FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For January 31, 2003
AERCO LIMITED
22 Grenville Street
St. Helier
Jersey, JE4 8PX
Channel Islands
------------------------------------------------
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
Form 20-F X Form 40-F
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Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes No X
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INDEX TO EXHIBITS
Item
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1. AerCo Limited December 16, 2002 Quarterly Cash Report, Analysis of
Financial Condition and Results of Operations and Particulars of AerCo's
portfolio.
24. Power of Attorney for AerCo Limited.
Page 2 of 3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: January 31, 2003
AERCO LIMITED
By: /s/ Adrian Robinson
------------------------------
Name: Adrian Robinson
Title: Attorney-in-Fact
Page 3 of 3
Item 1
AerCo Limited
Cash Analysis of Financial Condition and Results of Operations
Three Month Period from September 16, 2002 to December 16, 2002
I BACKGROUND AND GENERAL INFORMATION
The financial information contained in this report is not prepared in
accordance with generally accepted accounting principles of the United States
or the United Kingdom but is prepared in accordance with the Company's
obligations under the Indenture. This report should be read in conjunction with
the Company's most recent financial information prepared in accordance with
generally accepted accounting principles of the United Kingdom, including a
reconciliation of net loss, shareholders' deficit and aircraft assets to
estimated amounts under generally accepted accounting principles of the United
States. For this you should refer to the Company's Form 20-F which is on file
at the Securities and Exchange Commission.
On July 15, 1998, AerCo Limited ("AerCo" or "the Company"), a Jersey limited
liability company, issued $800 million of notes in four subclasses, subclass
A-1, subclass A-2, subclass B-1 and subclass C-1 (the "1998 notes"). The
Company also issued two additional subclasses of notes, the subclass D-1 notes
and the subclass E-1 notes which were purchased by debis AirFinance Ireland
plc, formerly AerFi Group plc ("debis AirFinance"). The Company used the
proceeds from the issuance of the 1998 notes, the subclass D-1 notes and the
subclass E-1 notes (i) to acquire the issued and outstanding capital stock of
Aircraft Lease Portfolio Securitization 94-1 Limited, a Jersey limited
liability company ("ALPS 94-1") (and thereby to indirectly acquire ALPS 94-1's
portfolio of 25 aircraft and the related leases), (ii) to finance the repayment
of all of ALPS 94-1's existing financial indebtedness and (iii) to finance the
acquisition of 10 aircraft and the related leases from debis AirFinance and its
subsidiaries ("debis AirFinance Group") through the acquisition of 100% of the
capital stock of three wholly owned subsidiaries of debis AirFinance. On May
14, 1999, AerCo consummated an exchange offer under which the 1998 notes were
exchanged for notes which are registered with the Securities and Exchange
Commission.
On July 17, 2000, AerCo issued a further $960 million of notes in four
subclasses, subclass A-3, subclass A-4, subclass B-2 and subclass C-2 (the
"2000 notes"). The Company also issued two additional subclasses of notes, the
subclass D-2 notes and subclass E-2 notes which were purchased by debis
AirFinance. The Company used the proceeds from the issuance of the 2000 notes,
the subclass D-2 notes and subclass E-2 notes (i) to refinance the subclass A-1
notes, (ii) to refinance the subclass D-1 notes and (iii) to acquire 30
additional aircraft (the "additional aircraft") with an appraised value of
$724.1 million, and associated leases through the acquisition of certain
aircraft owning subsidiaries, and one associated conduit leasing company, of
debis AirFinance. Certain of the additional aircraft transferred to AerCo on
July 17, 2000. The funds allocable to the remaining undelivered aircraft were
deposited into the aircraft purchase account and were used to purchase the
remaining additional aircraft as they were ready for delivery. As of January
31, 2001, all of the additional aircraft had been delivered to AerCo. On
January 31, 2001 AerCo completed an exchange offer under which the 2000 notes
were exchanged for notes registered with the Securities and Exchange
Commission. The currently outstanding notes are collectively referred to below
as the "notes".
Applying the declining value assumptions contained in the Offering Memorandum
issued by AerCo on July 12, 2000 to the appraisal dated March 1, 1998 of the
aircraft acquired by AerCo on July 15, 1998, adjusting for aircraft sales, and
to the April 30, 2000 appraisal of the additional aircraft, the total appraised
value of AerCo's portfolio was assumed to be $1,322.5 million at December 16,
2002. The adjusted appraised value of AerCo's portfolio at December 16, 2002 is
$1,313.5 million.
At December 16, 2002, AerCo owned (directly and indirectly) 61 aircraft, 59 of
which are on operating lease and 2 of which are currently off lease, the
Company having sold one Fokker 100 aircraft in January 1999, a second Fokker
100 aircraft in July 1999 and one B757 aircraft and one B747 aircraft in April
2001. AerCo may also acquire further aircraft and any related existing leases
or similar arrangements from various sellers, which may include debis
AirFinance. Further aircraft may include among other things, aircraft, engines
and entities with an ownership or leasehold interest in aircraft or engines.
AerCo will finance acquisitions of further aircraft with external funds,
including issuing further notes. Any acquisition of further aircraft will be
subject to certain confirmations from the Rating Agencies and compliance with
certain operating covenants of AerCo set out in the Indenture dated as of July
15, 1998, as amended on July 17, 2000, by and between AerCo and Deutsche Bank
Trust Company Americas (formerly Bankers Trust Company), as trustee of the
notes (the "Indenture"). As of December 16, 2002, 59 aircraft were on lease to
33 lessees in 20 countries as shown on pages 16 and 17 attached.
Page 1
On October 10, 2002 and October 14, 2002, AerCo repossessed its two MD82
aircraft from Vanguard Airlines Inc. which had filed for Chapter 11 bankruptcy
protection on July 31, 2002. These two aircraft remain off lease as at December
16, 2002.
The discussion and analysis which follows is based on the results of AerCo
Limited and its subsidiaries as a single entity (collectively the "AerCo
Group").
AerCo Group's cash receipts and disbursements are determined, in part, by the
overall economic condition of the aircraft leasing market. This, in turn, is
affected by factors including various regional economic conditions affecting
airline operations and trading; aircraft manufacturer production levels;
passenger demand; retirement and obsolescence of aircraft models; manufacturers
exiting or entering the market or ceasing to produce aircraft types;
re-introduction into service of aircraft previously in storage; governmental
regulation; air traffic control infrastructure constraints; capital market
risks and general risks of lessee default, bankruptcy and mergers.
AerCo Group's ability to compete against other lessors is determined, in part,
by the composition of its fleet in terms of mix, relative age and popularity of
the aircraft types. In addition, operating restrictions imposed by the
Indenture, and the ability of other lessors, who may possess substantially
greater financial resources, to offer leases on more favourable terms than
AerCo Group, may also impact AerCo Group's ability to compete with other
lessors.
For the purposes of this report, the "Three Month Period", referred to on page
13 "AerCo Cashflow Performance for the Period from September 16, 2002 to
December 16, 2002 - Comparison of Actual Cash Flows versus Adjusted Base Case
Cash Flows", comprises information from the monthly cash reports dated October
15, November 15 and December 16, 2002. The financial data in these reports
includes cash receipts from September 11, 2002 (first day of the Collection
Period for the October 2002 Report) up to December 10, 2002 (last day of the
Collection Period for the December 2002 Report). Page 15 presents the cashflow
information from July 17, 2000 to the December 2002 Payment Date. This report
however limits its commentary to the Three Month Period.
II COMPARISON OF ACTUAL CASH FLOWS VERSUS THE ADJUSTED BASE CASE FOR THE
THREE MONTH PERIOD
The global economic downturn combined with the terrorist attacks of September
11, 2001 and the associated military action by the United States and its allies
in Afghanistan has had an adverse financial impact on the aviation industry,
and in particular, on the condition of some of AerCo's lessees and their
ability to perform under their leases. Since September 11, 2001, AerCo has
reached agreement with a number of its lessees for rental reductions and
deferrals, early return of aircraft and other temporary cashflow alleviation
measures designed to aid the survival of these airlines, which has had and is
expected to continue to have a negative impact on AerCo's future cash
performance. There is no certainty that AerCo`s results for the current Three
Month Period are indicative of its future cashflow performance and/or that the
aviation industry will recover in the near term or at all from the effects of
the terrorist attacks of September 11, 2001 and the global economic downturn.
See Section IV Recent Developments.
The July 12, 2000 Offering Memorandum (the "Offering Memorandum") issued by
AerCo contained assumptions in respect of AerCo Group's future cash flows and
expenses (the "2000 Base Case"). These cash flows and expenses have been
adjusted for the sale of one B757-200 aircraft (MSN 28486) on April 9, 2001,
which was not anticipated at the time of preparation of the 2000 Base Case (the
"Adjusted Base Case"). These assumptions were developed prior to the events of
September 11, 2001 and do not take into account the subsequent effects that
these events have had on the global economy and in particular, the aviation
industry, including aircraft leasing. Future performance can be expected to
diverge from certain assumptions contained in the Offering Memorandum including
those relating to aircraft re-lease rates, aircraft values, aircraft downtime
and lessee defaults.
