unaudited condensed combined financial statements for the three months ended June 30, 2006 include an allocation from GE of expense of $1.0 million. This increase was due to (1) the additional cost of operating as an independent standalone company and (2) an increase in operational expenses as a result of the increase in the number of aircraft acquired during 2006.
Provision for income taxes were $1.6 million for the three months ended June 30, 2007, which decreased by 61.5% from $4.2 million recorded for the three months ended June 30, 2006. The predecessor’s unaudited condensed combined financial statements for the three months ended June 30, 2006 reflect income taxes as if the predecessor had been a separate taxable entity resident in the United States with an effective tax rate of 37.1%. The provision for income taxes of $1.6 million reported by Genesis for the three months ended June 30, 2007 reflects the fact that Genesis is a separate taxable entity, resident in Ireland with an effective actual tax rate of 12.5%.
Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2007
Total revenues were $86.0 million for the six months ended June 30, 2007, which increased 18.8 % from $72.4 million recorded for the six months ended June 30, 2006. This increase was primarily due to (1) the purchase of four additional aircraft in 2006 that generated additional revenue during the six months ended June 30, 2007, (2) $4.0 million increase in other income generated on cash investments and (3)a $0.5 million decrease in additional rent primarily reflecting re-delivery adjustments on leases that expired during the six months ended June 30, 2006.
Depreciation of flight equipment was $28.2 million for the six months ended June 30, 2007, which increased by 17.2% from $24.1 million recorded for the six months ended June 30, 2006. This increase was primarily due to an increase of $3.8 million from four aircraft purchased during 2006.
Interest expense was $23.3 million for the six months ended June 30, 2007, which increased by 5.3% from $22.1 million recorded for the six months ended June 30, 2006. The predecessor’s condensed combined financial statements for the six months ended June 30, 2006 include an allocation from GE of interest expense of $22.1 million. On December 19, 2006, we issued $810.0 million of aircraft lease-backed notes as part of a securitization transaction. The interest expense of $23.3 million for the six months ended June 30, 2007 primarily reflects the cost associated with these borrowings.
Maintenance expense is typically incurred to prepare aircraft for re-delivery to new lessees. The maintenance expense of $1.8 million for the six months ended June 30, 2006 was primarily due to the costs associated with the re-lease of three aircraft to new lessees. The maintenance expense of $0.2 million for the six months ended June 30, 2007 was primarily due to an accrual associated with the re-lease of one aircraft.
Selling, general and administrative expenses were $8.8 million for the six months ended June 30, 2007, which increased by 385.4% from $1.8 million for the six months ended June 30, 2006. The predecessor’s unaudited condensed combined financial statements for the six months ended June 30, 2006 include an allocation from GE of expense of $1.8 million. This increase was due to (1) the additional cost of operating as an independent standalone company and (2) an increase in operational expenses as a result of the increase in the number of aircraft acquired during 2006.
Provision for income taxes was $3.2 million for the six months ended June 30, 2007, which decreased by 61.9% from $8.4 million recorded for the six months ended June 30, 2006. The predecessor’s unaudited condensed combined financial statements for the six months ended June 30, 2006 reflect income taxes as if the predecessor had been a separate taxable entity resident in the United States with an effective tax rate of 37.0%. The provision for income taxes of $3.2 million reported by Genesis for the six months ended June 30, 2007 reflects the fact that Genesis is a separate taxable entity, resident in Ireland with an effective actual tax rate of 12.5%.
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Liquidity & Capital Resources
Our Cash Flows
Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2007
Cash flows generated from operations were $42.1 million for the six months ended June 30, 2007 compared with $43.3 million for the six months ended June 30, 2006. The decrease was primarily the result of an additional $8.4 million in restricted cash as a result of the requirement to hold certain amounts in separate accounts, offset by $4.4 million of increased cash flows from leasing activities and $2.9 million of lower cash taxes paid in the period.
Cash flows from investing activities relate to the acquisition, modification and major overhaul of aircraft or pre-delivery payments on aircraft or the acquisition of other fixed assets. Cash used in investing activities in the six months ended June 30, 2007 was $1.4 million compared with cash used in investing activities of $55.8 million in the six months ended June 30, 2006.
