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| ● | airline operating costs, including fuel costs; |
| ● | general economic conditions affecting our lessees' operations; |
| ● | governmental regulation, including new airworthiness directives, statutory limits on age of aircraft, and restrictions in certain jurisdictions on the age of aircraft for import, climate change initiatives and environmental regulation, and other factors leading to obsolescence of aircraft models; |
| ● | interest and foreign exchange rates; |
| ● | airline restructurings and bankruptcies; |
| ● | increased supply due to the sale of aircraft portfolios; |
| ● | availability and cost of credit; |
| ● | manufacturer production levels and technological innovation; |
| ● | retirement and obsolescence of aircraft models; |
| ● | manufacturers merging or exiting the industry or ceasing to produce aircraft or engine types; |
| ● | accuracy of estimates relating to future supply and demand made by manufacturers and lessees; |
| ● | reintroduction into service of aircraft or engines previously in storage; and |
| ● | airport and air traffic control infrastructure constraints. |
Any of
ContentsThesethese factors may produce sharp and prolonged decreases in assetaircraft values and achievable lease rates, which would have ana negative impact on the value of our fleet, and may prevent our cost of acquiring aircraft or other aviation assets, may result in lease defaults and could delay or prevent the aircraft or other aviation assets from being leased or re-leased on favorable terms, or if desired, soldat all. Any of these factors could have a material adverse effect on favorable terms.
our financial results, our growth prospects and our ability to meet our debt obligations.
We will need additional capital to finance our growth
and refinance our existing debt, and we may not be able to obtain it on acceptable terms, or at all, which may
limitadversely affect our financial results, and inhibit our ability to grow and compete in the
aviationcommercial aircraft leasing market.
Our ability to acquire additional
assetsaircraft and to refinance our existing debt depends to a significant degree on our ability to access debt and equity capital markets. Our access to capital markets will depend on a number of factors including our historical and expected performance, compliance with the terms of our debt agreements, general market conditions, interest rate fluctuations and the relative attractiveness of alternative investments. In addition, volatility or disruption in the capital markets
or a downgrade in our credit ratings could
adversely affect banks and financial institutions causingcause lenders to be reluctant or unable to provide us with financing on terms acceptable to us, or to increase the costs of such financing. We compete with other lessors and airlines when acquiring aircraft and our ability to grow our portfolio is dependent on our ability to access attractive financing. The terms of our debt facilities include significant restrictions on our ability to incur additional
debt.indebtedness. If we are unable to raise additional funds or obtain capital on acceptable terms, our growth opportunities
are limited.will be limited and our ability to refinance our existing debt could be adversely affected, any of which could have a material adverse effect on our financial condition, cash flow and results of operations, and inhibit our ability to grow and compete in the commercial aircraft leasing market.
Our future growth and profitability will depend on our ability to acquire aircraft and
make other
aviation assets.strategic investments.
Growth through future acquisitions of additional commercial aircraft
and other aviation assets requires the availability of capital. Even if capital were available, the market for commercial aircraft is cyclical, sensitive to economic instability and extremely competitive, and we may encounter difficulties in acquiring aircraft on favorable terms, or at
all which could reduce our acquisition opportunities or cause us to pay higher prices.all. A significant increase in
market interest rates wouldour cost to acquire aircraft may make it more difficult for us to make accretive
acquisitions that would increase our distributable cash flows.acquisitions. Any acquisition of aircraft
or other aviation assets may not be profitable to
us after the acquisition of such asset and may not generate sufficient cash flow to justify our investment.us. In addition, acquisition of additional aircraft
other aviation assets and other investments that we may make,
may expose us to risks that may harm our business, financial condition, results of operations and cash
flows,flow, including risks that we may:
| ● | impair our liquidity by using a significant portion of our available cash or borrowing capacity to finance acquisitions and investments; |
| ● | significantly increase our interest expense and financial leverage to the extent we incur additional debt to finance acquisitions and investments; |
| ● | incur or assume unanticipated liabilities, losses or costs associated with the aircraft that we acquire, or investments we may make; or |
| ● | incur other significant charges, including asset impairment or restructuring charges. |
Our aircraft portfolio sales are contingent upon the satisfaction of a number of conditions, and may fail to be completed in the timeframe anticipated, or at all.
In 2015, we agreed to sell 45 aircraft in two portfolio sales (the "Sale Transactions"). As of December 31, 2015, we had delivered 32 of these aircraft to the purchasers. One of the aircraft was removed from the Sale Transactions and was sold to an independent purchaser in 2016.
Subsequent to December 31, 2015, ten additional aircraft in the Sale Transactions have been delivered. It is possible that we will not be able to deliver the remaining two aircraft in the timeframe anticipated because such deliveries are subject to customary closing conditions, some of which are outside of our available cash or borrowing capacity to finance acquisitionscontrol.
We operate in a highly competitive market for investment opportunities in aircraft.
The leasing and investments;
significantly increase our interest expenseremarketing of commercial jet aircraft is highly competitive. We compete with other aircraft leasing companies, including AerCap Holdings N.V., Air Lease Corp., Aircastle Limited, Aviation Capital Group, Avolon Holdings Limited, AWAS, Bank of China Aviation, Boeing Capital Corporation, Bohai Leasing, CIT Aerospace, GE Commercial Aviation Services Limited (GECAS), ICBC Leasing, Intrepid Aviation Limited, Jackson Square Aviation, Macquarie Bank Limited, and financial leverage to the extent we incur additional debt to finance acquisitions and investments;
incur or assume unanticipated liabilities, losses or costs associatedSMBC Aviation Capital, among others. We also may encounter competition from other entities that selectively compete with the aircraft or other aviation assets that we acquire or investments we may make;us, including:
incur other significant charges, including asset impairment or restructuring charges; or
be unable to maintain our ability to pay regular dividends to our shareholders.
| ● | financial institutions (including those seeking to dispose of repossessed aircraft at distressed prices); |
| ● | special purpose vehicles formed for the purpose of acquiring, leasing and selling aircraft; and |
| ● | public and private partnerships, investors and funds, including private equity and hedge funds. |
Competition for a leasing transaction is based principally upon lease rates, delivery dates, lease terms, reputation, management expertise, aircraft condition, specifications and configuration and the availability of the types of aircraft necessary to meet the needs of the customer. Some of our competitors have significantly greater operating and financial resources than we have. In addition, some competing aircraft lessors have a lower overall cost of capital and may provide financial services, maintenance services or other inducements to potential lessees that we cannot provide.
Competition in the purchase and sale of used aircraft is based principally on the availability of used aircraft, price, the terms of the lease to which an aircraft is subject and the creditworthiness of the lessee. When we decide to dispose of an aircraft, BBAM, as our servicer, will arrange the disposition pursuant to the terms of the relevant servicing agreement. In doing so, BBAM will compete with other aircraft leasing companies, as well as with the other types of entities described above.
Many of our competitors have order positions with Boeing and Airbus that guarantee them the delivery of new, highly desirable aircraft in the future. We do not currently have any order positions with aircraft manufacturers.
If we experience abnormally high maintenance or obsolescence issues with any aircraft
or aviation assets that we acquire, our financial results and growth
prospects could be materially and adversely affected.
Aircraft are long-lived assets, requiring long lead times to develop and manufacture, with particular types and models becoming obsolete and less in demand over time when newer, more advanced aircraft are manufactured. By acquiring used aircraft, we have greater exposure to more rapid obsolescence of our fleet, particularly if there are unanticipated events shortening the life cycle of such aircraft, such as government regulation or changes in our airline customers' preferences. This may result in a shorter life cycle for our fleet and, accordingly, declining lease rates, impairment charges or increased depreciation expense.
In general, the costs of operating an aircraft, including maintenance expenses, increase with the age of the aircraft. Further, variable expenses like fuel, crew size or aging aircraft corrosion control or modification programs and related airworthiness directives could make the operation of older aircraft more costly to our lessees and may result in increased lessee defaults or renegotiation of lease terms. We also may incur some of these increased maintenance expenses and regulatory costs upon acquisition or re-leasing of our aircraft. Any of these expenses or costs would have a negative impact on our financial results.
Unlike new aircraft, used aircraft typically do not carry warranties as to their condition. As a result, we may not be able to claim any warranty related expenses on used aircraft. Although we may inspect an existing aircraft and its documented maintenance, usage, lease and other records prior to acquisition, we may not discover all defects during an inspection. Repairs and maintenance costs for existing aircraft are difficult to predict and generally increase as aircraft age and can be adversely affected by prior use. These costs could decrease our cash flow and reduce our
liquidity and our ability to pay regular dividends to our shareholders.In addition, aircraft are long-lived assets, requiring long lead times to develop and manufacture, with particular types and models becoming obsolete and less in demand over time when newer, more advanced aircraft are manufactured. By acquiring existing aircraft, we have greater exposure to more rapid obsolescence of our fleet, particularly if there are unanticipated events shortening the life cycle of such aircraft, such as government regulation or changes in our airline customers’ preferences. This may result in a shorter life cycle for our fleet and, accordingly, declining lease rates, impairment charges, increased depreciation expense or losses related to aircraft asset value guarantees, if we were to provide such guarantees.
Further, variable expenses like fuel, crew size or aging aircraft corrosion control or modification programs and related airworthiness directives could make the operation of older aircraft more costly to our lessees and may result in increased lessee defaults. We may also incur some of these increased maintenance expenses and regulatory costs upon acquisition or re-leasing of our aircraft. Any of these expenses or costs will have a negative impact on our financial results.
liquidity.
We may enter into strategic ventures which pose risks including a lack of complete control over the enterprise, and our financial results and growth prospects may be adversely affected if we encounter disputes, deadlocks or other conflicts of interest with our strategic partners.
We may occasionally enter into strategic ventures or investments with third parties. For example, we
had a 15% investment in BBAM LP and still have a 57% investment in
an entitya joint venture that
currently owns
fourtwo Boeing 767-300 aircraft. We may have limited management rights in
theseour strategic ventures and may not control decisions regarding the remarketing or sale of aircraft
assets owned by these strategic ventures. In addition, if we are unable to resolve a dispute with a strategic partner that retains material managerial veto rights, we might reach an impasse that could require us to liquidate our investment at a time and in a manner that
couldwould result in our losing some or all of our original investment in the venture, which could have an adverse effect on our financial results and growth prospects. These strategic ventures and investments
are also
new forms of investments for us and may subject us to
new and unforeseen risks, including adverse tax consequences and additional reporting and compliance requirements.
We have restated our prior consolidated financial statements, which may lead to additional risks and uncertainties, including substantial costs for accounting and legal fees, shareholder litigation, and potential negative impact on investor confidence.
As discussed in Note 2 to our consolidated financial statements included in Item 18 of this Form 20-F, we have restated our consolidated financial statements for the years ended December 31, 2014 and 2013 and for the quarterly periods within the fiscal years ended December 31, 2015 and 2014, including the cumulative effect of the adjustments for periods prior to January 1, 2013. The determination to restate these consolidated financial statements and the unaudited interim condensed consolidated financial statements was made by our Audit Committee upon management's recommendation following the identification of errors related to our accounting for aircraft purchased with in-place leases.
As a result of this restatement, we have
paid a dividend each quarter since our IPO, there arebecome subject to a number of
factors that could affect our ability to pay future dividendsadditional risks and uncertainties, including
but not limitedsubstantial costs for accounting and legal fees in connection with or related to the
following:restatement and related shareholder litigation. In addition, the fact that we have restated our consolidated financial statements may negatively impact investor confidence in us. lack of availability of cash to pay dividends due to changes
We have identified a material weakness in our operating cash flow, capital expenditure requirements, working capital requirementsinternal control over financial reporting which could, if not remediated, result in additional material misstatements in our financial statements.
Our management is responsible for establishing and other cash needs;
restrictions imposedmaintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. As disclosed in Item 15 of this Form 20-F, management identified a material weakness in our internal control over financial reporting related to the accounting for maintenance rights in connection with the purchase of aircraft with in-place leases. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a result of this material weakness, our management concluded that our internal control over financial reporting was not effective as of December 31, 2015 based on criteria set forth by the Committee of Sponsoring Organization of the Treadway Commission in Internal Control—An Integrated Framework. We have reviewed and assessed the acquisition of aircraft with in-place leases since our financing arrangementsinception to identify whether a maintenance right asset or liability existed. We also have developed and any indebtedness incurredare implementing a remediation plan designed to address this material weakness. See Item 15, "Controls and Procedures." If our remediated controls are deemed ineffective, or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, to refinance our existing debt or to expand our aircraft portfolio;
our inability to make acquisitions offinancial statements may contain additional aircraft, other aviation assets or investments that are accretive to cash flow;
use of funds to make and finance acquisitions of aircraft, other aviation assets and investments we may make;
reduced levels of demand for, or value of, our aircraft;
increased supply of aircraft;
obsolescence of aircraft in our portfolio;
lower lease rates on new aircraft and re-leased aircraft;
delays in re-leasing our aircraft after the expiration or early termination of existing leases;
impaired financial condition and liquidity of our lessees;
deterioration of economic conditions in the commercial aviation industry generally;
poor performance by our Manager and BBAM LP and other service providers and our limited rights to terminate them;
unexpected or increased maintenance, operating or other expenses or changes in the timing thereof;
a decision by our board of directors to cease distributing a portion of our cash flow available for distribution;
changes in Irish tax law, the tax treaty between the United States and Ireland (the “Irish Treaty”) or our ability to claim the benefits of such treaty;
cash reserves which may be established by our board of directors; and
restrictions under Bermuda law on the amount of dividends that we may pay.
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The recent debt crisis in Europe and downgrade of the U.S. government’s sovereign credit rating by Standard & Poor’s Ratings ServicesLitigation pending against us could
adversely affectmaterially impact our business and results of operations.