Page 2
For the purpose of this report, "Net Cash Collections" is defined as Total Cash
Collections less Total Cash Expenses, Movements in the Expense Account,
Interest Payments and Swap Payments. A discussion of the Total Cash
Collections, Cash Expenses, Interest Payments and Principal Payments is given
below and should be read in conjunction with the analysis on page 13.
CASH COLLECTIONS
"Total Cash Collections" include Net Lease Rentals (Contracted Lease Rentals
less Net Stress-Related Costs), Movement in Current Arrears Balance, Interest
Earned, Aircraft Sales and Net Maintenance. In the Three Month Period, AerCo
generated approximately $41.0 million in Total Cash Collections, $2.3 million
less than the Adjusted Base Case amount of $43.3 million. This difference is
due to a combination of the factors set out below (the numbers in brackets
refer to the line item number shown on page 13).
[2] Renegotiated Leases
Renegotiated Leases refers to the loss in rental revenue caused by a lessee
negotiating a reduction in the lease rental. Typically, this can be a permanent
reduction over the remaining lease term in exchange for other contractual
concessions. In the Three Month Period, an amount of $1.8 million in loss of
revenue was attributed to Renegotiated Leases, most of which related to leases
which were renegotiated post September 11, 2001.
[3] Rental Resets Including Interest Rate Adjustments for Floating Rate Leases
Rental Resets is a measure of the loss in rental revenue when new lease rates
are lower than those assumed in the Adjusted Base Case, including lease rate
adjustments for changes in interest rates on floating rate leases and lease
rates achieved where revenues are dependant on aircraft usage. At December 16,
2002, AerCo had 46 fixed rate leases, 4 power by the hour leases and 9 floating
rate leases. The revenue loss attributable to Rental Resets during the Three
Month Period was $5.3 million, reflecting the poor market conditions currently
being experienced in addition to the low interest rate environment.
[4] Aircraft Sales
Aircraft Sales is a measure of the loss in rental revenue as a result of
aircraft sales. In the Three Month Period, no revenue was lost due to aircraft
sales.
[5] Contracted Lease Rentals
Contracted Lease Rentals represents the current contracted lease rental rollout
which equates to the 2000 Adjusted Base Case Lease Rentals less adjustments for
Renegotiated Leases, Rental Resets and Aircraft Sales. For the Three Month
Period, Contracted Lease Rentals were $37.5 million compared to $38.1 million
for the previous three month period.
[6] Movement in Current Arrears Balance
Current Arrears are the total contracted lease rentals outstanding from current
lessees at a given date and excludes any amounts classified as Bad Debts. The
Current Arrears Balance at the start of the Three Month Period was $4.2 million
versus $4.3 million at the end of the Three Month Period, giving a negative
movement of $0.1 million.
Page 3
[6] Movement in Current Arrears Balance - continued
Analysis of Current Arrears Balances
% of Current Current Movement in
Aircraft Appraised Arrears Arrears Current
Country Type Value* 16/12/02 16/9/02 Arrears
-------- -------- --------- -------- ------- -----------
$M $M $M
1 Italy**............... B737-400 3.5 - 0.2 0.2
2 Italy**............... A320-200 1.8 0.6 0.6 -
3 Spain................. MD83 3.4 0.7 1.0 0.3
4 US.................... MD82 2.5 1.1 1.0 (0.1)
6 Brazil................ F100 3.7 1.0 0.6 (0.4)
7 Brazil................ B737-500 1.4 0.4 0.2 (0.2)
8 Brazil**.............. B737-300 1.4 0.6 0.4 (0.2)
9 Other+................ Various 7.1 (0.1) 0.2 0.3
--- --- ---
Total................. 4.3 4.2 (0.1)
--- --- ---
* Appraised Value as of February 19, 2002
** Restructuring Agreements have been signed with these lessees. See Section
III Other Financial Data
+ This comprises a number of lessees none of which had significant
outstanding balances.
As at December 16, 2002, an amount of $4.3 million was owed to AerCo Group,
against which security deposits of $5.1 million were held.
As at September 16, 2002, an amount of $4.2 million was owed to AerCo Group,
against which security deposits of $7.1 million were held.
[7] Net Stress-Related Costs
Net Stress-Related Costs is a combination of all the factors that can cause
actual lease rentals received to differ from the Contracted Lease Rentals. The
Adjusted Base Case assumed Net Stress-Related Costs equal to 6% of the Adjusted
Base Case Lease Rentals. For the Three Month Period, Net Stress-Related Costs
led to a cash outflow of $0.5 million compared to $2.2 million outflow assumed
in the Adjusted Base Case. This variance of $1.7 million is due to the six
factors described in items [8] to [13] below.
[8] & [9] Bad Debts and Security Deposits Drawn Down
Bad Debts are arrears owed by lessees who have defaulted and which are deemed
irrecoverable. These arrears are partially offset by the utilisation of
security deposits held and amounts subsequently recovered from the defaulted
lessee. There were no bad debt write-offs or security deposit draw downs in the
Three Month Period.
[10] Deferred Arrears Balance
Deferred Arrears Balance refers to current arrears that have been capitalized
and restructured into a deferred balance. In the Three Month Period, AerCo
received payments totalling $0.6 million from four lessees in accordance with a
payment schedule agreed with those lessees. The total rescheduled receivable
amounted to $1.6 million at the end of the Three Month Period in respect of
three lessees. See Section III Other Financial Data for further information on
the restructuring agreements.
Page 4
[11] Aircraft on Ground ("AOG")
AOG is defined as the Adjusted Base Case lease rental lost when an aircraft is
off-lease and non-revenue earning. During the Three Month Period there were two
aircraft off lease, the two MD82 aircraft repossessed in October 2002 which
gave rise to lost revenue of $0.8 million.
[12] Other Leasing Income
Other Leasing Income consists of miscellaneous income received in connection
with a lease other than contracted rentals, maintenance receipts and security
deposits, such as early termination payments or default interest. There were no
cashflows from Other Leasing Income during the Three Month Period.
[13] Repossession Costs
Repossession Costs cover legal and aircraft technical costs incurred in
repossessing aircraft. In the Three Month Period, there were costs of $0.3
million associated with the repossession of two MD82 aircraft.
[15] Net Lease Rentals
Net Lease Rentals is Contracted Lease Rentals less any movement in Current
Arrears Balance and Net Stress-Related Costs. In the Three Month Period, Net
Lease Rentals amounted to $36.9 million, $5.5 million lower than assumed in the
Adjusted Base Case. The variance was attributable to the combined effect of the
factors outlined in items [2] to [4] and in items [6] to [13] above.
[16] Interest Earned
Interest earned relates to interest received on cash balances held in the
Collection and Expense Accounts. Cash held in the Collection Account consists
of the cash liquidity reserve amount of $65 million plus the security deposit
amount, in addition to the intra-month cash balances for all the rentals and
maintenance payments collected prior to each monthly payment date. The Expense
Account contains cash set aside to pay for expenses which are expected to be
payable over the next month. In the Three Month Period, interest earned
amounted to $0.4 million, $0.5 million less than assumed in the Adjusted Base
Case, due primarily to the lower LIBOR rates currently being experienced.
[17] Aircraft Sales
There were no aircraft sales during the Three Month Period.
[18] Net Maintenance
Net Maintenance refers to maintenance reserve revenue received less any
maintenance reimbursements paid to lessees. In the Three Month Period, actual
maintenance reserve revenue received amounted to $5.3 million and maintenance
expenditure amounted to $1.6 million, generating a positive net maintenance
revenue of $3.7 million. The Adjusted Base Case assumes that, over time,
maintenance revenue will equal maintenance expenditure. However, it is unlikely
that in any particular Three Month Period, maintenance revenue will exactly
equal maintenance expenses.
Cash Expenses
"Total Cash Expenses" include Aircraft Operating Expenses and Selling, General
and Administrative ("SG&A") Expenses. In the Three Month Period, Total Cash
Expenses were $2.3 million, which was broadly in line with an assumed amount of
$2.2 million.
[21] Re-leasing and other overhead costs
Re-leasing and other overhead costs consist of miscellaneous re-delivery and
leasing costs associated with re-leasing events. In the Three Month Period,
these costs amounted to $1.7 million, compared with $0.9 million per the
Adjusted Base Case which assumed costs to be 2% of Adjusted Base Case Lease
Rentals. Included in the actual costs for the Three Month Period is $0.9
million relating to the cost of replacing certain insulation blankets on three
MD-80 aircraft in the fleet in accordance with an FAA Airworthiness Directive.
Page 5
[23] Aircraft Servicer Fees
Aircraft Servicer Fees are defined as amounts paid to the Aircraft Servicer. In
the Three Month Period, the total Aircraft Servicer Fees paid were $0.8
million, which is equal to $0.8 million assumed in the Adjusted Base Case.
