation Law Committee (ALC). Sybille Rexer of ASD was the principal moderator, assisted by Gerard Melling, Treasurer of the ALC. Ayşe Akcan of Turkish Airlines was meant to be a panellist, but had a serious accident and was unable to attend – we are hoping for a speedy recovery.

Introduction

Shipping went through major restructuring, starting in 2008, with the global financial crisis (GFC)/'valley of pain', with steep downturns in production, values and financing, so the effects of Covid-19 have been limited and the trend is up. Aviation recovered quickly from 9/11 and GFC, but Covid-19 has had continuing strong effects on the sector. We heard about pre-delivery payments (PDPs) in India for aviation deliveries, and environmental, social and governance (ESG) is a big topic for the future.

Shipping

The panel commenced with two commercial speakers – Philipp Wünschmann of Berenberg Bank, Hamburg, a 430-year-old independent bank, and John Wessel of Reederei Nord, Hamburg, a shipowner, operator and manager – who provided a great overview of the recent history of ship finance. Wünschmann described the three main types of ships which account for 85 per cent of world trade: bulkers, containers and tankers.The shipping industry was in a boom bonanza, with huge order books, before the GFC:

• Deliveries and values plunged to an historic low: a Panamax vessel valued at $80m in 2008 is now worth only $25m.
• Chinese shipbuilders were reduced from 380 to 71, and now the Chinese Government controls their order book.
• Two-thirds of finance was provided by European banks, but many withdrew and closed their departments, so financing capacity was reduced by 50 per cent. Kommanditgesellschaft (KG) and Norwegian highly leveraged funds left the market, leaving only large players.
• For containers, 93 per cent of the fleet is now consolidated in three operators, with state interests.
• For big owners with acceptable balance sheets, financing is still offered by bigger international banks, while the next layer of Tier 2 and 3 owners needs to access asset finance-based finance offered by a smaller number of international and regional banks at higher credit margins. Asian leasing that emerged from the South Korean/Chinese/Japanese builders – smaller shipowners with 40–60 per cent of vessels – with fleets of 10–20, have more limited access to finance, with 15–20 finance providers, however, with rates lowering from London Inter-Bank Offered Rate (LIBOR) + eight per cent to LIBOR + five per cent

Wessel described the immediate effect of Covid-19, with containers misplaced that had to be collected: government stimulus packages caused trade to revive, leading to congestion. A container that previously took 42 days to get from Asia to Los Angeles now takes 73 days.

Aircraft

Ajay Kumar opened the batting for aviation. He has his own practice and is the Conference Quality Officer of the ALC. His topic was India and PDPs. India is one of the top five aviation markets, with about 800 aircraft, but a requirement of 2,000 in the next 20 years. PDPs account for 30 per cent of the price. Indian airlines have placed huge orders for aircraft, such as Indigo, which ordered 300 Airbus aircraft. Indian banks were burned by the Kingfisher Airlines meltdown, so operators have looked outside through external commercial borrowing, which is subject to foreign exchange regulations. Kumar mentioned Spicejet, which was sued by De Havilland Canada for its failure to make pre-delivery payments for 14 Q-400 aircraft and has a default judgment for $43m against it in England that is now before the Indian courts.

Dr Donal Hanley is an adjunct professor with the Institute of Air and Space Law at McGill University, an IATA instructor and author, and also works with leasing companies.

He has been through three crises: 9/11, GFC and Covid-19 – 9/11 and GFC were quick recoveries, but the Covid-19 crisis has been much deeper for aviation. Long haul will take longer than short haul to recover because the assets are less mobile.

Hanley noted that 50 per cent of the commercial aircraft fleet is now leased and an additional 25 per cent is financed, so 75 per cent is with a separate interested party. Leasing comprises operating leases ('wet'/aircraft crew maintenance insurance (ACMI)), dry leases and finance leasing:

• There has been a consolidation of lessors recently, with large speculative orders and portfolio acquisitions/takeovers.
• Their profit comes from trading rather than rent, which is a possible friction with airlines that are not necessarily dealing with the original lessor relationship, and the use of managed funds further dilutes the relationship: would they be as cooperative regarding helping lessees in crisis? However, as it happened, there was no choice as there was nowhere for aircraft to go outside distressed lessees. Managed funds could see a pushback from lessees.
• Lessee relief saw rent holidays, relief/reductions and power by the hour (PBH). Maintenance reserves, where applicable, were sometimes suspended and shifted to credit risk, letting operators concentrate on rent payments.

Hanley spoke about non-binding restructurings (NBRs), on which there has been a lot of discussion, particularly for the new English schemes of arrangement:

• NBRs could bind dissenting creditors.
• Unlike in shipping, the Cape Town Convention (CTC) has applied to aircraft for the last 20 years. The question had arisen whether NBRs cut across creditors' rights, which would contravene the CTC.
• NBRs could be treated as CTC insolvency proceedings as the CTC included 'other proceedings for the purposes of restructuring' so that creditors' rights prevail. Additionally, creditors' rights survived in that the remedy of return/giving possession would continue (although in an Australian case, 'giving possession' was treated as simply letting the creditor pick up the plane, without further obligations of the lessee).

Question and answer (Q&A) topics

• Differences in lease terms: ships could be five years – though Wessel sees two years to one month. Aviation leases are 5–12 years: in India, operating leases tend to be six years and finance leases tend to be 12 years.
• ESG: this is the next headwind:
  • Aviation has green pressures for tax and limiting flights, clean fuels to consider and new aircraft that will be subject to conservative aircraft financiers/lessors who have lived with stable models.
  • The shipping industry had adopted fuel reduction/slower times/sulphur reduction, but the balance has shifted to non-carbon fuels. The major shipping banks adopted the Poseidon principles for financing environmental concerns, but on social and governance, it's more difficult: some crews are stuck on ships for two years, and many owners are in offshore jurisdictions, like Panama, which traditionally offer 'ship registration', but are under increasing pressure from Western regulators, mainly for anti-money laundering (AML) compliance and tax evasion reasons, making acceptance outside the immediate industry more difficult.

We could have gone on for much longer, but time ran out and an excellent webinar drew to a close.

IBA members can listen to the recording here – to request the passcode, please email webinars@int-bar.org. It is very engaging and well worth an hour.