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The Commercial Aircraft Finance Handbook
Ronald Scheinberg
Deal Types, Structures and Enhancements
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Ronald Scheinberg
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PART 3
DEAL TYPES, STRUCTURES AND

ENHANCEMENTS
Introduction: basic transaction types

Aircraft Finance transactions come in many shapes and sizes but, fundamentally,
they are either a lease financing or a mortgage financing (or some combination
thereof). These two fundamental prototypes can be summarized as follows.
Lease Financing
The airline/operator of an Aircraft Asset (lessee) does not own the asset but borrows
it from a third party who does own it (lessor) for a period of time (lease term) during
which the lessee will have the right to possession and use of such asset in exchange
for rent, and at the end of the lease term the airline/operator must return that asset
to the lessor. While leases may be Operating Leases or Finance Leases (which are
disguised Mortgage Financings), for the purposes of this book we are treating a
‘Lease Financing’ as a financing with the characteristics of an Operating Lease, where
the lessor is treated as the true owner of the Aircraft Asset; that is, see
‘Finance/Capital Lease’, for an extensive discussion of the Finance Lease versus
Operating Lease criteria determinants and see Exhibit 3.1 for a schematic depiction
of a Lease Financing.1
Mortgage Financing
The owner of an Aircraft Asset (whether a lessor or airline/operator) borrows money
from lenders to finance or refinance the purchase price (or value) of that asset and
the lenders receive a Security Interest in that asset as collateral to secure repayment
of the related loan. A Mortgage Financing includes a Finance Lease where the lessor
is treated, not as an owner, but rather as a mortgagee. See Exhibit 3.2 for a
schematic depiction of a Mortgage Financing.
The variations on these two prototypes keep Aircraft Financiers rather busy.
Financings may involve multiple jurisdictions to take advantage of different tax
regimes; they may involve public or privately placed securities to achieve the best
pricing; they may be placed in the capital markets or the commercial bank/loan
market; they may involve a single Aircraft Asset, or many of them; and they may
be subject to airline or lessor risk or have the support of an Export Credit Agency
(ECA).
Ultimately, the structure choice of Lease Financing or Mortgage Financing is
determined by the operator in its ‘lease versus own’ analysis. The following criteria
will have a hand in the operator’s decision.
19
DEAL TYPES, STRUCTURES & ENHANCEMENTS
Operang lessor
SPV/lessor Lease $ rentals Airline
Lease
Aircra
Exhibit 3.1 Lease Financing

Source: Author’s own
Benefits of mortgage
A
Waterfall
Security trustee/agent Loan distribuons $ B Lenders
Debt service $
Mortgage Loan $ (day 1)
Airline
(borrower)
Aircra
Exhibit 3.2 Mortgage Financing

20
• Operational flexibility.
• Cost:
º lease rates versus debt rates; and
º ability to take advantage of tax benefits.
• Residual risk:
º long-term view of asset value appreciation;
º risk appetite;
º view on emergence of new aircraft models and technology;
º view on current and future aircraft needs (‘lift’) and gaps (taking into
consideration its own order book);2
º future maintenance costs;
º perceived future availability of asset model from other sources; and
º Original Equipment Manufacturers (OEM) order book for future
deliveries generally.
• Corporate policy:
º keep fleet ‘young’;3
º interest in de-leveraging (in a Lease Financing, the lessor would be
the one to bear the burden of debt financing); and
º accounting policy to minimize on-balance sheet debt.4
• Technological advancements:
º cheaper maintenance for newer models;
º better fuel burn for newer models; and
º ability to retrofit these advancements on older models (for example,
Winglets).
• Access to capital:
º debt markets;
º equity markets; and
º lessor markets.
• Tax:
º ability to take advantage of tax benefits available to an owner (for
example, depreciation).
In this Part of the Handbook, the various structures used to finance Aircraft will
be reviewed as well as different features that may be appended onto these structures.
Placement
Prior to delving into the various transaction structures, a word should be said about
the placement of Aircraft Finance transactions in the financial markets. There are
two considerations here: (i) the identity of the purchasers of the financing; and (ii)
the nature of the placement itself.
The Purchaser
While the previous discussion largely revolved around the needs of the airline/
operator, the other side to these matters is making sure the needs of the purchaser
21
of the Aircraft Finance security are similarly satisfied. These purchasers can be broken
down into two groupings:
1 the third party equity, being the lessor/owner in a transaction; and

2 the debt.
EQUITY
In lease financings, there will be an equity component. The purchaser of the metal,
the person who would become the lessor/owner of the Aircraft Asset, is driven by
its interest in the operating business of leasing and obtaining: (i) residual returns;
(ii) current cash flow (rent); and/or (iii) tax benefits. Its economic return require-
ments based on these three criteria must be satisfied, taking into account the
following (non-comprehensive) set of risks associated with any Aircraft Finance
transaction (‘Risk Factors’).
• Lessee performance (and other credit support providers) (credit risk).

• Aircraft asset value stability (technological developments, obsolescence, life
cycle, secondary markets, and so on) (residual value).
• Jurisdictional issues (ability to enforce/repossess – country risk) (legal).
• Airline industry performance (local and international; terrorism, SARS, and
so on).
• Economy performance (local and international).
• Airline regulatory developments (airworthiness directives (ADs), noise rules
and so on).
• Fuel costs.
• Change-of-law/accounting rules.
Of course, the longer the lease term, the greater the chance that any of these
Risk Factors might surface into a problem, thus the tenor of a transaction will have
a tremendous bearing on risk assessment (and, accordingly, return requirements).
Investors in Aircraft Asset equity include:
• traditional operating leasing companies (AerCap, GECAS, ACG, and so

on);
• specialized operating leasing companies (Vx, Apollo, Compass Capital, and
so on);
• tax-play investors (for example, MetLife);
• hedge and private equity funds (Strategic Value Partners, Fortress, Wayzata,
and so on);
• finance companies (for example, Siemens Credit);
• banks (for example, SMBC); and
• pension plans.
The longer term trends show Aircraft leasing to be on the rise. Approximately
40 percent of new Aircraft deliveries are funded by Operating Lease Finance. The
investor pool is constantly expanding as investors from all of the sectors described
22
above are looking for the ‘next big opportunity’, with Aircraft ownership and leasing
an increasingly visible opportunity. The historically strong performance of

commercial aircraft investments should continue to attract sufficient equity (and
any necessary leverage).5
DEBT
In Back-leveraged Lease financings and in mortgage financings there is a requirement
for debt. Providers of debt have more simple criteria than equity for assessing their
return which is primarily covered by: (i) up-front fees; and (ii) interest earnings.
The economic return requirements of debt providers will necessarily factor in the
Risk Factors spelt out above and, similarly, the tenor of a transaction will have a
bearing on the risk assessments and return requirements. Investors in Aircraft Asset
debt components include:
• commercial banks;
• non-bank lenders: insurance companies, finance companies, pension plans
and funds (for example, Fidelity);
• public debt/capital markets;
• ECAs (directly or through guaranteed-debt); and
• OEMs.
The interest of these equity and debt participants in Aircraft Finance rise and
fall with market developments and cycles. Boeing Capital, in their annual ‘Current
Aircraft Finance Market Outlook, 2013–2017’ provides a useful snapshot of the
current trend lines for the various Aircraft Finance funding sources; see
www.boeingcapital.com/cafmo/.
Distribution; securities laws

While placement of the equity component is typically a straightforward matter of
private contract law, the distribution of the debt component will require an
examination of the securities laws. In the U.S., the securities laws (primarily the
Securities Act of 1933, as amended (the ‘Securities Act’)) covers the offer and sale
of any, inter alia, debt security, and, absent an exemption, requires the preparation
and filing with the SEC of a registration statement in respect thereof (which is a
rather costly undertaking that requires both public disclosure and ongoing
compliance obligations) for any offer and sale of such security. Here is a list of the
primary debt placement options and their relationship to the Securities Act.
• Bank financing – bank loans are not a security covered by the Securities
Act, so may be placed without a registration statement.
• Rule 144A Financing – Rule 144A is a rule of the SEC that allows an
exemption to registration for resales of debt securities to institutional
investors previously acquired in a private placement. Such institutional
investors must be Qualified Institutional Buyers (defined below). Holders
and prospective purchasers of Rule 144A-placed securities must have the
right to obtain from the issuer, upon request, certain bank information about
23
the issuer and the securities. For this reason, in a Rule 144A transaction,
there is often drafted an offering memo describing the transaction.

• Private placement – under Section 4(a)(2) of the Securities Act, the
obligation to register the offer and sale of securities does not apply to
transactions by an issuer not involving a public offering. The SEC adopted
Regulation D under the Securities Act to provide guidance as to what would
constitute a private placement. Regulation D has varying criteria for
exemption depending on the size of the offering. Rule 506 of Regulation D
under the Securities Act is the particular private placement exemption that
most Aircraft-secured debt securities would utilize because there is no limit
on the dollar amount that may be raised under Rule 506. To have a valid
private placement under Rule 506: (i) investors must be Accredited Investors
(defined below); and (ii) neither the issuer nor any person acting on behalf
of the fund may offer or sell interests in the fund by any form of general
solicitation or general advertising.
• Government-guaranteed securities – Section 3(a)(2) of the Securities Act
exempts securities guaranteed by the U.S. Insofar as U.S. Ex-Im-guaranteed
transactions (see ‘ECA Financings’) have the full faith and credit of the
U.S. standing as guarantor,6 the related securities sold to investors are not
subject to the registration requirements of the Securities Act.
• Registered offering – while, as noted above, there are significant expenses
and ongoing compliance obligations for registered offerings, investors
provide to issuers pricing benefits if a security is registered, since the
registration significantly enhances the liquidity of the security (as offerings
and sales of debt securities in secondary market trades are similarly subject
to securities laws restrictions). Issuers of debt securities who are already
‘reporting companies’ under the Securities and Exchange Act of 1934, as
amended (for example, companies that are publicly traded and which,
accordingly, regularly make filings with the SEC) have already in place the
mechanisms for their initial disclosure and ongoing compliance require-
ments, so many of these issuers will take the extra steps to have their debt
securities registered. For this reason, many of the Enhanced Equipment
Trust Certificates (EETCs) issued by U.S. publicly-traded airlines are
registered.
The placement of Aircraft Asset-backed securities in the financial markets is not

without aspects of financial engineering. Investment bankers and others tasked with
this placement slice and dice the securities to minimize yields by tranching the debt
so as to appeal to different investors’ risk, yield and tenor appetite. It would not be
unusual to see, for example, an EETC security structured as follows:
• Senior A Tranches:
º A-1 – amortizing over 12 years;
º A-2 – bullet maturity in year 7; and
• Junior B Tranche.
24
Each Tranche, then, is targeted to the needs of particular investors, thus expanding
the market and optimizing yields for the issuer.
Balance of supply and demand

In the light of the foregoing review, we see that the need for Aircraft finance is,
practically speaking, driven by the ‘lift’ needs of the airline/operators. Their need
for Aircraft Assets drives the need to find the means for financing these expensive
assets. The need for financing – the demand side of the equation – must, then, be
satisfied by a supply of financing sources. Whether the supply and demand are in
balance – whether there is enough product to supply the needs of Aircraft Financiers,
and whether there is enough available financing to meet the needs of the airlines
(and lessors) – is not always assured. On the one hand, there are times when Aircraft
Financiers are bemoaning the fact that there are not enough deals out there; airlines
and lessors may be paying (gasp!) cash7 or turning to the capital markets for funding.
On the other hand, there may be an overall lack of liquidity in the markets due to
market developments, much as there was in 2008, 2009 and 2010 following the
Lehman Brothers crash and resulting financial tailspin. In the aftermath of that
market crash, a number of major international banks disbanded their aircraft finance
teams and left the sector while other banks went on a lending ‘hiatus’ or had vastly
reduced lending budgets. This phenomenon was the result of a number of factors:
• banks were looking to preserve capital, so as to minimize the addition of

further liabilities at a time when their balance sheets are already rather
stressed;
• banks were being cajoled, or even forced, by their new taskmasters and
owners (that is, national and state governments) to redirect their available
liquidity to local businesses and industries; and
• banks were having difficulty accessing capital with which to make loans in
the light of restrictive credit exposure limitations imposed by their funding
counterparties.8
The withdrawal of bank liquidity in the aircraft finance sector in the aftermath
of the bank liquidity crisis led to much discussion as to whether there would be a
‘Funding Gap’; that is, will there be enough available funding sources to finance
new deliveries (as well as to refinance those aircraft the financings of which mature)?9
The bottom line to the ‘funding gap’ debate is usually the question as to what degree
the ECAs and the manufacturers10 will step up to fill the gap so as to avoid, for new
deliveries, the prospect of whitetails in the desert. In fact, in the aftermath of the
2009 funding crisis, the ECAs and the remaining market participants stepped up
and no Funding Gap materialized. ECAs fill funding gaps in one of two ways. First,
they can support with bank guarantees an increasing number of aircraft exports so
as to tap the pool of ECA banks (which seem to have faced a less severe liquidity
cutback than banks that are asset-based lenders). Second, some of the ECAs can
issue loans on a direct basis if ECA banks are not willing to step up to the plate at
competitive pricing (or at all). Importantly, the ECA financings can only support
25
exports. So, due to that fact and agreements that exist among the ECAs, ECA
financing is not available for purchasers/users of commercial aircraft located in

the U.S., France, Germany, Spain or the UK (see Part 7, ‘Aircraft Sector
Understanding’). This lack of availability of ECA financing partially explains why
airlines in these jurisdictions are more apt to turn to the capital markets.
Prospects
In the light of the foregoing, then, what are the industry prospects for these various
debt funding sources?
ECA Financings
As discussed in ‘Export Credit Agency (ECA) Financing’, the ECA-guaranteed loan
product remains an important source of Aircraft Financing, covering some 23
percent of new Aircraft Financings. The increasing usage of the capital markets to
fund these (primarily U.S. Ex-Im) financings for both airlines and lessors. However,
with the Aircraft Sector Understanding (ASU) rules requiring ECA financings to
more closely approximate private market pricing, there will likely be a tail-off of
usage for this financing source.
Bank Financings
With a number of years now having passed since the bank liquidity crisis of
2008–2009, the commercial bank market has become increasingly robust in appetite.
While a number of European banks (especially German landesbanks) have per-
manently exited the market, the remaining European (primarily French and German)
banks and the U.S. banks are being joined by new (or returning) market entrants
from commercial banks in Japan, Australia, the Middle East and (in the case of
financing Chinese airlines) China. Commercial banks currently fund approximately
28 percent of new Aircraft deliveries.11
Capital Markets
The prognosis for continued availability of Aircraft Financing in the capital markets
is similarly positive. The EETC market continues to be strong, and that market’s
liquidity and improving pricing remains an important feature. In addition to airlines
(who are accessing the capital markets with EETCs), lessors should continue to
evolve their use of the capital markets through Collateralized Lease Obligations
(CLO) type structures. The expansion of lessor penetration into the capital markets
will need to coincide with an evolution of the credit rating agencies’ understanding
of the aircraft leasing business and the development of rational and consistent rating
criteria for aircraft lessors. Rating agencies also have a role in introducing non-U.S.
airlines to the efficiencies of capital markets financing and shaping the market
for international EETCs relying on the Cape Town Convention.12 While the U.S.
capital markets are expected to continue to be the primary market for the origination
and syndication of aircraft public debt, regional capital markets may start to play
a growing role. The capital markets fund approximately 14 percent of new Aircraft
deliveries.13
26
Non-bank Financing
Non-bank debt investors in Aircraft Finance are most prevalent in the purchasing
of capital markets products. However, they are increasingly looking at this sector
on a private basis for improved yields and palatable risk levels. This investor pool
is constantly expanding, with Aircraft Finance investing an increasingly visible
opportunity. The historically strong performance of commercial aircraft investments
should continue to attract new investors to this sector, especially in the secondary
markets (post-delivery) and with used14 Aircraft (which will provide stronger yields).
Original Equipment Manufacturers