Aircraft Servicer Fees consist of:
$m
--
Retainer Fee 0.4
Rent Collected Fee 0.4
---
Total Aircraft Servicer Fees 0.8
===
The Retainer Fee is a fixed amount per month per aircraft and changes only as
aircraft are acquired or sold.
[25] Other Servicer Fees
Other Servicer Fees relate to fees and expenses paid to other service providers
including the Administrative Agent, the Cash Manager, financial advisors, legal
advisors, accountants and to the directors. In the Three Month Period, Other
Servicer Fees amounted to $1.5 million, which is broadly in line with the
assumed fees of $1.4 million in the Adjusted Base Case.
[31] Interest Payments and [32] Swap Payments
In the Three Month Period, interest payments to Noteholders amounted to $9.6
million. This is $12.5 million less than the Adjusted Base Case, which assumed
Interest Payments for the Three Month Period to be $22.1 million. No interest
was paid to the Class E noteholder which was in line with the Adjusted Base
Case for the period. The lower interest payments reflect lower actual interest
rates than those assumed in the Adjusted Base Case. In the Three Month Period,
swap payments amounted to $10.5 million, $10.8 million greater than the assumed
swap receipt of $0.3 million. This also reflects the lower than assumed
interest rate environment.
[32] Principal Payments
In the Three Month Period, total principal payments to Noteholders amounted to
$17.3 million, $1.2 million less than assumed in the Adjusted Base Case. At
December 16, 2002, total outstanding principal balances of $1,204.0 million
were $4.3 million greater than that assumed in the Adjusted Base Case of
$1,199.7 million.
III OTHER FINANCIAL DATA
Weakly capitalized airlines are more likely than well capitalized airlines to
seek operating leases. Therefore, some of the lessees are in a relatively weak
financial position and several of them have faced and continue to face severe
economic difficulties. Following the events of September 11, 2001, the economic
difficulties faced by many of the lessees have been greatly exacerbated.
AerCo has responded and continues to respond to the needs of lessees in
financial difficulty, where appropriate, by restructuring the applicable leases
or agreeing to rent deferrals. The restructurings typically involve the
rescheduling of rental payments for a specified period. In addition, certain
restructurings may involve the voluntary early termination of a lease, the
replacement of aircraft with less expensive aircraft and the arrangement of
sub-leases from the lessee to another aircraft operator. In certain cases, it
may be necessary to repossess aircraft from defaulting lessees and re-lease the
aircraft to other lessees. The early termination of leases may lead AerCo to
incur swap breakage costs under its agreements with swap providers which could
be substantial.
As of December 16, 2002, amounts outstanding for more than 30 days for rental
payments due under the leases equalled $3.3 million. These leases were in
respect of aircraft representing 14.2% of the portfolio by appraised value at
February 19, 2002. The outstanding amounts are net of agreed deferrals or other
restructuring and default interest.
An Asian lessee of two B737-300 and one B737-400 aircraft representing 4.6% of
the portfolio by appraised value at February 19, 2002, was adversely affected
by the 1998 Asian economic crisis such that it sought bankruptcy protection
Page 6
in 1998. As part of the lessee's rehabilitation plan, the Servicer agreed with
the lessee to a schedule covering the payment of arrearages over the period to
October 31, 2002 and the extension of leases. At December 16, 2002, all amounts
outstanding have been cleared.
As of December 16, 2002, a European lessee representing 1.8% of the portfolio
by appraised value at February 19, 2002 owed $0.6 million, $0.3 million of
which was outstanding for more than 30 days. The lessee repaid $0.3 million of
this amount by mid January 2003. The Servicer had previously concluded a
restructuring agreement with the lessee which included a deferral of
receivables in the amount of $0.9 million and a deferral of 33% of the rentals
from March to May 2002, all of which are repayable from June 2002 to March
2003. To date, the lessee has repaid all deferred amounts in accordance with
the schedule of terms.
As of December 16, 2002, a European lessee representing 3.4% of the portfolio
by appraised value at February 19, 2002 owed $0.7 million, $0.4 million of
which was outstanding for more than 30 days. The Servicer is in negotiations
with the lessee regarding the settlement of this overdue amount.
As of December 16, 2002 a North American lessee representing 2.5% of the
portfolio by appraised value at February 19, 2002, owed $1.1 million, all of
which was outstanding for more than 30 days. The Servicer repossessed the two
aircraft on lease to this lessee in early October 2002 (See Section IV - Recent
Developments below) and is currently investigating any possible recovery of
this receivable amount. The servicer does not expect that it will recover the
full amount of the arrears.
Following two non-fatal emergency landings involving F-100 aircraft, on August
30, 2002, a Latin American lessee representing 3.66% of the portfolio by
appraised value at February 19, 2002, informed all its lessors of F-100
aircraft of its intention to return early at least twenty of its leased F-100
aircraft, which may have included any or all of AerCo's five F-100 aircraft
currently on lease to it. However, arising from discussions with the lessee,
the Servicer does not expect that the AerCo aircraft will be returned in the
immediate future. The lessee has paid 50% of contracted rentals during August,
September and October 2002 and 75% of contracted lease rentals during November
and December 2002. The Servicer is currently in discussions with the lessee for
the payment of its overdue amount during 2003. There can be no assurance that
the lessee will pay this outstanding amount. At December 16, 2002 the lessee
owed $1.1 million, $0.9 million of which was outstanding for more than 30 days.
As of December 16, 2002, a Latin American lessee representing 1.44% of the
portfolio by appraised value at February 19, 2002 owed $0.4 million, $0.2
million of which was in arrears for more than 30 days. The Servicer is in
negotiations with the lessee regarding recovery of this outstanding amount.
At December 16, 2002 a Latin American lessee representing 1.4% of the portfolio
by appraised value at February 19, 2002 owed $0.4 million, all of which was
outstanding for more than 30 days. The Servicer is in negotiations with the
lessee regarding settlement of this amount. In addition an amount of $0.5
million is outstanding as part of its deferred receivable.
Certain lessees have experienced periodic difficulties in meeting their
maintenance obligations under the leases. Such difficulties may be caused by a
variety of factors including the failure of the lessee to have in place an
adequate maintenance program, adverse climate and other environmental
conditions in the locations where the aircraft are operated or financial and
labour difficulties experienced by the relevant lessee.
IV RECENT DEVELOPMENTS
In July 2000, AerCo issued subclass A-3 notes in the principal amount of $565
million and bearing interest at Libor plus 0.46% with an expected final payment
date of June 15, 2002 and a final maturity date of July 15, 2025. At the time
the subclass A-3 notes were issued, the expected final payment date was
scheduled based on an assumption that these notes would be refinanced on June
15, 2002. Step-up interest of 0.50% has accrued on the subclass A-3 notes since
June 15, 2002 because they were not repaid in full or refinanced by their
expected final payment date and will continue to be due and payable until they
are repaid in full or refinanced. Under the schedule of required payment
priorities applicable to AerCo, step-up interest is payable after payment of
interest, minimum principal and scheduled principal on AerCo's class A, class
B, class C and class D notes and any aircraft modification payments. The Board
of Directors of AerCo, in consultation with its advisers, gave extensive
consideration to the economic feasibility of refinancing the subclass A-3 notes
on or before June 15, 2002, including a review of various structural
enhancements which might have rendered such a refinancing viable. On
Page 7
May 14, 2002 the Board of Directors determined that, in the current market
conditions, it was not in the economic interests of AerCo to refinance the
subclass A-3 notes on or before June 15, 2002. On July 24 and October 23, 2002
and January 22, 2003 the Board of Directors reaffirmed its decision not to
refinance the subclass A-3 notes in the current market environment.
The Board of Directors of AerCo will continue to monitor market conditions and
to assess when and if a refinancing of the subclass A-3 notes is appropriate.
During the past two years, there has been a general downturn in the world
economic climate, with a consequential negative impact on the commercial
aviation industry. During the Three Month Period, the slowdown in the world
economic climate has continued with a consequential continuing negative impact
on the operating conditions in the world aviation industry. This economic
slowdown was exacerbated by the events of September 11, 2001 in the United
States and the economic and political situation since those events.
The short term effects of the events of September 11, 2001 included among other
things, a reduction in demand for air travel, grounding of aircraft by
airlines, bankruptcy and/or consolidation of airlines particularly in Europe
and the United States, reduced operations by airlines, increased costs due to
new security directives adopted by the relevant aviation authorities, increased
insurance premiums and new insurance arrangements required by the insurance
markets and fluctuations in the price of fuel.
In particular, airlines worldwide continue to experience significant
difficulties in maintaining war insurance cover in the amounts required under
their leases with AerCo and other lessors. While these insurance issues have
been mitigated in certain jurisdictions by a number of temporary government
schemes, in the absence of satisfactory solutions on this matter, it may be
necessary for the relevant aircraft to be grounded. The uncertainty over
potential military action by the United States in the Middle East, together
with the strike in Venezuela, has now resulted in sharp increases in the price
of oil and the price may rise further, which would increase operating costs for
our lessees significantly.