Cash flows from financing activities for the six months ended June 30, 2007 relate to net proceeds received of $103.1 million following the exercise of the over-allotment option less the dividend payments of $19.1 million on May 10, 2007. Cash flows from financing activities relate to proceeds received by the predecessor from GE to fund aircraft investments and general corporate purposes in the six months ended June 30, 2006.
Our Future Sources of Liquidity
We operate in a capital-intensive industry. Our predecessor financed the purchase of aircraft and pre-delivery payments for aircraft with cash received from GE. We expect to fund our capital needs from retained cash flow and debt and equity financing, including borrowings under our $1 billion credit facility.
Our short-term liquidity needs include working capital for operations associated with our aircraft and cash to pay dividends to our shareholders. We expect that cash on hand, cash flow provided by operations and the availability of borrowings under our liquidity facility will satisfy our short-term liquidity needs with respect to our Initial Portfolio and dividend payments through at least the next 12 months.
Our sole source of operating cash flows is currently from distributions made to us by oursubsidiaries, through which we hold all ofour aircraft. Distributions of cash to us by Genesis Fundingand Genesis Acquisitionare subject to compliance with covenants contained in the agreements governing the securitizationand the credit facility, both of which are described below.
Our liquidity needs also include the financing of acquisitions of additional aircraft and other aviation assets that we expect will drive our growth. We plan to finance acquisitions through additional securitizations, borrowings under our credit facility and additional debt and equity offerings. Our ability to execute our business strategy to acquire these additional assets therefore depends to a significant degree on our ability to access debt and equity capital markets.
Our access to debt and equity financing to fund acquisitions will depend on a number of factors, such as our historical and expected performance, compliance with the terms of our debt agreements, industry and market trends, the availability of capital and the relative attractiveness of alternative investments. We believe that funds will be available to support our growth strategy and that we will be able to pay dividends to our shareholders as contemplated by our dividend policy. However, deterioration in our performance or in the capital markets could limit our access to these sources of financing, increase our cost of capital, or both, which could negatively affect our ability to raise additional funds, grow our aircraft portfolio and pay dividends to our shareholders.
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Capital Expenditures
On April 20, 2007, we signed an agreement to purchase two new Airbus 320 aircraft from Air Deccan of India. One of these aircraft was delivered in July 2007, and the other is expected to be delivered in September 2007. Both aircraft will be leased back on long-term leases to Air Deccan.
On June 12, 2007, we signed an agreement to purchase two new Airbus 320 aircraft from IndiGo Airlines of India. One of these aircraft was delivered in July 2007, and the other is expected to be delivered in September 2007. Both aircraft will be leased back on long-term leases to IndiGo Airlines.
In addition to acquisitions of additional aircraft and other aviation assets, we expect to make capital expenditures from time to time in connection with improvements to our aircraft. These expenditures include the cost of major overhauls and modifications. As of June 30, 2007, the average weighted age of the aircraft in our Initial Portfolio was 6.2 years. In general, the costs of operating an aircraft, including capital expenditures, increase with the age of the aircraft.
Maintenance
Under our leases, the lessee is generally responsible for maintenance and repairs, airframe and engine overhauls, obtaining consents and approvals and compliance with return conditions of aircraft on lease. In connection with the lease of a used aircraft we may agree to contribute specific additional amounts to the cost of certain major overhauls or modifications, which usually reflect the usage of the aircraft prior to the commencement of the lease. In many cases, we also agree to share with our lessees the cost of compliance with airworthiness directives.
Our Initial Portfolio includes twenty-two leases pursuant to which we collect additional rent that is determined based on usage of the aircraft measured by hours flown or cycles operated and we are obligated to make contributions to the lessee for expenses incurred for certain planned major maintenance, including amounts typically determined based on additional rent paid by the lessee. Such major planned maintenance includes heavy airframe, off-wing engine, landing gear and auxiliary power unit overhauls and replacements of engine life limited parts. We are not obligated to make maintenance contributions under such leases at any time that a lessee default is continuing.
Under the remaining nineteen leases in our Initial Portfolio, we are not obligated to make any maintenance contributions. However, most of these nineteen leases provide for a lease-end adjustment payment based on the usage of the aircraft during the lease and its condition upon return. Most such payments are likely to be made by the lessee to us, although payments may be required to be made by us.
