Part B
Question 2
Freddy has entered into a letter of intent with another leasing company for the purchase of one Boeing 737 aircraft on lease to Clear Sky Airways (“Clear Sky”), a Saudi Arabian low-cost carrier which specialises in “desert-hopping” short haul flights around the Arabian Peninsula.
The seller has provided Freddy with copies of the operating lease and related documents for review before the sale & purchase agreement is executed. Freddy observes the following: (i) the legal owner of the aircraft is a trust company incorporated in Ireland (the “Trustee”), (ii) the Trustee leases the aircraft to Clear Sky, (iii) Clear Sky does not pay monthly maintenance rent but instead has provided a maintenance letter of credit of $1,000,000, (iii) Clear Sky has paid a cash security deposit of $200,000, (iv) the operating lease is governed by English law, (v) Clear Sky has executed a Deregistration Power of Attorney, Assignment of Insurances and Air Traffic Control Letter in favour of the existing lessor.
Freddy has informed the seller that it does not wish to lease the aircraft using an owner trust structure, and that it would prefer to purchase and lease the aircraft using an Irish incorporated special purpose company (the “New Lessor”).
Freddy will obtain financing for the aircraft from a group of lenders, led by a German bank who will act as security trustee (the “Security Trustee”). The term sheet for the financing provides that (i) the New Lessor will be the borrower under the Loan Agreement, (ii) the New Lessor must be a newly incorporated orphan special purpose company, (ii) Freddy will issue a guarantee in favour of the Security Trustee of the New Lessor’s obligations as borrower under the Loan Agreement, (iii) the New Lessor will execute a mortgage and lease security assignment in favour of the Security Trustee, (iv) the loan will be governed by English law.
(a) The aircraft will be sold to the New Lessor with the operating lease to Clear Sky attached. Explain what documents and other arrangements will need to be made in connection with the transfer of the lease? How would these arrangements differ if Freddy decided to retain the trust structure?
(b) What is meant by the terms ‘limited recourse’ and ‘full recourse’ and explain whether you would expect recourse to the New Lessor and Freddy in this transaction to be limited or full recourse and why.
(c) Clear Sky has complained to Freddy’s commercial team that the maintenance rent rate for the engine performance restoration shop visit is very high and they would like the rate to be reduced in connection with the transfer of the lease to Freddy. Explain what factors the seller may 5 have taken into account when deciding on a high maintenance rent rate when the operating lease was first negotiated.