Such consequences continue to have a material adverse impact on the financial
condition of AerCo's lessees and their ability to perform under their leases
and, depending on their scope and duration, which AerCo cannot predict at this
time, may continue to have such effect. Any future military action by the U.S.
and its allies may also exacerbate these effects. They may also lead to reduced
demand for AerCo's aircraft, which may impact its ability to re-lease aircraft
on a timely basis and at favourable rates, and may reduce the value of its
aircraft. These effects have caused a reduction in AerCo's cash flow which has
adversely affected AerCo's ability to make payments on the notes.
As outlined above, many of AerCo's lessees have made requests for amongst other
things, rental reductions and deferrals, early return of aircraft and other
cashflow alleviation measures. In particular, during this downturn in the
aviation industry, there has been a sharp increase in the availability of
aircraft for lease, leading to significant over capacity, increased downtime, a
decline in lease rates and a fall in the realisable value of aircraft in open
market sale transactions. The effect of these events have resulted in
impairment provisions being made with respect to the carrying value of certain
of AerCo's aircraft in its audited financial statements. As a consequence of
these adverse economic, political and trading conditions, we expect to continue
to perform behind the 2000 Adjusted Base Case assumptions.
Aircraft Sales: During November 2002 AerCo entered into an agreement with a
third party for the sale of one A300B4-200 aircraft representing 0.6% of the
portfolio by appraised value at February 19, 2002. The closing date of the sale
has not yet been agreed but the sale price has been agreed, this price being
less than the Note Target Price of the aircraft. The Board of Directors of
AerCo has determined that the sale of the aircraft is in the best interests of
AerCo in light of the aircrafts type, age and the agreed sales price.
North American Concentration. At December 16, 2002, 16.1% of the aircraft by
appraised value at February 19, 2002 were leased by operators in North America.
The commercial aviation industry in North America is highly sensitive to
general economic conditions. Since airline travel is largely discretionary, the
industry has suffered severe financial difficulties during economic downturns.
Over the last several years, nearly half of the major North American passenger
airlines have entered into plans of reorganisation or sought protection through
bankruptcy, insolvency or other similar proceedings and several major U.S.
airlines have ceased operations. The long term effect that the September 11,
2001 terrorist attacks in the United States and subsequent military action in
Afghanistan and any future military action in the Middle East may have for the
aviation industry in the U.S. is not yet fully known. However, the
Page 8
immediate effects have included, among other things, a reduction in demand for
domestic and international passenger air travel by U.S. citizens, a general
reduction in North Atlantic traffic and increased security costs for U.S.
airlines in mitigating against possible further acts of terrorism, resulting in
reduced profits and financial difficulties for U.S. airlines. US Airways and
United Airlines filed for Chapter 11 bankruptcy protection in the United States
on August 11, 2002 and December 9, 2002 respectively.
One of our U.S. lessees, representing 2.49% of our portfolio by appraised value
at February 19, 2002, filed for Chapter 11 protection on July 31, 2002. Since
then there have been ongoing talks between the lessee and several potential
investors. Following the rejection on September 26, 2002 of an offer made for
the lessee by one potential investor, the Servicer repossessed AerCo's two
MD-82 aircraft in early October 2002. At December 16, 2002, arrears by this
lessee amounted to $1.1 million, all of which was outstanding for more than 30
days. The Servicer is in negotiations regarding the payment of this amount but
it does not expect that it will recover the full amount of these arrears from
this lessee.
Asia Pacific Concentration. At December 16, 2002, 22.10% of the aircraft by
appraised value at February 19, 2002 were leased by operators in "emerging"
markets in the Asia Pacific region, including China, the Philippines, South
Korea, Taiwan and India. One Asian lessee leased 5.1% of the aircraft by
appraised value at February 19, 2002.
Trading conditions in Asia's civil aviation industry were adversely affected by
the severe economic and financial difficulties in the region during 1998 and
1999. The economies of the region experienced acute difficulties including many
business failures, significant depreciation of local currencies against the
dollar, downgrading of sovereign and corporate credit ratings and
internationally organized financial stability measures. One Asian lessee which
leases 4.6% of the aircraft by appraised value at February 19, 2002, was
adversely affected by the Asian economic crisis such that it sought bankruptcy
protection in 1998. As part of its rehabilitation plan, certain of the lessee's
outstanding lease obligations were re-scheduled in 1999. Several other airlines
in the region re-scheduled their aircraft purchase obligations, eliminated
certain routes and reduced employees. A repeat of this downturn in the region's
economies may further undermine business confidence, reduce demand for air
travel and adversely affect the Asian lessees' operations and their ability to
meet their obligations. The medium to long term effect that the bombings in
Bali on October 12, 2002 may have for the global aviation industry and the Asia
Pacific region in particular, have led to among other things, a reduction in
tourist traffic to the region and increased security costs for Asian airlines
and other businesses in mitigating against possible further acts of terrorism.
Latin American Concentration. At December 16, 2002, 10.00% of the aircraft by
appraised value at February 19, 2002 were leased by operators in "emerging
markets" in Latin America, principally Brazil, Chile and Colombia. The
financial prospects for lessees in Latin America depend amongst other things on
the level of political stability and economic activity and policies in the
region. Developments in the United States, Europe and/or other "emerging
markets" may also affect the economies of Latin American countries and the
entire region.
Most significantly, in 1999, Brazil experienced significant downturns in its
economy and financial markets, with large decreases in financial asset prices
and dramatic decreases in the value of its currency. One of the lessees, TAM,
the lessee of 3.66% of the aircraft by appraised value at February 19, 2002,
operates five of the aircraft in Brazil. In addition Varig and Nordeste lease
one B737-300 and one B737-500 respectively, together representing 2.9% of the
aircraft by appraised value at February 19, 2002. While there was some
stabilisation in the Brazilian economy, the economy is currently suffering
instability and high inflation and any future general deterioration in the
Brazilian economy means that these lessees may be unable to generate sufficient
revenues in Brazilian currency to pay the U.S. dollar-denominated rental
payments under the leases. More importantly, financial and economic problems in
Brazil and Argentina could spread throughout Latin America and other "emerging"
economies, having a similar effect on many of AerCo's other lessees. Following
two non-fatal emergency landings involving F-100 aircraft, on August 30, 2002,
TAM informed all its lessors of F-100 aircraft of its intention to return early
at least twenty of its leased F-100 aircraft, which may have included any or
all of AerCo's five F-100 aircraft currently on lease to it. However, arising
from discussions with the lessee, the Servicer does not expect that the AerCo
aircraft will be returned in the immediate future. The lessee has paid 50% of
contracted rentals during August, September and October 2002 and 75% of
contracted lease rentals during November and December 2002. The Servicer is
currently in discussions with the lessee for the payment of its overdue amount
during 2003. There can be no assurance that the lessee will pay this
outstanding amount. At December 16, 2002 the lessee owed $1.1 million, $0.9
million of which was outstanding for more than 30 days.
Page 9
Colombia recently suffered economically as a result of the deterioration in the
value of the Colombian Peso and the resulting negative impact on the Colombian
economy. AerCo leases one aircraft, representing 2.59% of the portfolio by
appraised value at February 19, 2002, to a Colombian lessee. This lessee
advised the Servicer that as of July 1, 2002, no further lease rental payments
would be made to any of its lessors unless and until an agreement is signed
with the lessee accepting payment of 50% of the contracted lease rentals for a
period of six months, foregoing the remaining 50%. (See Section III - Other
Financial Data above).
The long term effect that the September 11, 2001 terrorist attacks in the
United States and subsequent military action in Afghanistan and any future
military action in the Middle East may have for the aviation industry in the
Latin American region is not yet fully known. However, the current effects have
included, among other things, a reduction in demand for passenger air travel
especially to and from the U.S. due to fears regarding additional acts of
terrorism and increased security costs for airlines in mitigating against
possible further acts of terrorism, which has resulted in reduced profits for
most airlines and Chapter 11 bankruptcy protection for two major carriers,
United Airlines and U.S Airways and possible solvency issues for some airlines.
Fuel prices could also rise significantly.
European Concentration. At December 16, 2002, 49.3% of the aircraft by
appraised value at February 19, 2002 were leased by operators based in Europe.
Of this amount, lessees of 42.8% of the aircraft were based in "developed"
European markets, principally the United Kingdom and Spain. Lessees of the
remaining 6.5% of the aircraft were based in "emerging" European markets,
principally Turkey and Hungary. As of December 16, 2002, 22.5% of the aircraft
by appraised value at February 19, 2002 were leased to lessees in the United
Kingdom.