The recent crisis in Europe has created uncertainty with respect
We are currently party to
the ability of certain European Union (“EU”) countriesa putative shareholder class action lawsuit. We believe this lawsuit is without merit, and intend to
continuedefend it. See Item 8, "Financial Information – Legal Proceedings." However, failure by us to
service their sovereign debt obligations. The continued uncertainty over the outcomeobtain a favorable resolution of the
EU governments’ financial support programs andclaims set forth in the
possibility that other EU member states may experience similar financial troubles have created substantial volatility and adversely impacted financial markets. Several European banks which have been active in financing aircraft have announced their intention to scale back their aircraft related lending activities, and this may impact our ability to source debt financing for our aircraft. In addition, in early August 2011, many of the nationally recognized credit rating agencies either downgraded the U.S. long term debt rating or provided a negative rating outlook. Risks related to the recent debt crisis in Europe and downgrade of the U.S. government’s sovereign credit rating have had, and are likely to continue tocomplaint could have a
negative impact on global economic activity and the financial markets. As these conditions persist, the ability of our lessees to meet their financial and other obligations under our operating leases could be adversely affected, which in turn could have anmaterial adverse effect on our business,
and results of
operations.operations and financial condition. Currently, the amount of such material adverse effect cannot be reasonably estimated, and no provision or liability has been recorded for these claims. The costs associated with defending and resolving the lawsuit and ultimate outcome cannot be predicted. These matters are subject to inherent uncertainties and the actual cost, as well as the distraction from the conduct of our business, will depend upon many unknown factors and management's view of these factors may change in the future.
A new standard for lease accounting
is expected to be announced in the futurehas been issued and we are
unable to predict the impact of such a standard at this time.In May 2013,currently evaluating its impact.
On February 25, 2016, the Financial Accounting Standards Board
(‘‘FASB’’("FASB")
andissued its new lease standard, ASU 2016-02, Leases ("ASU 2016-02"). Based on this new standard, the
International Accounting Standards Board (‘‘IASB’’) jointly issued an Exposure Draft on Lease Accounting. The proposal requiresaccounting for leases by lessors would basically remain unchanged from the existing concepts in ASC 840, Leases, accounting. FASB has decided that
all leases be recorded on the statement of financial position of both the lessee and lessor.Under the Exposure Draft, lessees will record their lease obligations on the balance sheet similar to debt. At lease inception a right to use asset will also be recorded that will be amortized on a straight line basis over the lease term. The impact will be to front load the income statement impacts similar to how capital leases are recorded today. Lesseeslessors would be able to continue to use operatingprecluded from recognizing selling profit and revenue at lease accounting if thecommencement for any sales-type or direct finance lease term is insignificant to the total economic lifethat does not transfer control of the underlying asset or the present value of the lease payments is insignificant in relation to the valuelessee. This requirement aligns the notion of what constitutes a sale in the underlying asset.
For lessors,lessor accounting guidance with that in the proposed changes are even more substantial. Unless the lease term or lease payments are insignificant, upon entering intoforthcoming revenue recognition standard, which evaluates whether a lease, lessors will derecognize the leased asset and in turn record a lease receivable for its right to receive lease paymentssale has occurred from the lessee and a residual asset for its right of return of the asset at the end of the lease term. A gain or loss could be recognized upon de-recognition of the portion of the leased asset thatcustomer's perspective.
The standard will be
recovered througheffective for public business entities for annual periods beginning after December 15, 2018 (i.e., calendar periods beginning on January 1, 2019), and interim periods therein. For all other entities, the
lease. The residual asset is measured as the present value of the estimated residual value at lease expiry.The receivable assetstandard would be effective for annual periods beginning after December 15, 2019 (i.e., calendar periods beginning on January 1, 2020), and interim periods therein. Early adoption will be treated like a loan with the interest portion of the lease payment being reflected in the income statement. The residual asset will accrete in value over the lease term generating additional income. The income generated, however, will be substantially less than operating lease revenues currently reflected in a lessor’s income statement. In turn, the lessor will no longer reflect a depreciation charge in its results.
The Exposure Draft did not include a proposed effective date. The FASB and IASB collectively acknowledged the concerns of interested parties and that they are aware the proposed changes to accountingpermitted for leases are significant. The FASB and IASB will continue to deliberate on the proposed accounting throughout 2014. all entities.
We are
unable to predictcurrently evaluating the
effectpotential impact the
proposed change in lease accountingadoption of ASU 2016-02 will have
on the airline industry’s leasing arrangements or on our consolidated financial statements.
Currently, there is no estimated date of issuance of the standard nor a proposed effective date.Table of Contents
We are a Bermuda company that is managed and controlled in Ireland. It may be difficult for you to enforce judgments against us or against our directors and executive officers.
We are incorporated under the laws of Bermuda and are managed and controlled in Ireland. Our business is based outside the United States and a majority of our directors and officers reside outside the United States and a majority of our assets and some or all of the assets of such persons are located outside the United States. As a result, it may be difficult or impossible to effect service of process within the United States upon us or those persons, or to recover against us or them on judgments of U.S. courts, including judgments predicated upon the civil liability provisions of the U.S. federal securities laws. Further, no claim may be brought in Bermuda or Ireland against us or our directors and officers in the first instance for violation of U.S. federal securities laws because these laws have no extraterritorial application under Bermuda or Irish law and do not have force of law in Bermuda or Ireland. However, a Bermuda or Irish court may impose civil liability, including the possibility of monetary damages, on us or our directors and officers if the facts alleged in a complaint constitute or give rise to a cause of action under Bermuda or Irish law.
There is doubt as to whether the courts of Bermuda or Ireland would enforce judgments of U.S. courts obtained in actions against us or our directors and officers, predicated upon the civil liability provisions of the U.S. federal securities laws, or entertain actions brought in Bermuda or Ireland against us or such persons predicated solely upon U.S. federal securities laws. Further, there is no treaty in effect between the United States and Bermuda or Ireland providing for the enforcement of judgments of U.S. courts in civil and commercial matters, and there are grounds upon which Bermuda or Irish courts may decline to enforce the judgments of U.S. courts. Some remedies available under the laws of U.S. jurisdictions, including some remedies available under the U.S. federal securities laws, may not be allowed in Bermuda or Irish courts as contrary to public policy in Bermuda or Ireland. Because judgments of U.S. courts are not automatically enforceable in Bermuda or Ireland, it may be difficult for you to recover against us or our directors and officers based upon such judgments.
Risks Relating to Our Aircraft Portfolio
Factors that increase the risk of decline in aircraft value and achievable lease rates could have an adverse effect on our financial results and growth prospects and on our ability to meet our debt
obligations and to pay dividends.obligations.
In addition to factors linked to the aviation industry generally, other factors that may affect the value and achievable lease rates of our aircraft
and other aviation assets include:
| ● | the particular maintenance, damage and operating history of the airframes and engines; the number of operators using that type of aircraft or engine;
whether an aircraft or other aviation asset is subject to a lease and, if so, whether the lease terms are favorable to the lessor;
the age of our aircraft and other aviation assets;
| ● | the number of operators using a type of aircraft or engine; |
| ● | whether an aircraft is subject to a lease and, if so, whether the lease terms are favorable to the lessor; |
| ● | the age of our aircraft; |
| ● | airworthiness directives and service bulletins; |
aircraft noise and emission standards;
any tax, customs, regulatory and other legal requirements that must be satisfied when an aircraft is purchased, sold or re-leased; | ● | aircraft noise and emission standards; |
compatibility of our aircraft configurations or specifications with other aircraft owned by operators of that type; and
decreases in the creditworthiness of our lessees. | ● | any tax, customs, regulatory and other legal requirements that must be satisfied when an aircraft is purchased, sold or re-leased; |
| ● | compatibility of our aircraft configurations or specifications with other aircraft owned by operators of that type; and |
| ● | decreases in the creditworthiness of our lessees. |
Any decrease in the values of and achievable lease rates for commercial aircraft or other aviation assets that may result from the above factors or other unanticipated factors may have a material adverse effect on our financial results and growth prospects and our ability to meet our debt obligations and to pay dividends.obligations.
The advent of superior aircraft technology or the introduction of a new line of aircraft could cause our existing aircraft portfolio to become outdated and therefore less desirable, which could adversely affect our financial results and growth prospects and our ability to compete in the marketplace.
As manufacturers introduce technological innovations and new types of aircraft, including the Boeing 787, 777X and Airbus A350, certain aircraft in our existing aircraft portfolio may become less desirable to potential lessees or purchasers. Such technological innovations may increase the rate of obsolescence of existing aircraft faster than currently anticipated by our management or accounted for in our accounting policy. TheFor example, the Boeing 787 and 777X and the Airbus A350, are expected towhich recently entered production, provide improved fuel consumption and operating economics as compared to current-technology aircraft. The Boeing 787 is already in production while delivery ofearlier aircraft types. In addition, Airbus recently launched the Boeing 777X is expected in 2020-2021. The first variant of the Airbus A350 is expected to be delivered in 2014. AirbusA320neo family and Boeing also planplans to launch the A320 NEO and 737 MAX familiesfamily of aircraft in 2016 and 2017, whichby 2017. These "next generation" narrow-body aircraft are expected to improve fuel consumption and to reduce noise, emissionemissions and lower maintenance costs as compared to its current model.models. In addition, Embraer, Bombardier Inc., Commercial Aircraft Corporation of China Ltd and Sukhoi Company (JSC) in Russia are developing aircraft models that will compete with existing Airbus and Boeing aircraft. It’s uncertainIt is not certain how these new aircraft offerings in the future could adverselywill impact the demand and liquidity of existing equipment. In addition, the imposition of more stringent noise or emissions standards may make certain of our aircraft less desirable and less valuable in the marketplace. Any of these risks could adversely affect our ability to lease or sell our aircraft on favorable terms or at all or our ability to charge rental amounts that we would otherwise seek to charge, all of which could have an adverse effect on our financial results. The advent of new technologies or the introduction of new types of aircraft could materially adversely affect the value of the aircraft in our portfolio.
Our operational costs will increase as our aircraft age, which may adversely affect the amounts available to pay dividends.age.
As of December 31, 2013,2015, the weighted average age of theour aircraft in our portfolio was 8.66.6 years. In general, the cost of re-leasing an aircraft, including maintenance and modification expenditures, increases with the age of the aircraft. The costs of converting an aging passenger aircraft to a cargo aircraft are also substantial. The incurrence of these greater expenditures as our fleet ages could adversely affect our financial results and our ability to pay dividends.Table of Contents
The concentration of aircraft types in our portfolio could harm our business and financial results should any difficulties specific to these particular types of aircraft occur.
As of December 31, 2013,2015, our aircraft portfolio containscontained a mix of aircraft types, including Airbus A319 aircraft, A320 aircraft, A321 aircraft, A330 aircraft, and A340 aircraft, and Boeing 737 aircraft, Boeing 747 aircraft, Boeing 757 aircraft, Boeing 767 aircraft, Boeing 777 aircraft and Boeing 787 aircraft. 83%67% of ourthese aircraft are single-aisle, narrow-body aircraft, as measured by net book value. TheOur business and financial results could be negatively affected if the market demand for any of these aircraft types (or other types that we acquire in the future) declines, if any of them is redesigned or replaced by its manufacturer. Out-of-production aircraft, such as the Boeing 757 is no longer in production and Airbus has ceased productionA340, current models of the A340. Out of production aircraftA320 family, known as the CEO, and Boeing 737, known as Next Generation, may have a shorter useful lifelives or lower residual values due to obsolescence. In addition, if any of these aircraft types (or other types that we acquire in the future) should encounter technical or other difficulties, such affected aircraft types may be subject to grounding or diminution in value, and we may be unable to lease such affected aircraft types on favorable terms or at all. The inability to lease the affected aircraft types may materially reduce our revenues and net income to the extent the affected aircraft types comprise a significant percentage of our aircraft portfolio.We operate in a highly competitive market for investment opportunities in aircraft and other aviation assets.
The leasing and remarketing of commercial jet aircraft is highly competitive. We compete with other aircraft leasing companies, including GE Commercial Aviation Services Limited (GECAS), ILFC, AerCap B.V., Aircastle Advisor LLC, Air Lease Corp., Aviation Capital Group, Avolon, AWAS, Boeing Capital Corporation, CIT Aerospace, Macquarie Bank Limited, SMBC Aviation Capital and Bank of China Aviation among others. We also may encounter competition from other entities that selectively compete with us, including:
airlines;
aircraft manufacturers;
financial institutions (including those seeking to dispose of repossessed aircraft at distressed prices);
aircraft brokers;
special purpose vehicles formed for the purpose of acquiring, leasing and selling aircraft; and
public and private partnerships, investors and funds, including private equity and hedge funds.
Competition for a leasing transaction is based principally upon lease rates, delivery dates, lease terms, reputation, management expertise, aircraft condition, specifications and configuration and the availability of the types of aircraft necessary to meet the needs of the customer. Some of our competitors have significantly greater operating and financial resources than we have. In addition, some competing aircraft lessors have a lower overall cost of capital and may provide financial services, maintenance services or other inducements to potential lessees that we cannot provide. Given the financial condition of the airline industry, many airlines have reduced their capacity by eliminating select types of aircraft from their fleets. This has resulted in an increase in available aircraft of these types, a decrease in rental rates for these aircraft and a decrease in market values of these aircraft.
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Competition in the purchase and sale of used aircraft is based principally on the availability of used aircraft, price, the terms of the lease to which an aircraft is subject and the creditworthiness of the lessee. When we decide to dispose of an aircraft, BBAM, as our servicer, will arrange the disposition pursuant to the terms of the servicing agreement for that aircraft. In doing so, BBAM will compete with the aircraft leasing companies listed above, as well as with the other types of entities described above and other investors.
Many of our competitors also have order positions with Boeing and Airbus that guarantee them the delivery of new, highly desirable aircraft in the future. We do not currently have any order positions with the aircraft manufacturers.
Depreciation expenses and impairment charges could have a material adverse effect on our financial condition and results of operations.
Our aircraft have finite economic lives,lives. Over time, their values depreciate in the ordinary course, over time and their ability to generate earnings and cash flow for our business declines over time.declines. If depreciated aircraft are not replaced with newer aircraft, our ability to generate earnings and cash to pay dividendsmeet our debt service obligations will be reduced. In addition, we depreciate our aircraft for accounting purposes on a straight-line basis to the aircraft’saircraft's estimated residual value over its estimated useful life. If we dispose of an aircraft for a price that is less than its depreciated value, then we would be required to recognize a loss that would reduce our net income during the period of the disposition and reduce our total assets and shareholders’shareholders' equity. In addition, aircraft
Aircraft in our portfolio and any other aircraft and other aviation assets that we acquire in the future are subject to periodic review for impairment for accounting purposes. WeIn the years ended December 31, 2015, 2014 and 2013, we recognized an impairment chargecharges of $8.8$66.1 million, in 2013 on an Airbus A319-100 aircraft which was manufactured in 2000. We recognized an impairment charge of $11.4$1.2 million in 2012.and $6.2 million, respectively. In the future, if expected cash flows related to any of our aircraft are adversely affected by factors including credit deterioration of a lessee, declines in rental rates, shortened economic life, residual value risk and other market conditions, then we may be required to recognize additional depreciation or material impairment charges that would reduce our net earnings or increase our net losses. Under U.S. GAAP, once an impairment
Our financial performance depends partly on our ability to regularly sell aircraft, and we may not be able to do so on favorable terms, or at all.
