Cape Town discount for aircraft export credit financing transactions
Already since June 7, 2022, airlines and commercial participants of the aviation sector registered in Latvia in case of the purchase or lease of new or used aircraft or engines (financial or operating leasing), as well as the conversion of aircraft have been eligible for a reduction of 10% to the minimum premium rate when entering into export credit financing transactions supported by guarantee of foreign export credit agencies or by direct financing programs.
What arrangement can be considered as an export credit financing transaction?
An export credit financing transaction is an arrangement involving a governmental financial support, to help finance the acquisition of goods or services from national exporters, through (i) direct financing, (ii) guarantees, (iii) insurance, or (iv) interest rate support accorded to foreign buyers.
Export credit financing is carried out within the framework of a direct loan or guarantee (insurance) program adopted by the national export credit agency of a foreign counterparty. These foreign financiers minimize their own risk, to an extent practicable, with the support of their national export credit agency.
In contrast to a typical corporate loan, where financiers of an airline or of an investor assess, basically, only the standing of the borrower itself (an airline or an investor), the purpose of the export credit financing program is promoting the interests of the exporter (a foreign counterparty of the airline) and, more broadly, stimulating the economy of the foreign country concerned by encouraging exports. This allows obtaining more favorable conditions for the financing of the transaction as a whole.
If an airline seeks to attract external financing for modernization or expansion of its fleet, including due to implementation of environmental requirements in the context of rising compliance costs for aviation emission units, as well as for launching new business lines, export credit financing is an appropriate solution that complements the usual financing sources, mainly corporate loans issued by credit or finance institutions.
Export credit financing smoothly fits into almost any financing form in aviation. Namely, anything from the usual direct acquisition (purchase) or lease transaction of an aircraft when a credit institution loan is received to cover payment obligations, towards complex financial and capital market mechanisms when funding is provided by a range of investors in a public or private offering (for instance, through enhanced equipment trust certificates (EETC) or securitization instruments).
Export credit financing is particularly relevant now as standard credit institutions are bound to observe the increasing capital adequacy, financing ratios, and liquidity requirements under the Basel III/IV rules. This makes only individual regional or international credit institutions capable of undertaking aviation financing transactions. Moreover, credit institutions often automatically consider aviation related transactions as being very specific and of high exposure. The involvement of export credit agencies is important as it provides a ‘guarantor role’. For more details, see an article available on the Airfinance Journal platform, available to registered users.
Who can avail of the Cape Town Discount in export credit financing transactions?
Cape Town Discount for export financing credit transactions is available to:
- An airline registered in Latvia if it meets any of the following criteria:
- it holds a valid air transport (operating) licence issued by the Ministry of Transport and an aircraft operator's certificate or an authorization of high risk commercial specialised operations issued by the state agency ‘Civil Aviation Agency’ or
- it is an operator having submitted a declaration to the state agency ‘Civil Aviation Agency’ regarding commercial specialised operations or non-commercial operation of complex motor-powered aircraft.
- A natural or legal person habitually residing or established in Latvia who purchases or leases aircraft or engines for commercial purposes, including fur further resale or sublease.
- Foreign airlines or investors considering acquisition or leasing of aircraft or engines, or aircraft conversion processes through natural or legal persons habitually residing or registered in Latvia.
What is the scope of the transactions?
The following transactions are included:
- Acquisition or lease (financial or operating) of new or used aircraft with engines installed, meeting any of the following requirements:
- aeroplane type certified for the transport of at least 8 persons (including crew) or goods in excess of 2,750 kg;
- helicopter type certified for the transport of at least 5 persons (including crew) or goods in excess of 450 kg,
- Acquisition or lease (financial or operating) of a new or used engine which meets any of the following requirements:
- jet propulsion engines with a thrust of at least 1,750 lb or its equivalent;
- turbine and piston engines with a rated take-off shaft horsepower of at least 550 or its equivalent.
- Aircraft conversion process with a service value of at least USD 5,000,000.
What is the regulatory basis for aviation export credit financing transactions?
Aviation export credit transactions are mainly governed by the following laws:
- OECD Agreement on Officially Supported Export Credits, Annex III. Sector Understanding on Export Credits for Civil Aircraft (the ‘OECD ASU’);
- Regulation (EU) No 1233/2011 of the European Parliament and of the Council of 16 November 2011 on the application of certain guidelines in the field of officially supported export credits and repealing Council Decisions 2001/76/EC and 2001/77/EC;
- Latvian laws. Latvia has implemented additional mechanisms in the context of the Cape Town Convention and its Protocol on Matters Specific to Aircraft Equipment (the ‘Cape Town Convention’) listed in Annex I to Appendix II to the OECD ASU:
- Law On the Convention on International Interests in Mobile Equipment and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment;
- Law On Aviation, Articles 13 and 22.1;
- Cabinet of the Ministers Regulations dated April 1, 2021 No. 195 Regarding Submitting, Accepting, and Revoking IDERA and De-registration of Aircraft from the Register.