OEM financing support has not played a significant role in recent years, although
many purchasers do require OEMs to provide ‘back-stop’ financing for new order
deliveries. This means that the OEM will agree to finance its Aircraft on delivery
on specified conditions if the purchaser is not able to source financing on its own
or is not able to finance the Aircraft at desired commercial terms.15
Secondary market trading

The conversation on placement of Aircraft Asset-backed securities would not be
complete without saying a word about secondary market trading. Trading these
securities is subject to the securities laws rules, so, absent a registered security, one
of the exemptions touched on above would need to be utilized. The trading of these
securities has historically been rather light following initial placement, since the
investors are usually making their initial acquisitions to fill a need in their portfolios.
However, if there are (usually bad) market developments, there is often a rush to
the exits, since many investors have internal policies on the holding of distressed
securities. The obvious example of this is when a U.S. airline issuer enters
bankruptcy. At the early stages of a bankruptcy, when there is tremendous
uncertainty about the ultimate exit or exit strategy for the airline, these debt securities
may sell at a deep discount. Hedge funds and other investors with a high risk
tolerance (and a (hopefully) savvy market view) often snap up these securities at
these times, looking to maximize value once the airline’s exit strategy settles down.
As well, these investors may buy the securities: (i) to negotiate with the debtor Section
1110(b) agreements (see Part 8, ‘Section 1110’) so as to restructure a transaction;
(ii) to cash in on the Deficiency Claim aspects on these securities as the market
stabilizes;16 and (iii) to acquire Aircraft Assets on the cheap.
The buyer of these distressed securities may, accordingly, end up with three items
of value:17
• a restructured lease with the debtor (with associated rent cash flow);
• deficiency claims; and
• the residual value of an Aircraft Asset at its lease termination.
Each of these items is subject to monetization in different ways: the Leases can
be backleveraged or sold; the Deficiency Claims can be traded; and the Aircraft
Assets can be sold on a current or forward basis. Mind you, the ability to be in a
27
position to so monetize these assets may require Foreclosure (discussed in detail

under Part 8, ‘Foreclosure’) and the taking of other enforcement action.
U.S. dollar supremacy

Aircraft Finance transactions are almost universally done in U.S. dollars. The
primary reason for this is that Aircraft Assets are priced and traded exclusively in
U.S. dollars. With transactions priced in this fashion: (i) airlines which operate in
non-U.S. dollar environments (and whose revenue is earned in other than U.S.
dollars) need to take into consideration currency risks on U.S. dollar-denominated
liabilities such as leases and mortgage financings;18 and (ii) financiers who would
normally fund themselves in non-U.S. dollars must likely either hedge their exposure
to U.S. dollar-denominated assets or obtain funding from U.S. dollar sources.19
Repossession risks
Finally, a word about repossession risks. Aircraft Finance is necessarily a discussion
about asset-based financing where the fact that there is a valuable asset standing
behind the obligation of a debtor is critical. The ability to repossess the financed
Aircraft Asset, then, is of utmost importance in a distress situation. Section 1110
of the U.S. Bankruptcy, and comparable provisions under Cape Town, accordingly,
are highly important features for Aircraft Financiers’ assessment of repossession risk.
The availability of these legal rights (or lack thereof) in any particular jurisdiction
will, therefore, greatly color the view of Aircraft Financiers on doing business in
that jurisdiction and acquiring any associated securities. The robustness of the U.S.
EETC market is largely owing to the availability to the financiers of Section 1110
rights in respect of the financed Aircraft. See Part 8 for a discussion of repossession
and other risks associated with defaults.
AFIC
Aircraft Finance Insurance Consortium (AFIC) is a credit insurance product
developed by Marsh Aviation Aerospace Practice, an affiliate of Marsh & McLennan
Companies, for financiers providing financing to operating lessors and airlines
acquiring Boeing-manufactured aircraft. AFIC is intended to replicate, in large part,
the credit support provided by U.S. Eximbank in its traditional support arrangements
for Boeing-manufactured aircraft. This product was launched, for among other
reasons, to provide an alternative to U.S. Eximbank financing support due to the
freezing of U.S. Eximbank’s export support programs because of political disputes
over matters of U.S. Eximbank’s role in the economy and corporate welfare concerns.
The AFIC product is a non-payment insurance policy; that is, it will pay the
insured financier if the obligor under the related aircraft financing fails to make
payments when due. The AFIC insurance policy is underwritten by international
insurance companies that are affiliates of Allianz, Axis and Sompo International.
These underwriting arrangements are on a several basis. Thus, an insured taking
this policy is assuming credit risk of each of the underwriting insurance companies
28
– the individual underwriters do not backstop the underwriting obligations of the

other underwriters. Insofar as the credit of the insurers is inferior to that of the U.S.
government, combined with the risk inherent in the ‘several liability’, the insureds
may have a greater interest in the aircraft collateral than they do in a U.S. Eximbank
transaction.
At the time of this writing, the AFIC product is fairly new to the market, so it is
difficult to ascertain how successful it will be at this stage. We would anticipate that
Airbus will seek to replicate this product as an alternative to European ECA-
supported financing transactions for Airbus aircraft.
Asset-backed Securities (ABS)

Asset-backed Securities (ABS) are issued in the private and capital markets secured
by assets and lease (or debt) cash flows. The predominant forms of ABS in the
realm of Aircraft Financing are transactions structured as CLOs and Collateralized
Debt Obligations (CDOs). EETCs are not typically characterized as ABS since they
are highly reliant on the single issuer credit (in addition to the Aircraft Asset
collateral security).
Aircraft, Crew, Maintenance and Insurance (ACMI)

Aircraft, Crew, Maintenance and Insurance (ACMI) is a form of Wet Lease. The
operator/lessor provides ACMI for the lessee. This arrangement is most prevalent
in the cargo market.
Back-leveraged Lease
This is an Operating Lease which, together with its related Aircraft Asset, is
collaterally assigned/mortgaged by a lessor in favor of an Aircraft Financier as security
for a loan. The Debt Service requirements under such loan are serviced by the rentals
under such Operating Lease, see Exhibit 3.3. Insofar as such rentals may not be
sufficient to repay such loan, the related Aircraft Asset may need to be sold to pay
off any resulting Balloon (and most Back-leveraged Lease facilities are Non-
recourse). A Finance Lease is not well suited for a back-leveraging insofar as the
‘lessor’ (borrower) has no equity interest in the asset; accordingly, among other
things, there can be no Balloon exposure (unless there is a matching balloon-type
payment under the Finance Lease), and there is no ‘equity cushion’.
From an airline’s perspective, back-leveraging of an Aircraft should not be
cause for too much concern as, other than a redirection of rental payments and
amendments to the insurance certificates, the relationship between the operating
lessor and the airline remains unaltered. However, that could change if the lessor
defaults, if the airline defaults, or if the lessor does not refinance the debt balloon.
In each case, the lender may be taking management of the lease and Aircraft away
from the operating lessor. As a result, the airline may lose the operating lessor as a
business partner with whom it has a larger relationship and for which waivers,
workouts or management of Aircraft returns might yield a different result than with
29
Pledged account
Debt service $
Waterfall
Security Loan
Lessor/owner distribuon B Lenders
trustee/agent $
C
Mortgage and
lease assignment
Lease rentals $
Aircra
Lease
Airline (lessee)
Exhibit 3.3 Back-leveraged Lease Facility

a new lessor (the lender) which has a different agenda. Of course, the ultimate identity
of a lessor is never fixed as lessors always retain the right to trade their Aircraft
positions. In addition, tapping bank financiers or the capital markets for the back-
leveraging of Aircraft may absorb credit capacity that the same airlines wish to use
for other bilateral or capital markets transactions. Finally, airlines should be mindful
that certain ‘bankruptcy remote’ protections might conflict with the airline’s interest
to have the operating lessor guarantee the obligations of the lessor.
PRACTICE NOTE
Financiers taking Balloon risk in Back-leveraged Lease deals must be prepared
to take over the asset and the lessor should be advising the financier in a timely
manner if it is walking away from the asset so that the financier can prepare
for potential repossession and remarketing at Lease maturity.
Bankruptcy Remote
This is a transaction using a Special Purpose Vehicle (SPV) that is structured in a
manner to protect the financing from the bankruptcy of the originator, sponsor or
servicer of the financed assets (see ‘Securitization’) or the entity that owns the entity
that owns the financed assets. Transactions are characterized as Bankruptcy Remote
rather than bankruptcy proof since there is no way to ensure 100 percent bankruptcy-
proof protections (especially in the light of the fact that bankruptcy courts are courts
of equity).
30
PRACTICE NOTE
In order to minimize bankruptcy risk, a number of features are typically
employed: SPVs, Orphan Trust Structures and inclusion of provisions in
organizational documents that require independent managers/members/
directors to agree to any bankruptcy filing and other significant corporate event
or restructuring/reorganization. Many transactions structured as Bankruptcy
Remote require from the lawyers of the originator a legal opinion that the
Bankruptcy Remote entity will not be subject to Consolidation with the
originator in the event of the originator’s bankruptcy (see Part 8, ‘Non-
consolidation’). These opinions are reasoned (meaning that they are not
absolute in conclusion), dozens of pages long and very expensive to procure.
Collateralized Debt Obligation (CDO)

Collateralized Debt Obligations (CDOs) are a type of structured asset-backed
security, substantially similar to a CLO described below, with the primary difference
being that the CDO securitizes debt obligations (that is, principal and interest debt
service) and the CLO securitizes lease obligations (that is, rent).
An Aircraft Finance-related CDO, then, is the Securitization of multiple Aircraft-
secured loans/bonds into a single facility. The principal and interest on the debt
underlying the security is paid back to the investors regularly from the cash flow of
the assigned equipment notes. Exhibit 3.4 displays a traditional CDO structure.
In a CDO, the originator assembles the debt securities that it wishes to securitize.
Once a suitably large portfolio of assets is assembled or ‘pooled’, they are transferred
to an SPV (the issuer), a tax-exempt company or trust formed for the specific purpose
Pledged account
Debt service $ Loan $
A
Waterfall
SPE Issuer Loan

Security
(registered holder distribuon B Lenders
trustee/agent
of debt ) $
C
Debt service $
Pledge, mortgage
and equipment
Equipment Equipment Equipment Equipment
note note note note
note assignment
Mortgage Mortgage Mortgage Mortgage
Aircra Aircra Aircra Aircra
Airline/ Airline/ Airline/ Airline/

lessor lessor lessor lessor
Exhibit 3.4 CDO Structure

31
of funding the assets. Once the assets are transferred to the issuer, there is normally
no recourse to the originator. The issuer is designed to be Bankruptcy Remote.
Issuance
To be able to buy the debt securities from the originator, the issuer issues tradable
securities to fund the purchase. Investors purchase the securities, either through
a private offering (targeting institutional investors) or on the open market.
Alternatively, this structure can be funded by bank lenders in the loan market. The
performance of the securities is then directly linked to the performance of the assets.
Credit rating agencies are often required to rate the securities which are issued as
a matter of corporate policy (or regulatory necessity) for an investor, as well as to
provide an external perspective on the liabilities being created and help the investor
make a more informed decision.
The securities can be issued with either a Fixed Rate or a Floating Rate coupon,
which will largely be driven by: (i) investor appetite for one or the other; and (ii)
the nature of the cash flows (interest debt service) thrown off by the related loans.
Credit enhancement and tranching

Unlike conventional corporate bonds which are unsecured, securities generated
in a CDO are ‘credit enhanced’, meaning their credit quality is increased above that
of the unsecured debt of the obligor(s) of the underlying bundled debt obligations
or the underlying asset pool. This enhancement is achieved by the availability of
the Aircraft collateral, the related Loan to Value ratios (LTVs) and the other
features described below. Such enhancements increase the likelihood that the
investors will receive cash flows to which they are entitled or, at a minimum, recoup-
ment of their principal investment on final maturity, and thus causes the securities
to have a higher credit rating than such underlying obligor(s). Some Aircraft Finance
CDOs use external credit enhancement provided by third parties, such as a Liquidity
Facility.
Many Aircraft CDOs benefit from asset/obligor/geographic diversification, which
are reflected in Concentration Limits (see Part 13, ‘Concentration Limits’) which
seek to protect this diversity.
Individual securities issued by the CDO SPV are often split into Tranches, or
categorized into varying degrees of subordination. Each Tranche has a different level
of credit protection or risk exposure than another: there is generally a senior (‘A’)
class of securities and one or more junior subordinated (‘B’, ‘C’ and so on) classes
that function as protective layers for the ‘A’ class. The senior classes have first claim
on the cash (including the proceeds from the liquidation of Aircraft Asset collateral)
that the SPV receives, and the more junior classes only start receiving repayment
after the more senior classes have been repaid. This cascade is effected through the
Waterfall. In the event that the underlying loan pool generates insufficient debt
service to make payments on the securities, the loss is absorbed first by the
Subordinated Tranches, and the upper-level Tranches remain unaffected until the
losses exceed the entire amount of the Subordinated Tranches.20
The most junior class (often called the equity class) is the most exposed to
payment risk. In some cases, this is a special type of instrument which is retained
32
by the originator as a potential profit flow. In some cases, the equity class receives
no coupon (either fixed or floating), but only the residual cash flow (if any) after
all the other Tranches have been paid. In addition to Subordination, credit may be
enhanced through a reserve account, in which funds remaining after expenses such
as principal and interest payments, charge-offs and other fees have been paid-off
are accumulated, and can be used when debt service on the CDO exceeds the SPV’s
income.
A CDO may employ a Servicer to collect payments, to monitor the assets that
are the subject of such Securitization and to provide remarketing and re-deployment
services if the Aircraft are subject to return (due to scheduled or early (default)
termination situations). A Servicer may be less likely in a CDO as compared with
a CLO since the underlying debt securities typically used are full pay-out instruments,
thereby minimizing redeployment risks.
PRACTICE NOTE
Securitizations may employ Turbo, Debt Services Coverage Ratio (DSCR)
and LTV tests.
In contrast to a CLO where the investors have an opportunity to obtain
value from the Aircraft Assets serving as collateral up to the entire value of
those assets, the CDO investor is capped at the value of the underlying debt
serving as collateral vis-à-vis the issuer thereof; with the airline or operator of
whose debt is included in the CDO entitled to keep all of the equity in the
Aircraft collateral.
Another difference with the CLO is that while the CLO would most likely
have a diversity of underlying credits/lessees, CDOs may either have such
diversity or may involve just a single credit (and, therefore, look more similar
to EETC). In fact, CDOs are often masqueraded as EETCs to tap investor
acceptability of that product, especially if Section 1110 or Cape Town remedies
are available in connection with the underlying debt obligations.
Collateralized Lease Obligation (CLO)