As a result of the timing of maintenance expenditures on our aircraft, our expenses for maintenance will vary from period to period, and the aggregate maintenance contributions and lease-end adjustment payments that we will be required to makein a particular period may exceed theadditional rent payments and lease-end adjustment paymentsthatwe receive from lessees. during that period. We expect to fund any such net outflow through cash balances, borrowings under the liquidity facility maintained by Genesis Funding and cash flow from operations.
Dividend Policy
Overview
Our board of directors has adopted a policy to pay a regular quarterly cash dividend to our shareholders in an initial amount of $0.47 per share. Our dividend policy is based on the cash flow profile of our business. We generate significant cash flow from leases with a diversified group of commercial aviation customers. The distributable cash flow on which we focus is derived principally from our minimum contracted lease rentals, reduced by our net cash interest expenses,selling, general and administrative expenses and cash taxes.
We intend to distribute a portion of our cash flow to our shareholders, while retaining cash flow for reinvestment in our business. Retained cash flow may be used to fund acquisitions of aircraft and other aviation assets, make debt repayments and for other purposes, as determined by our management and board of directors. Our
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dividend policy reflects our judgment that by reinvesting cash flow in our business, we will be able to provide value to our shareholders by enhancing our long-term dividend paying capacity. Our objectives are to maintain and to increase distributable cash flow per share through acquisitions of additional aircraft and other aviation assets beyond our Initial Portfolio of 41 aircraft. We cannot assure you that we will be successful in achieving these objectives.
The declaration and payment of future dividends to holders of our common shares will be at the discretion of our board of directors and will depend on many factors, including our financial condition, cash flows, legal requirements and other factors as our board of directors deems relevant.
Possible Changes in Quarterly Dividends
Our goal is to increase our distributable cash flow per share through accretive acquisitions of additional aircraft. If we are successful, our board of directors will consider an increase in our quarterly dividends. Our plan, however, is not to increase dividends unless the board concludes we are retaining adequate funds in our business to assure that we maintain our asset base and our long-term dividend paying ability. Assuming we continue to make regular quarterly dividends of $0.47 per share, we may not retain sufficient amounts to ensure that we are maintaining our asset base. As a result, it is likely that we will not increase our dividends until we have made accretive acquisitions.
There are a number of factors that could affect our ability to pay dividends. Factors that may cause you not to receive dividends in the expected amounts or at all, include, but are not limited to, the following:
| • | lack of availability of cash to pay dividends due to changes in our operating cash flow, capital expenditure requirements, working capital requirements and other cash needs; |
| • | our inability to refinance the notes that we have issued in the securitization before theend of the fifth year following the issuance of such notes, when we will be required to apply all available cash flow from our Initial Portfolio to repay the principal amount thereof on a monthly basis; |
| • | our inability to make acquisitions of additional aircraft that are accretive to cash flow; |
| • | our inability to comply with the covenants in our senior credit facility, which could prevent Genesis Acquisition from making any distributions to us; |
| • | application of funds to make and finance acquisitions of aircraft and other aviation assets; |
| • | reduced levels of demand for, or value of, our aircraft; |
| • | increased supply of aircraft; |
| • | obsolescence of aircraft; |
| • | 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; |
| • | unexpected or increased fees and expenses payable under our agreements with GECAS and its affiliates and other service providers; |
| • | poor performance by GECAS and its affiliates and other service providers and our limited rights to terminate them; |
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| • | unexpected or increased maintenance, operating or other expenses or changes in the timing thereof; |
| • | a decision by our board of directors to modify or revoke its policy to distribute a portion of our cash flow available for distribution; |
| • | restrictions imposed by our financing arrangements, including under the notes issued in the securitization, our credit facility and any indebtedness incurred in the future to refinance our existing debt or to expand our aircraft portfolio; |
| • | changes in Irish tax law, the Irish Treaty or our ability to claim the benefits of such treaty; |
| • | cash reserves established by our board of directors; and |
| • | restrictions under Bermuda law on the amount of dividends that we may pay. |
Our growth strategy contemplates that we will fund the acquisition of additional aircraft and other aviation assets beyond our Initial Portfolio through a combination of retained cash flow and debt and equity financing. If financing is not available to us on acceptable terms, our board of directors may determine to finance or refinance acquisitions solely with cash from operations, which would reduce or even eliminate the amount of cash available for dividends.
