Spanish aviation finance market
27/10/2006 Airfinance Journal
Great attention has recently been paid to the Spanish aviation market, particularly since 15 September 2005 when Iberia, the Spanish flag carrier, closed its first Spanish Operating Lease (SOL) deal. When we consider that market players now have an alternative to the traditional Japanese Operating Leases and German Leverage Leases, indeed a new era has begun, reinforcing Spain as a friendly venue for myriad asset-finance schemes, particularly for aircraft and ships. In fact, the SOL is being exported to other assets and how the bankers appetite for new deals is increasingly growing. Is the SOL only an appetizer, a Spanish tapa?
New strategic movements show a consolidation of the Spanish market as a niche capable of growing much further as a result of its still largely unexploited low-cost possibilities. Both Easy Jet and Ryanair have very recently obtained from the public business entity “Spanish Airports and Air Navigation” (Aeropuertos Españoles y Navegación Aérea - AENA) the slots necessary to operate domestic connections from Madrid-Barajas, taking advantage of the significant expansion of the airport’s capacity after the recent inauguration of Terminal Four and new runways.
Indeed the Spanish market is changing and growing. We will broadly review certain of its features from a general business perspective, spanning subjects such as the SOL, security package in air finance transactions, bankruptcy law, international protection of asset-based financing and leasing transactions, airport finance, and repossession issues, among others, with a view to giving the reader an overall picture of the Spanish aviation legal environment.
1. The SOL
Traditionally, as in many countries where aviation is (or has been) a significant feature in the national economy, Spain has endeavoured to support its main national air carrier. Nevertheless, Iberia has traditionally used (and continues to use) the available international aviation finance tools mentioned above. It is well recognized that tax-related issues impact asset finance structures and their returns. In this regard, a new step has been recently achieved by the air carrier, by using the tax-based incentives available for lease arrangements in its domestic market, pursuant to the provisions of the Spanish Companies Income Tax Law.
In essence, under the SOL structure, on its delivery date, a leasing company acquires the aircraft ordered by the airline under normal commercial terms pursuant to a sale and purchase contract entered into with the manufacturer (Airbus, in the case of Iberia). The leasing company will in turn lease it, under a financial leasing agreement, to a third party (financial lessee), which will then enter into an operating lease agreement (which may or may not have a purchase option) with the airline. The use of a finance lease agreement allows the financial lessee to benefit from an accelerated tax depreciation of the leased asset and to benefit from the financial effect of a deferral of the Spanish income tax (set at 35%, although it is to be reduced progressively to 30% in the coming years). In this case, the financial lessee may transfer some of the financial advantage to the airline as lower rental payments under the operating lease or as a reduced exercise price of the purchase option held by the airline, for example.
In essence, the Spanish structure described may represent a suitable alternative to other structured finance products offered internationally and may be suitable for forthcoming projects worldwide. The main features of the SOL must be further explored in the framework of the acquisition of new aircraft. This should constitute a first approach to the product, an approach that will need to be adapted and developed further as a function of the airlines’ businesses, account and tax planning and considering carefully, among others, issues such as residual value risk, ownership and registration of the aircraft.
2. Repossession issues
Under Spanish law, repossession of aircraft financed either through (i) contracts of sale in instalments with reservation of title (contratos de venta a plazos con reserve de dominio) or (ii) finance lease agreements, provided the legal compulsory requirements are met, is admitted.
Other than under those two scenarios, repossession by the owner may not be simple in Spain. Nonetheless, it is always possible to adopt preventive measures in relation to an aircraft (e.g., deposit). This being said, in connection with the immobilisation of the asset, Spain is a party to the Convention for the Unification of Certain Rules Relating to the Precautionary Attachment of Aircraft, signed at Rome on 29 May 1933 which, as it is well known, limits the possibilities of adopting such a measure. In addition, section 132 of the Spanish Law of Air Navigation (Ley de Navegación Aérea) prohibits the immobilisation of aircrafts performing a public service. In such cases, the preventive measure is in fact replaced by a recording of a seizure in the relevant Registry, whilst the aircraft continues to operate.
It also has to be noted that the recognition in Spain of precautionary measures adopted in relation to an aircraft by a court of Member State of the European Union is subject to the provisions of the Council Regulation (EC) No 44/2001, of 22 December 2000, on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.
3. Cape Town Convention and recognition of rights in aircraft
Spain neither is a party to the Cape Town Convention on International Interests in Mobile Equipment nor to the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment, dated 16 November 2001 (the Protocol is in force since 1 March 2006). It is not foreseeable that Spain will sign or ratify any of said two international instruments in the short term. In this respect, it should also be borne in mind that Spain is also not a party to the Convention on the International Recognition of Rights in Aircraft signed at Geneva on 19 June 1948.