What are advantages from availability of the Cape Town Discount in export credit financing transactions?
Under the OECD ASU requirements, the relevant foreign export credit agency is set to receive a mandatory payment – a premium – for its provided support of any kind for the covered aircraft financing transaction. That premium for the transaction in question depends on the rating assigned to the respective airline or an investor by an internationally recognized credit rating agency (such as S&P, Moody's, Fitch, or Scope Ratings) in the context of senior unsecured credit obligations or liabilities. The prevailing minimum premium rates can be found on the official website of the OECD ASU.
Market participants in the Central and Eastern European aviation sector have often not been listed on stock exchanges or otherwise participated in public securities or investment platforms, and, accordingly, have not been, normally, assessed by such credit rating agencies. (In the confines of the European Economic Area, all assigned credit ratings to entities can be found on the European Rating Platform). This means that an airline or investor, when considering the export credit financing model, will need to apply for and obtain at least an indicative credit rating. It is a paid service.
The mandatory premium rate charged by export credit agencies must be no less than the minimum rate set under the OECD ASU rules, and in practice it frequently turns out to be a significant amount. The Cape Town Convention discount (10%, according to the OECD ASU rules) can often be estimated at several tens of thousands of euros. It should be noted that international aviation financing transactions are usually denominated in the US dollars (currency code USD).
This aspect, valued in the context of the involvement of a foreign export credit agency as a “foreign incentive” for the consummation of the transaction, is a financially significant benefit compared to a situation where the transaction would not have any funding from credit institutions or investors at all in absence of the guarantee or insurance provided by the relevant export credit agency.
What are the main preconditions for export credit financing transactions in the context of the Cape Town Convention discount?
- The intended transaction must relate to an aircraft or engine already registered (or intended, under the parties’ agreement, to be duly registered) on the international registry of aircraft established under the rules of the Cape Town Convention (the International Registry).
- The maximum allowable financing endorsed by the export credit agency shall be 85% of the value of the aircraft or service (including, the operating lease). The remaining funding (15%) comes either from own cash of the airline or investor, or through tapping into the usual path of debt or capital market instruments.
- In practice, export credit agencies engage in financing only those transactions in which the object of the transaction contains a minimum predefined amount of the so-called national content. If the object of the transaction is the purchase of an aircraft (including, through the commonplace financial lease mechanism), the exact percentage manufactured (or value-added or compiled) in the jurisdiction concerned is determined to assess if such amount reaches the minimum required to permit the national export credit agency to provide support. In practice, it also happens that export credit agencies across several countries provide a ‘syndicated’ support, each according to its permissible maximum size. On the other hand, if the transaction relates to a service (including, the operating lease or aircraft conversion), the situation is usually easy to assess: the export credit agency will normally consider that the service provided by a company based in its country complies with the export credit support programs of that country.
How does this operate in practice?
If the airline or investor itself is the originator of the idea to modernize or supplement the fleet, in practice they also are the ones addressing and indicating to the potential partners (aircraft manufacturers, leasing companies, conversion service providers, etc.) an interest in recoursing to the export credit financing support in the context of the Cape Town Convention discount.
Foreign counterparties already have some cooperation arrangements in place with their country's export credit agency and even individual financiers.
In the absence of such prior cooperation with foreign counterparties, the originator shall itself identify potential (most likely foreign) financiers who would be interested in providing financing for the transaction in full or in part if appropriate support from a foreign export credit agency were to be provided for the anticipated transaction.
Legal advice on aviation credit financing transactions is available from any of the below mentioned law firms:
COBALT LAW FIRM
Marijas iela 13 k-2, Rīga, LV-1050, Latvija
Partner Edgars Lodziņš
Mobile: + 371 29 132 397
Senior Associate Ivo Cimdiņš
Mobile: +371 26 545 554
Associate Kristīne Rāviņa
Mobile: +371 26 114 253
LOZE & PARTNERI LAW FIRM
Kr.Valdemāra 33-5, Rīga, LV-1010, Latvija
Manging Partner Jānis Loze
Tel.: +371 67 744 444
Attorney at Law Kristaps Loze
Tel.: +371 67 744 444
SORAINEN LAW FIRM
Kr. Valdemāra iela 21, LV-1010 Rīga, Latvija
Partner: Rūdolfs Eņģelis
Tel.: +371 67 365 000
Mobile: +371 29 454 150
Senior Associate Inese Heinacka
Tel.: +371 67 365 000
Mobile: +371 29 710 303
SUCCESS410.COM Specialized Advisory Services
Elizabetes iela 63 - 2, Rīga, LV-1050, Latvija
Managing Partner Ivars Mekons
Mobile: +371 26 184 400