A Collateralized Lease Obligation (CLO) is a type of structured asset-backed
security, substantially similar to a CDO described above, with the primary difference
being that the CDO securitizes debt obligations (that is, principal and interest debt
service) and the CLO securitizes lease obligations (that is, rent).
An Aircraft Finance-related CLO, then, is the Securitization of multiple Aircraft
leases packaged into a single facility. The principal and interest on the debt under-
lying the security is paid back to the investors regularly from the cash flow of the
assigned lease rentals. Exhibit 3.5 displays a traditional CLO structure.
In a CLO, the originator, typically a leasing company, assembles the Aircraft Assets
that it wishes to securitize. Once a suitably large portfolio of assets is assembled or
‘pooled’, they are transferred to an SPV (the issuer), a tax-exempt company or trust
33
formed for the specific purpose of funding the assets. Once the assets are transferred
to the issuer, there is normally no recourse to the originator. The issuer is designed
to be Bankruptcy Remote. Accounting standards govern when such a transfer is a
sale, a financing, a partial sale, or a part-sale and part-financing. In a sale, the
originator is allowed to remove the transferred assets from its balance sheet; in a
financing, the assets are considered to remain the property of the originator. Because
of these structural issues, the originator typically needs the help of an investment
bank (the arranger) in setting up the structure of the transaction and placing the
related securities.
Issuance
To be able to buy the Aircraft Assets from the originator, the issuer issues tradable
securities to fund the purchase. Investors purchase the securities, either through a
private offering (targeting institutional investors) or on the open market.
Alternatively, this structure can be funded by bank lenders in the loan market as
part of a loan (not securitization) facility.
The performance of the securities is then directly linked to the performance of
the assets. Credit rating agencies are often required to rate the securities which are
issued as a matter of corporate policy (or regulatory necessity) for an investor, as
well as to provide an external perspective on the liabilities being created and help
the investor make a more informed decision.
The securities can be issued with either a Fixed Rate or a Floating Rate
coupon, which will largely be driven by: (i) investor appetite for one or the other;
and (ii) the nature of the cash flows (interest debt service) thrown off by the related
loans.
Pledged account
Debt service $ Loan $
A
Waterfall
Loan
SPE issuer Security
distribuon B Lenders
(lessor/owner) trustee/agent
$
C
Lease rentals $
Mortgage and
lease assignment
Aircra Aircra Aircra Aircra
SPE1 SPE2 SPE3 SPE4
Lease Lease Lease Lease
Lessee Lessee Lessee Lessee
Exhibit 3.5 CLO structure

34
Credit enhancement and tranching

Unlike conventional corporate bonds which are unsecured, securities generated in

a CLO are ‘credit enhanced’, meaning their credit quality is increased above that
of the unsecured debt of the obligor(s) of the underlying bundled lease obligations
or the underlying asset pool. This enhancement is achieved by the availability of
the Aircraft collateral, the related LTVs and the other features described below.
Such enhancements increase the likelihood that the investors will receive cash flows
to which they are entitled or, at a minimum, recoupment of their principal investment
on final maturity, and thus causes the securities to have a higher credit rating than
such underlying obligor(s). Some Aircraft Finance CLOs use external credit
enhancement provided by third parties, such as a Liquidity Facility.
Many Aircraft CLOs benefit from asset/obligor/geographic diversification, which
are reflected in Concentration Limits (see Part 13, ‘Concentration Limits’), which
seek to protect this diversity.
Individual securities issued by the CLO SPV are often split into Tranches, or
categorized into varying degrees of subordination. Each Tranche has a different level
of credit protection or risk exposure than another: there is generally a senior (‘A’)
class of securities and one or more junior subordinated (‘B’, ‘C’ and so on) classes
that function as protective layers for the ‘A’ class. The senior classes have first claim
on the cash lease rentals (including the proceeds from the liquidation of Aircraft
Asset collateral) that the SPV receives, and the more junior classes only start
receiving repayment after the more senior classes have been repaid. This cascade is
effected through the Waterfall. In the event that the underlying lease pool generates
insufficient debt service to make payments on the securities, the loss is absorbed
first by the Subordinated Tranches, and the upper-level Tranches remain unaffected
until the losses exceed the entire amount of the Subordinated Tranches.
The most junior class (often called the equity class) is the most exposed to pay-
ment risk. In some cases, this is a special type of instrument which is retained by
the originator as a potential profit flow. In some cases the equity class receives no
coupon (either fixed or floating), but only the residual cash flow (if any) and the
residual value of the Aircraft Assets after all the other Tranches have been paid.
In addition to Subordination, credit may be enhanced through a reserve account,
in which funds remaining after expenses such as principal and interest payments,
charge-offs and other fees have been paid-off are accumulated, and can be used
when debt service on the CLO exceeds the SPV’s lease rental income.
In a CLO, a Servicer is often engaged to collect payments, to monitor the assets
that are the subject of such Securitization and to provide remarketing and re-
deployment services if the Aircraft are subject to a lease return (due to scheduled
or early (default) termination situations). The servicer is often the originator,
because the servicer needs very similar expertise to the originator (and the
originator may be interested in the servicing fee income it charges for its undertaking
of this role). The provision of these services is effected through a Servicing
Agreement.
35
PRACTICE NOTE
In a CLO, investors have an opportunity to obtain value from the Aircraft
Assets serving as collateral up to the entire value of those assets, in contrast
to a CDO where the CDO investor is capped at the value of the underlying
debt serving as collateral vis à vis the issuer thereof. The residual value of the
Aircraft Assets subject to the CLO may be a substantial value component for
the CLO ‘equity’ investor.
While CLOs would most likely have a diversity of underlying credits/lessees,
they could be structured with a single lessee obligor. Either way, if a CLO’s
lease obligors are subject to Section 1110 or Cape Town remedies, then they
may be packaged and marketed as EETC-type products, thereby taking
advantage of the deep market for EETC securities.
CLOs may employ Turbo, DSCR and LTV tests.
Credit Default Swap (CDS)

A Credit Default Swap (CDS) is a credit derivative transaction that is a financial
swap agreement pursuant to which a seller of the CDS will compensate the buyer
in the event of a loan default or other credit event. The buyer of the CDS makes a
series of payments (the CDS ‘fee’ or ‘spread’) to the seller and, in exchange, receives
a payoff if the loan defaults. A CDS is linked to a ‘reference entity’ or ‘reference
obligor’, usually (in our context) an airline or operating lessor. The reference entity
is not a party to the contract. The buyer makes regular premium payments to the
seller, the premium amounts constituting the ‘spread’ charged by the seller to insure
against a credit event. If the reference entity defaults, the protection seller pays the
buyer the par value of the bond in exchange for physical delivery of the bond,
although settlement may also be by cash.
A default is often referred to as a ‘credit event’ and includes such events as failure
to pay, restructuring and bankruptcy, or even a drop in the reference entity’s credit
rating.
Credit default swaps are often used to manage the risk of default that arises from
holding debt. A bank, for example, may hedge its risk that a borrower may default
on a loan by entering into a CDS contract as the buyer of protection. If the loan
goes into default, the proceeds from the CDS contract cancel out the losses on the
underlying debt.
A bank can also use a CDS to free up regulatory capital. By offloading a particular
credit risk, a bank is not required to hold as much capital in reserve against the risk
of default. This frees resources the bank can use to make other loans to the same
key customer or to other borrowers.
There are other ways to eliminate or reduce the risk of default. A lender could
sell (that is, assign) the loan outright or bring in other banks as participants. How-
ever, these options may not meet a particular lender’s needs.
36
Club Deal
This is a financing where the debt participants are not led by a single arranger or
agent but are on relatively equal footing when negotiating a financing with a
borrower. Club Deals are, by their nature, somewhat more difficult to close since
there are many ‘captains’ to co-ordinate.
Cross-border Tax Lease

This is a Finance Lease where the lessee and the lessor are domiciled in different
jurisdictions and where, due to different accounting and/or tax treatment in the
respective jurisdictions, both parties are able to obtain tax/accounting benefits of
ownership in their respective jurisdictions. Such deal structures typically are
successful where the lessor’s jurisdiction treats the form of the transaction as the
guiding principle and the lessee’s jurisdiction treats the substance of the transaction
as definitive. Cross-border Tax Leases have largely disappeared because many
jurisdictions have shifted away from a ‘form’ to a ‘substance’ analysis.
Depository
This is a financial institution (typically a bank with a high credit rating) that holds
the proceeds of loans in a financing transaction when such loans are pre-funded,
such as in a pre-funded EETC. Loans are pre-funded so that an issuer can lock in
current interest rates and take advantage of market liquidity in anticipation of
scheduled future deliveries for specified Aircraft. The prefunded amounts are
deposited with the Depository, are evidenced by escrow receipts and are made
available to the EETC issuer only upon the delivery and financing of the earmarked
Aircraft from the OEM. Such funds on deposit are not intended to be assets of the
issuer.
Dry Lease
A Dry Lease is an Operating Lease that provides lease financing only for the
equipment itself, and does not extend to personnel, maintenance, fuel and
provisioning necessary to operate the asset. In contrast, there are the Wet Lease and
ACMI arrangements.
Export Credit Agency (ECA) Financing

This is a financing supported by an Export Credit Agency (ECA). ECAs provide
financing, or governmental-based guarantees to lenders, to support the export of
aircraft, engines and other manufactured goods from the home country. ECAs supply
billions of dollars of support annually for Aircraft and Engine exports alone. The
primary ECAs involved in Aircraft Asset support are:
• Brazil – Banco Nacional de Desenvolvimento Economico e Social (BNDES)

(supporting Embraer aircraft);
37
• Canada – Export Development Canada (EDC) (supporting Bombardier

aircraft);
• France – Bpifrance Assurance Export (formerly known as COFACE)
(supporting Airbus and ATR aircraft, among others);
• Germany – Euler Hermes Aktiengesellschaft (Euler Hermes) (supporting
Airbus aircraft, among others);
• UK – Her Britannic Majesty’s Secretary of State acting through the Export
Credits Guarantee Department (ECGD), operating as UK Export Finance
(supporting Airbus aircraft and Rolls Royce engines, among others); and
• U.S. – U.S. Ex-Im (supporting Boeing aircraft and CFM, IAE, GE and
Pratt & Whitney engines, among others).21
ECA Financings by the ECAs described above are currently regulated by the ASU
arrangements. However, it is worth noting other substantial ECAs, as follows, are
not subject to the ASU rules. The roles being played by these ECAs are expanding
and are increasingly factoring into export financings in the Aircraft Asset space.
• Nexi (Japan).
• China Ex-Im.
• Servizi Assicurativi del Commercio Estero (SACE S.p.a.) (Italy).
ECA Financings come primarily in two structures.
1 Guarantees issued by the ECA to lenders, whose loans allow an owner or

operator to acquire the exported asset.
2 The ECA itself provides the financing to allow an owner or operator to
acquire the exported asset.22
Most ECA Financings using the guarantee structure are constructed on the basis
of the arrangements noted in Exhibit 3.6.
ECA guaranteed financing structures can support both privately placed loans
funded (primarily) by banks or securities placed with investors in a public-type
offering. In a typical public-style issuance the guaranteed loans would either be: (i)
prefunded; or (ii) funded on a preliminary private basis. In the case of a prefunding,
all of the funds necessary to fund the Aircraft would be drawn down at an initial
closing, placed with a Depository and would be represented by escrow receipts until
applied to the Aircraft’s purchase price on delivery. In the case of a private funding,
a bank funds each Aircraft as and when the Aircraft Assets are delivered, and once
there is a sufficient sized pool of loans to support a placement in the public markets,
the loans are converted to these public instruments and so placed. Capital market
access for ECA guaranteed financings has been primarily available to financings
supported by U.S. Ex-Im; U.S. Ex-Im was instrumental in the facilitation of
transaction structures allowing for the issuance of securities in the capital markets
that were comprised of U.S. Ex-Im guaranteed loans. This U.S. Ex-Im guaranteed
bond structure is expected to evolve further, expanding the market breadth and
improving its efficiency.23
38
Charity
Security trustee
(holds security on Directs ECA
Pledges behalf of ECA)
SPV
shares
Trustee
Trust
(manages trust)
Assignment
of security
Directs Guarantee
SPV
Orphan SPV Debt service $ Lenders

Guaranteed loan (85%) + fee $
Aircra
Aircra
purchase Lease rentals $
tle
price Aircra
Finance
lease
Manufacturer Lessee
Exhibit 3.6 ECA Guaranteed Financing Facility

ECA guaranteed financing (absent some global shock akin to 9/11 or the Lehman
collapse) is likely to reduce over time in the light of the ASU’s requirements to
impose market-level fees and rates on these financings, thereby making these types
of financings less advantageous to Aircraft Asset purchasers.
ECA Co-commercial Financing

ECA Co-commercial Financing is the provision of commercial (non-guaranteed)
funding by financiers secured by Aircraft on a transaction when such Aircraft also
secure debt in an ECA guaranteed financing. In the light of the ECA’s rather strict
LTV advance rates and rapid paydown requirements, opportunities are created for
extending commercial/non-guaranteed debt secured by the otherwise ECA-
guaranteed debt. Based on these economics, certain financiers are willing to lend
to airlines or lessors side-by-side with lenders that are receiving ECA support. Such
loans may be effected at the time of the initial borrowing and/or may accrete over
time as the ECA supported loans are repaid. The latter are called Stretched Overall
Amortization Repayment (SOAR) loans, or ‘mismatch loans’; however, the latest
ASU has largely eliminated this particular financing structure. All such commercial
lenders’ loans are subordinate to the ECA’s guaranteed loans in respect of the
financed Aircraft and such commercial lenders have no power to direct the exercise
of remedies unless and until the ECA-supported loans are paid in full.
39
If an airline or lessor elects to use a commercial loan to finance the difference

between the purchase price of an Aircraft and the related guaranteed loan, the
commercial lenders will receive proceeds from the exercise of remedies on an
Aircraft-by-Aircraft basis, only after the related guaranteed loan and all other
amounts due and owing to the ECA and the guaranteed lenders with respect to
such Aircraft have been paid in full. However, the commercial lenders receive
proceeds prior to the application of amounts toward other ECA-supported financings
for that airline or lessor.
As long as either: (i) the related ECA guarantee in favor of the guaranteed lenders
is in effect; or (ii) there are any amounts owing to the ECA under the related
transaction; the ECA will have the sole right to direct the taking of any action under
the transaction documents, including, without limitation, exercising any remedies
after the occurrence of an event of default. If neither (i) nor (ii) applies, the com-
mercial lenders would be the instructing party.
Even though these commercial lenders have limited rights with respect to the
collateral, the commercial lenders often have the right to pursue claims directly
against the airline or lessor for any amounts owed to them that are not covered by
an ECA guarantee, provided, so long as the relevant ECA guarantee is in effect or
the ECA has any exposure or is owed any amounts arising out of the transaction
documents, that:
• no recovery may be had directly from, and no such suit shall assert any
rights or claims against, the collateral or borrower;
• such action does not interfere with, or otherwise adversely affect, any
restructuring, enforcement or other collection efforts by, or on behalf of,
the ECA (other than by requiring payment of moneys then due to such
person but only to the extent enforcement is on assets not constituting part
of the collateral or part of the collateral securing any other obligation
running to or for the benefit of or otherwise relating to any transaction
involving the ECA);
• such commercial lender may not initiate any bankruptcy, suspension of
payment or other insolvency proceedings against the borrower or the lessor/
airline in connection with such recovery; and
• the ECA has not sent a notice that such action materially interferes with
the enforcement or remedial actions which are being taken or could be taken
by or the direction of the ECA, or otherwise materially adversely affects the
ECA.
Any amount recovered by any lender is required to be applied through the

standard waterfall.
The above detailed description of the relative rights between an ECA and a
commercial lender is based on a typical U.S. Ex-Im transaction. The other ECAs
may adopt similar or more stringent or relaxed intercreditor terms.
40
ECA Co-financing
ECA Co-financing arrangements are arrangements made by different ECAs to

