Bond requirements imposed on non-Brazilian plaintiffs in Brazilian aircraft repossession cases have been subject to uncertainties for some time. However, emerging court trends have increased the clarity of such issues and improved the procedures for the repossession of leased aircraft. While these trends and the decision have not eliminated all uncertainties, they have reduced them significantly.
Two recent changes - one legislative and one regulatory - have substantially altered the way in which aircraft may be financed for Brazilian operators. The changes affect virtually all new cross-border aircraft finance transactions, although the precise impact will depend on the type of Brazilian operator. For business aviation, the modifications are the most significant and sweeping to occur in nearly two decades.
Despite Brazil's position as a major emerging market, its transportation infrastructure is somewhat lacking. Ground-based alternatives are limited, which exerts tremendous pressure on the air transport system. As the government does not have the necessary resources to modernise its facilities, it has turned to privatisation to speed up renovation of the country's most important airports.
Despite committing to the Cape Town Convention over a year ago, Brazil's legal system requires publication of a further executive order before the convention can be fully implemented. Notwithstanding this, the government recently announced proposed rules and procedures concerning how international interests over aircraft registered in Brazil may eventually be made with the International Registry, among other things.
Mortgages given over aircraft registered in Brazil have been used for many years. However, there are several major differences between Brazilian aircraft mortgages and those given under New York or English law. An understanding of these differences assists lending institutions in deciding how to evaluate their security packages, when to require aircraft mortgages and what they can expect from such mortgages.
Since the early 1990s repossession of leased aircraft in Brazil has been a relatively efficient process, with most lessors able to secure possession of leased aircraft in a matter of days. However, over the past two years, several changes have occurred in the procedures that have resulted in longer periods for exporting and deregistering aircraft repossessed from Brazilian lessees.
In recent months Brazil has been inching closer to ratification of the Cape Town Convention on International Interests in Mobile Equipment and the attendant Protocol to the Convention on Matters Specific to Aircraft Equipment. The Senate recently approved both the convention and the supplementary protocol, completing the last legislative step in the approval process. The president is expected to ratify the convention shortly.
The National Civil Aviation Agency (ANAC) has recently made two changes in its practices that are causing uncertainty and difficulty in some aircraft lease deliveries and redeliveries. As in the past, changes in ANAC practices are subject to review and may be reversed, especially if airlines and other operators raise any problems relating to them. Occasionally, ANAC alters its policies without realising the potential consequences.
After the September 11 2001 terrorist attacks, many governments sought or were required to provide support to their national airlines in bearing the increased cost of insurance against certain war and terrorist risks. In order to deal with this, the Brazilian government passed a specific law providing certain cover to Brazilian airlines. However, the law generates many misunderstandings concerning the risks and parties covered.
Earlier in 2010 the Brazilian Aeronautical Registry promulgated several changes to its filing procedures that have caused considerable confusion and altered the way in which parties must organise closings. Its objective was to streamline the filing and registration process, and it is hoped that the new policies will result in more consistently applied policies that will help closings to proceed without delays.
Previous court cases have produced precedents that posed a threat to the voting rights of aircraft lessors in Brazilian bankruptcy restructuring proceedings. However, a recent decision by a Sao Paulo bankruptcy court and the initial vote of an appeals court panel indicate a more balanced and beneficial approach, rather than one which follows vague concepts of equity in an attempt to save airlines at any cost.
One of the innovations of the Brazilian Bankruptcy Law was to allow airlines to seek bankruptcy restructuring protection. Since the law entered into force in 2005, five Brazilian airlines have sought judicial protection to allow for restructuring - termed 'judicial recuperation' in Brazil. One such case, the VarigLog Case, created precedents that threaten the exercise of creditor voting rights.
In 2007 the monopoly that the Brazilian Reinsurance Institute had held over Brazil's reinsurance market for nearly 70 years began to end. Legislation that had been expected for 10 years was finally ratified. Part of that legislation addressed cut-through clauses in reinsurance contracts, which are particularly relevant to aviation contracts given the extent to which risk is reinsured through international reinsurance markets.
A certidão is a printed extract from the records of the Brazilian Aeronautical Registry to determine the ownership and lien status of registered aircraft. For the past few years the time required to obtain certidões has been approximately two months and in some cases even longer. However, the National Civil Aviation Agency has recently greatly improved the issuance system.
The procedures and delays involved in the export and deregistration of aircraft registered in Brazil have been attracting increasing attention over the past year. In the few months that have elapsed since this issue was first addressed in July, changes have been made to the procedures.
The procedures and delays involved in the export and deregistration of aircraft registered in Brazil have been attracting increasing attention over the past year. In many jurisdictions deregistration is a simple formality that requires the completion and filing of a few forms. In Brazil, it is considerably more complex.
For tax reasons almost all aircraft operated in Brazil are leased. Financiers new to the jurisdiction need to understand the requirements and procedures for repossession of leased aircraft in case the lessee operator defaults. One of the requirements, which applies to all lawsuits involving foreign plaintiffs, is the posting of a bond.
The Brazilian Aeronautical Code provides that the owner of an aircraft registered in Brazil is the party recorded as the owner at the Brazilian Aeronautical Registry. For the past 12 to 18 months the registry's filing procedures and requirements have been in flux and the changes have presented new challenges to aviation finance lawyers practising in Brazil.
When aircraft owners consider leasing aircraft to new jurisdictions a common due diligence issue is whether charges incurred by the lessee operator can lie in rem against the aircraft if repossessed or returned at the end of a lease term. In Brazil, two sets of potential fees can obstruct the export of a leased aircraft: airport charges and customs fees.
It is becoming increasingly common for aircraft and aircraft engines on lease to Brazilian airlines to be sold or transferred during their lease terms as part of refinancing transactions, securitizations or simple portfolio dispositions. However, since amendments to the law in 2004 such transactions risk being assessed for Brazilian capital gains tax.