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05 February 2014
As part of the government's ongoing consultation on the ratification of the Convention on International Interests in Mobile Equipment and the Protocol thereto on Matters Specific to Aircraft Equipment, the government response to the call for evidence was published on December 6 2013. It followed a call for evidence issued on July 30 2010 and a summary of responses published in February 2011. The government response is positive, but cautious about any benefits that may accompany ratification, noting that it:
The government response also suggests that, following ratification, UK airlines may be eligible for the Organisation for Economic Cooperation and Development Aircraft Sector Understanding (ASU) discount, which an export credit agency can grant in relation to its support for the financing of an aircraft. The discount for UK airlines is normally restricted as the United Kingdom is a producer nation – this is the unwritten 'home country rule', which has traditionally prevented UK, French, German, Spanish and US airlines from receiving export credit support from export credit agencies for aircraft manufactured in those countries (predominantly Airbus and Boeing aircraft).
However, British Airways was able to obtain the support of Euler Hermes (the German export credit agency) for its Japanese operating lease with a call option transaction for an Airbus A380 in September 2013. The 'home country rule' does not apply to, among others, Embraer or Bombardier aircraft.
One advantage of ratifying the convention and the protocol to the standard the ASU suggests – the so-called 'gold standard' – is the positive weight that ratings agencies attach to this standard when they consider the ratings for capital markets transactions. In this way, even if a UK airline does not enter an export credit-supported aircraft financing transaction, full implementation of the qualifying declarations may result in the ratings agencies providing more favourable ratings for capital markets transactions than are available now.
One of the principal qualifying declarations is the adoption of 'Alternative A', the insolvency regime set out in Article XI (Remedies on insolvency), which arguably provides the best legal protection for creditors in aircraft financing transactions. The government has not yet determined whether to implement Alternative A, although the government response indicates this will be consulted on. The United Kingdom's ability to adopt Alternative A is restricted by the declarations made by the European Union and implementation may be made only through amendment to national insolvency laws. In capital markets transactions through the Enhanced Equipment Trust Certificates vehicle with airlines located in countries (other than the United States) which have ratified the convention and the protocol (eg, Canada and the United Arab Emirates), the adoption of Alternative A has been a focus of the ratings agencies.
In the United Kingdom, British Airways' 2013-1 enhanced equipment trust certificates of June 2013 (covering six Airbus A320s, two Boeing B777-300ERs and six Boeing B787-8s) were entered into without the convention or the protocol's Alternative A protection, which is favoured by the ratings agencies.
When giving a rating for the enhanced equipment trust certificates, Fitch noted:
"[its] legal analysis for this transaction relied on the general insolvency regime in the UK, which [it] considers to be strong for creditors in general, but notes that there are no special carve-outs for aviation assets similar to 1110 or the CTC. However, the creditor-friendly nature and reliability of the UK legal regime, precedent under UK law, and several structural elements of the transaction provide significant credit protection, making possible the application of [its] EETC criteria to this transaction."(1)
It could be argued that the repossession regime in the United Kingdom is sufficiently robust so as not to need Alternative A, but previously favourable statements by ratings agencies do not guarantee that the United Kingdom's repossession regime will continue to be regarded this way. Adoption of Alternative A should ensure that UK airlines are at least on a par, in this respect, with the airlines of other countries that have adopted Alternative A.
Ratification of the convention and protocol has, as some of those who commented on the call for evidence highlighted, raised the possibility of ridding English law of fundamental issues with respect to the creation of valid mortgage interests in aircraft and valid title transfer (if the aircraft is located outside the United Kingdom at the relevant time). The rule under English law is that the mortgage interest/title transfer must be valid in the jurisdiction in which the aircraft is located at the relevant time – that is, the application of the lex situs rules as confirmed in Blue Sky.(2) Some commentators have (perhaps hopefully) suggested that, because the convention and the protocol do not look to lex situs when considering whether an international interest has been created, lex situs would have no relevance in the creation of valid mortgage interests (or valid title transfers) under English law following ratification of the convention and the protocol.
The government response confirms that the ratification of the convention and protocol will not solve this. Ratification allows registration of interests against UK 'debtors' (as defined in the convention and protocol) and in relation to UK-registered aircraft, but this does not resolve general lex situs issues. Creditors must still look to the lex situs to determine whether an interest has been validly created or transferred.
Ratification of the convention and protocol may represent an opportunity to make an additional amendment to English law to address the lex situs issues, but the government response does not indicate that it is considering this matter.
The government response does not set out a timetable for the ratification of the convention and protocol, but notes that there will be a consultation on the declarations to be made in relation to the treaty.
The United Kingdom's choices in relation to the declarations are limited, in certain circumstances, by its membership in the European Union. The European Union acceded to the convention as a "regional economic integration organisation" (pursuant to Article 48 of the convention) and made certain declarations, which bind the member states so that no member state will be able to make a declaration in relation to:
For further information on this topic please contact John Pearson at Vedder Price by telephone (+44 20 3440 4680), fax (+44 20 3440 4681) or email (email@example.com). The Vedder Price website can be accessed at www.vedderprice.com.
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