supply credit support for Aircraft with components manufactured in multiple
jurisdictions. The manufacture of large commercial jets is a global business. By way
of example, for today’s Boeing Aircraft, more and more of the components are
manufactured outside the U.S. before they are shipped to, and installed on, an
airframe in Boeing’s States-side plants. This can and does significantly affect the
strict eligibility requirements for U.S. Ex-Im financing. If a particular Aircraft has,
for example, only 50 percent U.S. content, then U.S. Ex-Im’s support would be
limited to this amount. If the balance of the content would be eligible for support
from another ECA, then it may be possible to arrange separate support from such
other agency. To address this particular situation and streamline the financing
process, U.S. Ex-Im has entered into a number of so-called ‘co-financing’ arrange-
ments with other ECAs. This creates real value for the airline or lessor acquiring
the aircraft by allowing ‘one-stop shopping’ for its export credit financing. Under
a co-financing arrangement, there is normally a lead ECA which co-ordinates all
negotiations, documentation, disbursements, administration and exercise of rem-
edies. With respect to the airline/lessor borrower, its sole interaction is with the lead
ECA who is typically given broad authority under the co-financing arrangement to
service a transaction. As part of the co-financing arrangement, the other ECAs
involved agree to insure the lead ECA for such other ECA’s proportionate share of
a transaction.
U.S. Ex-Im has active co-financing agreements for large commercial Aircraft with
the UK’s HM Export Credit Guarantee Department (ECGD), Japan’s Nippon
Export and Investment Insurance (NEXI) and Korea’s Export-Import Bank, insofar
as many Boeing aircraft components are manufactured in these countries. Similarly,
the European export credit agencies (ECGD, COFACE in France and Euler
Hermes in Germany) use co-financing arrangements frequently in supporting Airbus
financings. In fact, in many European ECA-supported financings of Airbus Aircraft,
a single of these ECAs may act as a ‘fronting’ ECA in a transaction, with internal
arrangements as among all the participating ECAs behind the curtain to address
risk-sharing protocols.
EETC Rating
An EETC Rating is a rating that assesses the likelihood that a borrower makes ‘full
and timely payment of interest and ultimate payment of principal’. This analysis
treats interest and principal differently. As for interest, the requirement is for inter-
est to be paid currently. This means that there cannot be any interruption of the
interest payment even if the borrower is in default or bankruptcy. The primary means
to ensure current payment of interest is to employ a Liquidity Facility (see ‘Liquidity
Facility’) that will ensure payment of interest (only) if the borrower fails to pay
interest. As for principal, ultimate payment of principal means that the principal needs
to be paid in full by the relevant Final Legal Maturity Date (see ‘Final Legal Maturity
Date’) which is a date, typically 18 months (in U.S. airline transactions), after the
41
underlying debt is scheduled to mature. This extra period is the period that the
rating agencies perceive is the maximum length of time it should take to repossess
and liquidate a financed aircraft asset and apply the proceeds to outstanding balances
of principal. This rating methodology is utilized by the rating agencies rating EETCs
and certain other aircraft-secured debt securities.
Enhanced Equipment Trust Certificate (EETC)

An Enhanced Equipment Trust Certificate (EETC) is a publicly (but sometimes
privately) issued, rated security that:
• relies on the credit of a single corporate issuer;

• is secured by Aircraft Assets as collateral;
• utilizes a Liquidity Facility to provide up to 18 (or, in some cases, 24)
months of missed interest payments;
• utilizes structural enhancements to provide improved LTV ratios for the
more senior levels, or Tranches, of debt securities; these structural enhance-
ments include:
º tranching
º cross-default
º cross-collateralization
º cross-subordination
• relies on the certainty of remedies afforded by Section 1110 of the U.S.
Bankruptcy Code or, in the case of non-U.S. airlines, comparable rights
under Cape Town (or other local law);
• is rated based on an EETC Rating; and
• maintains a constant level of over-collateralization.
Exhibit 3.7 is a schematic that boils down the primary characteristics of an EETC.
Exhibit 3.7 highlights the following primary features of an EETC:
• as a credit matter, there is a single full-recourse airline issuer on whose credit

the financing rests; and
• as a collateral security matter, the Aircraft Assets serve as collateral and, as
a matter of supreme importance to the structure, have the benefit of Section
1110 of the U.S. Bankruptcy Code (or the equivalent under Cape Town
or local law), which provides certainty as to the ability to repossess the
collateral (or be given assurances of continued performance).
Over $90 billion of EETC securities have been issued since the product was
developed in 1994. While predominantly a financing vehicle used by U.S. airlines,
non-U.S. airlines as diverse as Air Canada, DORIC/Emirates, LATAM, British
Airways, Virgin Australia, Turkish Airlines (THY) and Norwegian Air Shuttle have
utilized this product as well. The attraction of EETCs from the airline issuer’s
perspective are manyfold:
42
Credit risk/
Corporate (single issuer) bond
cash flow
Collateral security Default risk
Aircra Liquidity Debt tranching and

collateral + §1110* + facility + cross subordinaon
Value Timing to Keeping ‘current’ Over

• Value retenon realise value during Value collateralisaon
• Secondary realizaon period
Markets (global) (18 months)
• Ease of tracking
• Big ___________________
* Or Cape Town
Exhibit 3.7 EETC Schematic

• Size: Given the capacity of the capital markets into which EETCs are issued,
airlines may finance in a single financing upwards of $1.5 billion of aircraft
debt in one fell swoop, which can cover dozens of aircraft. This saves airline
treasury staff the trouble of needing to hit-up large numbers of financial
institutions to finance a year’s-worth of deliveries.
• Fixed rate: EETCs are typically issued at a fixed interest rate which is often
desired by airlines.
• Ease of execution: While by no means simple to document (and rather
expensive to do so given disclosure requirements typically subsumed in a
detailed offering memorandum issued to investors), EETCs are subject to
largely standardized documentation across the board (that is, from airline
to airline) and, as to any single airline issuer, its transaction documentation
will be entirely uniform across its EETC-financed fleet. This standardiza-
tion applies as well to intercreditor terms, which can involve laborious
negotiations in private transactions.
• Financing diversification: The access to the capital markets may be a very
attractive option for airlines concerned with relying exclusively, say, on the
bank market (with that market’s difficulties such as risk of Market Dis-
ruption, Increased Costs and other costs).
• Pricing: The structural enhancements provided by an EETC allow the
senior-most Tranches to be rated investment grade, with the attendant
pricing advantages associated with such ratings.
Exhibit 3.8 provides a structural overview of a typical EETC transaction (with

this indicative transaction including a financing done on a prefunded basis (utilizing
a Depository); prefunded transactions are not universal to every financing).24
43
The EETC is fundamentally a secured corporate credit, not a securitization. The

investor takes default risk of a single airline (and not a diversified borrower/lessee
base). There are two primary financing structures for EETCs that create the
underlying obligation of the airline to make its scheduled payments. The first is a
Mortgage Financing. In this type of financing, the airline will issue promissory notes
(commonly known as equipment notes) in Tranches, with the ‘A’ note Tranche
being ranked ahead of the ‘B’ note Tranche, the ‘B’ note Tranche being ranked
ahead of the ‘C’ note Tranche and so on. The equipment notes are issued on a per-
aircraft basis, and are secured by that aircraft in the airline’s fleet.
The second type of underlying financing is a U.S. Leveraged Lease Financing.25
In this type of financing, an equity investor, acting through an owner trustee, will
Airline
Lease rental payments assigned by

lessors on leased aircra and
mortgage payments on owned aircra
Indenture trustee for leased aircra and owned aircra
Series A Series B Series C

equipment notes equipment notes equipment notes
Equipment note payments on all aircra

Excess rental payments
Advances and
Subordinaon agent reimbursements Liquidity provider
Lessors for
(if any)
leased aircra
Principal, premium (if any)

and interest distribuons
For pre-funded
EETC only
Depositary
Pass through Pass through Pass through

Interest payments trustee for trustee for trustee for
on deposits Class A trust Class B trust Class C trust
Escrow
agent
Holders of Class Holders of Class Holders of Class

A cerficates B cerficates C cerficates
Exhibit 3.8 EETC Overview

44
purchase an Aircraft, borrowing up to 80 percent of the Aircraft Fair Market Value

(FMV), with the balance provided by the equity investor. The borrowed funds will
be obtained by the issuance by the owner trustee of equipment notes in Tranches
as described above. The owner trustee will then lease the aircraft to the airline issuer.
As collateral for the equipment notes, the owner trustee will grant the equipment
note holders a mortgage on the aircraft and assign the lease to the holders. The
equipment notes are issued by the owner trustee on a non-recourse basis and will
be entirely serviced by the lease cash flows.
An EETC financing may involve 30 or more Aircraft. The equipment notes issued
with respect to each aircraft will be aggregated and held by a separate pass through
trust for each class of notes pursuant to a Pass Through Certificate (PTC) structure.26
Thus, all of the A equipment notes for all of the Aircraft in a particular EETC are
held by a class A pass through trust, all of the B equipment notes for all of the
aircraft are held by a class B pass through trust, and so on. Each pass through trust,
then, issues PTCs to investors. Each investor can then purchase PTCs that are issued
at either the class A, B or C level. EETCs have historically been almost exclusively
the domain of U.S. airline issuers, but with the advent of Cape Town (which satisfies
the need for assured repossession), non-U.S. airlines have been making significant
inroads with this product; see Practice Note below.27
Since 2005, EETC transactions have benefited from the Cross-default and Cross-
collateralization across all of the Aircraft in the financed pool.28 These two features
allow issuers to combine diverse pools of Aircraft Asset collateral such as superior
younger collateral pooled with older, less liquid aircraft types, since the weaker assets
will be supported by the stronger ones. Putting it differently, the airline issuer will
not be able to compel the return of Aircraft Assets under Section 1110(c) of the
Bankruptcy Code if it wants to keep the stronger Aircraft Assets under Section
1110(a) of the Bankruptcy Code (see Part 8, ‘Section 1110’).
While the Mortgage Financing or Lease Financing facing an EETC issuance may
be fairly standard, the transaction gets somewhat complicated among the investors,
since they are often Tranched. The Tranched investors of different classes will have
varying inter-creditor rights. An EETC will typically feature:
• Controlling Party rights transitions;

• Waterfalls;
• Minimum sales prices; and
• Buyout rights.
In addition, multi-Tranched EETCs, also feature, through the Waterfalls, Asset

and Credit Subordination. An interesting feature of this subordination is that there
are situations where the holders of the more junior Tranches of PTCs may be in a
position vis-à-vis the airline-issuer worse than the holder of that airline’s unsecured
debt. Whereas the holder of a bankrupt airline’s unsecured debt may receive pennies
on the dollar (or equity in the reorganized airline), the holders of the more junior
Tranches of PTCs have absolutely no direct claim at all. All Deficiency Claims flow
through the Waterfall, even those attributable to the most junior classes of equipment
notes. For example, if the controlling party were to sell all of the equipment notes
45
in an EETC for, say, 60 percent of the outstanding principal balance of the equip-
ment notes, the proceeds of such sale would, as per the Waterfall, be applied to the
more senior Tranches leaving the holders of class C certificates with no further claim
since the equipment notes, which represent the ‘direct’ claim against the airline (and
would have the benefit of the Deficiency Claim), have been sold. Another interesting
feature of EETC intercreditor terms which is rather unique to EETCs is that the
Waterfall provides that the holders of the junior classes of the PTCs receive ‘adjusted’
interest29 on their PTCs ahead of distributions to the holders of the senior classes
of PTCs. This feature is intended to incentivize the holders of the senior PTCs to
maximize recoveries post-default. Exhibit 9.3 summarizes the primary intercreditor
terms in a traditional (2017) EETC.
All EETCs have the benefit of a Liquidity Facility, which assures EETC investors
with continued payments of interest (only) for up to 18 months (or more in the case
of certain non-U.S. jurisdictions) if the issuer ceased making debt service payments.
This continued payment of interest for such period – being the period the rating
agencies perceive as the maximum period required to repossess, market and liquidate
the Aircraft Assets subject to an EETC – enables the rating agencies (together with
the other structural features of the EETC) to provide enhanced ratings for the EETC,
see ‘EETC Rating’ and ‘Liquidity Facility’.
The enhanced ratings provided by the rating agencies tasked with rating a
particular EETC issuance, of course, provide the EETC with improved marketability
and liquidity, allow the issuer to obtain advantageous pricing and allow institutional
investors to participate in such a type of transaction.
PRACTICE NOTE
While EETCs have traditionally been a financing vehicle enjoyed by U.S.
airlines by reason of the availability of Section 1110 of the U.S. Bankruptcy
Code in the U.S., with the advent of Cape Town’s Alternative A, which is the
Section 1110 equivalent for Contracting States, one would expect the EETC
product to (theoretically) work for airlines in Contracting States that have
adopted Alternative A. In fact, both Air Canada and Emirates have entered
the EETC market on the basis of their jurisdiction’s adoption of Cape Town
(and Alternative A).1 As well, Doric Nimrod Air Finance Alpha Limited, an
aircraft leasing company, has issued EETCs on at least two occasions (with
Emirates and British Airways as lessees). One should expect increasing
attention paid to this market by non-U.S. carriers as ECA financings become
more expensive as ASU requirements are reflected in loan pricing. See
‘International EETCs’.
1
British Airways has also utilized the EETC markets, notwithstanding that the UK is not a
Contracting State, on the basis that rating agencies became comfortable with the UK’s general
creditor-friendly insolvency regime and structural enhancements offered by the EETC
structure.
46
EETC documentation is somewhat voluminous, with two broad categories

addressed. The first category is the aircraft financing documents. These would
include:
• Note Purchase Agreement

• Participation Agreement
• Trust Indenture and Security Agreement (one per Aircraft)
• Equipment Notes
The second category covers the documents associated with the PTCs or trust-
level documents. These would include:
• Underwriting Agreement
• Pass Through Trust Agreements
• Trust Supplements
• Pass Through Certificates (PTCs)
• Revolving Credit Agreements (Liquidity Facilities)
• Intercreditor Agreement
• Deposit Agreement(s) (for pre-funded facilities)
• Escrow Agreement(s) (for pre-funded facilities)
Equipment Trust Certificates (ETCs)