The commercial aviation industry in Europe is very sensitive to general
economic conditions. Since air travel is largely discretionary, the industry
tends to suffer severe financial difficulties during slow economic periods. As
a result, the financial prospects for European lessees depend on the level of
economic activity in Europe and in the specific countries where they operate.
The current downturn as exacerbated by the events of September 11, 2001 and the
subsequent and continuing economic and political fallout, particularly if
combined with high fuel prices and a weak euro, may adversely affect the
ability of many European lessees to meet their financial and other obligations.
Since European airlines primarily receive their revenue in euro, any weakness
in the euro may adversely affect the ability of those airlines to meet U.S.
dollar denominated lease rental, fuel and other operating costs. Competitive
pressures from continuing deregulation of the airline industry by the EU may
also adversely affect European lessees' operations and their ability to meet
their obligations under the leases. In addition, the long term effect that the
September 11, 2001 terrorist attacks in the United States and subsequent
military action in Afghanistan and any future military action in the Middle
East may have for the European aviation industry is not yet fully known and
although European airlines currently do not appear to be as adversely impacted
as airlines in the United States, the immediate effects have included, among
other things, a drop in passenger confidence in air travel with a consequent
decrease in demand for air travel, increased security costs for European
airlines, grounding of aircraft, reduced profits and possible solvency or even
bankruptcy issues for some airlines which may result in the consolidation of
some European airlines, and may affect the prospects of AerCo's European
lessees.
At December 16, 2002, 3.2% of the aircraft by appraised value at February 19,
2002 were on lease to Turkish lessees. Any adverse movement in value of the
euro, the principal currency in which Turkish airlines receives their revenues,
against the U.S. dollar, may affect the ability of these airlines to pay U.S.
dollar denominated costs including lease rentals. The long-term effect which
the September 11, 2001 terrorists attacks in the United States and subsequent
military action in Afghanistan and any future military action in the Middle
East may have for the Turkish aviation industry is not yet fully known.
However, the immediate effects have included, among other things, a drop in
passenger confidence in air travel to and from Turkey and a consequent decrease
in demand for air travel resulting in the grounding of aircraft which may lead
to significant increases in operating costs for airlines based in Turkey. This
may adversely impact the ability of such airlines to perform their lease
obligations to AerCo Group in the future.
Compliance with Governmental and Technical Regulations
In addition to general requirements regarding maintenance of aircraft, aviation
authorities issue airworthiness directives ("ADs") requiring the operators of
aircraft to take particular maintenance actions or make particular
modifications to a number of aircraft of designated types. ADs normally specify
a period in which to carry out the required action or modification and
generally enough time is allowed to permit the implementation of the AD in
connection with scheduled maintenance of the aircraft or engines. The lessees
usually bear the cost of compliance with ADs issued by applicable aviation
authorities and relevant manufacturers' recommendations. We may be required to
contribute a portion of such costs over a specified threshold. However, if a
lessee fails to perform ADs required on an
Page 10
aircraft or if the aircraft is off-lease, we would bear the cost of compliance
necessary for the aircraft to maintain its certificate of airworthiness. In
such circumstances, funds in the collection account and lessee funded account
will be available to mitigate costs of compliance, although such use would
reduce the availability of such amounts to cover the cost of scheduled
maintenance. There can be no assurance that such funds will be available at the
time needed or that any funds will be sufficient for such purposes.
The US Federal Aviation Administration (the "FAA") has issued an Airworthiness
Directive ("AD") that requires operators of MD-11, MD-80 and DC-10 aircraft to
replace certain insulation blankets in order to reduce the risk of fire. We
have eight MD-80 series aircraft representing 9.65% of the portfolio by
appraised value at February 19, 2002. We will incur significant costs in
ensuring these aircraft comply with these standards. To date, four of the
aircraft have already been modified and lessor contributions of approximately
$1.3 million have already been made. We expect to complete the modification on
the remaining four aircraft by June 2005 at an estimated cost of approximately
$1.65 million after lessee contributions.
The FAA has issued an AD mandating the modification of affected lapjoints on
Boeing 737 aircraft when the aircraft has completed 50,000 cycles. The
estimated labor cost to implement such modifications for each aircraft is
approximately $270,000 per aircraft. We have 31 Boeing 737 aircraft in the
portfolio, representing 48.37% of the portfolio by appraised value at February
19, 2002. Based on the current cycles completed to date by our Boeing 737
aircraft, our Boeing 737 aircraft are not likely to require these modifications
prior to 2008. However, we could incur significant costs in ensuring our Boeing
737 aircraft comply with these standards, which could impact adversely on our
results of operations.
The FAA has issued an AD mandating the replacement of main landing gear shock
strut pistons on MD-80 and MD-90 aircraft prior to the accumulation of 30,000
cycles on the existing main landing gear shock strut pistons. The cost for such
replacement is approximately $265,000 per aircraft. Depending on warranty
credit provided by the manufacturer, the majority of this cost may be claimed
from the manufacturer. We have eight MD-80 series aircraft representing 9.65%
of our portfolio by appraised value at February 19, 2002. In the event that
warranty credit is not available from the manufacturer for any aircraft, we
could incur significant costs in ensuring our MD-80 aircraft comply with these
standards, which could impact adversely on our results of operations.
The FAA has issued an AD mandating a re-design of the rudder systems of Boeing
737 aircraft prior to November 2008. The average cost per aircraft of such
modifications is approximately $182,000. We have 31 Boeing 737 aircraft in the
portfolio, representing 48.37% of the portfolio by appraised value at February
19, 2002. It is expected that we will incur the full cost of this modification,
which could impact adversely on our results of operations.
The FAA has issued an AD mandating the installation of an overwing heater
blanket system or a primary upper wing ice detection system on MD-80 aircraft
prior to 7 May 2004. The cost per aircraft of such modifications ranges between
$70,000 for the primary upper wing ice detection system and $151,000 for the
overwing heater blanket system. The choice of system will depend on the
operational requirements of the operator. We have eight MD-80 series aircraft
representing 9.65% of our portfolio by appraised value at February 19, 2002. We
could incur significant costs in ensuring our MD-80 aircraft comply with these
standards, which could impact adversely on our results of operations.
The aircraft engines in our portfolio are subject to a number of mandated
inspections which are accomplished while the engine is installed on the
aircraft. In the event that an engine fails such an inspection, a shop visit
repair of the engine may be required earlier than anticipated based on normal
operating performance. Depending on whether the cost of carrying out the shop
visit would have to be borne by us or the lessees, such mandated repairs could
result in significant cash expenditures by us in the future.
Operational requirements for an aircraft may vary from one jurisdiction to
another. Some requirements are mandated by the state of registration, some are
mandated by the state of the operating airline (which, in some cases, may be
different to the state of registration). Other requirements are mandated by the
states into which or over which an aircraft will be flown. An aircraft
operating in a particular jurisdiction may require new modifications as they
are mandated by the responsible authorities. Similarly, an aircraft
transferring operation from one jurisdiction to another may require
modifications to bring it up to the standard of the new jurisdiction. Depending
on whether the costs of complying with these requirements are borne by us or
the lessees, installation of these systems could result in significant cash
expenditures by us in the future.
Page 11
Major examples of such requirements are as follows:
TCAS/ACAS (Traffic Collision Avoidance System) is already a requirement in the
United States and most of Europe. The majority of our aircraft are already
compliant or will have some provisions already installed. The average cost of
an installation for a non-compliant aircraft would be approximately $200,000.
EGPWS (Enhanced Ground Proximity Warning System) has been mandated for
incorporation in the United States and the Joint Aviation Authorities ("JAA")
countries in Europe by 2005. The average cost of an installation for a
non-compliant aircraft would be approximately $120,000.
Cargo Compartment Fire Detection and Suppression System is already a
requirement in the United States. It is currently not required by the JAA for
Europe, but widely expected to be required by 2005. The average cost of an
installation for a non-compliant aircraft would be approximately $100,000.
Additional Flight Data Recorder Parameters are a requirement in the United
States from August 2002. The requirement varies depending on year of
manufacture and existing provisions. The average cost of an installation for a
non-compliant aircraft would be approximately $100,000. To date, AerCo has not
made any payments in respect of this requirement.
As a result of the terrorist attacks in the United States on September 11,
2001, new security directives may be adopted by aviation authorities. The
International Civil Aviation Organization ("ICAO") requires contracting states
to mandate the incorporation of enhanced security cockpit doors and cockpit
doorway surveillance systems by November 1, 2003. Depending on whether the cost
of complying with such regulations would have to be borne by us or the lessees,
such regulations could result in significant cash expenditures by us in the
future.