4. A reference to Spanish bankruptcy law
First, it should be borne in mind that, generally, the usual security package present in most aircraft finance structures internationally can be implemented in Spanish-based schemes. We will now briefly refer to the new insolvency act that is of interest to airlines financiers and which gives a higher degree of comfort to the holders of Spanish-based security packages on aircraft.
As of September 1, 2004, a new law on insolvency (the “Ley Concursal”) is in force in Spain. European Union legislation on bankruptcy (Council Regulation (EC) No. 1346/2000 of 129 May 2000 on insolvency) also applies in Spain.
This legislation has endorsed and somewhat enlarged the privilege traditionally enjoyed by creditors holders of a right in rem (e.g., chattel mortgages) over an aircraft in an insolvency scenario. Mortgagees will receive special treatment because, regardless of the insolvency/bankruptcy of the mortgagor, they will not be:
i. prevented from foreclosing their chattel mortgage by bringing their action in proceedings separate from the debtor’s universal insolvency proceedings; or
ii. compelled to stay the foreclosure proceedings at any stage as opposed to holders of rights in rem over other kind of debtor’s assets.
Under Spanish law, a chattel mortgage does not vest a proprietary interest on the asset to the mortgagee but rather the right to cause the sale of the asset and be paid out of the sale proceeds.
5. Applicable law to contractual obligations and resolution of disputes
Closely linked to the security package is the law applicable to the structure documents. From an international perspective, it should be noted that in Spain the 1980 Rome Convention on the law applicable to contractual obligations is also applicable. This legal instrument and the case law of the Court of Justice of the European Communities, the supreme body responsible for its interpretation, provides certainty for international players when it comes to determining the applicable law for a certain contractual relationship.
Moreover, as mentioned above, the Council Regulation (EC) No. 44/2001 on jurisdiction and recognition and enforcement of judgements in civil and commercial matters applies in Spain. This Council Regulation, together with the 1968 Brussels Convention and the 1988 Lugano Convention guarantees: (i) uniformity in establishing the competent court to hear and decide a potential dispute, and (ii) the recognition and enforcement of decisions handed down by Spanish courts in all other EC and EFTA States and vice-versa. When it comes to arbitration, instead of jurisdiction, as the chosen method to solve a dispute, it should be noted that Spain is also a contracting state of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958).
6. Airport infrastructure
The development of airport infrastructure is inevitably linked to the forecasts set by the Governing Plans (Planes Directores) approved by each airport of general interest and, in any event, political measures connected to infrastructure, as designed by the State Administration and which are further reflected in the Infrastructure and Transport Strategic Planning 2005-2020 (PEIT, under its Spanish acronym) and its developing instrument, the Air Transport Sector Planning.
In the financing of such infrastructure we should not forget the recently approved Community Guidelines on Financing of Airports and Start-up Aid to Airlines Departing from Regional Airports, following the Commission Decision 2004/393/EC of 12 February 2004 concerning advantages granted by the Walloon Region and Brussels South Charleroi Airport to the airline Ryanair in connection with its establishment at Charleroi and the Decision of 20 October 2004 concerning the aid scheme implemented by the Kingdom of Spain for the airline Intermediación Aérea, S.L. (Intermed).
According to the PEIT, the forecasted investments relating to the State airport network shall amount to EUR 15,700 million. This sum would be partially (up to 2.2%) financed by the State budget and the remaining through non-budgetary sources. In this latter case, the PEIT suggests the need for AENA to become self-financed, either through the investment of the profits obtained by the operation of the airports (in essence, the income deriving from the fees paid by airport users for using the infrastructure) or through external financing. Notwithstanding this, the high level of AENA’s debt is also borne in mind. This results in that this latter source of financing will somehow need to be limited in the coming years.
We may thus forecast in Spain, around year 2020, an airport network composed of both public (airports owned by the central state administration or by the regional administrations) and privately owned airports. Spain is thereby following the trail set by the White Paper submitted by the Commission on 12 September 2001, European Transport Policy for 2010: Time to Decide.
We have focused on a number of elements specific to aircraft finance structures and aviation and airport finance generally implemented in Spain. In light of the above, most of the well-used patterns and elements of international finance will fit, or will find their way, within a Spanish-structured finance scheme. This is so regardless of whether we face a traditional corporate finance or an asset or project-based finance deal. The fact is that any such Spanish finance transaction will not differ to an important extent (e.g., arrangement, security package, among others), if it does at all, from any other scheme as such schemes may be implemented in any other developed jurisdiction.
In essence, we believe that Spain offers a secure, flexible and trustworthy environment suitable for developing business opportunities. There are indeed many aspects of the domestic market to be explored and further developed, such as, why not, Islamic finance deals that have become more and more fashionable in the industry but that have mainly been implemented following UK law principles.