Equipment Trust Certificates (ETCs) are promissory notes issued by an airline or
U.S. Leveraged Lease equity Owner Trust that evidence the loans made by lenders
that are secured by Aircraft Assets and, in the case of a U.S. leveraged lease, the
related lease. This term was primarily used as the name given to the debt securities
issued as part of a public offering of the promissory notes to investors.
Finance/Capital Lease
This is a lease transaction that is treated as a Mortgage Financing for any particular
purpose. The criteria for ascertaining whether a particular lease transaction is a
Finance Lease will, in the first instance, depend on whether the determination is
for tax, Uniform Commercial Code (UCC) or, in the case of U.S.-registered
Aircraft, FAA filing purposes. As for accounting purposes, in light of newly adopted
accounting rules under both GAAP and IFRS standards (ASC 842 and IFRS 16,
respectively), the distinction between operating leases and finance leases has lost
much significance for disclosure purposes insofar as the lessee, under any lease –
howsoever characterized – is required to recognize (under GAAP): (a) assets and
liabilities for all leases with a term of more than 12 months (unless the underlying
asset is of low value); and (b) depreciation of leased assets separately from interest
on lease liabilities in the income statement; provided that lessors will need to
continue to classify their leases as either an operating lease or a finance lease, and
to account for those two types of leases differently (see IAS 17).
47
Each of the tax, UCC and FAA disciplines has its own set of determination
criteria.
Tax
Under U.S. tax rules, Revenue Procedure 2001–28 (Rev. Proc. 2001–28) sets out
a guideline of criteria (the ‘Guidelines’) for classifying a lease as a true lease for U.S.
federal income tax purposes.
The U.S. Internal Revenue Service (IRS) developed the Guidelines specifically
for ‘leveraged lease’ transactions, which involve three parties: a lessor/owner, a
lessee/user and a lender to the lessor. However, the Guidelines are also used to aid
in structuring single investor leases, which involve two parties – a lessor and lessee.
The Guidelines are not controlling as a matter of law, but provide a set of criteria
by which the IRS decides the character of a transaction for purposes of providing
advance income tax rulings. The application of the Guidelines to single investor
leases, while useful, has largely served as a voluntary construct on which to con-
servatively structure a lease involving a lessor and lessee. The theory is that if the
structure works for the more complex leveraged leases, the structure should work
for single investor transactions.
A lessor under a U.S. Leveraged Lease should qualify as the tax owner of property
if the following Guidelines criteria are satisfied.
• The lessor must maintain a minimum unconditional ‘at risk’ equity

investment in the property being leased (at least 20 percent of the cost of
the property) during the entire lease term. Within this general concept, a
lessor must show that it expects the property at the end of the lease term
to have a fair market value equal to at least 20 percent of its original cost.
The lessor must also demonstrate that it expects that the equipment will
have a useful life at the end of the lease of not less than 20 percent of its
original useful life (or at least one year). These requirements are sometimes
called the ‘20/20 tests’.
• The lessee may not have a contractual right to buy the property from the
lessor at less than fair market value when the right is exercised.
• Lessee lease renewal options must be at fair rental value at the time of
renewal.
• With exceptions, the lessee may not invest in the leased property.
• The lessee may not lend any money to the lessor to buy the property or
guarantee the loan portion of a leveraged lease that the lessor uses to buy
the leased property.
• The lessor must show that it expects to receive a profit apart from the tax
benefits.
Importantly, the Guidelines are just that, guidelines. Leveraged (and single
investor) leases may deviate from the Guidelines and still qualify as true tax leases
for federal income tax purposes.
48
UCC/Commercial law
Under the Uniform Commercial Code (UCC) in the U.S., § 1–201(37) of the UCC
provides guidance: whether a transaction creates a lease or security interest is
determined by the facts of each case; however, a transaction creates a security interest
if the consideration the lessee is to pay the lessor for the right to possession and use
of the goods is an obligation for the term of the lease not subject to termination
by the lessee, and: (i) the original term of the lease is equal to or greater than the
remaining economic life of the goods; (ii) the lessee is bound to renew the lease for
the remaining economic life of the goods or is bound to become the owner of the
goods; (iii) the lessee has an option to renew the lease for the remaining economic
life of the goods for no additional consideration or nominal additional consideration
upon compliance with the lease agreement; or (iv) the lessee has an option to become
the owner of the goods for no additional consideration or nominal additional con-
sideration upon compliance with the lease agreement.
See ‘Appendix C-2A’ for the complete text of UCC § 1–201(37) which includes
further elaboration on the above.
Importantly, the common ‘commercial’ understanding of the term ‘Finance
Lease’ – that is, a lease intended for security, which is substantively equivalent to a
mortgage financing – does not comport with the definition of that term under Article
2A of the UCC. Under Section 2.A-103(1)(g), a ‘Finance Lease’ is a lease with
respect to which:
• the lessor does not select, manufacture, or supply the goods;

• the lessor acquires the goods or the right to possession and use of the goods
in connection with the lease; and
• one of the following occurs:
º (A) the lessee receives a copy of the contract by which the lessor
acquired the goods or the right to possession and use of the goods
before signing the lease contract;
º (B) the lessee’s approval of the contract by which the lessor acquired
the goods or the right to possession and use of the goods is a condition
to effectiveness of the lease contract;
º (C) the lessee, before signing the lease contract, receives an accurate
and complete statement designating the promises and warranties, and
any disclaimers of warranties, limitations or modifications of remedies,
or liquidated damages, including those of a third party, such as the
manufacturer of the goods, provided to the lessor by the person
supplying the goods in connection with or as part of the contract by
which the lessor acquired the goods or the right to possession and use
of the goods; or
º (D) if the lease is not a consumer lease, the lessor, before the lessee
signs the lease contract, informs the lessee in writing (a) of the identity
of the person supplying the goods to the lessor, unless the lessee has
selected that person and directed the lessor to acquire the goods or
the right to possession and use of the goods from that person, (b) that
49
the lessee is entitled under this Article to the promises and warranties,
including those of any third party, provided to the lessor by the person
supplying the goods in connection with or as part of the contract by
which the lessor acquired the goods or the right to possession and use
of the goods, and (c) that the lessee may communicate with the person
supplying the goods to the lessor and receive an accurate and complete
statement of those promises and warranties, including any disclaimers
and limitations of them or of remedies.
Insofar as this particular definition does not comport to our usage of Finance
Lease for the purposes of this Handbook, it should be ignored for our purposes.
Bankruptcy
Under U.S. bankruptcy situations, the matter of true versus finance leases would
most likely be determined by reference to the UCC tests.
FAA
The U.S. FAA pays attention to identify properly the entity in whose name an
Aircraft should be registered. In 1990, pursuant to the so-called ‘Leiter Letter’,30
the FAA’s Chief Counsel issued a legal opinion setting out the relevant criteria for
FAA purposes. According to that opinion, the FAA will recognize the lessee as the
owner for Aircraft registration purposes under a lease with an option to purchase
in three specific scenarios.
1 The purchase option price is 10 percent or less of the value of the Aircraft
determined at the time the lease is executed.
2 The purchase option price is above the 10 percent bright line, but contains
a requirement that if the option is not exercised, the lessee nevertheless is
obligated to pay a residual value or termination sum equal to or exceeding
the purchase option price.
3 The purchase option price is higher than 10 percent and there is no
mandatory full payout if the option is not exercised, but the option price is
less than the lessee’s reasonably predictable cost of performing under the
lease if the option is not exercised.31
In addition to one of the above, both of the following factors must also be present:
• the lessee must have the obligations of maintenance, insurance, taxes,

operations and risk of loss with respect to the Aircraft; and
• the lease must not permit the lessee the unilateral right to terminate the
lease without an economic penalty.32
As the Leiter Letter does not have the binding nature of a statute or regulation,
it is prudent to consult with the FAA and obtain an opinion from the Aeronautical
50
Center Counsel in advance of a closing in order to determine the propriety of

registering an Aircraft in the name of a lessee.
PRACTICE NOTE
While the lessor in a Finance Lease holds ‘title’ to the asset, holding such title
is akin to having a mortgage interest in the asset with the lessee being treated
as the true owner of the asset insofar as the benefits and burdens of ownership
ultimately rest with the lessee. Transactions are structured as Finance Leases,
rather than mortgages, for many reasons, including to obtain benefits of a
Cross-border Tax Lease or for the financier to achieve ‘lessor’ status under
local law in overseas jurisdictions (which almost universally entitles the
financier to a more beneficial status in the exercise of remedies than it would
have had it been classified as a mortgage).
The mischaracterization of a lease as a true lease can have major rami-
fications.
In the context of tax matters, a mischaracterization for a lessor would result
in recoupment by the IRS of tax benefits previously taken plus fines and
penalties.
In the context of commercial matters, failure to obtain true lease characteriza-
tion would eliminate any residual recovery and potentially leave the lessor with
a substantial economic downside loss. In addition, if a lease is construed to
be a loan, for usury purposes, the lessee may argue that the lessor violated
applicable usury law and should suffer the penalties of overcharging the lessee
for the imputed ‘interest’ paid by the lessee on the financing.
In the context of a lessee bankruptcy proceeding, a lessee may challenge a
lessor’s true-lease characterization and rights under a purported lease.
Consequences of losing a true lease challenge include the following.
• Loss of Section 365(d)(10) payments (if Section 1110 not applicable). A

lessor has meaningful rights to payment on leases under Section
365(d)(10) of the federal Bankruptcy Code. Section 365(d)(10)
requires debtors-in-possession to ‘timely perform all of the obligations
of the debtor . . . first arising from or after 60 days after the order for
relief in a . . . Chapter 11 . . . under an unexpired lease of personal
property . . . until such lease is assumed or rejected’.
• No required cure of defaults under Section 365(b). Under Section 365(b)
of the Bankruptcy Code, a debtor-lessee must cure all monetary and
non-monetary defaults before the debtor-lessee can assume the lease.
A lessor does not enjoy this right if the court characterizes the
transaction as financing instead of a true lease.
• Potential loss of lien and/or priority. If for any reason a lessor fails to
make a timely and correct filing of financing statements under the
UCC or other priority-creating statute to perfect a security (versus
ownership) interest, the lessor may not achieve expected priority with
51
respect to the leased property. In that instance, another secured party

may take priority and leave the lessor with little or no recovery in a
bankruptcy. Even if a valid, secured claim exists due to a proper grant
of a security interest, the security interest may still be subject to:
º the ‘cram down’ provisions under Section 1129 of the Bank-
ruptcy Code (producing lower payments to the lessor than
contractual rent);
º a reduction of the value of the collateral (leased property) under
Section 506 of the Bankruptcy Code; or
º the ‘strong-arm’ powers of the trustee in bankruptcy to avoid a
lien of the lessor against the leased property Section 544(a) of
the Bankruptcy Code.
• Loss of favorable lessor remedies. When a lessor properly structures a
‘lease’ as a true lease, the lessor obtains remedies as an owner, instead
of remedies as a secured party under Article 9 of the UCC. For
example, Part 6 of Article 9 of the UCC requires a secured party (even
if called a ‘lessor’) to give reasonable notice of a disposition of fore-
closure of collateral, and to sell the collateral in a commercially
reasonable manner, paying the excess proceeds to the debtor (even if
called the ‘lessee’). The true lessor is not bound by these rules. Lessors
can cancel a lease, recover the equipment, collect discounted rents
and even require the payment of liquidated damages (a genuine pre-
estimate of damages, including lost residual value, that cannot be easily
or accurately calculated). The remedies available under a true lease
provide several advantages to a lessor over those of a secured party
with respect to the same property.1
1
Mayer, DG, ‘True leases under attack: lessors face persistent challenges to true lease
transactions’, Journal of Equipment Lease Financing 23(3), Fall 2005/Part B.
A Finance Lease financing is, as noted, the economic equivalent of a Mortgage

Financing, insofar as the ‘lessor’ has no upside (or downside) risk in the financed
Aircraft. The utilization of Finance Lease structures is ubiquitous in the financing
of Aircraft world-wide in the situation where a mortgage financing would otherwise
suffice; that is, the financiers are providing debt financing with no residual interest
in the Aircraft. This financing structure is so highly favored for, among others, the
following reasons:
• The laws, and the courts, of the local jurisdiction of the airline may provide
greater rights in an airline default situation to lessors over mortgagees
(notwithstanding the substantive equivalent of the two structures).
• Procurement of a mortgage in the local jurisdiction may be prohibitively
expensive (by reason of, for example, stamp taxes on recorded mortgages).
52
Charity
Beneficiary
Del. Stat. Trust Lenders

Pledge of
Borrower
100% Member
Security Trustee/Agent
Del. LLC
Loan $
Borrower/Lessor
Title
Mortgage &
Lease Assignment
Aircra
Finance Lease
Lessee
Exhibit 3.9 Finance Lease Structure
In fact, nearly all ECA financings utilize the Finance Lease structure. Exhibit 3.9
is a schematic illustration of a standard Finance Lease structure utilized to finance
Aircraft.
Final Legal Maturity Date

In an EETC or other aircraft-secured facility that is rated using the EETC Rating,
the Final Legal Maturity Date is the date that is 18 months (or, in certain cases,
24 or 36 months) after the date that is the economic maturity date of the underlying
security. This 18-month period (or other period, as explained below) is the period
determined by the rating agency providing the EETC Rating on a given security to
be the longest length of time it should take to repossess and liquidate aircraft collateral
starting on the last possible day the security can be in default.
While 18 months is the norm in deals for U.S. airlines that utilize the EETC
Rating methodology, rating agencies may assess longer periods in other jurisdictions
based on their assessment of the time it might take to repossess and liquidate aircraft
collateral.
53
French Lease
This is a Cross-border Tax Lease where the lessor is domiciled in France. These
types of leases are increasingly difficult to arrange in the light of EU investigations
into whether these amount to an illegal subsidy. French commercial banks have
historically been the investors in these transactions, with their subsidiaries acting as
lessors.
Interchange
This is an arrangement whereby an Aircraft changes operators and Registration when
its jurisdiction of operation changes.33 Interchange arrangements are a matter of
increasing interest with the conglomeration of airline operators across jurisdictions,
especially in Central and South America. There is the tension between Cabotage
rules, on the one hand and the desire by operators to maximize Aircraft utilization,
on the other.
PRACTICE NOTE
The change of Registration of an Aircraft as it bounces from jurisdiction to
jurisdiction has critical effects on Aircraft Financiers for all the reasons noted
in Part 7, ‘Re-registration’. Documentation to deal with this can be rather
arduous and complex.
International EETCs
This is the issuance of an EETC by a non-U.S. airline/issuer. As discussed in the
Practice Note in ‘EETCs’, EETCs are no longer the sole domain of U.S. airline
issuers. EETCs issued by non-U.S. airlines are, absent any particular local or issuer
requirements, structured in the identical fashion as those issued by U.S. airlines.
The Rating Agencies’ willingness to rate non-U.S. airline issuers will turn almost
exclusively on the built-in requirement of the EETC to have legal and practical
certainty to the return of the Aircraft Asset collateral in a default situation. Section
1110 is the lynchpin to this in the U.S. The adoption of Cape Town in non-U.S.
jurisdictions may provide the necessary support for non-U.S. carriers. You will note
that the preceding sentence uses the word ‘may’. Whether a jurisdiction which has
adopted Cape Town will satisfy the Rating Agencies will depend on the following
criteria.
• Has the jurisdiction adopted the ‘right’ Cape Town Declarations?

• How do the Rating Agencies evaluate the rule of law in that jurisdiction?
A guide to what the ‘right’ declarations are is in Appendix II to the ASU. That
appendix identifies the Cape Town declarations necessary for a country to receive
a discount from the minimum premium rate in respect of export financing support
54
from the applicable ECAs. Key declarations like Alternative A, choice of law,
IDERA, self-help and timely remedies are must-haves under the ASU rules and are
usually must-haves for Rating Agencies as part of their analysis. The Organization
of Economic Co-operation and Development (OECD) assesses whether countries
that have adopted Cape Town have adopted the proper ‘qualifying declarations’
under Appendix II to the ASU. The OECD website, www.oecd.org/tad/export
credits/ctc.htm, provides a status list of countries qualified for the ASU discount.
That list details those countries eligible for the ASU discount, those countries
currently under review or subject to future review, those countries which did not
adopt the qualifying declarations and those countries that have adopted the qualifying
declarations but on which there are implementation issues.
The adoption of Cape Town with all of the right declarations may not be enough,
however. An analysis will be made by the Rating Agencies as to the degree that the
attendant repossession laws will be enforced under local law and by law enforcement
authorities. This analysis follows the Country Risk analysis discussed in Part 7,
‘Country Risk’.
Finally, it should be noted that Cape Town, and the adoption of all of the right,
qualifying, declarations is not dispositive for the Rating Agencies. As they have done
in a British Airways (England) and a Virgin Australia (Australia) EETC issuance,
the applicable Rating Agencies have concluded that the legal system in the relevant
jurisdiction, even absent Cape Town or Section 1110 like laws, is creditor-friendly
enough to allow a positive rating assessment because creditors in that jurisdiction
are assured of repossessing their Aircraft Assets in a timely manner.
PRACTICE NOTE
If Rating Agencies conclude that a particular jurisdiction, even with the proper
legal framework, would not allow a timely (for example, 60 to 90 days)
recovery of an asset, rather than excluding that jurisdiction altogether, they
may add on more time to the requisite Liquidity Facility to cover the longer
recovery period. Thus, 24 month Liquidity Facilities have been required in
the DORIC 2013 1 EETC which was a United Arab Emirates based
transaction (with Emirates Airlines as the underlying credit).
Islamic Finance
Islamic Finance in the context of Aircraft Finance is the financing of Aircraft
Assets in compliance with Sharia’a requirements. Sharia’a is the religious law
forming part of the Islamic tradition. This law is derived from the holy book of the
Muslims – the Koran – and the Hadith (the body of statements or actions ascribed
to Mohammed, the Prophet) and Sunnah (the verbally transmitted record of the
teachings of Mohammed, the Prophet). The particular item in the Sharia’a impacting
matters of aircraft finance is the prohibition against the charging or receipt of interest.
Accordingly, for a transaction to be Sharia’a compliant, it cannot employ the
55
payment of interest as a return factor for investors. The matter of whether a

particular transaction is compliant with Sharia’a precepts is often passed upon by

a panel of experts in Islamic law.
While there are multiple forms of Sharia’a compliant forms of financing for
commercial aircraft, three types stand out as worthy of mention:
Ijarah – Ijarah is, in concept, akin to the leasing of an aircraft.