Other governmental regulations may apply to the aircraft, including
requirements relating to noise and emissions levels. Again, such regulations
may be imposed not only by the jurisdictions in which the aircraft are
registered, but also in jurisdictions where the aircraft operate. Annex 16
Volume 1 Chapters 2 and 3 of the Chicago Convention establish two progressively
restrictive noise level standards that correspond to the requirements for Stage
2 and Stage 3 aircraft as defined by the U.S. Federal Aviation Administration
in FAR 36. A number of jurisdictions have adopted, or are in the process of
adopting, noise regulations which will require all aircraft to comply with the
most restrictive of these standards. Such regulations restrict the future
operation of aircraft that are not Chapter 3 aircraft and are expected
imminently to prohibit the operation of such aircraft in the relevant
jurisdictions. In the United States such a prohibition went into effect at the
end of 1999. In the European Union, the prohibition came into effect at the end
of March 2002. Since AerCo Group has the ability to acquire Chapter 2 aircraft,
these regulations may affect AerCo adversely. In addition, local municipalities
may have more stringent noise regulations than those applicable to Chapter 3
aircraft. Furthermore, a new more restrictive standard has been adopted in
Annex 16 Volume 1 Chapter 4 of the Chicago Convention that is currently only
applicable to aircraft newly manufactured after 1 January 2006. At present
there is no requirement to phase out aircraft manufactured prior to 2006 which
do not comply with the Chapter 4 standard. However, if such a requirement is
mandated in the future, it may adversely affect the value of or the ability to
remarket such aircraft within the AerCo portfolio.
Volume 2 of Annex 16 of the Chicago Convention also contains standards and
recommendations regarding limitations on vented fuel and smoke and gaseous
emissions for aircraft. While a number of countries have adopted regulations
implementing these recommendations, such regulations generally have been
prospective in nature, requiring only that newly manufactured engines meet
particular standards after a particular date.
The FAA have issued a new rule applicable to US Registered aircraft mandating
an Aging Aircraft Record Review and Inspection by FAA representatives for an
aircraft once it has exceeded 14 years since manufacture. Thresholds are
provided for aircraft that are already more than 14 years since manufacture at
the time the rule was introduced. Thereafter, Record Reviews and Inspections
for the aircraft are to be repeated every 7 years. It is expected that the cost
of such Record Reviews and Inspections will, in general, be borne by the
lessees.
Page 12
AERCO Cashflow Performance for the Period from September 16, 2002 to December 16, 2002
Comparison of Actual Cash flows versus Adjusted Base Case Cash Flows
Adjusted * Adjusted *
Actual Base Case Variance Actual Base Case Variance
------ --------- -------- ------ --------- --------
CASH COLLECTIONS
1 Lease Rentals 44.60 44.60 0.00 100.0% 100.0% 0.0%
2 - Renegotiated Leases (1.80) 0.00 (1.80) (4.0%) 0.0% (4.0%)
3 - Rental Resets (5.30) 0.00 (5.30) (11.9%) 0.0% (11.9%)
4 - Aircraft Sales 0.00 0.00 0.00 0.0% 0.0% 0.0%
------------------------------ ---------------------------------
5 (SIGMA) 1-5 Contracted Lease Rentals 37.50 44.60 (7.10) 84.1% 100.0% (15.9%)
6 Movement in Current Arrears (0.10) 0.00 (0.10) (0.2%) 0.0% (0.2%)
Balance
7 less Net Stress Related Costs
8 - Bad Debts 0.00 (0.45) 0.45 0.0% (1.0%) 1.0%
9 - Security Deposits drawn down 0.00 0.00 0.00 0.0% 0.0% 0.0%
10 - Deferred Arrears 0.60 0.54 0.06 1.3% 1.2% 0.1%
11 - AOG (0.80) (1.90) 1.10 (1.8%) (4.3%) 2.5%
12 - Other Leasing Income 0.00 0.00 0.00 0.0% 0.0% 0.0%
13 - Repossession (0.30) (0.36) 0.06 (0.7%) (0.8%) 0.1%
------------------------------ ---------------------------------
14 (SIGMA) 8-13 Sub-total (0.50) (2.18) 1.68 (1.1%) (4.9%) 3.8%
15 5+6+14 Net Lease Rentals 36.90 42.42 (5.52) 82.7% 95.1% (12.4%)
16 Interest Earned 0.40 0.91 (0.51) 0.9% 2.0% (1.1%)
17 Aircraft Sales 0.00 0.00 0.00 0.0% 0.0% 0.0%
18 Net Maintenance 3.70 0.00 3.70 8.3% 0.0% 8.3%
------------------------------ ---------------------------------
0.00
19 (SIGMA) 15-18 Total Cash Collections 41.00 43.33 (2.33) 91.9% 97.2% (5.2%)
============================== =================================
CASH EXPENSES
Aircraft Operating Expenses
20 - Insurance (0.10) 0.00 (0.10) (0.2%) 0.0% (0.2%)
21 - Re-leasing and other overheads (1.70) (0.85) (0.85) (3.8%) (1.9%) (1.9%)
------------------------------ ---------------------------------
22 20+21 Sub-total (1.80) (0.85) (0.95) (4.0%) (1.9%) (2.1%)
SG&A Expenses
23 Aircraft Servicer Fees
- Retainer Fee (0.37) (0.37) 0.00 (0.8%) (0.8%) 0.0%
- Rent Collected Fee (0.39) (0.43) 0.04 (0.9%) (1.0%) 0.1%
- Previous Servicer 0.00 0.00 0.00 0.0% 0.0% 0.0%
- Sales Fee 0.00 0.00 0.00 0.0% 0.0% 0.0%
------------------------------ ---------------------------------
24 23 Sub-total (0.76) (0.80) 0.04 (1.7%) (1.8%) 0.1%
25 Other Servicer Fees (1.54) (1.36) (0.18) (3.5%) (3.0%) (0.4%)
------------------------------ ---------------------------------
26 24+25 Sub-total (2.30) (2.16) (0.14) (5.2%) (4.8%) (0.3%)
============================== =================================
------------------------------ ---------------------------------
27 26+22 Total Cash Expenses (4.10) (3.01) (1.09) (9.2%) (6.7%) (2.4%)
============================== =================================
NET CASH COLLECTIONS
28 19 Total Cash Collections 41.00 43.33 (2.33) 91.9% 97.2% (5.2%)
29 26 Total Cash Expenses (4.10) (3.01) (1.09) (9.2%) (6.7%) (2.4%)
30 Movement on Expense Account 0.50 0.00 0.50 1.1% 0.0% 1.1%
31 Refinancing Fees 0.00 0.00 0.00 0.0% 0.0% 0.0%
31 Interest Payments (9.60) (22.10) 12.50 (21.5%) (49.6%) 28.0%
32 Swap Payments (10.50) 0.32 (10.82) (23.5%) 0.7% (24.2%)
------------------------------ ---------------------------------
33 (SIGMA) 28-32 TOTAL 17.30 18.54 (1.24) 38.8% 41.6% (2.8%)
============================== =================================
33 PRINCIPAL PAYMENTS
Class A 13.70 15.28 (1.58) 30.7% 34.3% (3.6%)
Class B 2.00 1.82 0.18 4.5% 4.1% 0.4%
Class C 1.60 1.43 0.17 3.6% 3.2% 0.4%
Class D 0.00 0.00 0.00 0.0% 0.0% 0.0%
------------------------------ ---------------------------------
Total 17.30 18.54 (1.24) 38.8% 41.6% (2.8%)
============================== =================================
*Adjusted Base Case - The cashflows and expenses assumed in the July 2000
Offering Memorandum ("Base Case") have been adjusted to reflect the sale of one
B757-200 (MSN 28486) on April 9, 2001 which was not anticipated at the time of
preparation of the Base Case.