Our financial performance depends partly on our ability to regularly sell aircraft profitably. Our ability to sell our aircraft profitably, or at all, will depend on conditions in the airline industry and general market and competitive conditions at the time we seek to sell. In addition, our ability to sell our aircraft will be affected by the particular maintenance, damage and operating history of the aircraft and its engines. Failure to sell aircraft regularly and profitably could have a material adverse effect on our financial condition, cash flow and results in a reduction to the carrying value of an asset, the carrying value of such asset cannot thereafter be increased.operations.
Aircraft liens could impair our ability to repossess, re-lease or resellsell the aircraft.aircraft in our portfolio.
In the normal course of business, liens that secure the payment of airport fees and taxes, custom duties, air navigation charges, landing charges, crew wages, maintenance charges, salvage or other obligations are likely, depending on the laws of the jurisdictions where aircraft operate, to attach to the aircraft in our portfolio (or, if applicable, to the engines separately). The liens may secure substantial sums that may, in certain jurisdictions or for limited types of liens (particularly fleet liens), exceed the value of any particularthe aircraft to which the liens have attached. Until they are discharged, the liens described above could impair our ability to repossess, re-lease or resellsell our aircraft.
If our lessees fail to fulfill their financial obligations, liens may attach to our aircraft. In some jurisdictions, aircraft liens or separate engine liens may give the holder thereof the right to detain or, in limited cases, sell or cause the forfeiture of the aircraft (or, if applicable, the engines separately). We cannot assure you that the lessees will comply with their obligations under the leases to discharge liens arising during the terms of the leases. We may, in some cases, find it necessary to pay the claims secured by such liens in order to repossess or sell the aircraft or obtain the aircraft or engines from a creditor thereof. These payments, and associated legal and other expenses, would be a required expenseexpenses for us, and would reduce our net income and our cash flows.Table of Contents
We cannot assure you that all lessees and governmental authorities will comply with the registration and deregistration requirements in the jurisdictionjurisdictions where theyour lessees operate.
All of our aircraft are required to be registered at all times with appropriate governmental authorities. Generally, in jurisdictions outside the United States, failure by a lessee to maintain the registration of a leased aircraft would be a default under the applicable lease, entitling us to exercise our rights and remedies thereunder. If an aircraft were to be operated without a valid registration, the lessee operator or, in some cases, the owner or lessor might be subject to penalties, which could constitute or result in a lien being placed on such aircraft. Failure to comply with registration requirements also could have other adverse effects, including inability to operate the aircraft and loss of insurance. We cannot assure you that all lessees will comply with these requirements.
An aircraft cannot be registered in two countries at the same time. Before an aviation authority will register an aircraft that has previously been registered in another country, it must receive confirmation that the aircraft has been deregistered by that country's aviation authority. In order to deregister an aircraft, the lessee must comply with applicable laws and regulations, and the relevant governmental authority must enforce these laws and regulations. Failure by lessees and governmental authorities to comply with or enforce deregistration requirements in the jurisdictions in which they operate could impair our ability to repossess, re-lease or sell our aircraft, and cause us to incur associated legal and other expenses.
Risks Relating to Our Leases
We will need to re-lease or sell aircraft as leases expire to continue to generate sufficient funds to meet our debt obligations and finance our growth and operations and pay dividends.operations. We may not be able to re-lease or sell aircraft on favorable terms, or at all.
Our business strategy entails the need to re-lease aircraft as our current leases expire to generate sufficient revenues to meet our debt obligations and finance our growth and operations and pay dividends to our shareholders.operations. The ability to re-lease aircraft depends on general market and competitive conditions. Some of our competitors may have greater access to financial resources and, as a result of restrictions on us contained in the terms of our indebtedness, may have greater operational flexibility. If we are not able to re-lease an aircraft or to do so on favorable terms, we may be required to attempt to sell the aircraft to provide funds for our debt service obligations or to otherwise finance our operations. Our ability to re-lease or sell aircraft on favorable terms or without significant off-lease time and transition costs could be adversely affected by depressedgeneral economic conditions, market conditions in the airline and aircraft industries,industry, airline bankruptcies, restructurings and mergers, the effects of terrorism and war, the sale of other aircraft by financial institutions or other factors.
We rely on our lessees’lessees' continuing performance of their lease obligations.
We operate as a supplier to airlines and are indirectly impacted by the risks facing airlines today. Our success depends upon the financial strength of our lessees, our ability to assess the credit risk of our lessees and the ability of lessees to perform their contractual obligations to us. The ability of each lessee to perform its obligations under its lease will depend primarily on the lessee’slessee's financial condition and cash flow, which may be affected by factors beyond our control, including: competition;
fare levels;
air cargo rates;
passenger air travel and air cargo demand;
geopolitical and other events, including war, acts of terrorism, civil unrest, outbreaks of epidemic diseases and natural disasters;
increases in operating costs, including the availability and cost of jet fuel and labor costs;
labor difficulties;
economic and financial conditions and currency fluctuations in the countries and regions in which the lessee operates; and
governmental regulation of, or affecting, the air transportation business, including noise and emissions regulations, climate change initiatives and age limitations.
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Given the size of our portfolio, we
| ● | passenger air travel and air cargo demand; |
| ● | geopolitical and other events, including war, acts of terrorism, civil unrest, outbreaks of epidemic diseases and natural disasters; |
| ● | increases in operating costs, including the availability and cost of jet fuel and labor costs; |
| ● | economic and financial conditions and currency fluctuations in the countries and regions in which the lessee operates; and |
| ● | governmental regulation of, or affecting, the air transportation business, including noise and emissions regulations, climate change initiatives and age limitations. |
We expect that some lessees may encounter financial difficulties or suffer liquidity problems and, as a result, will struggle to make lease payments under our operating leases. We further expect that lessees experiencing financial difficulties may seek a reduction in their lease rates or other concessions in lease terms. We could experience increased delinquencies, particularly in any future downturns in the airline industry, which could worsen the financial condition and liquidity problems of these lessees. In addition, many airlines are exposed to currency risk due to the fact that they earn revenues in their local currencies and certain of their liabilities and expenses are denominated in U.S. dollars, including lease payments to us. A delayed, missed or reduced rental payment from a lessee decreases our revenues and cash flow and may adversely affect our ability to make payments on our indebtedness and pay dividends to shareholders.indebtedness.
We are typically not in possession of any aircraft while the aircraft are on lease to the lessees. Consequently, our ability to determine the condition of the aircraft or whether the lessees are properly maintaining the aircraft is limited to periodic inspections that we perform or that are performed on our behalf by third-party service providers or aircraft inspectors. A lessee’slessee's failure to meet its maintenance obligations under a lease could: result in a grounding of the aircraft;
cause us to incur costs in restoring the aircraft to an acceptable maintenance condition to re-lease | ● | result in a grounding of the aircraft; |
adversely affect lease terms in the re-lease of the aircraft; and
adversely affect the value of the aircraft. | ● | cause us to incur costs in restoring the aircraft to an acceptable maintenance condition to re-lease the aircraft; |
| ● | adversely affect lease terms in the re-lease of the aircraft; and |
| ● | adversely affect the value of the aircraft. |
We cannot assure you that, in the event that a lessee defaults under a lease, any security deposit paid or letter of credit provided by the lessee will be sufficient to cover the lessee’slessee's outstanding or unpaid lease obligations and required maintenance expenses or be sufficient to discharge liens that may have attached to our aircraft.
If our lessees encounter financial difficulties and we decide to restructure our leases with those lessees, this could result in less favorable leases, significant reductions in our cash flows and adversely affect our ability to meet our debt obligations and pay dividends on our shares.obligations.
We have restructured leases when lessees are late in making payments, fail to make required payments or have otherwise advised us that they expect to default in making required payments. A lease restructuring can involve a rescheduling of payments or even termination of a lease without receiving all or any of the past-due or deferred amounts. The terms and conditions of possible lease restructurings could result in a significant reduction of lease revenue which would have an adverse impact on our cash flow available for distribution and to pay dividends to shareholders.distribution. We may receive more requests for lease restructurings if any of our lessees should experience financial difficulties in the future. Lease defaults could result in significant expenses and loss of revenues.
In 2013, six2015, we terminated five leases were terminated prior to their expiration datedates, and we may repossess additional aircraft in the future. Repossession, re-registration and flight and export permissions after a lessee default typically result in greater costs than those incurred when an aircraft is redelivered at the end of a lease. These costs include legal and other expenses of court or other governmental proceedings, including the cost of posting surety bonds or letters of credit necessary to effect repossession of an aircraft which could be significant, particularly if the lessee is contesting the proceedings or is in bankruptcy. Delays resulting from repossession proceedings also would increase the period of time during which an aircraft or other aviation asset does not generate lease revenue. In addition, we may incur substantial maintenance, refurbishment or repair costs that a defaulting lessee has failed to pay and that are necessary to put the aircraft in a condition suitable for re-lease or sale. We may also incur storage costs associated with any aircraft that we repossess and are unable to immediately place with another lessee. It may also be necessary to pay off liens, taxes and governmental charges on the aircraft to obtain clear possession and to remarket the assetaircraft effectively, including liens that a defaulting lessee may have incurred in connection with the operation of its other aircraft.
We may also suffer other adverse consequences as a result of a lessee default and the related termination of the lease and the repossession of the related aircraft. It is likely that our rights upon a lessee default will vary significantly depending upon the jurisdiction of operation and the applicable law, including the need to obtain a court order for repossession of the aircraft and/or consents for deregistration or re-export of the aircraft. We anticipate that when a defaulting lessee is in bankruptcy, protective administration, insolvency or similar proceedings, additional limitations may apply. Certain jurisdictions give rights to the trustee in bankruptcy or a similar officer to assume or reject the lease or to assign it to a third party, or entitle the lessee or another third party to retain possession of the aircraft without paying lease rentals or performing all or some of the obligations under the relevant lease. In addition, certain of our lessees are owned in whole, or in part, by government-related entities, which could make it difficult to repossess our aircraft in that lessee’slessee's domicile. Accordingly, we may be delayed in, or prevented from, enforcing certain of our rights under a lease and in re-leasing the affected aircraft.
If we repossess an aircraft, or other aviation asset, we will not necessarily be able to export or deregister and profitably redeploy the asset.aircraft. For instance, where a lessee or other operator flies only domestic routes in the jurisdiction in which an aircraft is registered, repossession may be more difficult, especially if the jurisdiction permits the lessee or the other operator to resist deregistration. Significant costs may also be incurred in retrieving or recreating aircraft records required for registration of the aircraft and obtaining a certificate of airworthiness for the aircraft or engine. IfIn addition, we incur significant costs in repossessing ourmay not be able to release a repossessed aircraft or are unable to gain possession of our aircraft asat a result of lesseesimilar lease rate. Lessee defaults and related expenses may materially and adversely affect our financial condition and results of operations may be materially adversely affected.operations.
Our lessees’lessees' failure to comply with their maintenance obligations on our aircraft could significantly harm our financial condition and results of operations and ability to pay dividends.operations.
The standards of maintenance observed by our lessees and the condition of aircraft at the time of sale or lease may affect the market values and rental rates of our aircraft. Under each of our leases, the lessee is primarily responsible for maintaining the aircraft and complying with all governmental requirements applicable to the lessee and to the aircraft, including operational, maintenance, government agency oversight, registration requirements and airworthiness directives. A lessee’slessee's failure to perform required maintenance during the term of a lease could result in a diminution in the value of an aircraft, an inability to re-lease the aircraft at favorable rates or at all, or a potential grounding of the aircraft. Table of Contents
Failures
Failure by a lessee to maintain an aircraft would also likely require us to incur maintenance and modification costs upon the termination of the applicable lease, which could be substantial, to restore the aircraft to an acceptable condition prior to re-leasing or sale. Even if we are entitled to receive maintenance payments, these payments may not cover the entire cost of actual maintenance required. If we are unable to re-lease an aircraft when it comes off-lease because we need to make repairs or conduct maintenance, we may realize a substantial loss of cash flow without any corresponding decrease in our debt service obligations with respect to that aircraft. Any failure by our lessees to maintain our aircraft may materially adversely affect our financial results, assetcash flow, aircraft values and growth prospects.
Failure to pay other operating costs could result in the grounding of our aircraft and prevent the re-lease, sale or other use of our aircraft, which would negatively affect our business, financial condition and results of operations.
As in the case of maintenance costs, we may incur other operational costs upon a lessee default or where the terms of the lease require us to pay a portion of those costs. Such costs, which can be substantial, include:
| ● | the costs of casualty, liability, war and political risk insurance and the liability costs or losses when insurance coverage has not been or cannot be obtained as required or is insufficient in amount or scope; |
| ● | the costs of licensing, exporting or importing an aircraft, costs of storing and operating an aircraft, airport taxes, customs duties, air navigation charges, landing fees and similar governmental or quasi-governmental impositions; and |
penalties and costs associated with the failure of lessees to keep the aircraft registered under all appropriate local requirements or obtain required governmental licenses, consents and approvals.
| ● | penalties and costs associated with the failure of lessees to keep the aircraft registered under all appropriate local requirements or obtain required governmental licenses, consents and approvals. |
The failure to pay some of these costs can result in liens on the aircraft or a loss of insurance. Any of these events could result in the grounding of the aircraft and prevent the re-lease, sale or other use of the aircraft until such default is cured.
Our lessees may have inadequate insurance coverage or fail to fulfill their respective indemnity obligations, which could result in us not being covered for claims asserted against us and may negatively affect our business, financial condition and results of operations.