We are a passive foreign investment company (“PFIC”) under U.S. federal income tax rules, and our dividends will not be eligible for either the dividends-received deduction for corporate U.S. holders or treatment as “qualified dividend income” (which is taxable at the rates generally applicable to long-term capital gains) for U.S. holders taxed as individuals. U.S. holders that elect to treat us as a qualified electing fund (a “QEF election”) will not be subject to U.S. federal income tax on dividends and will instead be taxed currently on their pro rata share of our ordinary earnings as ordinary income and a pro rata share of our net capital gain as long-term capital gain, and generally capital gain from the sale, exchange or other disposition of shares held more than one year will be long-term capital gain eligible for a maximum 15% rate of taxation for non-corporate holders. U.S. holders who make a QEF election may be required to include amounts in income for U.S. federal income tax purposes in excess of amounts distributed by us.
As a Bermuda company, our ability to pay dividends is subject to certain restrictions imposed by Bermuda law.
Securitization
Concurrently with the completion of our IPO, our subsidiary Genesis Funding completed a securitization transaction that generated net proceeds of approximately $794.3 million after deducting initial purchasers’ discounts and fees. Genesis Funding is a special purpose exempted company that was organized under the laws of the Bermuda to purchase our Initial Portfolio. Although Genesis Funding is organized under the laws of the Bermuda, it is a resident in Ireland for Irish tax purposes and thus subject to Irish corporation tax on its income in the same way, and to the same extent, as if it were organized under the laws of Ireland. The authorized business of Genesis Funding is limited to acquiring, buying, leasing, maintaining, operating and selling aircraft and entering into hedge agreements and credit facilities related to such activities. We own 100% of thevotingClass A Shares of Genesis Funding, through which we are the beneficiary of more than 99.99% of the equity interest in the property of Genesis Funding. A charitable trust established for the benefit of identified charities, which we refer to as the Charitable Trust, indirectly owns 100% of the Class B Shares of Genesis Funding entitling it to a nominal equity interest in the property of Genesis Funding and a vote on certain matters with respect to bankruptcy and corporate governance of Genesis Funding.
The notes have the benefit of a financial guaranty insurance policy issued by the policy provider identified below to support the payment of interest when due on the notes and the payment of the outstanding principal balance of the notes on the final maturity date of the notes and, under certain other circumstances, prior thereto.
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The notes are rated Aaa and AAA by Moody’s Investors Service, Inc., or Moody’s, and Standard & Poor’s Rating Services, a division of The McGraw-Hill Companies, Inc., respectively.
We acquired the title or beneficial interest in all the aircraft in our Initial Portfolio through Genesis Funding and its subsidiaries. As a result, our rights to these aircraft are structurally subordinated to the rights of the creditors of Genesis Funding. This means that the creditors of Genesis Funding will be paid from its assets before we would have any claims to those assets.
Interest Rate
The notes bear interest at one-month LIBOR plus 0.24%. Interest expense for the securitization will also include amounts payable to the policy provider and the liquidity facility provider thereunder. Genesis Funding has also entered into an interest rate swap agreement intended to hedge the interest rate exposure associated with issuing the floating-rate obligations of the notes.
Maturity Date; Payment Terms
The final maturity date of the notes is December 19, 2032. During the first three years, there are no scheduled principal payments on the notes and for each month during the fourth and fifth years following the closing date of securitization, there are be scheduled principal payments of $1 million per month, in each case subject to satisfying certain debt service coverage ratios and other covenants. Thereafter, cash flow generally will not be available to us for the payment of dividends since principal payments are not fixed in amount but rather are determined monthly based on revenues collected and costs and other liabilities incurred prior to the relevant payment date. Effectively, after the fifth anniversary of the closing date of the securitization, all revenues collected during each monthly period will be applied to repay the outstanding principal balance of the notes, after the payment of certain expenses and other liabilities, including the fees of the service providers (including GECAS as servicer and us in our role as manager), the liquidity facility provider and the policy provider, interest on the notes and interest rate swap payments, all in accordance with the priority of payments set forth in the indenture.
We expect to refinance the notes on or prior to the fifth anniversary of the completion of our IPO. In the event that the notes are not refinanced on or prior to that month, any excess securitization cash flow will be used to repay the principal amount of the notes and will not be available to us to pay dividends to our shareholders.