Page 13
Coverage Ratios
Adjusted*
Closing Actual Base Case
------- ------ ---------
Net Cash Collections 17.3 18.5
Add Back Interest and
Swap Payments 20.1 21.8
Add Back Permitted Accruals 0.0 0.0
a Net Cash Collections 37.4 40.3
(excl. interest and swap payments)
b Swaps 10.5 (0.3)
c Class A Interest 4.5 14.4
d Class A Minimum 0.0 0.0
e Class B Interest 0.9 2.5
f Class B Minimum 0.3 0.2
g Class C Interest 1.3 3.3
h Class C Minimum 0.0 0.0
I Class D Interest 2.1 2.1
j Class D Minimum 0.0 0.0
k Class A Scheduled 0.0 0.0
l Class B Scheduled 1.7 1.6
m Class C Scheduled 1.6 1.4
n Class D Scheduled 0.0 0.0
o Permitted Aircraft Modificatons 0.0 0.0
p Step-up Interest 0.8 0.0
r Class A Supplemental 13.7 15.2
s Class E Primary Interest 0.0 0.0
t Class B Supplemental 0.0 0.0
u Class A Outstanding 0.0 0.0
------------ ------------
Total 37.4 40.3
------------ ------------
[1] Interest Coverage Ratio
Class A 2.49 2.86 = a/(b+c)
Class B 2.35 2.44 = a/(b+c+d+e)
Class C 2.14 2.02 = a/(b+c+d+e+f+g)
Class D 1.91 1.83 = a/(b+c+d+e+f+g+h+i)
[2] Debt Coverage Ratio
Class A 1.91 1.83 = a/(b+c+d+e+f+g+h+I+j+k)
Class B 1.76 1.70 = a/(b+c+d+e+f+g+h+I+j+k+l)
Class C 1.63 1.60 = a/(b+c+d+e+f+g+h+I+j+k+l+m)
Class D 1.63 1.60 = a/(b+c+d+e+f+g+h+I+j+k+l+m+n)
Loan to Value Ratios (in 100,000 dollars)
[3] Assumed Portfolio Value 1,566.7 1,322.5 1,322.5
[4] Adjusted Portfolio Value 1,313.5
Liquidity Reserve Amount
Of which - Cash 65.0 65.0 65.0
- Accrued Expenses 5.0 6.2 5.0
- Security Deposit 22.4 16.4 22.4
------------ ------------ ------------
Subtotal 92.4 87.6 92.4
Letters of Credit 0.0 0.0 0.0
Subtotal 92.4 87.6 92.4
[5] Total Asset Value 1,659.1 1,410.1 1,414.9
Note Balances as at December 16, 2002
Class A 998.4 816.8 812.6
Class B 154.8 131.0 130.9
Class C 164.1 156.2 156.2
Class D 100.0 100.0 100.0
------------ ------------ ------------
1,417.3 1,204.0 1,199.7
------------ ------------ ------------
[1] Interest Coverage Ratio is equal to Net Cash Collections (excl. interest
and swap payments) expressed as a ratio of the interest payable on each
subclass of Notes plus the interest and minimum principal payments payable
on each subclass of Notes that rank senior in priority of payment to the
relevant subclass of Notes.
[2] Debt Service Ratio is equal to Net Cash Collections (excl. interest and
swap payments) expressed as a ratio of the interest and minimum and
scheduled principal payments payable on each subclass of Note plus the
interest and minimum and scheduled principal payments payable on each
subclass of Notes that ranks equally with or senior to the relevant
subclass of Notes in the priority of payments.
[3] Assumed Portfolio Value represents the Initial Appraised Value of each
aircraft in the Portfolio multipled by the Depreciation Factor at
Calculation Date divided by the Depreciation Factor at Closing Date.
[4] Adjusted Portfolio Value represents the Base Value of each aircraft in the
Portfolio as determined by the most recent Appraisal multiplied by the
Depreciation Factor at Calculation date divided by the Depreciation Factor
at Closing Date.
The lower of the Assumed Portfolio Value or 105% of the Adjusted Portfolio
Value is used to calculate the principal repayment amounts to Noteholders.
[5] Total Asset Value is equal to Total Assumed Portfolio Value plus Liquidity
Reserve Amount.
Page 14
AERCO Cashflow Performance for the Period from July 17, 2000 to December 16, 2002
Comparison of Actual Cash flows versus Adjusted Base Case Cash Flows
Adjusted * Adjusted *
Actual Base Case Variance Actual Base Case Variance
------ --------- -------- ------ --------- --------
CASH COLLECTIONS
1 Lease Rentals 445.00 445.00 0.00 100.0% 100.0% 0.0%
2 - Renegotiated Leases (16.70) 0.00 (16.70) (3.8%) 0.0% (3.8%)
3 - Rental Resets (20.60) 0.00 (20.60) (4.6%) 0.0% (4.6%)
4 - Aircraft Sales 0.00 0.00 0.00 0.0% 0.0% 0.0%
-------------------------------- ----------------------------
5 (SIGMA) 1-5 Contracted Lease Rentals 407.70 445.00 (37.30) 91.6% 100.0% (8.4%)
6 Movement in Current Arrears (5.10) 0.00 (5.10) (1.1%) 0.0% (1.1%)
Balance
7 less Net Stress Related Costs
8 - Bad Debts 0.00 (4.48) 4.48 0.0% (1.0%) 1.0%
9 - Security Deposits drawn down 0.50 0.00 0.50 0.1% 0.0% 0.1%
10 - Capitalised Arrears 0.10 3.17 (3.07) 0.0% 0.7% (0.7%)
11 - AOG (7.00) (18.82) 11.82 (1.6%) (4.2%) 2.7%
12 - Other Leasing Income 0.00 0.00 0.00 0.0% 0.0% 0.0%
13 - Repossession (0.40) (3.59) 3.19 (0.1%) (0.8%) 0.7%
-------------------------------- ----------------------------
14 (SIGMA) 8-13 Sub-total (6.80) (23.72) 16.92 (1.5%) (5.3%) 3.8%
15 5+6+14 Net Lease Rentals 395.80 421.28 (25.48) 88.9% 94.7% (5.7%)
16 Interest Earned 7.90 8.83 (0.93) 1.8% 2.0% (0.2%)
17 Aircraft Sales 50.50 51.00 (0.50) 11.3% 11.5% (0.1%)
18 Net Maintenance 18.00 0.00 18.00 4.0% 0.0% 4.0%
-------------------------------- ----------------------------
19 (SIGMA) 15-18 Total Cash Collections 472.20 481.11 (8.91) 106.1% 108.1% (2.0%)
================================ ============================
CASH EXPENSES
Aircraft Operating Expenses
20 - Insurance (0.50) 0.00 (0.50) (0.1%) 0.0% (0.1%)
21 - Re-leasing and other overheads (12.50) (13.40) 0.90 (2.8%) (3.0%) 0.2%
-------------------------------- ----------------------------
22 20+21 Sub-total (13.00) (13.40) 0.40 (2.9%) (3.0%) 0.1%
SG&A Expenses
23 Aircraft Servicer Fees
- Retainer Fee (3.60) (4.10) 0.50 (0.8%) (0.9%) 0.1%
- Rent Collected Fee (4.00) (4.70) 0.70 (0.9%) (1.1%) 0.2%
- Previous Servicer (1.30) 0.00 (1.30) (0.3%) 0.0% (0.3%)
- Sales Fee (0.50) 0.00 (0.50) (0.1%) 0.0% (0.1%)
-------------------------------- ----------------------------
24 23 Sub-total (9.40) (8.80) (0.60) (2.1%) (2.0%) (0.1%)
25 Other Servicer Fees (19.40) (9.20) (10.20) (4.4%) (2.1%) (2.3%)
-------------------------------- ----------------------------
26 24+25 Sub-total (28.80) (18.00) (10.80) (6.5%) (4.0%) (2.4%)
================================ ============================
-------------------------------- ----------------------------
27 26+22 Total Cash Expenses (41.80) (31.40) (10.40) (9.4%) (7.1%) (2.3%)
================================ ============================
NET CASH COLLECTIONS
28 19 Total Cash Collections 472.20 481.11 (8.91) 106.1% 108.1% (2.0%)
29 26 Total Cash Expenses (41.80) (31.40) (10.40) (9.4%) (7.1%) (2.3%)
30 Movement on Expense Account 8.90 0.00 8.90 2.0% 0.0% 2.0%
Refinancing Costs 0.00 (2.30) 2.30 0.0% (0.5%) 0.5%
31 Interest Payments (162.00) (234.31) 72.31 (36.4%) (52.7%) 16.2%
32 Swap Payments (64.00) 4.50 (68.50) (14.4%) 1.0% (15.4%)
-------------------------------- ----------------------------
33 (SIGMA) 28-32 TOTAL 213.30 217.60 (4.30) (58.2%) (59.2%) 1.0%
================================ ============================
33 PRINCIPAL PAYMENTS
Class A 181.60 185.80 (4.20) 40.8% 41.8% (0.9%)
Class B 23.80 23.90 (0.10) 5.3% 5.4% (0.0%)
Class C 7.90 7.90 0.00 1.8% 1.8% 0.0%
Class D 0.00 0.00 0.00 0.0% 0.0% 0.0%
-------------------------------- ----------------------------
Total 213.30 217.60 (4.30) 47.9% 48.9% (1.0%)
================================ ============================
*Adjusted Base Case - The cashflows and expenses assumed in the July 2000
Offering Memorandum ("Base Case") have been adjusted to reflect the sale of one
B757-200 (MSN 28486) on April 9, 2001 which was not anticipated at the time of
preparation of the Base Case.