Although we do not expect to control the operation of our leased aircraft, our ownership of the aircraft could give rise, in some jurisdictions, to strict liability for losses resulting from their operation. Our lessees are required to indemnify us for, and insure against, liabilities arising out of the use and operation of the aircraft, including third-party claims for death or injury to persons and damage to property for which we may be deemed liable. Lessees are also required to maintain public liability, property damage and hull all risks and hull war risks insurance on the aircraft at agreed upon levels. However, they are not generally required to maintain political risk insurance. There may be circumstances under which it would be desirable for us to maintain “top-up”"top-up" and/or political risk coverage at our expense, which would add to our operating expenses. Table of Contents
Following the terrorist attacks of September 11, 2001, aviation insurers significantly reduced the amount of insurance coverage available to airlines for liability to persons other than employees or passengers for claims resulting from acts of terrorism, war or similar events. At the same time, they significantly increased the premiums for such third-party war risk and terrorism liability insurance and coverage in general. As a result, the amount of such third-party war risk and terrorism liability insurance that is available at any time may be below the amount required under the initial leases and required by the market in general.
We cannot assure you that the insurance maintained by our lessees will be sufficient to cover all types of claims that may be asserted against us. Any inadequate insurance coverage or default by lessees in fulfilling their indemnification or insurance obligations, as well as the lack of available insurance, could reduce the proceeds upon an event of loss and could subject us to uninsured liabilities, either of which could adversely affect our business, financial condition and results of operations.
Failure to obtain certain required licenses, consents and approvals could negatively affect our ability to re-lease or sell aircraft, which would negatively affect our business, financial condition and results of operations.
Aircraft leases often require specific licenses, consents or approvals. These include consents from governmental or regulatory authorities for certain payments under the leases and for the import, re-export or deregistration of the aircraft. Subsequent changes in applicable law or administrative practice may increase or otherwise modify these requirements. In addition, a governmental consent, once given, might be withdrawn. Furthermore, consents needed in connection with future re-leasing or sale of an aircraft may not be forthcoming. Any of these events could adversely affect our ability to re-lease or sell aircraft, which would negatively affect our business, financial condition and results of operations.
Some of our leases provide the lessees with early termination options.
As of December 31, 2013, three2015, six of our leases provide provided the lessees with early termination options. We also could enter into leases in the future that provide lessees with early termination options. If any lease is terminated early at a time when we could not re-lease the aircraft at rates at least as favorable to us as the terminated lease, our results of operations and ability to pay dividends could be adversely affected.
Risks associated with the concentration of our lessees in certain geographical regions could harm our business.
In addition to global economic conditions, our business is exposed to local economic and political conditions that can influence the performance of lessees located in a particular region.region. Such conditions can be adverse to us, and may include regional recession and financial or political emergencies, additional regulation or, in extreme cases, seizure of our aircraft. The effect of these conditions on payments to us will be more or less pronounced, depending on the concentration of lessees in the region with adverse conditions. European concentration.Revenues from 33 lessees based in Europe accounted for 43%In the year ended December 31, 2015, we had our largest concentration of our total revenues in 2013. Of the 33 lessees, 9 are based in Eastern Europe. Commercial airlines in Europe face, and can be expected to continue to face, increased competitive pressures, in part as a result of the deregulation of the airline industry(42%), followed by the European UnionAsia and the development of low-cost carriers. In addition, European carriers may be impacted by the recent lack of economic growth in Europe and the on-going debt crisis in some European countries. European countries generally have relatively strict environmental regulations and traffic constraints that can restrict operational flexibility and decrease aircraft productivity, which could significantly increase aircraft operating costs.
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Asian and South Pacific concentration.Revenues from 18 lessees based in Asia (including India and Australia) accounted for 27% of our total revenues in 2013, and lease rental revenues from five lessees based in China accounted for 12% of total revenues. There are significant obstacles to the Indian airline industry’s development, including poor aviation infrastructure, continuing losses from operations due to overcapacity and other factors, and continuing government control and regulation over the industry. If this control and regulation persists or expands, the Indian airline industry likely would experience a significant decrease in growth or restrictions on future growth.
North American concentration.Revenues from six lessees based in(31%), North America accounted for 12% of our total revenues in 2013. During the past 15 years a number of North American passenger airlines filed Chapter 11 bankruptcy proceedings and several major U.S. airlines ceased operations altogether. High labor costs, high fuel costs, the strength of labor unions in collective bargaining negotiations and the September 11, 2001 terrorist attacks in the United States have imposed additional financial burdens on most U.S. airlines.
Mexico, South and Central American concentration.Revenues from five lessees based in(10%), Mexico, South and Central America accounted for 13% of our total revenues in 2013. While lessees throughout the world are affected by exchange rate fluctuations as a result of the mismatch of U.S. dollar exposure between their operating expenses(10%), and revenues, airlines in Mexico, South and Central America are particularly sensitive to this risk because of the history of currency devaluations in this region. Any strengthening of the U.S. dollar against the local currency could negatively impact the profitability of these airlines and their ability to meet their lease obligations to us.
Middle East and Africa concentration.Revenues from five lessees based in the Middle East and Africa accounted for 5%(7%). Severe recession in any of our total revenuesthese regions, or the inability to resolve financial or political emergencies in 2013. Continued and spreading civil unrestany particular region where we have many customers, could result in the Middle East and Africa, as well as other regionsadditional failures of the world, may negatively impact airlines and airline travel.
could have a material adverse effect on our financial condition, cash flow and results of operations.
The risks associated with the geographical concentration of our lessees may become exacerbated as our aircraft are re-leased to lessees or subleased to sublessees in other regions or as we acquire additional aircraft. In addition to
We derived approximately 61% of our total operating lease revenues for the geographic concentrations described above, we also have significant exposure to risks associated with conducting businessyear ended December 31, 2015 from airlines in emerging markets. Emerging markets have less developed economies and infrastructure and are often more vulnerable to business and political disturbances, such as economic instability,disturbances. The emerging markets in which our lessees were based have included Brazil, China, Ethiopia, India, Indonesia, Mexico, Moldova, the Philippines, Russia, Serbia, Thailand, Turkey and the United Arab Emirates. These countries may experience significant fluctuations in GDP, interest rates and currency exchange rates, as well as civil unrest,disturbances, government instability, the nationalization orand expropriation of private assets and the imposition of unexpected taxes or other charges by government authorities. The occurrence of any of these events in markets served by our lessees and the resulting economic instability may adversely affect our ownership interest in aircraft or the ability of lessees which operate in these markets to meet their lease obligations. As a result, lessees that operate in emerging market countries may be more likely to default than lessees that operate in developed countries. In addition, legal systems in emerging market countries may be less developed, which could make it more difficult for us to enforce our legal rights in such countries. Further, demandFor example, certain countries may not have fully implemented the Cape Town Convention on International Interests in Mobile Equipment, a treaty that, among other things, established international standards for aircraft is dependentthe registration, protection and enforcement of lessors' and financiers' rights in aircraft. These matters may not be resolved on passenger and cargo traffic, whichterms favorable to us, or in turn is dependent on general business and economic conditions. As a result, weak or negative economic growth in emerging markets may have an indirect effect on the value of the assets that we acquire if airlines and other potential lessees are adversely affected. For these and other reasons, our financial condition and results of operations may be negatively impacted by adverse economic and political developments in emerging market countries.
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Risks Related to the Aviation Industry
Airline reorganizations could impair our lessees’lessees' ability to comply with their lease payment obligations to us.
In recent years, multiple airlines have sought to reorganize and seek protection from creditors under their local laws.laws and certain airlines have gone into liquidation. Bankruptcies have led to the grounding of significant numbers of aircraft, rejectionsrejection of leases and negotiated reductionsreduction in aircraft lease rentals, with the effect of depressing aircraft market values. Additional reorganizations or liquidations by airlines under applicable bankruptcy or reorganization laws or further rejection or abandonment of aircraft by airlines in bankruptcy proceedings may depress aircraft values and aircraft lease rates. Additional grounded aircraft and lower market values would adversely affect our ability to sell certain of our aircraft or re-lease otherour aircraft at favorable rates. High
Changes in fuel prices can adversely affect the profitability of the airline industry and our lessees’lessees' ability to meet their lease payment obligations to us.
Fuel costs represent a major expense to airlines, significantly impacting the profitability of the airline industry and fuelour lessees' operating results. Fuel prices fluctuate widely, dependingdriven primarily onby international market conditions, geopolitical and environmental events, regulatory changes including those related to greenhouse gas emissions and currency exchange rates. FuelIn recent years, fuel prices continuehave been volatile, increasing and decreasing rapidly due to factors outside of airlines' control.
Higher fuel costs may have a significantmaterial adverse impact on airline profitability. profitability, including the profitability of our lessees. Due to the competitive nature of the airline industry, airlines may not be able to pass on increases in fuel prices to their customers by increasing fares. If they pass on the higher costs, it may adversely affect demand for air travel, which would reduce revenues to our customers. In addition, airlines may not be able to manage this risk by appropriately hedging their exposure to fuel price fluctuations. Although
A sustained period of lower fuel prices have been relatively stablecosts may adversely affect regional economies that depend on oil revenue, including those in recent years, they have stabilized at prices significantly higher than historical averages. If fuel prices increase further,which our lessees may incur higher costs or experience reduced revenues. operate.
Consequently, these conditions may:may (i) affect our lessees’lessees' ability to make rental and other lease payments; (ii) result in lease restructurings and aircraft repossessions; increase our costs of servicing and marketing aircraft;
(iii) impair our ability to re-lease or dispose the aircraft and other aviation assets or re-lease or otherwise dispose of the assets on a timely basis at favorable rates; and (iv) reduce the proceeds received for the aircraft or other aviation assets upon any disposition. Any of these results could have a material adverse effect on our financial position, cash flow and results of operations.
Government regulations could require substantial expenditures, reduce our profitability and limit our growth.
Certain aspects of our business are subject to regulation by state, federal and foreign governmental authorities. Aircraft are subject to regulations imposed by aviation authorities regarding aircraft maintenance and airworthiness. Laws affecting the airworthiness of aircraft generally are designed to ensure that all aircraft and related equipment are continuously maintained in proper condition to enable safe operation of the aircraft. Aircraft manufacturers also may issue their own recommendations. Airworthiness directives and similar requirements typically set forth particular special maintenance actions or modifications to certain aircraft types or models that the owners or operators of aircraft must implement. Table of Contents
Each lessee generally is responsible for complying with airworthiness directives with respect to its aircraft and is required to maintain the aircraft’saircraft's airworthiness. To the extent that a lessee fails to comply with airworthiness directives required to maintain its certificate of airworthiness or other manufacturer requirements in respect of an aircraft or if the aircraft is not currently subject to a lease, we may have to bear the cost of such compliance. Under many leases, we have agreed to share with our lessees the cost of obligations under airworthiness directives (or similar requirements). These expenditures can be substantial and, to the extent we are required to pay them, our cash flow and ability to pay dividends could be substantially adversely affected.
In addition to these expenditures, which may be substantial, significant new requirements with respect to noise standards, emission standards and other aspects of our aircraft or their operation could cause our costs to increase and could cause the value of our aircraft portfolio to decrease. Other governmental regulations relating to noise and emissions levels may be imposed not only by the jurisdictions in which the aircraft are registered, possibly as part of the airworthiness requirements, but also by other jurisdictions where the aircraft operate. In addition, most countries’countries' aviation laws require aircraft to be maintained under an approved maintenance program having defined procedures and intervals for inspection, maintenance and repair. To the extent that our aircraft are off-lease or a lessee defaults in effecting such compliance, we are required to comply with such requirements at our expense.
The effects of various environmental regulations may negatively affect the airline industry. This may cause lessees to default on their lease payment obligations to us.
The airline industry is subject to increasingly stringent federal, state, local and international environmental laws and regulations concerning emissions to the air, discharges to surface and subsurface waters, safe drinking water, aircraft noise, the management of hazardous substances, oils and waste materials, and other regulations affecting aircraft operations. Governmental regulations regarding aircraft and engine noise and emissions levels apply based on where the relevant aircraft is registered and operated. For example, jurisdictions
Jurisdictions throughout the world have adopted noise regulations which require all aircraft to comply with noise level standards. In addition to the current requirements, the United States and the International Civil Aviation Organization or ICAO, have("ICAO") adopted a new, more stringent set of standards for noise levels which applies to engines manufactured or certified on or after January 1, 2006. Currently, U.S. regulations woulddo not require any phase-out of aircraft that qualify with the older standards applicable to engines manufactured or certified prior to January 1, 2006, but the European Union has established a framework for the imposition ofimposes operating limitations on aircraft that do not comply with the new standards and incorporatedincorporates aviation-related emissions into the European Union’sUnion's Emissions Trading Scheme ("ETS"). ICAO has also adopted new, more stringent noise level standards to apply to new airplane type design with a maximum certificated takeoff weight of 55,000 kg or more on or after December 31, 2017; or with maximum certificated takeoff weight of less than 55,000 kg on or after December 31, 2020. On January 14, 2016, the U.S. proposed noise regulations to harmonize with the new ICAO standards.
In addition to more stringent noise restrictions, the United States and other jurisdictions are beginning to impose more stringent limits on nitrogen oxide, carbon monoxide and carbon dioxide emissions from engines, consistent with current ICAO standards. On June 10, 2015, the United States Environmental Protection Agency proposed an endangerment finding that greenhouse gas emissions from certain classes of aircraft engines contribute to climate change and endanger public health and welfare and also issued an Advance Notice of Proposed Rulemaking proposing domestic adoption of the ICAO emissions standards expected in 2012. TheseFebruary 2016. On February 8, 2016, ICAO announced a proposed global performance standard for aircraft carbon intensity.
European countries generally have relatively strict environmental regulations that can restrict operational flexibility and decrease aircraft productivity. The European Parliament has confirmed that all emissions from flights within the European Union are subject to the ETS requirement, even those emissions that are emitted outside of the European Union. The European Union suspended the enforcement of the ETS requirements for international flights outside of the European Union due to a proposal issued by the ICAO in October 2013 to develop a global program to reduce international aviation emissions, which would be enforced by 2020. In response to this, the European Commission amended the ETS legislation through the end of 2016 so that only flights or portions thereof that take place in European regional airspace are subject to the ETS requirements. The United States, China and other countries continue to oppose the inclusion of aviation emissions in the ETS.
The potential impact of ETS and the proposed ICAO carbon standards on costs have not been completely identified. Concerns over global warming also could result in more stringent limitations on the operation of aircraft. Any of these regulations could limit the economic life of the aircraft and engines, reduce their value, limit our ability to lease or sell the non-compliant aircraft and engines or, if engine modifications are permitted, require us to make significant additional investments in the aircraft and engines to make them compliant.