Available Cash
Genesis Funding is required to maintain as of each monthly payment date cash in an amount sufficient to cover its operating expenses for a period of one month or, in the case of maintenance expenditures, six months, following such payment date. In addition, during the three years after completion of our IPO, additional rent is deposited in a separate account to be used for major airframe overhauls, engine overhauls, engine life limited parts replacements, auxiliary power unit overhauls and landing gear overhauls. All cash flows attributable to the underlying aircraft after the payment of amounts due and owing in respect of, among other things, maintenance and repair expenditures with respect to the aircraft, insurance costs and taxes and all repossession and remarketing costs, certain amounts due to any credit support providers, swap providers, the policy provider, trustees, directors and various service providers (including GECAS as servicer and us as manager) will be distributed in accordance with the priority of payments set forth in the indenture. Genesis Funding, however, is required to use the amount of excess securitization cash flows to repay principal under the notes instead of paying dividends upon the occurrence of certain events, including failure to maintain a specified debt service coverage ratio, certain events of bankruptcy or liquidation and any acceleration of the notes after the occurrence of other events of default.
Collateral
The notes are secured by first priority, perfected security interests in and pledges or assignments of equity ownership and beneficial interests in the subsidiaries of Genesis Funding, their interests in the leases of the aircraft they own, cash held by or for them and by their rights under agreements with GECAS, the initial liquidity facility provider, hedge counterparties and the policy provider. The notes are also secured by a lien or similar interest in any
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of the aircraft in the Initial Portfolio that are registered in the United States or Ireland and in any additional aircraft of Genesis Funding so registered at any time prior to the second anniversary of the closing date of the securitization.
Certain Covenants
Genesis Funding is subject to certain operating covenants including relating to the maintenance, registration and insurance of the aircraft as set forth in the indenture. The indenture also contains certain conditions and constraints which relate to the servicing and management of the Initial Portfolio including covenants relating to the disposition of aircraft, lease concentration limits, restrictions on the acquisition of additional aircraft and restrictions on the modification of aircraft and capital expenditures as described below.
Liquidity Facility
Genesis Funding and Calyon are parties to a revolving credit facility, which we refer to as the liquidity facility. The aggregate amounts available under the liquidity facility is $75 million, $60 million of which may be drawn to cover certain expenses of Genesis Funding, including maintenance expenses, interest rate swap payments and interest on the notes issued under the indenture. and the remaining $15 million of which is available for the three years from the completion of our IPO to cover any shortfalls in the separate account set aside for overhauls and certain parts replacements. Genesis Funding is required to reimburse the provider of the liquidity facility for the amount of such drawing plus accrued interest from funds available as specified in the indenture. Any amounts under the liquidity facility advanced for overhauls and replacements remains outstanding after the third anniversary of the IPO will be due in an amount equal to $625,000 per month. Upon the occurrence of certain events, including a downgrade of the provider of the liquidity facility below a certain ratings threshold, the liquidity facility will be drawn in full such drawings will be available for the same purposes as drawings under the liquidity facility. Drawings under the initial liquidity facility bear interest at one-month LIBOR plus a spread of 120 basis points. Genesis Funding paid an upfront fee of $450,000 at closing and will pay a commitment fee of 60 basis points on each payment date.
Credit Facility
On April 5, 2007, Genesis Acquisition entered into a $1 billion senior secured credit facility with Genesis Lease Limited, as Manager, the financial institutions party thereto as lenders, Citibank, N.A., as administrative agent, and Deutsche Bank Trust Company Americas, as security trustee and account bank. The credit facility permits initial loans in an aggregate principal amount of up to $250 million, with an option for Genesis Acquisition to increase the aggregate principal amount of available loans by an additional amount of up to $750 million during the first 18 months following the closing date of the credit facility, for a total commitment amount of up to $1 billion. The credit facility will provide funding for 65.0-72.5% (depending on aircraft type) of the agreed value of the aircraft that Genesis Acquisition may acquire.