Murabaha – Murabaha is a financing method where a financial institution will
take title to an asset and then sell that asset to its customer – which may
be over time. The repayment to the investor may include a component
for a reasonable profit. Such profit element serves as compensation to the
investor for having taken title to the asset – and the associated risk of
ownership.
Sukuk – See ‘Sukuk’ herein.
Japanese Leveraged Lease (JLL)

A Japanese Leveraged Lease (JLL) is a Cross-border Tax Lease where the lessor is
MOST COMMONLY domiciled in Japan. This structure was a frequently used
financing mechanism in the 1980s and 1990s, but became largely untenable when
the Japanese tax authorities shifted to a more substance-based approach in their
analysis of Aircraft ‘ownership’. JLLs are no longer a financing option.
Japanese Operating Lease (JOL)

A Japanese Operating Lease (JOL) is an operating lease fully or partly funded by a
Japanese investor or equity sourced from Japan.
Japanese Operating Lease Call Option (JOLCO)

A Japanese Operating Lease with Call Option (JOLCO) is a long term operating
lease with a call option in the form of an early buyout option for the benefit of
the lessee. Such call option provides to the lessee the right to purchase the subject
Aircraft at a fixed purchase price at a fixed date prior to the expiry date of the related
lease.
The JOLCO is a tax/financing structure that can provide airlines with 10 to 12
years of low-cost aircraft funding. An investor with Japanese tax liability puts up a
minority portion of equity funding (the balance is debt) in exchange for the tax
benefits associated with the ownership and debt financing of the Aircraft. The tax
investor must take some actual asset risk to receive this tax benefit.
When the Japanese tax authorities required that an investor take some portion
of asset risk for most transactions, the JOLCO was developed. A key requirement
for any JOLCO is the ‘90 percent test’. This means the overall lease rentals payable
during the life of the transaction cannot exceed 90 percent of the lessor’s acquisition
cost of the financed aircraft, together with debt costs and other costs such as fees.
The lessee’s exercise of the fixed price call option must not be economically
56
compulsory. To demonstrate that the lessee’s purchase option is not compulsory,

that purchase option price is supported by third party appraisals. The call option
purchase price in a JOLCO would be an amount sufficient to repay the JOLCO
debt and provide a return to the equity investor.
The debt component of the JOLCO is typically bank debt. The JOLCO debt is
repaid from the rents under a JOLCO lease. The JOLCO debt may amortize to zero
prior to the maturity of the related JOLCO lease. If it has a balloon payment due
at the final maturity of the JOLCO lease, the balloon would be repaid from the sale
of the financed Aircraft.
From an investors’ perspective, there is the risk that the lessee under a JOLCO
will not exercise its call option for the leased Aircraft (leaving the Japanese equity
and, if applicable, financiers with a balloon on their financing, with the concomitant
asset risk). This risk can be minimized by maximizing the lessor’s investment
recovery to the extent that the transaction is not classified as a finance lease for the
Japanese tax purposes combined with more stringent redelivery conditions (e.g.
payment of maintenance accruals by the lessee when the aircraft is returned at the
lease expiry). In practice, the risk of a non-exercise of the call option has not
materialized.
Debt of a JOLCO lease is in principle booked by the lessor domiciled in Japan
to avoid Japanese withholding taxes.34 The Japanese equity investor can earn fixed
income during the lease term and make capital gains by disposal of the Aircraft at
the lease expiry. These investors can only take depreciation of the Aircraft to the
extent of their invested equity amount if the transaction is partly funded by non-
recourse debt. The typical equity investor in a JOLCO is a small and medium-size
Japanese company that is privately held.
There are some disadvantages associated with the JOLCO. It is a long-term
commitment – typically the transactions are of about 10 years’ duration. JOLCO
structures can be relatively inflexible – once they are up and running it can be difficult
to revisit the terms of a JOLCO if anything changes. An airline is not dealing with
an operating lessor in the traditional sense; it is really dealing with Japanese investors.
Over the life of a transaction, an airline may need to go to those investors and seek
their consent from time to time to do various things. That process needs to be
handled quite carefully in order to make sure the investors fully understand the issues
and the airline gets an answer within the time frame it needs.
Kommanditgesellschaft (KG)
Kommanditgesellschaft (KG) is an Aircraft Asset financing by individuals35
participating as limited partners (directly or by employing a trustee) in single
purpose companies which are organized in the legal form of a German limited
partnership (that is, a Kommanditgesellschaft). The KG has one general partner and
one or several limited partners. In the majority of cases, the general partner of a
German KG is a limited company (that is, Gesellschaft mit beschränkter Haftung
(GmbH)). The limited partners may be participating in the KG directly or via a
trustee. The KG may have an advisory board representing the investors’ interests
by monitoring the management of the general partner. The purchase of the Aircraft
57
36
Asset acquired by the KG is partly financed by the equity provided by the investors
and partly leveraged by bank loans. The KG receives income from leasing the Aircraft
Asset to a lessee. The KG is liquidated after the financed Aircraft Assets have been
sold.
Lease Financing
See introductory provisions to Part 3.
Lease/Head Lease Structure

This is the lease financing of an Aircraft whereby the owner of the Aircraft (head
lessor) leases an Aircraft Asset to an intermediate lessee/lessor and that intermediate
lessee/lessor subleases such Aircraft Asset to the operator/lessee.
PRACTICE NOTE
These structures are used typically to allow the operator/lessee to make
payments to the intermediate lessee/lessor without having to pay withholding
taxes on the net payments, taking advantage of favorable tax treaties between
the jurisdiction of the operator/lessee and the intermediate lessee.
Lease-in Lease-out (LILO)

A Lease-in Lease-out (LILO) structure is akin to a Lease/Head Lease Structure.
Liquidity Facility
A Liquidity Facility is a facility appended to a larger financing that provides for
payment of debt service (typically interest only) by a bank or other creditworthy
entity if the underlying obligor defaults in the making of such payment. A Liquidity
Facility is usually a revolving credit facility, but could be structured as a Standby
Letter of Credit (SBLOC). Liquidity Facilities are utilized in EETCs to provide
(typically) 18 months of interest coverage. The provider of the Liquidity Facility
would typically have a super-priority position in the Aircraft Assets securing the
larger financing. As such, principal and other amounts owing to the beneficiaries of
the Liquidity Facility are subordinated to recovery by the Liquidity Facility provider
of amounts it has paid. Effectively, then, the beneficiaries are trading timely pay-
ment of interest for future offsets to recoveries in the amount of such interest plus
a financing cost payable to the Liquidity Facility Provider. A Liquidity Facility,
therefore, is of value only if the investor (or the Rating Agency) places a value on
current, timely receipt of principal, since the investor will ultimately have to repay
the Liquidity Facility provider from collateral liquidation proceeds ahead of
repayment of principal.
58
The coverage period of 18 months is used in EETCs as this is the perceived (by
rating agencies) maximum period it should take to liquidate the Aircraft Assets
subject to an EETC. However, this period may be lengthened if the EETC issuer
is located in a jurisdiction in which the repossession time frame for financed Aircraft
Assets may exceed that in the U.S. Liquidity Facilities may be drawn if the liquidity
provider has its Credit Ratings downgraded to a specified threshold level or it does
not renew the facility by its renewal date.
Mortgage Financing
See introductory provisions to Part 3.
Non-recourse
This is an arrangement in a Back-leveraged Lease where the financier agrees that
recourse for its debt is expressly limited to the related Lease, the mortgage on the
leased Aircraft and other pledged collateral. In other words, the lessor is not
otherwise personally liable for the debt (except, perhaps, the Rats and Mice), and
none of its other assets are at risk.
PRACTICE NOTE
Some Back-leveraged Lease financings do provide for recourse to the operating
lessor, but those are atypical. Allowing for some level of recourse may provide
an operating lessor with better pricing and other terms, as well as access to a
broader lender pool. Also, in the case of an especially strong operating lessor
as to which there is full recourse, that lessor may be able to retain more
(exclusive) control over any Back-leveraged Lease that serves as security for
the transaction.
Operating Lease
Relating to any particular discipline (for example, tax, accounting, commercial law
or bankruptcy), this is a Lease Financing which does not meet the criteria of a
Finance Lease under the rules of such discipline. See a detailed discussion of these
criteria in ‘Finance/Capital Lease’. This would capture the structure where the owner
of the equipment (the operating lessor), rather than the lessee, retains most of the
benefits and risks of asset ownership. Operating Leases do not usually provide the
lessee with an option to terminate the lease prior to its scheduled termination date.
Orphan Trust Structure

This is a financing structure where the ultimate owner of the asset is a charity. Orphan
Trust Structures are employed to provide Bankruptcy Remote protection and as a
59
method for certain banks to avoid aggregating lessor/borrower exposure for internal
or regulatory lending-limit purposes. Exhibit 3.10 is a schematic showing the parties’

relationships in an Orphan Trust Structure.
PRACTICE NOTE
While the idea behind Orphan Trusts is to place ultimate ownership of Aircraft
Assets with a charity for the reasons outlined above, truth-be-told, the charity
never (intentionally) benefits from such ownership (other than by earning an
accommodation fee). By means of residual interest certificates in a CLO (which
entitle the holders of such certificates to residual value interest in the Aircraft
Assets) or a bargain purchase option granted to an operating lessor of the
financed Aircraft Assets at transaction conclusion, all upside and residual value
is engineered away from the charity.
Collateral
assignment of
purchase opon
Charity
Beneficiary
Purchase
Del. Stat. trust opon1
Operang lessor Lenders
Pledge of
borrower
100% member
Security
trustee/agent Del. LLC Sub loan $2
borrower/lessor Loan $
Purchase price
Mortgage and
lease Aircra Aircra seller
assignment
Lease
Lessee
__________________________
1
Bargain Purchase Opon to purchase membership
interest in Borrower/Lessor exercisable when loan
repaid.
2
Equivalent to equity investment.
Exhibit 3.10 Orphan Trust Structure

60
Owner Trust
This is a grantor trust established by a lessor (as beneficiary) to own an Aircraft. In

the U.S., Aircraft may be registered in the name of an owner trust.37 This is usually
accomplished by having the trust company/department of a bank establish a trust
to hold legal title to the Aircraft on behalf of one or more beneficiaries.38 An Owner
Trust has historically been the ownership vehicle of choice in U.S. Leverage Leases,
and for many other U.S. transactions. The benefits of using an Owner Trust are
comparable to other SPVs, with the added benefit that they will enable non-U.S.
lessors to own U.S.-registered Aircraft. In addition, under U.S. bankruptcy laws,
grantor trusts are not a type of legal entity that is susceptible to a bankruptcy filing.
The trustee of such a trust (often the trust department of a U.S. bank) must be
either a U.S. citizen or a resident alien. If any beneficiary is not a U.S. citizen, the
trust may still register the Aircraft in the U.S. provided the trustee also files an
affidavit stating that the trustee is not aware of any reason, situation, or relationship
the result of which would be that those persons who are not U.S. citizens together
would have more than 25 percent of the aggregate ‘power’ to influence or limit the
exercise of the trustee’s authority.
If the beneficiaries of a trust consist of non-U.S. citizens that do have such power,
the trust instrument itself must provide that those persons together may have no
more than 25 percent of the aggregate power to direct or remove a trustee. This is
ordinarily accomplished by adding limitation language to the trust agreement to the
effect that the beneficiary will have no rights or powers to direct, influence or control
the trustee’s absolute and complete discretion concerning the ownership and
operation of the Aircraft. To protect the non-U.S. citizen’s interests, this limitation
language is normally subject to the requirement that the trustee exercise due regard
for the interests of the beneficiary and agree not to sell, mortgage or otherwise
encumber the Aircraft without the prior consent of the beneficiary.
PRACTICE NOTE
On 18 June 2013, the FAA published in the Federal Register ‘Notice of Policy
Clarification for the Registration of Aircraft to Citizen Trustees in Situations
Involving Non-U.S. Citizen Trustors and Beneficiaries’ as an official rule of
the FAA. This Notice made clear that all owners of U.S.-registered Aircraft,
whether or not Owner Trusts and regardless of onshore or offshore bene-
ficiaries, have obligations ‘to communicate [to the FAA] critical safety
information’. To meet these obligations, an owner must maintain current
information about the identity and whereabouts of the actual operators of an
Aircraft and location and nature of the operation on an ongoing basis, thereby
allowing that owner to provide the operator with safety critical information in
a timely manner, and to obtain information responsive to FAA inquiries,
including investigations of alleged violations of FAA regulations.
The FAA expects that an owner trustee of Aircraft on the U.S. registry, in
carrying out the above-described obligations, normally should be able to
61
respond to a request by the FAA for the following information about the
Aircraft and its operation within two business days.
• The identity of the person normally operating, or managing the

operations of, the Aircraft.
• Where that person currently resides or has its principal place of
business.
• The location of maintenance and other Aircraft records.
• Where the Aircraft is normally based and operated.
The FAA further expects that an owner trustee of Aircraft on the U.S.
registry normally should be able to respond within five business days to a
request by the FAA for more detailed information about the Aircraft and its
operations, including:
• information about the operator, crew, and Aircraft operations on

specific dates;
• Maintenance and other Aircraft records; and
• the current airworthiness status of the Aircraft.
In the event of an emergency, the FAA may request a trustee to provide

information more quickly than the timelines noted above.
The FAA will in most cases, go directly to the air carrier or similar operator
through FAA personnel (for example, principal operations or maintenance
inspectors) to obtain information about the Aircraft and its operation. The
FAA will, however, always reserve the right to seek information from the
registered owner of an Aircraft on the U.S. registry.
Participation
This is a mechanism for a bank (or other debt financier) to off-load the obligations
and benefits of holding a loan (or credit commitment) by having a third-party lender
agree to take on the risks and rewards of such loan (or a portion thereof).39 As
compared with an assignment, where the lender holding the loan assigns its interest
to a new lender and is out of the picture once the assignment becomes effective,
the bank selling the Participation remains in the transaction as the lender of record
with the borrower. The purchaser of the Participation, the participant, in these
transactions, therefore, has no privity with the borrower, and is entirely reliant on
the selling bank to perform on the contract evidencing such Participation. Accord-
ingly, the participant is not only taking borrower risk, but also the risk of performance
by the bank from which it acquires the Participation. Also, it is the subject of
negotiation as to what instructions the facing bank must comply with coming from
the participant, and other intercreditor issues as between the two parties may come
into play. There are two types of Participations: funded and unfunded. In a funded
62
Participation, the participant pays the facing bank the full amount of the loan (or
portion thereof) in which it has purchased the participation, and such participant
receives distributions of principal and interest, at the contracted or agreed rate,40
made by the borrower. In an unfunded Participation, the participant pays the facing
bank the amount of the loan (or portion thereof) in which it has purchased the
Participation if and when a default occurs,41 and in the ordinary course such
participant receives a participation fee out of interest payments received by the
facing bank. Many Participations are sold such that the borrower is not aware of it
(as the selling bank may not want the borrower to know); these are called ‘blind
participations’.
While most loan agreements permit the granting of a Participation interest in the
related loans, restrictions are often placed on the ability of the participant to have
consent rights on other than the basic economics of the transaction.
PRACTICE NOTE
The term ‘participation’ is what I consider a loaded term. It may be used in
this context as a simple, straightforward term, but actually it needs a lot of
fleshing out to get to intended allocation of rights and obligations.
Pre-delivery Payment (PDP)

A Pre-delivery Payment (PDP) is a facility for the financing of the incremental
(progress) payments required to be made by Aircraft purchasers to OEMs prior to
the delivery of Aircraft. Aircraft production, for obvious reasons, has long lead times.
Procuring parts and construction of a particular Aircraft can take 6 to 18 months.
During this construction period, the OEM is making large expenditures for labor
and materials. To offset these ongoing pre-delivery costs, the OEM typically requires
in the related Purchase Agreement for its customer to make periodic progress
payments. These progress payments may be for as much as 20 to 30 percent of the
Aircraft’s purchase price.42 Insofar as these progress payments represent a large outlay
of cash by the airline or lessor Aircraft purchaser, financing is often sought to
maintain liquidity. An impediment to a financing is that there is no hard asset (yet)
that can be used as collateral. This is where the PDP comes into play. A PDP is a
full recourse financing by the purchaser secured by a collateral assignment of the
rights of the purchaser in the Purchase Agreement as relates to the delivery positions
of the Aircraft whose progress payments are being financed. The PDP financier,
therefore, can step in to the delivery of an Aircraft if the borrower defaults. The
crux of this benefit is the purchase price at which the financier can take delivery.
Insofar as Aircraft purchasers often receive significant discounts off OEM list prices,
this right of the financier to obtain delivery of an Aircraft at below market prices
and thereafter ‘flip’ the Aircraft at a higher price would enable the financier to recover
its loan. In addition, the financier does not typically fund 100 percent of the progress
63
payments, so there is so-called equity of the borrower in the Aircraft which improves
the LTV of the Aircraft’s delivery position.