In addition, to more stringent noise restrictions, the United States and other jurisdictions are beginning to impose more stringent limits on nitrogen oxide, carbon monoxide and carbon dioxide emissions from engines, consistent with current ICAO standards. Concerns over global warming also could result in more stringent limitations on the operation of aircraft.European countries generally have relatively strict environmental regulations that can restrict operational flexibility and decrease aircraft productivity. The European Parliament has confirmed that aviation is to be included in the European Union's Emissions Trading Scheme beginning in 2012, and that all emissions from flights within the European Union are subject to the Emissions Trading Scheme requirement, even those emissions that are emitted outside of the European Union. The European Union suspended the enforcement of the Emissions Trading Scheme requirements for international flights outside of the European Union due to a proposal issued by the ICAO in October 2013 to develop a global program to reduce international aviation emissions, which would be enforced by 2020. In response to this, the European Commission has proposed to amend the Emissions Trading Scheme so that only flights or portions thereof that take place in European regional airspace is subject to the Emissions Trading Scheme requirements.
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Compliancecompliance with current or future regulations, taxes or duties imposed to deal with environmental concerns could cause the lessees to incur higher costs and lead to higher ticket prices, which could mean lower demand for travel, thereby generating lower net revenues and resulting in an adverse impact on the financial condition of our lessees. Consequently, such complianceFor example, the United Kingdom doubled its air passenger duties, effective February 1, 2007, in recognition of the environmental costs of air travel. Similar measures may be implemented in other jurisdictions as a result of environmental concerns. Compliance may affect the lessees’lessees' ability to make rental and other lease payments and reduce the value received for the aircraft upon any disposition, which could have an adverse effect on our financial position, cash flow and results of operations.
Additional
If the effects of terrorist attacks and geopolitical conditions adversely impact the financial condition of the airlines, our lessees might not be able to meet their lease payment obligations, which would have an adverse effect on our financial results and growth prospects.
War, armed hostilities or terrorist attacks, or the fear of such attacks or civil unrest, even if not made directly on the airline industry,events, could negatively affect lessees and the airline industry.As a result of the September 11, 2001 terrorist attacks in the United States and subsequent terrorist attacks abroad, notably in the Middle East, Southeast Asia and Europe, increased security restrictions were imposed on air travel. Costs for aircraft insurance and security measures have increased, passenger and cargodecrease demand for air travel decreased,or increase the operating costs of our customers. The situations in Iraq, Afghanistan, Syria, North Africa and operators have faced increased difficulties in acquiring war riskUkraine remain unsettled, and other insurance at reasonable costs.
Additionalinternational incidents, such as tension over North Korea's nuclear program and territorial disputes in East Asia, may lead to regional or broader international instability. Future terrorist attacks, war or civil unrest, even if not made directly on the airline industry,armed hostilities, large protests or government instability, or the fear of such events, could further negatively impact the airline industry and may have an adverse effect on the financial condition and liquidity of our lessees, aircraft values and rental rates and may lead to lease restructurings or any precautions taken in anticipationaircraft repossessions, all of such attacks (including elevated national threat warnings or selective cancellation or reduction of flights),which could materially adversely affect lesseesour financial results.
Terrorist attacks and geopolitical conditions have negatively affected the airline industry. International hostilities, including heightened terrorist activity, could also have a material adverse impact on our lessees’ financial condition, liquidityindustry, and results of operations. Lessees’ financial resources might not be sufficient to absorb the adverse effects of anyconcerns about geopolitical conditions and further terrorist attacks could continue to negatively affect airlines (including our lessees) for the foreseeable future, depending upon various factors, including: (i) higher costs to the airlines due to the increased security measures; (ii) decreased passenger demand and revenue due to safety concerns or the inconvenience of additional security measures; (iii) the price and availability of jet fuel; (iv) higher financing costs and difficulty in raising the desired amount of proceeds on favorable terms, or at all; (v) the significantly higher costs of aircraft insurance coverage for future claims caused by acts of war, terrorism, sabotage, hijacking and other international hostilities involvingsimilar perils, and the United Statesextent to which such insurance has been or U.S. interests, which could result in significant decreases inwill continue to be available; (vi) the ability of airlines to reduce their operating costs and conserve financial resources, taking into account the increased costs incurred as a consequence of terrorist attacks and geopolitical conditions, including those referred to above; and (vii) special charges recognized by some airlines, such as those related to the impairment of aircraft leasing transactions thereby materially adversely affecting our results of operations.and other long lived assets stemming from the above conditions.
Epidemic diseases, severe weather conditions, natural disasters or their perceived effects may hindernegatively impact the airline travel.Inindustry and our lessees' ability to meet their lease payment obligations to us, which, in turn, could have an adverse effect on our financial results.
Over the past air travel hasseveral years, there have been adversely affected by the outbreakoutbreaks of epidemic diseases, such as severe acute respiratory syndrome (“SARS”), avian influenza orEbola virus disease and Zika virus disease, which have spread to other parts of the bird flu, and H1N1 virus orworld. If an outbreak of epidemic diseases were to occur, numerous responses, including travel restrictions, might be necessary to combat the swine flu.spread of the disease. Even if restrictions are not implemented, it is likely that passengers would voluntarily choose to reduce travel. Outbreaks of pandemicepidemic diseases, or the fear of such events, could provoke responses, including government-imposedresult in travel restrictions, whichbans or could negatively affect passengerhave an adverse effect on our financial results. Similarly, demand for air travel or the inability of airlines to operate to or from certain regions due to severe weather conditions or natural disasters, such as floods, earthquakes or volcanic eruptions, could have an adverse effect on our lessees' ability to their lease payment obligations to us, which could negatively impact our financial results.
We are subject to various risks and requirements associated with transacting business in multiple countries which could have a material adverse effect on our financial condition, cash flow and results of operations.
Our international operations expose us to trade and economic sanctions and other restrictions imposed by the United States, the European Union (the "EU") and other governments or organizations. The U.S. Departments of Justice, Commerce, State and Treasury and other federal agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against corporations and individuals for violations of economic sanctions laws, export control laws, the Foreign Corrupt Practices Act ("FCPA"), and other federal statutes and regulations, including those established by the Office of Foreign Assets Control ("OFAC"). In addition, the U.K. Bribery Act of 2010 (the "Bribery Act") prohibits both domestic and international bribery, as well as bribery across both private and public sectors. An organization that "fails to prevent bribery" by anyone associated with the organization can be charged under the Bribery Act unless the organization can establish the defense of having implemented "adequate procedures" to prevent bribery. Under these laws and regulations, various government agencies may require export licenses, may seek to impose modifications to business practices, including cessation of business activities in sanctioned countries or with sanctioned persons or entities, and modifications to compliance programs, which may increase compliance costs, and may subject us to fines, penalties and other sanctions. A violation of these laws or regulations could adversely impact our business, operating results and financial condition.
The European Union and the United States have imposed sanctions on Russia and certain businesses, sectors and individuals in Russia, including the airline industry. The European Union and the United States have also suspended the granting of certain types of export licenses to Russia. Russia has imposed its own sanctions on certain individuals in the United States and may impose other sanctions on the United States and the European Union and/or certain businesses or individuals from these regions. We cannot assure you that the current sanctions or any further sanctions imposed by the European Union, the United States or other international interests will not materially adversely affect our operations.
Recently, the United States and European Union lifted certain nuclear-related secondary sanctions as provided by the Joint Comprehensive Plan of Action ("JCPOA") with Iran. Among other things, the sale or lease of civil passenger aircraft to most Iranian airlines is now permitted, subject to receipt of an appropriate license. Transactions with sanctioned individuals and entities, including aircraft sale and lease transactions with such persons, remain prohibited, and the United States retains the authority to revoke the sanctions relief provided by the JCPOA if Iran fails to meet its commitments thereunder. While we do not currently do business in Iran or with Iranian airlines, we may seek to do so in the future in compliance with applicable laws and regulations.
We and our Manager have implemented and maintain policies and procedures designed to ensure compliance with FCPA, OFAC, the Bribery Act and other export control, anti-corruption, anti-terrorism and anti-money laundering laws and regulations. We cannot assure you, however, that our directors, officers, consultants and agents will not engage in conduct for which we may be held responsible, nor can we assure you that our business partners will not engage in conduct which could materially affect their ability to perform their contractual obligations to us or even result in our being held liable for such conduct. Moreover, while we believe that we have been in compliance with all applicable sanctions and embargo laws and regulations, and intend to maintain such compliance, there can be no assurance that we will be in compliance in the future, particularly as the scope of certain laws may be unclear and may be subject to change. Violations of FCPA, OFAC, the Bribery Act and other export control, anti-corruption, anti-terrorism and anti-money laundering laws and regulations may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could have a material adverse effect on our business, financial condition, cash flows and results of the aviation industry.Natural disasters and other natural phenomena may disrupt air travel.
Air travel can be disrupted, sometimes severely, by the occurrence of natural disasters and other natural phenomena. For example, the tsunami in Japan and flooding in Thailand in 2011 and the spread of volcanic ash in Europe in early 2010 caused the closure of airports and flight cancellations throughout the affected area. The airline industry incurred substantial losses from these disruptions.
operations.
We depend on aircraft and engine manufacturers’manufacturers' success in remaining financially stable and producing aircraft.
The supply of commercial aircraft is dominated by a few airframe manufacturers, including Boeing, Airbus, Embraer, ATR and Bombardier, and a limited number of engine manufacturers, such as GE Aircraft Engines, Rolls-Royce plc, Pratt & Whitney, a division of United Technologies Corporation, IAE International Aero Engines AG and CFM International, Inc. As a result, we will be dependent on the success of these manufacturers in remaining financially stable, producing products and related components which meet the airlines’airlines' demands, providing customer support and fulfilling any contractual obligations they may have to us. Table of Contents
Should
In the event that the manufacturers failprovide deep discounts with respect to respond appropriately to changes in the market environment or fail to fulfill any contractual obligations they might have to us, we may experience:missed or late delivery ofcertain aircraft, and a potential inability to meet our contractual obligations owed to any of our then lessees, resulting in potential lost or delayed revenues, lower growth rates and strained customer relationships;
an inability to acquire aircraft and related components on terms which will allow us to lease those aircraft to airline customers at a profit, resulting in lower growth rates or a contraction in our aircraft fleet;
a market environment with too many aircraft available, potentially creating downward pressure on demand for the anticipated aircraft in our fleet and reduced market lease rates and sale prices; or
a reduction in our competitiveness due to deep discounting by the manufacturers, which may lead to reduced market lease rates and aircraft values and maythat could affect our ability to effectively compete in the market, we may not be able to remarket or sell some of thesimilar aircraft in our fleet at a profit or at all. This could also lead to reduced market lease rates and aircraft values.
Risks Related to Our Relationship with BBAM LP
BBAM has conflicts of interest with us and their limited contractual or other duties will not restrict them from favoringmay favor their own business interestsinterest and those of their other managed entities to our detriment.
Conflicts of interest will arise between us and BBAM LP with respect to our operations and business opportunities. BBAM LP acquires, manages and remarkets aircraft for lease or sale for us and for other entities, including entities in which the owners of BBAM LP, Summit Aviation Partners LLC ("Summit") and Onex Corporation and its affiliates ("Onex"), may have an economic interest. We may compete directly with such other managed entities for investment opportunities. For example, BBAM performs aircraft acquisition, disposition and management services pursuant to a joint marketing agreement with Nomura Babcock & Brown Co., Ltd, referred to as NBB. BBAM has arranged a significant number of aircraft acquisitions and dispositions pursuant to the NBB arrangement. We expect that BBAM will continue to arrange acquisition and disposition opportunities with NBB and that we may compete with NBB for such opportunities. A conflict of interest will arise if BBAM identifies an aircraft acquisition opportunity that would meet our investment objectives as well as those of NBB or any other entity managed by BBAM. BBAM and Onex also may participate in other ventures that acquire and lease commercial jet aircraft. We do not have any exclusive right to participate in aircraft acquisition opportunities originated or identified by BBAM. Under our agreements with BBAM LP, our Manager has agreed to act in the best interests of our shareholders. However, neither BBAM nor any other BBAM LP affiliate will be restricted from pursuing, or offering to a third party, including NBB, Onex or any other party managed by, or otherwise affiliated or associated with BBAM LP, any investment or disposal opportunity or will be required to establish any investment protocol in relation to prioritization of any investment or disposal opportunity. We may purchase in the future aircraft from, or sell aircraft to, entities managed by BBAM, or entities in which Summit or Onex has an ownership interest. Although such purchases will require approval by our independent directors, the pricing and other terms of these transactions may be less advantageous to us than if they had been the result of transactions among unaffiliated third parties. Table of Contents
Under our servicing agreements with BBAM, if a conflict of interest arises as to our aircraft and other aircraft managed by BBAM, BBAM must perform the services in good faith, and, to the extent that our aircraft or other aircraft managed by BBAM have substantially similar characteristics that are relevant for purposes of the particular services to be performed, BBAM has agreed not to discriminate among our aircraft or between any of our aircraft and any other managed aircraft on an unreasonable basis. Nevertheless, despite these contractual undertakings, BBAM as Servicer may favor its own interests and the interests of other managed entities over our interests. Conflicts may arise when our aircraft are leased to entities that also lease other aircraft managed by BBAM and decisions affecting some aircraft may have an adverse impact on others. For example, when a lessee in financial distress seeks to return some of its aircraft, BBAM may be required to decide which aircraft to accept for return and may favor its or another managed entity’sentity's interest over ours. Conflicts also may arise, for example, when our aircraft are being marketed for re-lease or sale at a time when other aircraft managed by BBAM are being similarly marketed.
Under the terms of our servicing agreements, we are not entitled to be informed of all conflicts of interest involving BBAM and are limited in our right to replace BBAM because of conflicts of interest. Any replacement Servicer may not provide the same quality of service or may not afford us terms as favorable as the terms currently offered by BBAM. If BBAM, as the servicer, makes a decision that is adverse to our interests, our business, financial condition, results of operations and cash flows could suffer. See “"Even if we were to become dissatisfied with BBAM LP’sLP's performance, there are only limited circumstances under which we are able to terminate our management and servicing agreements and we may not terminate certain of our servicing agreements without the prior written consent of third parties, including insurance policy provider or lenders”lenders."
Even if we were to become dissatisfied with BBAM LP’sLP's performance, there are only limited circumstances under which we are able to terminate our management and servicing agreements and we may not terminate certain of our servicing agreements without the prior written consent of third parties, including insurance policy provider or lenders.