Fees. The following commitment fees relate to the credit facility:
| • | 0.375% commitment fee per year on the unused amount of $750 million (1) for a period of 12 months from the signing date, which was paid in advance by GECAS, (2) thereafter for a period of 6 months, payable quarterly by Genesis Acquisition in arrears, in each case of (1) and (2) whether or not the option to increase the commitment amount to $1 billion is exercised, and (3) thereafter, if Genesis Acquisition exercises the option to increase the commitment amount to $1 billion, payable quarterly by Genesis Acquisition in arrears; and |
| • | 0.375% commitment fee per year on the unused amount of the initial commitment of up to $250 million, payable quarterly by Genesis Acquisition in arrears from the closing date until October 2008. |
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If Genesis Acquisition exercises its option to increase the commitment amount to $1 billion before the first anniversary of the signing date, then it will receive a credit equal to the amount of the commitment fee paid with respect to subclause (2) of the prior bullet, for the period of time from the date of such exercise to the first anniversary of the signing date, and Genesis Acquisition will refund such amount to GECAS.
Interest Rate. Borrowings under the credit facility will bear interest at one- or three-month LIBOR plus an applicable margin. The applicable margin will be between 1.50% and 1.75%, depending on Genesis Acquisition’s portfolio composition and the principal amount outstanding under the credit facility during the revolving period and 2.75% during the term period (if Genesis Acquisition exercises its option to convert the credit facility to a term loan).
Prepayment. Genesis Acquisition has the right to prepay any amounts outstanding under the credit facility or to reduce the commitment thereunder. In addition, Genesis Acquisition will be required to make partial prepayments of borrowings under the credit facility upon the total loss, sale or other disposition of aircraft financed with borrowings under the credit facility, or if the aggregate amount of the loans outstanding under the credit facility exceeds the borrowing base (as defined in the credit facility), including as a result of a decrease in the value of an aircraft financed with borrowings thereunder as determined by mandatory periodic appraisals.
Collateral. Pursuant to a security trust agreement, dated as of April 5, 2007, among Genesis Acquisition, certain affiliates of Genesis Acquisition, Citibank, N.A., as administrative agent, and Deutsche Bank Trust Company Americas, as security trustee and account bank, borrowings under the credit facility will be secured by first priority, perfected security interests in and pledges or assignments of (1) the equity ownership and beneficial interests of each subsidiary of Genesis Acquisition, (2) leases of the aircraft financed under the credit facility, (3) rights under the casualty insurance on such aircraft, (4) accounts under the sole dominion and control of the administrative agent under the credit facility into which lease rentals, insurance proceeds, sale proceeds and other amounts will be paid, and (5) where possible, an international interest under the Cape Town Convention in each eligible airframe, engine and lease.
Covenants. The credit facility contains customary covenants, including the following:
| • | a requirement that Genesis Acquisition deliver periodic financial and other reports to the administrative agent; |
| • | limitations on the incurrence of additional indebtedness; |
| • | limitations on consolidation, acquisition, merger and transfer of assets; |
| • | a requirement that the aircraft in Genesis Acquisition’s portfolio comply with lessee and geographic concentration limits; |
| • | a requirement that the weighted average age of Genesis Acquisition’s aircraft portfolio not exceed 10 years until the option to increase the commitment amount to up to $1 billion is exercised, and 8 years thereafter; and |
| • | a requirement that from the earlier of (1) six months after the signing date and (2) Genesis Acquisition having borrowed at least $100 million under the credit facility, the ratio of earnings before interest, taxes, depreciation and amortization (“EBITDA”) to interest expense for any trailing period of three consecutive months exceeds (i) 1.1 at all times and (ii) 1.5 for advances to be available under the credit facility. |
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Interest rate risk is the exposure to loss resulting from changes in the level of interest rates and the spread between different interest rates. Interest rate risk is highly sensitive to many factors, including U.S. monetary and tax
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policies, U.S. and international economic factors and other factors beyond our control. We are exposed to changes in the level of interest rates and to changes in the relationship or spread between interest rates. Our primary interest rate exposures relate to our lease agreements and our floating rate debt obligations such as the notes issued in the securitization and borrowings under our liquidity facility and our credit facility. Thirty-eight out of 41 of our lease agreements require the payment of a fixed amount of rent during the term of the lease, with rent under the remaining three leases adjusting bi-annually based on six-month LIBOR Our indebtedness require payments based on a variable interest rate index such as LIBOR. However, we have entered into an interest rate swap for a five year period to fix the cost associated with the notes issued in the securitization.