Importantly, the OEM’s co-operation in the PDP is critical since the Aircraft
Purchase Agreements are not assignable without consent. The OEM, however, while
normally co-operative, typically does not provide to the financier the full discounted
purchase price under the Purchase Agreement, but rather a higher number. It is
this higher OEM offered purchase price (taking into account the borrower’s
‘equity’) that the financier must assess relative to market values when analyzing this
financing. As well, the financier will need to be mindful of, and build in restrictions
concerning:
• Aircraft price escalation;

• engine pricing and credits, if applicable;
• change orders to the Aircraft Purchase Agreement;
• Buyer Furnished Equipment (BFE) costs of the Aircraft; and
• OEM-required buy-back options (and the price the OEM will pay).
A further consideration for these types of financings is the Claw Back Risk inherent
in this structure. See Part 8, ‘Claw Back’.43
PRACTICE NOTE
PDPs are more credit-oriented than an Aircraft Financing in the light of the
lack of a hard asset serving as collateral.
As noted above, the OEM plays a major role in PDP financings. Here is a
summary of items the PDP financier and the OEM would normally agree to.
• PDP financiers may buy PDP-financed Aircraft for an agreed purchase

price from the OEM and thereafter exercise the borrower’s right to
purchase PDP-financed Aircraft under the Purchase Agreement.
• PDP financiers may step into the borrower’s shoes (to the exclusion
of the borrower) under the Purchase Agreement within a specified
time frame following a borrower default and not to sell the PDP-
financed Aircraft if a related ‘Event of Default’ is continuing under
the Facility.
• OEM may buy out PDP financiers for the debt balance of the PDP
facility (subject to agreed caps on breakage, expenses and interest)
within a specified time frame following a borrower default.
• OEM waives set-off rights.
• PDP financiers can assign rights under Purchase Agreement, subject
to customary conditions; the assignee will be entitled to certain war-
ranties, customer support and so on.
• OEM will apply PDPs against PDP-financed Aircraft purchase price.
• OEM will not refund PDPs to borrower (only to PDP financiers).
64
• OEM will not release the borrower from its obligations under the
Purchase Agreement or accept cancellation of the Purchase Agreement
unless OEM repays PDPs to PDP financiers.
• Subject to customary exceptions, OEM will not amend the Purchase
Agreement without PDP financier consent.
• Upon request, the OEM will notify the PDP financiers of any
outstanding breaches by the borrower which would entitle the OEM
to terminate the Purchase Agreement and, if the OEM intends to
exercise any right of termination it may have, the OEM will agree not
to exercise any such right without giving the PDP financiers the
opportunity to elect to cure the breach that gave rise to the right of
termination or complete the purchase of the relevant PDP-financed
Aircraft within an agreed period. In addition, the OEM will promptly
notify the PDP financiers of any cancellation by the borrower of the
Purchase Agreement or any part thereof.
Certain PDP financiers may require that there be in place at the time the
PDP facility is entered into definitive and binding arrangements for the PDP-
financed Aircraft to be financed on delivery to the borrower. In such a case,
the financier can rest assured that the borrower will have access to funds for
repayment of the related PDP loan on that Aircraft’s delivery.
Finally, PDP financiers wishing to create a relationship with an airline
located in a jurisdiction with relatively high repossession risk may turn to PDP
financing because the collateral (that is, the Purchase Agreement) is per se
located in the OEM’s jurisdiction.
Pfandbrief
This is an internationally recognized type of covered bond as used in Germany by
German banks to leverage their aircraft loan portfolios. Pfandbrief-covered bonds
are highly secure securities that have wide appeal and a high level of liquidity. They
are regulated by statutory law (Pfandbrief Act and supporting directives). The
Pfandbrief product was only recently approved in Germany to be available for aircraft
loans (having long been available for shipping, government-backed and real estate
portfolios); the aircraft-secured loans in a Pfandbrief program are known as the
covered pool. This Pfandbrief program can be used by qualifying financial institutions
to finance aircraft loans on their books. Pfandbrief bonds offer high levels of security
as a result of a combination of safety mechanisms. Under a Pfandbrief program, a
fiduciary agent (Treuhänder) and at least one deputy are appointed by the Financial
Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, commonly
referred to as ‘the BaFin’). The most important duty of the fiduciary agent is to
monitor the prescribed cover of the Pfandbrief on a day-by-day basis. The Pfandbrief
program contains detailed provisions on requirements for a ‘day one’ LTV of 60
percent with an accelerated amortization profile required,44 a going forward ‘normal’
65
LTV reduction requirement through the amortization of the loan and additional
obligations to provide additional collateral in case of a severe LTV disturbance. In

addition, the Pfandbrief Act imposes detailed specifications for qualifying collateral
and a risk management system in order to further improve protection for Pfandbrief
creditors. Furthermore, the transparency provisions of the Pfandbrief Act are
intended to permit investors to assess the composition of the Pfandbrief cover pool
on a quarterly basis. Finally, anything relevant for the Pfandbrief program of a
Pfandbrief bank is supervised and monitored by the BaFin, which makes random
checks on the cover of the Pfandbrief. The separation of cover pool assets from the
general estate of a Pfandbrief bank (as issuer) in the event of a Pfandbrief bank’s
insolvency is achieved by the registration of cover assets in a cover register which is
– under statutory law – sufficient to secure the segregation. This is a fundamental
difference to other covered bond programs where the cover assets are transferred
to SPVs. As a result of such segregation, the claims of the Pfandbrief creditors are
not affected by the commencement of insolvency proceedings against the assets of
the Pfandbrief bank. Pfandbrief debt may be issued in the U.S. capital markets as a
144A transaction.
Pooling
Pooling is the contribution by two or more aircraft operators of Spare Parts and/or
Engines into a common pool for utilization by the parties to such pooling
arrangement. Pooling is a way to reduce, through economies of scale, the carrying
costs of Spare Parts and Spare Engines. Participants in a pooling arrangement are
entitled to withdraw items from the agreed stock (pool) held by any participant.
PRACTICE NOTE
Financiers are rather reticent to allow Pooling of their Aircraft Asset collateral
since tracking and traceability are greatly impaired once the asset leaves the
possession of the operator that is the beneficiary of the financing. Pooling
arrangements might have impacts on ownership and security-interest rights in
collateral.
Pass Through Certificates (PTCs)

Pass Through Certificates (PTCs) are securities issued to investors by, usually, a
trust established by an issuer, that represent a fractional undivided interest in that
trust. The main assets of these types of trusts as utilized in Aircraft Finance
transactions are promissory notes (also known as ‘equipment notes’) of an airline
issued pursuant to Mortgage Financings (or, in the old days of U.S. Leveraged
Leases, equipment notes of Owner Trusts issued pursuant to Lease Financings).
By utilizing these trusts, equipment notes of a comparable economic nature from
66
multiple Aircraft can be pooled into a single security. EETCs use the PTC structure.
Holders of a PTC have only such rights and benefits as flow through to it from the
equipment notes held in the related trust.
Securitization
This is the financial practice of pooling various types of contractual payment
obligations to investors which, in the context of Aircraft Finance, would typically
be Lease rental receivables or debt obligations in a CLO or CDO, respectively, as
discussed above.
Spare Parts Financing

This is the financing of an airline’s Spare Parts inventory (see Part 2, ‘Spare Parts’).
Special Purpose Vehicle (SPV)

A Special Purpose Vehicle (SPV)45 is a legal entity (corporation, partnership, owner
trust, limited liability company) established for the sole purpose of participating in
a particular financing, typically as the owner/lessor/borrower of a particular asset or
group of assets. In a typical structured finance transaction of Aircraft Assets that
involves a Bankruptcy Remote entity, the legal entity is created whose purpose is
limited to acquiring Aircraft Assets (and related Leases) to be financed and
undertaking ancillary obligations. The SPV acquires the Aircraft Assets and enters
into a financing arrangement, pledging the equipment and the leases as collateral.
Some of the customary features of an SPV are: (i) organizational documents and
transactional document covenants that limit the entity’s business to a single, specific
and narrow purpose (generally, acquiring, leasing, financing, refinancing and
eventually liquidating the Aircraft Assets); (ii) organizational documents and
financing documents that contain ‘separateness’ covenants that require the subsidiary
to be managed and operated in a manner that is distinct from the assets and business
of the related lessor or transaction originator (among other entities); (iii) Non-
recourse (recourse is limited only to the financed assets); and (iv) the appointment
of one or more independent managers or independent directors of the SPV who
meet certain requirements that provide some comfort to financing parties that the
independent director is not overly sympathetic to the interests of the related lessor
or transaction originator. The independent director’s favorable vote or consent is
typically necessary for the SPV to approve a voluntary bankruptcy filing, to consent
to an involuntary bankruptcy or to engage in a corporate restructuring.
PRACTICE NOTE
There are a variety of reasons SPVs are so frequently employed to own Aircraft
Assets on behalf of an operating lessor.
67
• If the Aircraft Asset is subject to a financing, removing the asset from

the operating lessor:
º makes the Non-recourse nature more simple to document;
º provides Non-consolidation protection for the lender;
º insulates the lender from Lessor Liens that may spread to all the
assets of an operating lessor;
º provides the lender with another avenue for foreclosure by having
a pledge over the SPV’s Ownership Interests; and
º allows inclusion of an Orphan Structure if required by a lender.
• Insulates the operating lessor from Lessor Liability.
Importantly, independent directors appointed by creditors – notwithstanding that

their appointment is to protect creditors – must be subject to normal director
fiduciary duties. Thus, if it is in the best interest of the SPV to file for bankruptcy,
a director is required to authorize the same. This legal requirement should not impair
the intended purpose to protect an SPV from bankruptcy as a matter of consolidation
with a parent entity, but does present risk when the underlying financing is at risk
due to, for example, an impaired lessee in a Back-leveraged Lease situation.
Statutory Trust
A Statutory Trust is a trust formed by statute (for example, Delaware Statutory
Trusts (DSTs) formed pursuant to the Delaware Statutory Trust Act, 12 Del. C.
§ 3801 et. seq. (the ‘DST Act’)). Due to the inherent vagaries of common law and
fact-specific case law, certain states felt that they could clarify the benefits offered
by trusts and provide more certainty as to the availability of such benefits (and in
certain circumstances actually enhance the benefits) by codifying the benefits under
state law, creating Statutory Trusts. The laws governing Statutory Trusts vary slightly
by state jurisdiction. Any such variations will typically concern the wording on the
topics of: (i) the description of the subject-matter of trusts; (ii) the nature of the
writing required; (iii) the party who must sign or subscribe; (iv) the use of an agent
or attorney; and (v) whether there must be a signature or subscription. For example,
Delaware defines a Statutory Trust as an unincorporated association which:
1 is created by a governing instrument;

2 [is a trust] under which property is or will be held, managed, administered,
controlled, invested . . . and/or operated, or business . . . activities . . . are
carried on or will be carried on, by a trustee or trustees . . . for the benefit
of such person or persons as are or may become beneficial owners or as
otherwise provided in the governing instrument; and
3 files a certificate of trust pursuant to § 3810 of [the DST Act].
An additional requirement is that of trustee residency. Therefore, the trustee must

be a citizen residing in the state under which the Statutory Trust will be formed. If
68
the trustee is a natural person, such individual must reside in such state; or if the
trustee is a business entity, such entity must have its principal place of business in
such state. Once formed, a Statutory Trust will have perpetual existence, except to
the extent otherwise provided in the governing instrument (commonly referred to
as a Trust Agreement). With respect to common law Grantor Trusts, on the other
hand, the rule against perpetuities continues to apply, and common law Grantor
Trusts must have a limited life.
Structurally, the beneficiary holds the beneficial interest in the trust and thereby
indirectly owns all the assets therein. In Aircraft transactions, the trustee owns the
aircraft on behalf of and for the benefit of the owner of the trust and must follow
the direction of the owner. A key feature of Statutory Trusts is that they protect the
assets held in trust so that no creditor of a beneficial owner of the trust has any right
to obtain possession of, or exercise legal or equitable remedies with respect to, the
assets of the trust. Unless otherwise provided in the governing instrument, the
beneficial owners of a Statutory Trust have the same limitation of liability as would
a stockholder of a corporation.
A validly formed Statutory Trust offers many other attractive features. It has broad
power to provide indemnification to a trustee, a beneficiary and any other person,
except as restricted by the governing instrument. Furthermore, the risk of bankruptcy
may be minimized by vesting the decision of whether to voluntarily commence
bankruptcy proceedings in an appropriate decision maker, such as an independent
trustee or other manager.
Sukuk
Sukuk is an Islamic law-compliant financing. A Sukuk (which works in a broadly
similar way to a conventional securitization) is evidenced by a certificate that pro-
vides an investor with ownership or part-ownership in the underlying asset, usufruct,
or service. The Sukuk represents beneficial ownership of the underlying assets and
therefore entitles its holders to receive a pro rata share of profits generated by the
asset (not a fixed return tied to their face value). A Sukuk can also be issued in
tradable form and listed on investment exchanges. A Sukuk transaction is intended
to comply with Sharia’a prohibitions on the charging of interest and, therefore, repre-
sents an equity, not a debt, interest. Other forms of Islamic finance structures include
ijara, mudaraba or murabaha financings.
Synthetic Lease
This is an off-balance sheet (or ‘synthetic’) lease financing structure treated as a
lease for accounting purposes but as a loan for tax and commercial finance purposes.
This structure is used by corporations who may be seeking off-balance sheet
reporting of their asset-based financing, and who can nevertheless efficiently use the
tax benefits of owning the financed asset.
To achieve off-balance sheet treatment, a ‘lease’ financing must satisfy the
standards set out in Statement of Financial Accounting Standards No. 13 (SFAS
13). SFAS 13, as modified by various amendments, interpretations and technical
69
bulletins issued by the Financial Accounting Standards Board (FASB), applies fairly
objective tests between operating leases (the desired result) and capital leases. The
goal of the lessee in a synthetic lease is operating lease treatment for financial
accounting purposes, such that neither the asset nor the liability from the transaction
is reflected on its balance sheet. To reach this goal, the lease must:
• not automatically transfer ownership of the leased property to the lessee by