Our management agreement with our Manager expires on December 28, 2022.July 1, 2025. At that time, the Management Agreementmanagement agreement will automatically renew for five years, unless we make a payment to the Manager equal to $8$6.0 million, subject to potential future adjustment. Weplus, so long as the management expense amount does not exceed $12.0 million, 50% of the excess (if any) of the management expense amount over $6.0 million. We may terminate the management agreement sooner only if:
| ● | at least 75% of our independent directors and holders of 75% or more of all of our outstanding common shares (measured by vote) determine by resolution that there has been unsatisfactory performance by our Manager that is materially detrimental to us; our Manager materially breaches the management agreement and fails to remedy such breach within 90 days of receiving written notice from us requiring it to do so, or such breach results in liability to us and is attributable to our Manager’s gross negligence, fraud or dishonesty, or willful misconduct in respect of the obligation to apply the standard of care;
any license, permit or authorization held by the Manager which is necessary for it to perform the services and duties under the management agreement is materially breached, suspended or revoked, or otherwise made subject to conditions which, in the reasonable opinion of our board of directors, would prevent the Manager from performing the services and the situation is not remedied within 90 days;
| ● | our Manager materially breaches the management agreement and fails to remedy such breach within 90 days of receiving written notice from us requiring it to do so, or such breach results in liability to us and is attributable to our Manager's gross negligence, fraud or dishonesty, or willful misconduct in respect of the obligation to apply the standard of care; |
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BBAM Aviation Services Limited or one of its affiliates ceases to hold (directly or indirectly) more than 50% of the voting equity of, and economic interest in, the Manager;
our Manager becomes subject to bankruptcy or insolvency proceedings that are not discharged within 75 days, unless our Manager is withdrawn and replaced within 90 days of the initiation of such bankruptcy or insolvency proceedings with an affiliate or associate of BBAM that is able to make correctly the representations and warranties set out in the management agreement; | ● | any license, permit or authorization held by the Manager which is necessary for it to perform the services and duties under the management agreement is materially breached, suspended or revoked, or otherwise made subject to conditions which, in the reasonable opinion of our board of directors, would prevent the Manager from performing the services and the situation is not remedied within 90 days; |
our Manager voluntarily commences any proceeding or files any petition seeking bankruptcy, insolvency, receivership or similar law, or makes a general assignment for the benefit of its creditors, unless our Manager is withdrawn and replaced within 15 days with an affiliate or associate of BBAM that is able to make correctly the representations and warranties set out in the management agreement; or
an order is made for the winding up of our Manager, unless our Manager is withdrawn and replaced within 15 days with an affiliate or associate of BBAM that is able to make correctly the representations and warranties set out in the management agreement. | ● | BBAM Aviation Services Limited or one of its affiliates ceases to hold (directly or indirectly) more than 50% of the voting equity of, and economic interest in, the Manager; |
| ● | our Manager becomes subject to bankruptcy or insolvency proceedings that are not discharged within 75 days, unless our Manager is withdrawn and replaced within 90 days of the initiation of such bankruptcy or insolvency proceedings with an affiliate or associate of BBAM that is able to make correctly the representations and warranties set out in the management agreement; |
| ● | our Manager voluntarily commences any proceeding or files any petition seeking bankruptcy, insolvency, receivership or similar law, or makes a general assignment for the benefit of its creditors, unless our Manager is withdrawn and replaced within 15 days with an affiliate or associate of BBAM that is able to make correctly the representations and warranties set out in the management agreement; or |
| ● | an order is made for the winding up of our Manager, unless our Manager is withdrawn and replaced within 15 days with an affiliate or associate of BBAM that is able to make correctly the representations and warranties set out in the management agreement. |
We have the right to terminate the servicing agreement for our Initial PortfolioB&B Air Funding (with the prior written consent of the financial guaranty provider for the Securitization,B&B Air Funding, which we refer to as the policy provider) and the policy provider has the independent right to terminate the agreement (without our consent) in the following limited circumstances: Bankruptcy or insolvency of BBAM LP;
BBAM LP ceases to own, directly or indirectly, at least 50% of the Servicer; | ● | Bankruptcy or insolvency of BBAM LP; |
Summit ceases to own, directly or indirectly, at least 33.33% of the partnership interests in BBAM LP; provided that a sale that results in such ownership being at a level below 33.33% shall not constitute a servicer termination event if the sale is to a publicly listed entity or other person with a net worth of at least $100 million; and
50% or more of the Servicer’s key finance and legal team or technical and marketing team cease to be employed by BBAM LP and are not replaced with employees with reasonably comparable experience within 90 days. | ● | BBAM LP ceases to own, directly or indirectly, at least 50% of the Servicer; |
| ● | Summit ceases to own, directly or indirectly, at least 33.33% of the partnership interests in BBAM LP; provided that a sale that results in such ownership being at a level below 33.33% shall not constitute a servicer termination event if the sale is to a publicly listed entity or other person with a net worth of at least $100 million; and |
| ● | 50% or more of the Servicer's key finance and legal team or technical and marketing team cease to be employed by BBAM LP and are not replaced with employees with reasonably comparable experience within 90 days. |
In addition, we are required to obtain written consent of certain of our lenders prior to terminating certain of our servicing agreements.
Our management and servicing agreements limit our remedies against BBAM LP for unsatisfactory performance and provide certain termination rights to the policy provider.
Under our management and servicing agreements with BBAM LP, in many cases we may not have the right to recover damages from BBAM LP for unsatisfactory performance. Moreover, we have agreed to indemnify our Manager, BBAM LP and their affiliates for broad categories of losses arising out of the performance of services, unless they are finally adjudicated to have been caused directly by our Manager’sManager's or BBAM LP’sLP's gross negligence, fraud, deceit or willful misconduct in respect of its obligation to apply its standard of care or, in the case of the servicing agreement for our Initial Portfolio,B&B Air Funding, conflicts of interest standard in the performance of its services. In addition, because of our substantial dependence on BBAM LP, our board of directors may be reluctant to initiate litigation against BBAM LP to enforce contractual rights under our management and servicing agreements.
Under certain circumstances the provider of the financial guaranty insurance policy with respect to the Notesnotes issued by B&B Air Funding (the "Securitization Notes"), and certain of our lenders may have the right to terminate BBAM as the servicer for certain of our aircraft without our consent and may terminate the Servicer at a time which may be disadvantageous to us. Table of Contents
BBAM may resign as Servicer under our servicing agreements under certain circumstances, which would significantly impair our ability to re-lease or sell aircraft and service our leases.
BBAM may resign under one or more of our servicing agreements under certain circumstances if it reasonably determines that directions given, or services required, would, if carried out, be unlawful under applicable law, be likely to lead to an investigation by any governmental authority ofhaving jurisdiction over BBAM or its affiliates, expose BBAM to liabilities for which, in BBAM’sBBAM's good faith opinion, adequate bond or indemnity has not been provided or place BBAM in a conflict of interest with respect to which, in BBAM’sBBAM's good faith opinion, BBAM could not continue to perform its obligations under the servicing agreement with respect to all serviced aircraft or any affected aircraft, as the case may be (but with respect to the foregoing circumstance, BBAM may resign only with respect to the affected aircraft). Whether or not it resigns, BBAM is not required to take any action of the foregoing kind. BBAM may also resign if it becomes subject to taxes for which we do not indemnify it. BBAM’sBBAM's decision to resign would significantly impair our ability to re-lease or sell aircraft and service our leases.
A cyber-attack that bypasses BBAM's information technology, or IT, security systems, causing an IT security breach, may lead to a material disruption of our IT systems and the loss of business information, which may hinder our ability to conduct our business effectively and may result in lost revenues and additional costs.
We depend on the secure operation of BBAM's computer systems, to manage, process, store, and transmit information associated with aircraft leasing. A cyber-attack on these computer systems could adversely impact our daily operations and lead to the loss of sensitive information, including our own proprietary information and that of our customers. Such losses could harm our reputation and result in competitive disadvantages, litigation, regulatory enforcement actions, lost revenues, additional costs and liability. While BBAM devotes substantial resources to maintaining adequate levels of cyber-security, its resources and technical sophistication may not be adequate to prevent all types of cyber-attacks.
Risks Related to Our Indebtedness
We have substantial indebtedness that imposes constraints on our operations and could adversely affect our ability to pay dividends on our common shares.operations.
The terms of our debt facilities subject us to certain risks and operational restrictions, including:
| ● | most of the aircraft and related leases in our portfolio secure debt obligations, the terms of which restrict our ability to sell aircraft and require us to use proceeds from sales of aircraft, in part, to repay outstanding debt; |
| ● | we are required to dedicate a significant portion of our cash flow from operations to debt service payments, thereby reducing the amount of our cash flow available to fund working capital, make capital expenditures and satisfy other needs; |
| ● | restrictions on our subsidiaries' ability to distribute excess cash flow to us under certain circumstances; |
| ● | lessee, geographical and other concentration requirements limit our flexibility in leasing our aircraft; |
| ● | requirements to obtain the consent of third parties including lenders, the insurance policy provider and rating agency confirmations for certain actions; and |
| ● | restrictions on our subsidiaries' ability to incur additional debt, create liens on assets, sell assets, make freighter conversions and make certain investments or capital expenditures. |
we are required to dedicate a significant portion of our cash flow from operations to debt service payments, thereby reducing the amount of our cash flow available to pay dividends, fund working capital, make capital expenditures and satisfy other needs;
restrictions on our subsidiaries’ ability to distribute excess cash flow to us under certain circumstances;
lessee, geographical and other concentration requirements limit our flexibility in leasing our aircraft;
requirements to obtain the consent of third parties including lenders, the insurance policy provider and rating agency confirmations for certain actions; and
restrictions on our subsidiaries’ ability to incur additional debt, create liens on assets, sell assets, make freighter conversions and make certain investments or capital expenditures.
For example, B&B Air Funding is required to apply all of its available cash flow, after payment of certain expenses (including interest), to repay the principal on the Securitization Notes, and the cash flow from the aircraft in the B&B Air Funding portfolio is not available to us. Table of Contents
In connection with the acquisition of the GAAM Portfolio, we assumed a debt facility provided by Norddeutsche Landesbank Gironzentrale (“("Nord LB Facility”Facility"). Substantially all cash flow associated with these aircraft, after payment of certain expenses, is applied to payment of interest and principal and therefore is not available for distribution to us.
The restrictions described above, as well as restrictions in our other financing facilities, may impair our ability to operate and to compete effectively with our competitors. Similar restrictions may be contained in the terms of future financings that we may enter into to finance our growth.
Our substantial indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under the unsecured borrowing.our borrowings.
We and our subsidiaries have a significant amount of indebtedness. As of December 31, 2013,2015, our total consolidated indebtedness, net of unamortized debt discounts, was $2.5$2.4 billion.
Subject to the limits contained in the agreements governing our existing and future indebtedness, including the indentures governing our 2020 Notes and 2021 Notes, we may be able to incur substantial additional debt from time to time to finance aircraft, working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our high level of debt could increase.intensify. Specifically, our high level of debt could have important consequences, including the following:
| ● | making it more difficult for us to satisfy our debt obligations with respect to the notes and our other debt; |
| ● | limiting our ability to obtain additional financing to fund the acquisition of aircraft or for other general corporate requirements; |
| ● | requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for aircraft acquisitions and other general corporate purposes; |
| ● | increasing our vulnerability to general adverse economic and industry conditions; |
| ● | exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under our various credit facilities, are at variable rates of interest; |
| ● | limiting our flexibility in planning for and reacting to changes in the aircraft industry; |
| ● | placing us at a disadvantage compared to other competitors; and |
| ● | increasing our cost of borrowing. |
In addition, the indentures governing our debt obligations; limiting our ability to obtain additional financing to fund the acquisition of aircraft or for other general corporate requirements;
requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for aircraft acquisitions2020 Notes and other general corporate purposes;
increasing our vulnerability to general adverse economic and industry conditions;
exposing us to the risk of increased interest rates2021 Notes, as certain of our borrowings, including borrowings under our various credit facilities, are at variable rates of interest;
limiting our flexibility in planning for and reacting to changes in the aircraft industry;
placing us at a disadvantage compared to other competitors; and
increasing our cost of borrowing.
In addition,well as the agreements governing our existingother indebtedness, contain restrictive financial and operating covenants that may limit our ability to engage in activities that may be in our long-term best interest. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, may result in the acceleration of some or all our debt.
We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or refinance our debt obligations, depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal of, premium, if any, or interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay aircraft purchases or to dispose of material assets, or leases, or seek additional debt or equity capital or to restructure or refinance our indebtedness. We may not be able to effect any such alternative measures on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. Certain agreements governing our existing indebtedness restrict our ability to dispose of assets and use the proceeds from those dispositions. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due.
Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations and our ability to satisfy our obligations.
If we cannot make scheduled payments on our indebtedness, we will be in default and holders of our debt securities or our lenders, as applicable, may be able to declare such indebtedness to be due and payable, terminate commitments to lend money, foreclose against the aircraft, if any, securing such indebtedness or pursue other remedies, including potentially forcing us into bankruptcy or liquidation.
The terms of the agreements and indentures governing certain of our indebtedness restrict our current and future operations.
The indentures and agreements governing certain of our indebtedness contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to:
| ● | incur or guarantee additional indebtedness; |
| ● | pay dividends, repurchase certain equity interests or make other restricted payments; |
| ● | agree to any restrictions on the ability of restricted subsidiaries to transfer property or make payments to us; |
| ● | make certain investments; |
| ● | consolidate, amalgamate, merge, sell or otherwise dispose of all or substantially all of our assets; and; |
| ● | enter into transactions with our affiliates. |
As a result of these restrictions, we may be limited in how we conduct and grow our business, or unable to compete effectively or to take advantage of new business opportunities.
In addition, the indentures and agreements governing certain of our indebtedness contain financial and operating covenants that, among other things, require us to maintain specified financial ratios and tests. Our ability to meet these financial and operating covenants can be affected by events beyond our control, and we may be unable to meet them.
A breach of the covenants or restrictions under the indentures and agreements governing certain of our indebtedness could result in an event of default under the applicable indebtedness. Such a default may allow holders of our debt securities or our lenders, as applicable, to accelerate the related indebtedness, which may result in the acceleration of other indebtedness to which a cross-acceleration or cross-default provision applies. In addition, such lenders or debt holders could terminate commitments to lend money, if any. Furthermore, if we were unable to repay the indebtedness then due and payable, secured lenders could proceed against the aircraft, if any, securing such indebtedness. In the event our lenders or holders of our debt securities accelerate the repayment of our borrowings, we may not have sufficient assets to repay that indebtedness.