Sensitivity Analysis
The following discussion about the potential effects of changes in interest rates is based on a sensitivity analysis, which models the effects of hypothetical interest rate shifts on our financial condition and results of operations. Although we believe a sensitivity analysis provides the most meaningful analysis permitted by the rules and regulations of the SEC, it is constrained by several factors, including the necessity to conduct the analysis based on a single point in time and by the inability to include the extraordinarily complex market reactions that normally would arise from the market shifts modeled. Although the following results of a sensitivity analysis for changes in interest rates may have some limited use as a benchmark, they should not be viewed as a forecast. This forward-looking disclosure also is selective in nature and addresses only the potential impacts on our financial instruments and our three variable rate leases. It does not include a variety of other potential factors that could affect our business as a result of changes in interest rates.
A hypothetical 100-basis point increase / decrease in our variable interest rates would increase / decrease the minimum contracted rentals on our Initial Portfolio in 2007 by $1.0 million and would have no impact on our net interest expense on the notes issued in the securitization because we have entered into a five-year interest swap agreement to fix the cost associated with the debt. This assumes no drawdowns on our liquidity facility or our credit facility.
Foreign Currency Exchange Risk
We currently receive all of our revenue in U.S. dollars, and we pay substantially all of our expenses in U.S. dollars. However, we incur some of our expenses in other currencies, primarily the euro, and we may enter into leases under which we receive revenue in other currencies, primarily the euro. During the past several years, the U.S. dollar has depreciated against the euro. Depreciation in the value of the U.S. dollar relative to other currencies increases the U.S. dollar cost to us of paying such expenses. The portion of our business conducted in other currencies could increase in the future, which could expand our exposure to losses arising from currency fluctuations. We have not engaged in any foreign currency hedging transactions. However, we may consider engaging in these transactions in the future. Because we currently receive all of our revenue in U.S. dollars and pay substantially all of our expenses in U.S. dollars, a change in foreign exchange rates would not have a material impact on our results of operations.
Controls and Procedures
We conducted an evaluation of our disclosure controls and procedures under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2007 to ensure that information required to be disclosed in the reports we file or submit under the Securities and Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
In connection with our IPO and our acquisition of our Initial Portfolio, we assumed independent responsibility for our disclosure controls and internal controls over financial reporting. Prior to the IPO, GECAS and other affiliates of GE provided our predecessor with disclosure controls and internal controls over financial reporting. Under the supervision and with the participation of our senior management, including our Chief Executive
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Officer and Chief Financial Officer, we are in the process of conducting further evaluation of our internal controls over financial reporting for compliance with the requirements of Section 404 under the Sarbanes-Oxley Act. In this regard, we have engaged an advisor to assist us in evaluating, designing, implementing and testing internal controls over financial reporting intended to comply with the requirements of Section 404. As we are still in the evaluation process, we may identify material weaknesses or significant deficiencies in the future. Should we discover such conditions, we intend to remediate them as soon as practicable. We are committed to taking appropriate steps for remediation, as needed.
Our Chief Executive Officer and Chief Financial Officer do not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
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Other Information
Legal Proceedings
None.
Item 1A. Risk Factors
There have been no material changes to the disclosure related to the risk factors described in our Annual Report on Form 20-F, filed with the SEC on April 3, 2007.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Defaults Upon Senior Securities
None.
Submission of Matters to a Vote of Security Holders
At the Annual General Meeting of the holders (“Shareholders”) of common shares of Genesis Lease Limited (the “Company”) held on May 21, 2007, Shareholders approved the following:
| • | The election of each of the following directors to hold office until the next Annual General Meeting of the Company or otherwise pursuant to the Company’s bye-laws: |
| | Votes in Favor | | Votes Against | | Abstentions |
John McMahon | | 20,727,097 | | 477,020 | | 20,240 |
Niall Greene | | 19,698,392 | | 1,499,950 | | 21,240 |
Kenneth Holden | | 19,584,489 | | 1,614,353 | | 20,865 |
David C. Hurley | | 20,665,892 | | 538,360 | | 22,080 |
Andrew L. Wallace | | 21,180,042 | | 17,510 | | 21,630 |
| • | The appointment of KPMG of Dublin, Ireland as the Company’s independent auditors and authorization for the Board of Directors of the Company to determine the auditors’ remuneration. |
| | Votes in Favor | | Votes Against | | Abstentions |
| | 21,137,749 | | 9,985 | | 39,480 |
Other Information
None.
Exhibits
None.
35