Page 15
AerCo Portfolio Analysis at December 16, 2002
Date Appraised % of % of
of Manu- Value at Aircraft Aircraft by
facture/ February by Appraised
Aircraft Engine Serial Conver- 19, 2002 Appraised Value in
No. Region Country Lessee Type Configuration Number sion (US$ m) Value Region
- ------------------------------------------------------------------------------------------------------------------------------------
1. Asia (Emerging) China China Xinjiang B757-200 RB211-535E4 26153 Aug-92 34,663 2.7%
2. China China Southern B737-300 CFM56-3C1 26068 Jun-92 20,977 1.6%
3. China China Southern B737-300 CFM56-3C1 25604 Jan-93 20,760 1.6%
4. China Xiamen Airlines B737-500 CFM56-3C1 27153 Aug-93 19,260 1.5%
5. China Xiamen Airlines B737-500 CFM56-3C1 27155 Mar-93 19,657 1.5%
6. India Indian Airlines A300B4-200 CF6-50C2 240 May-83 8,137 0.6%
7. Indonesia Mandala Airlines B737-400 CFM56-3C1 23868 Oct-88 20,047 1.5%
8. Philippines PAL B737-300 CFM56-3B1 24465 Aug-89 18,130 1.4%
9. Philippines PAL B737-300 CFM56-3B1 24677 Mar-90 18,733 1.4%
10. Philippines PAL B737-400 CFM56-3C1 25594 May-92 23,340 1.8%
11. South Korea Asiana B737-400 CFM56-3C1 25764 Jun-92 22,570 1.7%
12. South Korea Asiana B737-400 CFM56-3C1 25765 Jul-92 22,830 1.8%
13. South Korea Asiana B737-500 CFM56-3C1 25768 May-95 20,683 1.6%
14. Taiwan FEAT MD83 JT8D-219 49952 Dec-91 17,760 1.4%
Sub-total 22.1%
15. Europe (Developed) Italy Volare Spa A320-200 CFM5-5A1 85 Feb-90 23,280 1.8%
16. Italy Blue Panorama B737-400 CFM56-3C1 24901 May-90 22,220 1.7%
17. Italy Blue Panorama B737-400 CFM56-3C1 27074 Apr-92 23,480 1.8%
18. Spain Spanair MD83 JT8D-219 49627 Apr-89 14,810 1.1%
19. Spain Spanair MD83 JT8D-219 49790 Oct-89 15,410 1.2%
20. Spain Spanair MD-82 JT8D-217C 49570 Feb-88 13,437 1.0%
21. UK Air 2000 B757-200 RB211-535E4 26158 Feb-93 37,237 2.9%
22. UK Mytravel A320-200 CFM56-5A3 299 Apr-92 25,387 2.0%
23. UK Mytravel A320-200 V2500-A1 362 Nov-92 24,600 1.9%
24. UK BMI A320-200 V2527-A5 934 Jan-99 37,273 2.9%
25. UK BMI A321-200 V2533-A5 1207 Apr-00 48,767 3.7%
26. UK Monarch A320-200 CFM56-5A3 391 Feb-93 26,650 2.0%
27. UK British Airways B737-500 CFM56-3C1 25789 Feb-92 19,583 1.5%
28. UK British Airways B737-300 CFM56-3C1 24908 Mar-91 20,420 1.6%
29. UK JMC Airlines A320-200 V2500-A1 354 Oct-92 25,230 1.9%
30. UK JMC Airlines A320-200 V2500-A1 411 Mar-93 27,180 2.1%
31. Belgium Virgin Express B737-400 CFM56-3C1 24270 May-89 20,190 1.6%
32. Belgium Virgin Express B737-400 CFM56-3C1 24271 Jun-89 20,123 1.5%
33. Belgium Virgin Express B737-300 CFM56-3B2 25041 Mar-91 20,387 1.6%
34. Finland Finnair MD-82 JT8D-219 49905 Oct-90 15,680 1.2%
35. Finland Finnair MD-82 JT8D-219 53245 Apr-92 16,037 1.2%
36. France Europe Airpost B737-300QC CFM56-3B2 24021 Nov-88 19,320 1.5%
37. France Aigle Azur B737-400 CFM56-3C1 26066 Jun-92 23,077 1.8%
38. Norway Braathens SAFE B737-500 CFM56-3C1 24651 Apr-90 17,790 1.4%
Sub-total 42.8%
AerCo Portfolio Analysis at December 16, 2002
Date Appraised % of % of
of Manu- Value at Aircraft Aircraft by
facture/ February by Appraised
Aircraft Engine Serial Conver- 19, 2002 Appraised Value in
No. Region Country Lessee Type Configuration Number sion (US$ m) Value Region
- ------------------------------------------------------------------------------------------------------------------------------------
39. Europe (Emerging) Hungary Malev B737-300 CFM56-3C1 24909 Apr-91 19,500 1.5%
40. Hungary Malev B737-400 CFM56-3C1 24904 Feb-91 23,107 1.8%
41. Turkey Pegasus B737-400 CFM56-3C1 23979 Jan-89 19,913 1.5%
42. Turkey Pegasus B737-400 CFM56-3C1 24685 May-90 21,707 1.7%
Sub-total 6.5%
43. Latin America Brazil TAM Fokker 100 TAY650-15 11341 Aug-91 9,963 0.8%
44. (Emerging) Brazil TAM Fokker 100 TAY650-15 11350 Apr-92 10,337 0.8%
45. Brazil TAM Fokker 100 TAY650-15 11351 Sep-91 9,650 0.7%
46. Brazil TAM Fokker 100 TAY650-15 11320 Apr-91 9,237 0.7%
47. Brazil TAM Fokker 100 TAY650-15 11322 Jun-91 8,723 0.7%
48. Brazil Nordeste B737-500 CFM56-3C1 26067 Jun-92 18,843 1.4%
49. Brazil Varig B737-300 CFM56-3C1 24834 Jun-90 18,690 1.4%
50. Chile AILL (1) DC8-71F CFM56-2C1 46040 Mar-91 11,543 0.9%
51. Columbia Avianca B757-200 RB211-535E4 26152 Aug-92 33,750 2.6%
Sub-total 10.0%
52. North America Canada Air Canada A320-200 CFM56-5A1 403 Dec-93 28,333 2.2%
53. (Devoloped) Canada Air Canada B767-300ER PW4060 24947 Mar-91 49,027 3.8%
54. Canada Air Canada B767-300ER PW4060 24999 Feb-91 48,230 3.7%
55. USA BAX Global DC8-71F CFM56-2C1 46064 Mar-92 9,413 0.7%
56. USA Delta B737-300 CFM56-3B1 23345 Jul-85 13,110 1.0%
57. USA Frontier B737-300 CFM56-3C1 24856 Aug-90 19,407 1.5%
58. USA Frontier B737-300 CFM56-3B2 26440 Mar-92 20,847 1.6%
59. USA Frontier B737-300 CFM56-3B2 26442 May-92 21,003 1.6%
Sub-total 16.1%
60. Off-Lease AOG AOG (2) MD-82 JT8D-219 49931 Aug-90 16,177 1.2%
61. AOG AOG (2) MD-82 JT8D-219 49932 Sep-90 16,240 1.2%
Sub-total 2.5%
------------------------------------
Total 1,301,865 100.0% 100.0%
====================================
1. Aircraft International Leasing Limited is an indirect 100% subsidiary of Lan Chile.
2. The two aircraft off lease were repossessed from Vanguard Airlines Inc. in October 2002.
Item 24
POWER OF ATTORNEY
Each of the undersigned, being a Director and officer of AerCo Limited,
hereby individually appoints John McMahon, Huib van Doorn, Sean Brennan, Brian
Marks, Wouter Marinus den Dikken, Pat Keating, Aengus Kelly and Caroline Jones
and each of them, acting on behalf of debis AirFinance Administrative Services
Limited, as Administrative Agent of AerCo Limited, his true and lawful
attorney-in-fact and agent (each an "Attorney-in- Fact"), with full power by
power of attorney of substitution and resubstitution, for him and in his name,
place and stead, in his capacity as a Director and an officer of AerCo Limited,
to sign each Report on Form 6-K which will be filed at least monthly, provided
that where any such Report on Form 6-K is required to contain any information
in addition to or other than a copy of the relevant monthly report to
noteholders the contents of such Report on Form 6-K shall be approved by any
one Director of AerCo Limited prior to the filing thereof, each such Report on
Form 6-K containing a monthly report to noteholders to be filed monthly on or
about the 15th day of each month and each other Report on Form 6-K to be filed
within the time prescribed by the Securities and Exchange Commission (the
"SEC") upon the occurrence of certain events listed in the SEC rules and
regulations with the SEC and any amendments thereto, and to file the same with
any exhibits thereto and any other documents in connection therewith with the
SEC, granting unto said Attorney-in-Fact full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said Attorney-in-Fact, or
his substitute, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has caused this Power of Attorney
to be duly executed and delivered in Shannon, Ireland on the date indicated
below.
Dated: 24 July 2002 /s/ G. Adrian Robinson
----------------------------
G. Adrian Robinson
Witness: /s/ B. C. Robins
--------------------
Dated: 24 July 2002 /s/ Peter Sokell
----------------------------
Peter Sokell
Witness: /s/ B. C. Robins
--------------------
Dated: 24 July 2002 /s/ Kenneth N. Peters
----------------------------
Kenneth N. Peters
Witness: /s/ B. C. Robins
--------------------
Dated: 24 July 2002 /s/ M. John McMahon
----------------------------
M. John McMahon
Witness: /s/ B. C. Robins
--------------------
Dated: 9 August 2002 /s/ Sean Brennan
----------------------------
Sean Brennan
Witness: Marian Kennedy
--------------------