We have a significant amount of non-recourse debt.
As of December 31, 2013,2015, we had total debt, net of unamortized debt discounts, of $2.5$2.4 billion. Of this amount, $1.6 billion$778.8 million was non-recourse to Fly, Leasing Limited, except for certain limited obligations which typically include reimbursement for certain expenses and costs incurred by the lenders. These non-recourse loans may be provided through loan facilities that are typically cross-collateralized and contain cross-default provisions against all of the loans advanced within each facility, as well as through individual loans against individual aircraft. We currently haveAs of December 31, 2015, we had the following non-recourse debt facilities that provideprovided financing against multiple aircraft:
Facility(1) | | | Amount Outstanding
at December 31, 20132015(2) | | Number of Aircraft Financed | | Number of
Aircraft Financed | | | Maturity DatesDate | Securitization Notes Payable | | $ | 592.9$295.8 million | | | | 35 | 18 | | November 2033 | | Nord LB Facility | | $ | 452.4$255.3 million | | | | 17 | 10 | | November 2018 | Fly Acquisition II Facility | | $ | 126.8 million | | | | 4 | | | July 2018 |
| (1) | | Excludes $391.5$240.2 million outstanding underfor 10 aircraft financed by individual non-recourse financing facilities for single aircraft.loans. |
| (2) | | Excludes unamortized debt discounts. |
The maturity dates for thesenon-recourse loans range from July 2018February 2016 to November 2033. In general, upon a default on a non-recourse loan, the lenders will have the ability to foreclose upon any or all available collateral (including aircraft, leases and shares of aircraft-owning and/or aircraft-leasing special purposes entities) to satisfy amounts due under the loan. However, the lenders cannot make a claim against Flyus for payment of these outstanding obligations, except for the limited payment obligations described above. The non-recourse nature of these loans means that we may decide, for economic reasons, to default on a non-recourse loansloan if and when we believe that the aircraft and other assets that secure asecuring such loan are worth less than the amountsamount outstanding under the loan. Although the direct financial impact to us under such a default on a non-recourse loan is limited, these defaults may impact our reputation as a borrower and impair our ability to secure future borrowings, which could have a material adverse impact on our ability to grow our aircraft portfolio and earnings. Table of Contents
We have secured,a significant amount of recourse financings on whichdebt outstanding, including debt of our subsidiaries that we have guaranteed the payment of all debt service and other amounts due under these loans.Fly has $1.0guaranteed.
We had $1.6 billion of unsecured and aircraft-secured recourse debt outstanding as of December 31, 2013.2015, including debt of our subsidiaries that we have guaranteed. We expect to incur additional recourse indebtedness in the future. Although these recourse loans may be secured by aircraft and their associated leases, Fly haswe have guaranteed and will be responsible for timely payment of all debt service and other amounts due under these loans in the event that the underlying leases do not provide sufficient cash flow to meet required debt payments. In this case, Fly wouldwe will be required to make payments from itsour unrestricted cash, which could have a materially adverse impact on Fly’sour ability to pay dividends or grow through future acquisitions of aircraft. In addition, the Term Loan, the new loans under the CBA Facility, our Unsecured2020 Notes and 2021 Notes, and certain of our other recourse indebtedness contain cross defaultcross-default provisions to other recourse indebtedness which if triggered could significantly increase the amount of indebtedness which is payable by Flyus at the time of the cross default.cross-default.
We are a holding company and currently rely on our subsidiaries to provide us with funds necessary to meet our financial obligations and pay dividends.obligations.
We are a holding company and our principal assets are the equity interests we hold in our subsidiaries, which own either directly or indirectly through their subsidiaries, the aircraft in our portfolio. As a result, we depend on dividends and other payments from our subsidiaries to generate the funds necessary to meet our financial obligations and to pay dividends on our shares.obligations. Our existing subsidiaries are legally distinct from us and may be significantly restricted from paying dividends or otherwise making funds available to us pursuant to the agreements governing their financing arrangements. If we are unable to comply with the financial and other covenants contained in these agreements, then the amounts outstanding under these debt facilities may become immediately due and payable, cash generated by aircraft financed through these facilities may be unavailable to us and/or we may be unable to draw additional amounts under these facilities. The events that could cause some of our subsidiaries to be noncompliant under their loan agreements, such as a lessee default, may be beyond our control, but they nevertheless could have a substantial adverse impact on the amount of our cash flow available to fund working capital, make capital expenditures and satisfy other cash needs. For a description of the operating and financial restrictions in our debt facilities, see the section titled “"Operating and Financial Review and Prospects—Financing.”Our subsidiaries"
We are subject to interest rate risk, which could impair their ability to make distributions to us.risk.
Certain of our debt facilities have floating interest rates, creating the risk of an increase in interest rates and the risk that cash flow may be insufficient to make scheduled interest payments if interest rates were to increase. To limit this risk, our subsidiarieswe have entered into interest rate swapsswap contracts with one or more counterparties. IfWe remain exposed, however, to changes in interest rates to the extent that our interest rate swap contracts are not correlated to our financial liabilities. In addition, if any counterparty were to default on its obligations, then a mismatch in the floating rate interest obligations and fixed rate lease payments may arise, which could impair our subsidiaries’ ability to make distributions to us, which would, in turn, adversely affect our ability to meet our financial obligations and pay dividends to our shareholders.obligations. If any of our interest rate swap arrangementscontracts were terminated early, we could be obligated to make a material payment to our counterparties. Table of Contents
Risks Related to Taxation If we generate ordinary earnings for U.S. federal income tax purposes, U.S. shareholders may be required to include their pro rata share of these ordinary earnings in their gross income for U.S. federal income tax purposes.
We expect that we will be treated as a passive foreign investment company, or a “PFIC”,"PFIC," for the current taxable year and for the foreseeable future, which could have adverse U.S. federal income tax consequences to a U.S. shareholder.
We expect that we will be treated as a PFIC for U.S. federal income tax purposes for the current taxable year and future taxable years and thatfor the foreseeable future. Assuming we are a PFIC, a U.S. Holdersholder of our shares will be subject to the PFIC rules. However, no assurance can be given that we will or will not be considered a PFIC in the current or future years. The determination whether or not we are a PFIC is a factual determination that is made annually based on the types of income we earn and the value of our assets, and because certain aspects of the PFIC rules, are not entirely certain, there can be no assurance that we are or are not a PFIC or that the IRS will agree with our conclusion regarding our PFIC status. A U.S. Holder of shares of a PFIC is subject to special rules and a variety of potentially adverse tax consequences under the U.S. federal income tax laws. Assuming we are a PFIC, U.S. Holders of our shares will be subject to different taxation rules with respect to an investmentSuch consequences depend in our shares dependingpart on whether they electsuch shareholder elects to treat us as a qualified electing fund or(a "QEF"). Absent a QEF election or mark-to-market election, a U.S. shareholder who disposes or is deemed to dispose of our shares at a gain, or who receives or is deemed to receive certain distributions with respect to their investment in our shares.shares, generally will be required to treat such gain or distributions as ordinary income and to pay an interest charge on the tax imposed. If a U.S. Holdershareholder makes a QEF election in the first taxable year in which the U.S. Holdershareholder owns our shares (and if we comply(assuming our continued compliance with certain reporting requirements, which we have done and intend to do)requirements), then such U.S. Holdershareholder will be required for each taxable year to include in income a pro rata share of our ordinary earnings as ordinary income and a pro rata share of our net capital gains as long-term capital gain, subject to a separate voluntary election to defer payment of taxes, which deferral is subject to an interest charge. Such inclusion of taxable income is required even if the amount exceeds cash distributions, if any. Moreover, our distributions, if any, will not qualify for the reduced rate of U.S. federal income tax that applies to qualified dividends paid to non-corporate U.S. taxpayers.
It is also possible that one or more of our subsidiaries is or will become a PFIC. Such determination is made annually after the close of each taxable year and is dependent upon a number of factors, some of which are beyond our control, including the amount and nature of a subsidiary's income, as well as the market valuation and nature of a subsidiary's assets. In such case, assuming a U.S. shareholder does not receive from us the information it needs to make a QEF election with respect such a subsidiary, a U.S. shareholder generally will be deemed to own a portion of the shares of such lower-tier PFIC and may incur liability for a deferred tax and interest charge if we receive a distribution from, or dispose of all or part of our interest in, or the U.S. shareholder otherwise is deemed to have disposed of an interest in, the lower-tier PFIC (including through a sale of our shares).
The determination whether or not we (or any of our subsidiaries) is a PFIC is a factual determination that is made annually based on the types of income we (or any of our subsidiaries) earn and the value of our (or our subsidiaries') assets, and because certain aspects of the PFIC rules are not entirely certain, there can be no assurance that we (or any of our subsidiaries) will or will not be considered a PFIC in the current or future years or that the IRS will agree with our conclusion regarding our (or our subsidiaries') PFIC status. Investors should consult with their own tax advisors about the PFIC rules, including the advisability of making a QEF election or the mark-to-market election. (See ITEM 10. ADDITIONAL INFORMATIONItem 10, "Additional Information — Taxation — U.S. Federal Income Tax Considerations)Considerations").
We may face increased tax costs.
We and our subsidiaries could face increased tax costs for various reasons, including our failure to qualify for treaty benefits under the Irish Treaty, the maintenanceassertion of a permanent establishment within the United States, or the deduction of withholding taxes from rent payments. Any increase in our tax costs, directly or indirectly, would adversely affect our net income and would decrease cash available for distribution to our shareholders. In addition, because
Because Ireland does not have tax treaties with all jurisdictions, we may find it necessary to establish subsidiaries in other jurisdictions to lease or sublease aircraft to customers in those jurisdictions. Such subsidiaries may be subject to taxation in the jurisdictions in which they are organized, which would reduce our net income and have an adverse impact on our cash flow available for distribution to our shareholders. In addition, any increase in Irish corporate tax rates could have an adverse impact on us.
In addition, the Organization for Economic Co‐operation and Development has undertaken the Base Erosion and Profit Shifting Project ("BEPS"), which aims to restructure the taxation scheme currently affecting multinational entities. If the proposals recommended under BEPS are implemented, the tax rules to which we are subject may increase our liability for non-US taxes.
The tax rate applicable to us would be higher than we expect if we were considered not to be carrying on a trade in Ireland for the purposes of Irish law.
We are subject to Irish corporation tax on our net trading income at the rate of 12.5%. Under Irish tax law, non-trading income is taxed at the rate of 25% and capital gains are taxed at the rate of 33%. We believe that we carry on sufficient activity in Ireland, directly through our board of directors and indirectly through the services of our Manager, BBAM LP and our Servicer, so as to be treated as carrying on a trade in Ireland for the purposes of Irish tax law. If we or any of our Irish tax-resident subsidiaries were considered not to be carrying on a trade in Ireland, we or they may be subject to additional Irish tax liabilities. The application of a higher tax rate (25% instead of 12.5%) on taxable income could decrease cash available for distribution to our shareholders. In addition, we cannot assure you that the 12.5% tax rate applicable to trading income, the 33% tax rate applicable to capital gains or the 25% tax rate applicable to non-trading income will not be changed in the future. Table of Contents
Risks Related to the Ownership of Our Shares We have anti-takeover provisions
Provisions in our bye-laws, thatour management agreement and the indentures governing our 2020 Notes and 2021 Notes may discourage a change of control.
Our bye-laws contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors. These include:
| ● | provisions that permit us to require any competitor of BBAM LP that acquires beneficial ownership of more than 15% of our common shares either to tender for all of our remaining common shares for no less than their fair market value, or sell such number of common shares to us or to third parties as to reduce its beneficial ownership to less than 15%, in either case within 90 days of our request to so tender or sell; |
| ● | provisions that reduce the vote of each common share held by a competitor of BBAM LP that beneficially owns 15% or more, but less than 50%, of our common shares to three-tenths of one vote per share on all matters upon which shareholders may vote; |
provisions that reduce the vote of each common share held by a competitor of BBAM LP that beneficially owns 15% or more, but less than 50%, of our common shares to three-tenths of one vote per share on all matters upon which shareholders may vote; | ● | provisions that permit our board of directors to determine the powers, preferences and rights of any preference shares we may issue and to issue any such preference shares without shareholder approval; |
provisions that permit our board of directors to determine the powers, preferences and rights of any preference shares we may issue and to issue any such preference shares without shareholder approval;
| ● | advance notice requirements by shareholders for director nominations and actions to be taken at annual meetings; and |
no provision for cumulative voting in the election of directors, such that all the directors standing for election may be elected by our shareholders by a plurality of votes cast at a duly convened annual general meeting, the quorum for which is two or more persons present in person or by proxy at the start of the meeting and representing in excess of 25% of all votes attaching to all shares in issue entitling the holder to vote at the meeting.
| ● | no provision for cumulative voting in the election of directors, such that all the directors standing for election may be elected by our shareholders by a plurality of votes cast at a duly convened annual general meeting, the quorum for which is two or more persons present in person or by proxy at the start of the meeting and representing in excess of 25% of all votes attaching to all shares in issue entitling the holder to vote at the meeting. |
These provisions may make it difficult and expensive for a third party to pursue a tender offer, change in control or takeover attempt that is opposed by our management and/or our board of directors. Public shareholders who might desire to participate in these types of transactions may not have an opportunity to do so. These anti-takeover provisions could substantially impede the ability of public shareholders to benefit from a change in control of our company or change our board of directors and, as a result, may adversely affect the market price of our shares and your ability to realize any potential change of control premium. In addition, provisions
Provisions in our management agreement could make it more difficult for a third party to acquire our company without the consent of our board of directors or BBAM. Upon a change of control, our management agreement requires us to pay a fee equal to 1.5% of our enterprise value to our manager. OurManager. In addition, if the directors in office on December 28, 2012 and any successor to any such director who was nominated or selected by a majority of the current directors and our Manager appointed directors, cease to constitute at least a majority of the board (excluding directors appointed by our Manager), our Manager may terminate the management agreement, does notand we will pay our Manager a fee as follows: (i) during the first five year term, an amount equal to three times the aggregate management expense amount in respect of the last complete fiscal year prior to the termination date; (ii) during the second five year term, an amount an amount equal to two times the aggregate management expense amount in respect of the last complete fiscal year prior to the termination date; (iii) during the third five year term, an amount an amount equal to the aggregate management expense amount in respect of the last complete fiscal year prior to the termination date. Neither our management agreement nor our servicing agreements automatically terminate upon a change of control. TableFurthermore, the indentures governing our 2020 Notes and 2021 Notes contain provisions that permit our noteholders to require us to redeem their notes before maturity at a premium to par upon a change of ContentsAs a shareholdercontrol of our company, youcompany.
