I was recently asked about the risks associated with airline financing secured by aircraft located in foreign countries. The questions boiled down to the issue of whether the lender is willing to accept the risk of potentially being unable to repossess the aircraft securing the financing or whether the lender would rather purchase an insurance policy to insure against that risk.
My answer to the question was that regardless of which situation is presented, either the lender or the insurer will need to perform an underwriting analysis to determine how significant the risk may be. Since the risk varies from country to country, a written legal opinion from an independent lawyer expert in the particular country should be obtained. The legal opinion should discuss the regulations in force at inception of the policy relating to the titleholders rights under the laws of the particular country and it should also confirm that the lender’s interests and title have been fully registered.
Additional underwriting analysis will include review of the loan documents and lease, the political and economic stability of the country, the laws in force, the perception of the local judicial system, the type of aircraft, routes operated, the financial condition of the airline, and past experience of the lender, airline and country.
Another thing to consider will be whether the country has ratified the Cape Town Convention. Although many countries have not ratified it yet, if a country does ratify the Convention, this will remove a great deal of uncertainty and will increase a lender’s willingness to provide financing.
If a lender determines that it does not want to assume the risk and potential financial loss it will incur if it is unable to repossess its aircraft collateral, repossession policies are available through Lloyds of London and other larger insurers. The coverage is typically referred to as the “LSW147” repossession coverage.
At the end of the day, the decision will still be whether the lender wants to “self-insure” and assume the risk that it may not be able to successfully repossess an aircraft in the event of default, or whether it would rather pay an insurance premium to purchase a policy that will provide coverage in the event that it is unable to successfully repossess its collateral.