the end of the lease term;
• not contain a bargain purchase option (that is, a purchase price not less
than the reasonable estimate of fair market value at the end of the lease
term);
• have a term of less than 75 percent of the estimated economic life of the
property; and
• be priced such that the present value (typically discounted at the debt rate)
of the rentals and other minimum lease payments is less than 90 percent
of the fair market value of the leased property.
These SFAS standards are subject to ongoing review and will likely change in
the near term. In order to effect an off-balance sheet lease financing, the borrower/
lessee sells the assets to be subject to the financing to a lender/lessor for the amount
of the intended financing (typically for an amount of 80 to 100 percent of its then
current fair market value; the applicable percentage to be based on credit and asset
considerations). The lender/lessor immediately leases the financed assets back to
the borrower/lessee. The amortization (that is, the amount of ‘rent’ earmarked for
the principal component of debt service), back-end balloon (that is, the unamortized
amount of the loan) and tenor of the lease must satisfy the guidelines set out above.
On maturity of the synthetic lease, the lessee will have the option either to purchase
the leased assets for the amount of the unamortized portion of the loan (the Balloon)
or to pay an amount (the ‘deficiency guarantee amount’) to the lessor (and receive
nothing in return). The at-risk portion for the lessor/lender, the difference between
the Balloon and the deficiency guarantee amount (the At-Risk Amount), is a risk
the lender/lessor is willing to take because it would make economic sense for the
lessee/borrower to walk-away from its asset by paying the deficiency guarantee
amount only if the value of the financed assets are less than the At-Risk Amount.
In fact, at the outset of an off balance sheet synthetic lease financing, the projected
value of the financed assets is typically many multiples in excess of the At-Risk
Amount.
An off balance sheet lease financing is, in substance, a mortgage financing. For
tax and commercial (UCC) law purposes, the lessee is viewed as the true owner of
the asset. This is because, except for title, indicias of ownership reside with the lessee:
• the lessor/lender’s return on the transaction is equivalent to a loan financing;

there is no upside available;
• the lessee/borrower retains the burdens (maintenance, insurance, risk of loss
and so on), as well as the benefits (use, upside, and so on), of ownership;
and
70
• the lessee/borrower may not unilaterally terminate the lease without

recouping for lessor/lender its entire investment.
The conveyance of title to the financed asset and leaseback structure is, under
commercial law terms, a ‘lease intended for security’ with the holding of title to the
asset simply a security device akin to a mortgage.
By way of illustration, consider the following example. Company X desires to
finance on an off-balance sheet basis a sizeable asset on its books, such as a corporate
jet. An appraisal shows that the asset is worth U.S.$110 million has a remaining
economic life of 9 and one third years and has a projected value of U.S.$75 million
in 7 years (75 percent of 9 and one third years). A lessor/lender may be willing to
advance U.S.$100 million on the asset (based on its assessment of both the asset
and Company X). Based on the 90 percent test, Company X can agree to a
Deficiency Guarantee Amount of U.S.$66 million and a Purchase Option Payment
of U.S.$82 million (assuming a U.S.$700,000 a month rent payment, interest at
7 percent per annum and interest and principal allocated on a mortgage-style basis).
The At-Risk Amount is U.S.$16 million (U.S.$82 million minus U.S.$66 million),
which is well below the projected value at the end of the lease term.
PRACTICE NOTE
In 2002, the Financial Accounting Standards Board (FASB) promulgated
a number of ‘interpretations’ that largely rendered the Synthetic Lease
untenable.
U.S. Leveraged Lease

This is a long-term leveraged Operating Lease where the lessee brings together both
the equity investor owning the lessor and the lender (in contrast with a Back-
leveraged Lease where the lessor sources the lender) to finance an Aircraft. The
lessor owns the equipment and will generally provide a portion of the purchase price
(20 percent) while borrowing the remainder, usually on a non-recourse basis, from
the lender. The lessor’s economic return in these transactions includes the tax
benefits accruing to an owner of Aircraft (depreciation and so on), and such benefits
are factored in the rentals payable by the lessee thereby reducing the lessee’s rental
obligations. As compared with traditional Operating Leases, U.S. Leveraged Leases
allow for an early termination for obsolescence (which includes the lack of a need
by the lessee for the Aircraft). U.S. Leveraged Leases were the preferred financing
structure for the major U.S. airlines (and a number of non-U.S. airlines) in the
1980s and 1990s, and, accordingly, billions of dollars of Aircraft were financed by
this structure. In the aftermath of 9/11 and with so many of the U.S. airline majors
filing for bankruptcy in the 2000s, the traditional lease-equity sources of capital
(Philip Morris, Disney, Ford Motor Credit, NYNEX, AT&T and so on – large
corporations with income to shelter) dried up when they suffered heavy losses (and
71
Pledged account
Debt service $
Waterfall
Loan
Lessor/owner
Security trustee/agent distribuon B Lenders
U.S. grantor trust
$
C
Lease rentals $
Trust agreement Mortgage and
lease assignment
Owner parcipant
Aircra
Lease
Airline (lessee)
Exhibit 3.11 U.S. Leveraged Lease Structure

tax recapture) when their deals soured. Today, only the strongest credits can obtain
lease equity and, accordingly, the U.S. Leveraged Lease is rarely employed.
Exhibit 3.11 shows the parties’ relationships in a U.S. Leveraged Lease.
PRACTICE NOTE
Since U.S. Leveraged Leases are tripartite transactions (and not beholden to
market standards for documentation terms, much in the way ECA transactions
are), these are among the few types of transactions where the parties actually
sit down in a conference room to negotiate documentation.
Warehouse
A Warehouse is a financing facility typically supplied by banks for an operating lessor:
(i) to enable the lessor to accumulate a sufficient number of owned (and leased)
Aircraft Assets to effect an eventual Securitization of the accumulated pool; or (ii)
as a financing vehicle for Aircraft to ‘warehouse’ them until they are traded, parted-
out and/or an alternative long-term financing solution is found. Warehouses may
also be employed as a short-term facility to accommodate fast acquisitions by a lessor
who would then turn to long-term financing at a later date.
Warehouse facilities may be structured with an identified pool of Aircraft Assets
to be financed, or may be more open-ended with no identified pool. In the latter
case, the bank will identify the eligible equipment, eligible jurisdiction and eligible
lessees that may be part of the facility, and impose Concentration Limits, Mandatory
72
Document Terms and Mandatory Economic Terms as well. In either case, significant
due diligence is performed on the financed leases, lessees and jurisdictions.
Wet Lease
A Wet Lease is an Operating Lease where the lessor provides the crew and,
depending on the deal, fuel and maintenance services, to the lessee, in addition to
the Aircraft itself. An ACMI is a form of Wet Lease.
Notes
1 The vast majority of leasing transactions employ an SPV structure, but that is not required. The
lessor operating company can certainly be the direct owner of the leased Aircraft Asset.
2 Known as ‘interim lift’.
3 Some airlines, for example, have arbitrary policies of, for example, 50 percent leased and 50 percent
owned, and use the shorted term operating leases to rejuvenate their fleets.
4 But see discussion on ‘Operating Lease’, where accounting rule changes may result in Operating
Lease financing to be ‘on’ balance sheet.
5 Boeing Capital Corporation, ‘Current Aircraft Finance Market Outlook, 2013–2017’, available at
www.boeingcapital.com/cafno/ (The BCC Outlook).
6 See Nicholas Katzenbach’s opinion as Attorney General, 30 September 1966.
7 The ‘four letter word’ in Aircraft Finance.
8 Scheinberg, R, ‘The bank liquidity crisis and aircraft finance: a sector review’, Commercial Lending
Review 24(5), 2009, pp. 17–23.
9 The answer to this question has major ramifications in the aircraft finance sector. If there is a gap,
then the major aircraft manufacturers, if they are unwilling to supply the requisite financing, may be
left placing ‘whitetails’ in the desert insofar as their customers will not be able to purchase the aircraft
as they roll off the assembly line. In addition, if refinancings cannot be done because of the lack of
financing, airlines or operating lessors who own balloon payments on loan maturities may face
bankruptcy or, at a minimum, may be forced to turn over aircraft collateral in satisfaction of debt (if
a non-recourse financing). A plethora of whitetails and repossessed aircraft would serve to place
pressure on aircraft values over and above the pressures placed on those values as a result of the
economic downturn.
10 In a bid to obtain financing from the aircraft (and engine) manufacturers, airlines may condition new
aircraft orders on new (and immediate) financing. As the treasurer of one U.S. major told an OEM
(repeatedly) as it was negotiating a financing package for a new order: ‘We don’t buy airplanes; we
buy financing and it comes with airplanes.’
11 The BCC Outlook.
12 Non-U.S. airlines accessing the EETC market will likely rely on private (versus public registered)
offering securities exemptions such as Rule 144A so as to avoid the necessity to become a reporting
entity subject to the Securities and Exchange Act of 1934.
13 Non-U.S. airlines accessing the EETC market will likely rely on private (versus public registered)
offering securities exemptions such as Rule 144A so as to avoid the necessity to become a reporting
entity subject to the Securities and Exchange Act of 1934.
14 Thankfully, no one is calling them (yet) ‘pre-owned’.
15 See endnote 9, for some further color on this topic.
16 At the beginning of the American Airlines bankruptcy (filed November 2011), the related Deficiency
Claims were selling at 22 cents on the dollar. In June 2013, they were selling at 93 cents on the dollar.
17 Of course, if the debtor agrees to perform under Section 1110(a), the investor simply has a performing
security. And, if the debtor returns the Aircraft Asset under Section 1110(c), there would be no lease
attached to the security.
73
18 Similarly, they need to take into account currency issues that relate to their oil needs since oil is
similarly traded only in U.S. dollars.

19 When the financial markets melted down in 2008–2009, many French banks, for example, lost U.S.
dollar funding from U.S. money market funds. They had to scramble to find alternative U.S. dollar
funding sources (or had to pull back on U.S. dollar lending).
20 As an intercreditor matter, the holders of the Subordinated Tranches would not typically have the
right to accelerate the debt, but would have a Buy-Out Right. See Part 9, generally.
21 These ECAs are all parties to the ASU.
22 While U.S. Ex-Im actually offers both of these financing structures, many of the other ECAs only
offer one or the other.
23 Boeing Capital Corporation, ‘Current Aircraft Finance Market Outlook, 2013–2017’, available at
www.boeingcapital.com/cafno/.
24 There was a period of time when many EETCs also utilized a ‘wrap’ structure; the most senior Tranche
was, in essence, ‘guaranteed’ by a monoline insurance company, such as MBIA or AMBAC. However,
with the demise of the monoline insurance industry in the aftermath of the 2008 financial meltdown,
this feature is not currently available.
25 As noted in U.S. Leveraged Leasing, this product is largely unavailable due to the widespread losses
suffered by the equity investors who funded this market. We take the trouble to make note of it here
because of the large number of older EETCs still outstanding that have embedded U.S. Leveraged
Leasing structures.
26 A pass through trust is a grantor trust established under state law that is a ‘disregarded entity’ for
federal income tax purposes. It operated just like it sounds: all money received by it is passed through
the holders of the PTCs.
27 Scheinberg, R, ‘A guide for the perplexed: exogenous elements to consider when investing in
enhanced equipment trust certificates (EETCs)’, Journal of Structured Finance, Winter 2005, pp. 46–54.
28 Cross-default/collateralization was lacking historically largely due to the fact that in EETCs having
embedded U.S. Leveraged Leases, the equity investors would not permit cross-default/collateralization.
29 ‘Adjusted’ interest is interest on junior class PTCs in respect of unimpaired pool balances.
30 Treatment of Leases with an Option to Purchase for Aircraft Registration, 5 Fed. Reg. 40,502 (3
October 1990). The legal opinion was addressed to Peter Leiter, General Counsel of Bank of America.
33 There are other definitions of ‘Interchange Agreement’ that are used that are more likely to be used
in the context of business aircraft.
34 Some banks with no Japanese booking office that nevertheless want to participate in this product
may engage a fronting bank with a Japanese booking office and purchase a silent participation in the
JOL loan. There are tax risks in taking this approach.
35 Most often referred to as ‘doctors and dentists’.
36 The KG market in the shipping and real estate sector is far larger than the aircraft sector.
37 14 CFR. §47.7(c). In the U.S., Aircraft are registered in the name of the owner, rather than the name
of the operator.
38 The FAA has interpreted 14 CFR. §47.7(c)(2)(iii) as requiring registration of the applicable aircraft
in the name of the trustee and not in the name of the trust itself.
39 This term can certainly have other meaning, and may be used to indicate that a party is simply taking
a part of a facility (but for that, you do not need a definition).
40 The selling bank may retain a skim.
41 This trigger is subject to negotiation.
42 While this range covers a large portion of aircraft orders, there are variations above and below the
range depending on the nature of the purchaser, its order book and so on.
43 Gee, CA, ‘Aircraft pre-delivery payment financing transactions’, Journal of Structured Finance, Fall
2009, pp. 11–21.
44 Mortgage-style amortization is not fast enough, and ‘bullet’ maturities are not permitted.
45 Sometimes referred to as a special purpose corporation (SPC).
74

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The Commercial Aircraft Finance Handbook

Deal Types, Structures and Enhancements

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DEAL TYPES, STRUCTURES AND

Introduction: basic transaction types

SPV/lessor Lease $ rentals Airline

Exhibit 3.1 Lease Financing

Security trustee/agent Loan distribuons $ B Lenders

Mortgage Loan $ (day 1)

Exhibit 3.2 Mortgage Financing

down into two groupings:

1 the third party equity, being the lessor/owner in a transaction; and

• Lessee performance (and other credit support providers) (credit risk).

• traditional operating leasing companies (AerCap, GECAS, ACG, and so

an increasingly visible opportunity. The historically strong performance of

Distribution; securities laws

there is often drafted an offering memo describing the transaction.

The placement of Aircraft Asset-backed securities in the ﬁnancial markets is not

the market and optimizing yields for the issuer.

Balance of supply and demand

• banks were looking to preserve capital, so as to minimize the addition of

ﬁnancing is not available for purchasers/users of commercial aircraft located in

Original Equipment Manufacturers

Secondary market trading

position to so monetize these assets may require Foreclosure (discussed in detail

under Part 8, ‘Foreclosure’) and the taking of other enforcement action.

U.S. dollar supremacy

– the individual underwriters do not backstop the underwriting obligations of the

Asset-backed Securities (ABS)

Aircraft, Crew, Maintenance and Insurance (ACMI)

Exhibit 3.3 Back-leveraged Lease Facility

Collateralized Debt Obligation (CDO)

SPE Issuer Loan

Mortgage Mortgage Mortgage Mortgage

Aircra Aircra Aircra Aircra

Airline/ Airline/ Airline/ Airline/

Exhibit 3.4 CDO Structure

no recourse to the originator. The issuer is designed to be Bankruptcy Remote.

Credit enhancement and tranching

Collateralized Lease Obligation (CLO)

Aircra Aircra Aircra Aircra

SPE1 SPE2 SPE3 SPE4

Lease Lease Lease Lease

Lessee Lessee Lessee Lessee

Exhibit 3.5 CLO structure

Credit enhancement and tranching

Unlike conventional corporate bonds which are unsecured, securities generated in

Credit Default Swap (CDS)

Cross-border Tax Lease

Export Credit Agency (ECA) Financing

• Brazil – Banco Nacional de Desenvolvimento Economico e Social (BNDES)

• Canada – Export Development Canada (EDC) (supporting Bombardier

ECA Financings come primarily in two structures.

1 Guarantees issued by the ECA to lenders, whose loans allow an owner or

Orphan SPV Debt service $ Lenders

Exhibit 3.6 ECA Guaranteed Financing Facility

ECA Co-commercial Financing