Shareholders may have greater difficulties in protecting yourtheir interests than they would have as a shareholdershareholders of a U.S. corporation.
The Companies Act 1981 of Bermuda, as amended, which we refer to as the “Companies"Companies Act, ”" applies to our company and differs in material respects from laws generally applicable to U.S. corporations and their shareholders. Taken together with the provisions of our bye-laws, some of these differences may result in yourshareholders having greater difficulties in protecting yourtheir interests as a shareholder of our company than youthey would have as a shareholder of a U.S. corporation. This affects, among other things, the circumstances under which transactions involving an interested director are voidable, whether an interested director can be held accountable for any benefit realized in a transaction with our company, what approvals are required for business combinations by our company with a large shareholder or a wholly-owned subsidiary, what rights youshareholders may have as a shareholder to enforce specified provisions of the Companies Act or our bye-laws, and the circumstances under which we may indemnify our directors and officers.
We are a Bermuda company that is managed and controlled in Ireland. It may be difficult for you to enforce judgments against us or against our directors and executive officers.
We are incorporated under the laws of Bermuda and are managed and controlled in Ireland. Our business is based outside the United States, a majority of our directors and officers reside outside the United States and a majority of our assets and some or all of the assets of such persons are located outside the United States. As a result, it may be difficult or impossible to effect service of process within the United States upon us or those persons, or to recover against us or them on judgments of U.S. courts, including judgments predicated upon the civil liability provisions of the U.S. federal securities laws. Further, no claim may be brought in Bermuda or Ireland against us or our directors and officers in the first instance for violation of U.S. federal securities laws because these laws have no extraterritorial application under Bermuda or Irish law and do not have force of law in Bermuda or Ireland. However, a Bermuda or Irish court may impose civil liability, including the possibility of monetary damages, on us or our directors and officers if the facts alleged in a complaint constitute or give rise to a cause of action under Bermuda or Irish law.
There is doubt as to whether the courts of Bermuda or Ireland would enforce judgments of U.S. courts obtained in actions against us or our directors and officers, predicated upon the civil liability provisions of the U.S. federal securities laws, or entertain actions brought in Bermuda or Ireland against us or such persons predicated solely upon U.S. federal securities laws. Further, there is no treaty in effect between the United States and Bermuda or Ireland providing for the enforcement of judgments of U.S. courts in civil and commercial matters, and there are grounds upon which Bermuda or Irish courts may decline to enforce the judgments of U.S. courts. Some remedies available under the laws of U.S. jurisdictions, including some remedies available under the U.S. federal securities laws, may not be allowed in Bermuda or Irish courts as contrary to public policy in Bermuda or Ireland. Because judgments of U.S. courts are not automatically enforceable in Bermuda or Ireland, it may be difficult for you to recover against us or our directors and officers based upon such judgments.
| ITEM 4. | INFORMATION ON THE COMPANY |
Fly Leasing Limited is a Bermuda exempted company that was incorporated on May 3, 2007, under the provisions of Section 14 of the Companies Act 1981 of Bermuda. We are principally engaged in purchasing commercial aircraft which we lease under multi-year contracts to a diverse group of airlines throughout the world.
Our registered office is located at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda. Although we are organized under the laws of Bermuda, we are resident in Ireland for Irish tax purposes and thus are subject to Irish corporation tax on our income in the same way, and to the same extent, as if we were organized under the laws of Ireland. Our principal executive offices are located at West Pier, Dun Laoghaire, County Dublin, Ireland. Our telephone number at that address is +353-1-231-1900. Our agent for service of process in the United States is Puglisi & Associates located at 850 Library Avenue, Suite 204, Newark, Delaware 19711.
Our web address is: www.flyleasing.com. The information contained on or connected to our website is not incorporated by reference into this Annual Report on Form 20-F and should not be considered part of this or any other report filed with the SEC.
Our Relationship with BBAM
BBAM is a leading commercial jet aircraft servicer. BBAM and its affiliates assist us in acquiring, leasing, re-marketing and re-marketingselling aircraft, manage our day-to-day operations and affairs and act as Servicer for our portfolio of aircraft and related leases.
We engage BBAM and its affiliates as Manager of our company and Servicer for our aircraft portfolio under management and servicing agreements. Our Manager manages our company under the direction of its chief executive officer and chief financial officer, who are exclusively dedicated to our business andbusiness. BBAM assists our Manager in acquiring and disposing of our aircraft, markets our aircraft for lease and re-lease, collects rents and other payments from the lessees of our aircraft, monitors maintenance, insurance and other obligations under our leases and enforces our rights against lessees. BBAM is among the largest aircraft leasing companies in the world, as measured by the number of owned and managed aircraft in its portfolio. On
As of April 29, 2010,2016, the management teamowners of BBAM through Summit purchased substantially all of the aviation assets of Babcock & Brown and its affiliates, including Babcock & Brown’s ownership interests in BBAM, the Manager and certain other companies that manage and service Fly and its aircraft portfolio.Table of Contents
On April 29, 2010, we purchased through our wholly-owned subsidiary, Fly-BBAM, a 15% interest in BBAM LP, for $8.75 million. BBAM LP provides management and administrative services to Fly, including servicing of its aircraft portfolio. Summit owned the remaining 85% interest in BBAM LP. Also as part of the transaction, Summit acquired 1,000,000 Fly shares from Babcock & Brown.
On December 28, 2012, we sold our 15% interest in BBAM LP for $49.5 million to Onex. Summit sold 35% of its interest in BBAM LP to Onex. Concurrent with the transaction, Summit and Onex, investedbeneficially owned an aggregate of $25.0 million in 2,191,060 newly issued common shares4,186,632 of Fly. The new shares were sold at a per share price of $11.41, which represents a 5% discount to the volume-weighted average price of Fly’sour common shares in the five-day period ended November 29, 2012. The sharesform of ADSs, 2,191,060 of which are subject to lock-up provisions, and we have registered these shares with the Securities and Exchange Commission pursuant to a registration rights agreement.
provisions.
As of December 31, 2013,2015, we had 80 aircraft in our aircraft portfolio, consisted79 of 113 commercial jet aircraft.which were held for operating lease and one of which was recorded as an investment in direct finance lease. Our aircraft portfolio was comprised of 10569 narrow-body passenger aircraft (including two freighters) and eight11 wide-body passenger aircraft.aircraft (including two freighters).
We originate aircraft through BBAM's well-established relationships with airlines, financial investors and other aircraft leasing and finance companies. We primarily acquire aircraft by entering into purchase and leaseback transactions with airlines for new aircraft, purchasing portfolios consisting of aircraft of varying types and ages, and opportunistically acquiring individual aircraft that we believe are being sold at attractive prices. In addition, we actively consider opportunities to sell our aircraft, individually or in portfolio sales of various sizes, when we believe that selling will maximize our returns, or to manage the composition of our portfolio.
As of December 31, 2013,2015, we had 6346 Boeing aircraft and 5034 Airbus aircraft in our fleet. Theportfolio. These aircraft in our portfolio were manufactured between 1990 and 20132015 and had a weighted average age of 8.66.6 years as of December 31, 2013.2015. We estimate that the useful life of our aircraft is generally 25 years from the date of manufacture. In the case of a freighter, the remaining useful life is determined based on the date of conversion and in such case, the total useful life may extend beyond 25 years from the date of manufacture.
The following table presents the aircraft in our portfolio as of December 31, 2013:Lessee Name | Aircraft Type | Airframe Type | Date of
Manufacture | | 1. | Aeromexico | B737-700 | Narrowbody | 2006 | | 2. | Aeromexico | B737-700 | Narrowbody | 2005 | | 3. | Aeromexico | B737-700 | Narrowbody | 2005 | | 4. | Aeromexico | B737-800 | Narrowbody | 2000 | | 5. | Air Berlin | A330-200 | Widebody | 2001 | | 6. | Air China | B737-800 | Narrowbody | 2007 | | 7. | Air China | B737-800 | Narrowbody | 2002 | |
| Lessee | | | | Aircraft Type | | Airframe Type | | Date of Manufacture | | 1. | | Aeromexico | | B737-700 | | Narrow-body | | 2006 | | 2. | | Aeromexico | | B737-700 | | Narrow-body | | 2005 | | 3. | | Aeromexico | | B737-700 | | Narrow-body | | 2005 | | 4. | | Air Berlin | | A321-200 | | Narrow-body | | 2015 | | 5. | | Air Berlin | | A330-200 | | Wide-body | | 2001 | | 6. | | Air China | | B737-800 | | Narrow-body | | 2007 | | 7. | | Air China | | B737-800 | | Narrow-body | | 2002 | | 8. | | Air France (1) | | A340-300 | | Wide-body | | 1993 | | 9. | | Air Italy | | B767-300ER | | Wide-body | | 1997 | | 10. | | Air Moldova | | A319-100 | | Narrow-body | | 2006 | | 11. | | American Airlines | | B737-800 | | Narrow-body | | 2013 | | 12. | | Chang'An Airlines | | B737-800 | | Narrow-body | | 2006 | | 13. | | Eastern Airlines | | B737-800 | | Narrow-body | | 2006 | | 14. | | easyJet | | A319-100 | | Narrow-body | | 2007 | | 15. | | easyJet | | A319-100 | | Narrow-body | | 2004 | | 16. | | easyJet | | A319-100 | | Narrow-body | | 2004 | | 17. | | Ethiopian Airlines | | B777-200LRF (2) | | Wide-body | | 2015 | | 18. | | Ethiopian Airlines | | B777-200LRF (2) | | Wide-body | | 2015 | | 19. | | Finnair | | A320-200 | | Narrow-body | | 2003 | | 20. | | flydubai | | B737-800 | | Narrow-body | | 2010 | | 21. | | Frontier | | A319-100 | | Narrow-body | | 2001 | | 22. | | Garuda Indonesia | | B737-800 | | Narrow-body | | 2010 | | 23. | | Garuda Indonesia | | B737-800 | | Narrow-body | | 2010 | | 24. | | Icelandair | | B757-200SF (2) | | Narrow-body | | 1990 | | 25. | | IZair | | B737-800 | | Narrow-body | | 2007 | | 26. | | IZair | | B737-800 | | Narrow-body | | 2006 | | 27. | | Jet Airways | | B737-800 | | Narrow-body | | 2014 | | 28. | | Jet Airways | | B737-800 | | Narrow-body | | 2014 | | 29. | | Jet Airways | | B737-800 | | Narrow-body | | 2014 | | 30. | | Jet Lite | | B737-700 | | Narrow-body | | 2002 | | 31. | | Jetstar Pacific Airlines | | A320-200 | | Narrow-body | | 2005 | | 32. | | LATAM | | B787-8 | | Wide-body | | 2013 | | 33. | | Lucky Air Airlines | | B737-800 | | Narrow-body | | 2007 | | 34. | | Lucky Air Airlines | | B737-800 | | Narrow-body | | 2007 | | 35. | | Nok Airlines | | B737-800 | | Narrow-body | | 2015 | | 36. | | Nok Airlines | | B737-800 | | Narrow-body | | 2006 | | 37. | | Nok Airlines | | B737-800 | | Narrow-body | | 2006 | | 38. | | Philippine Airlines | | A321-200 | | Narrow-body | | 2014 | | 39. | | Philippine Airlines | | A321-200 | | Narrow-body | | 2014 | | 40. | | Philippine Airlines | | A330-300 | | Wide-body | | 2013 | | 41. | | Philippine Airlines | | A330-300 | | Wide-body | | 2013 | | 42. | | Qantas | | A320-200 | | Narrow-body | | 2005 | | 43. | | Shandong Airlines | | B737-800 | | Narrow-body | | 2013 | | 44. | | Shandong Airlines | | B737-800 | | Narrow-body | | 2013 | | 45. | | Silk Air | | A320-200 | | Narrow-body | | 2004 | | 46. | | South African Airways | | A319-100 | | Narrow-body | | 2004 | | 47. | | Spicejet | | B737-900ER | | Narrow-body | | 2008 | | 48. | | Spicejet | | B737-900ER | | Narrow-body | | 2007 | | 49. | | Sun Express (Germany) | | B737-800 | | Narrow-body | | 1998 | | 50. | | Sun Express (Turkey) | | B737-800 | | Narrow-body | | 2008 | | 51. | | Sun Express (Turkey) | | B737-800 | | Narrow-body | | 2007 | | 52. | | Sunwing Airlines | | B737-800 | | Narrow-body | | 2006 | | 53. | | Sunwing Airlines | | B737-800 | | Narrow-body | | 2006 | | 54. | | TAM | | A320-200 | | Narrow-body | | 2006 | | 55. | | Thomas Cook (3) | | A330-300 | | Wide-body | | 2000 | | 56. | | THY | | A320-200 | | Narrow-body | | 2005 | | 57. | | THY | | A320-200 | | Narrow-body | | 2005 | | 58. | | THY | | A320-200 | | Narrow-body | | 2005 | | 59. | | Titan Airways | | B737-300QC (2) | | Narrow-body | | 1991 | | 60. | | Transavia France | | B737-800 | | Narrow-body | | 2008 | | 61. | | Transavia France | | B737-800 | | Narrow-body | | 2008 | | 62. | | Travel Service | | B737-800 | | Narrow-body | | 2010 | | 63. | | Travel Service | | B737-800 | | Narrow-body | | 2010 | | 64. | | TUI Travel Aviation Finance | | B737-800 | | Narrow-body | | 2010 | | 65. | | TUI Travel Aviation Finance | | B757-200 | | Narrow-body | | 1999 | | 66. | | TUI Travel Aviation Finance | | B757-200 | | Narrow-body | | 1999 | | 67. | | US Airways | | A319-100 | | Narrow-body | | 2000 | | 68. | | US Airways | | A319-100 | | Narrow-body | | 2000 | | 69. | | US Airways | | A319-100 | | Narrow-body | | 2000 |
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