1
PROSPECTUS
$1,050,000,000
Offer to Exchange Notes due March 15, 2023
for Any and All Outstanding Notes due March 15, 2023
of
Morgan Stanley Aircraft Finance
The expiration date for the Exchange Offer has been extended from December 3,
1998 to
January 18, 1999 and the Exchange Offer will now expire at 5:00 P.M., New York
City time,
on January 18, 1999, unless further extended
------------------------
Morgan Stanley Aircraft Finance ("MSAF" and, together with its subsidiaries,
"MSAF Group") hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying Letter of Transmittal (the "Letter
of Transmittal", which together with this Prospectus constitutes the "Exchange
Offer") to exchange five subclasses of Notes due March 15, 2023 (collectively
the "New Notes") for each subclass of the issued and outstanding Notes due March
15, 2023 (the "Old Notes" and together with the New Notes, the "Notes") of MSAF
from the holders ("Holders") thereof. As of the date of this Prospectus there
were outstanding $1,050,000,000 aggregate initial principal amount of Old Notes.
The terms of the New Notes are identical in all material respects to the Old
Notes, except that the offer of the New Notes will have been registered under
the Securities Act of 1933, as amended (the "Securities Act") and therefore, the
New Notes will not be subject to certain transfer restrictions, registration
rights and certain provisions providing for an increase in the interest rate on
each subclass of the Old Notes under certain circumstances relating to the
Registration Agreement (as defined).
The Subclass A-1 Notes bear interest at the London interbank offered rate for
one month U.S. dollar deposits ("LIBOR") + 0.21%, have an expected final payment
date of March 15, 2000 and a final maturity date of March 15, 2023. The Subclass
A-2 Notes bear interest at a rate of LIBOR + 0.35%, have an expected final
payment date of September 15, 2005 and a final maturity date of March 15, 2023.
The Subclass B-1 Notes bear interest at a rate of LIBOR + 0.65%, have an
expected final payment date of March 15, 2013 and a final maturity date of March
15, 2023. The Subclass C-1 Notes bear interest at a rate of 6.90%, have an
expected final payment date of March 15, 2013 and a final maturity date of March
15, 2023. The Subclass D-1 Notes bear interest at a rate of 8.70%, have an
expected final payment date of March 15, 2014 and a final maturity date of March
15, 2023.
The New Notes are being offered hereunder in order to satisfy certain
obligations of MSAF under the Registration Rights Agreement dated March 3, 1998,
among MSAF and the other signatories thereto (the "Registration Agreement").
Based upon interpretations contained in letters to third parties by the staff of
the Securities and Exchange Commission (the "Commission"), MSAF believes that
the New Notes issued pursuant to the Exchange Offer in exchange for Old Notes
may be offered for resale, resold and otherwise transferred by Holders thereof
(other than a broker-dealer, as set forth below, or any such Holder which is an
"affiliate" of MSAF within the meaning of Rule 405 under the Securities Act),
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such New Notes are acquired in the ordinary
course of such Holders' business and such Holders have no arrangement or
understanding with any person to participate in the distribution of such New
Notes. Eligible Holders wishing to accept the Exchange Offer must represent to
MSAF in the Letter of Transmittal that such conditions have been met and must
represent, if such Holder is not a broker-dealer, or is a broker-dealer but will
not receive New Notes for its own account in exchange for Old Notes, that
neither such Holder nor the person receiving such New Notes, if other than the
Holder, is engaged in or intends to participate in the distribution of such New
Notes. Each broker-dealer that receives New Notes for its own account pursuant
to the Exchange Offer must represent that the Old Notes tendered in exchange
therefor were acquired as a result of market-making activities or other trading
activities and must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
The Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities. MSAF has
agreed that, starting on the Expiration Date (as defined herein) and ending on
the close of business on the 180th day following the Expiration Date, it will
make this Prospectus available to any broker-dealer for use in connection with
any such resale. See "Plan of Distribution."
MSAF will not receive any proceeds from the Exchange Offer. MSAF will pay all
the expenses incident to the Exchange Offer. Tenders of Old Notes pursuant to
the Exchange Offer may be withdrawn at any time prior to the Expiration Date. In
the event MSAF terminates the Exchange Offer and does not accept for exchange
any Old Notes, MSAF will promptly return all previously tendered Old Notes to
the Holders thereof. See "The Exchange Offer."
Prior to this Exchange Offer, there has been no public market for the Notes.
MSAF does not intend to apply for listing of the New Notes on any securities
exchange (other than the Luxembourg Stock Exchange) or to seek approval for
quotation through any automated quotation system. There can be no assurance that
an active public market for the New Notes will develop.
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ALL OF THE BENEFICIAL INTEREST IN MSAF IS INDIRECTLY OWNED BY MORGAN STANLEY BUT
THE NOTES ARE NOT OBLIGATIONS OF, OR GUARANTEED BY, MORGAN STANLEY OR ANY PERSON
OTHER THAN MSAF GROUP. THE NOTES ARE NOT OBLIGATIONS OF, OR GUARANTEED BY,
BANKERS TRUST COMPANY, AS TRUSTEE, SECURITY TRUSTEE OR CASH MANAGER, OR ILFC OR
ANY OF THEIR AFFILIATES.
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THE OLD NOTES WERE LISTED ON THE LUXEMBOURG STOCK EXCHANGE ON MARCH 3, 1998. THE
NEW NOTES WILL BE LISTED THEREON UPON ISSUANCE, SUBJECT ONLY TO NOTICE OF
ISSUANCE.
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SEE "RISK FACTORS" BEGINNING ON PAGE 20 HEREOF FOR A DISCUSSION OF CERTAIN
FACTORS ASSOCIATED WITH THE EXCHANGE OFFER AND THE NEW NOTES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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January 12, 1999
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MSAF WILL PROVIDE THE TRUSTEE FOR DISTRIBUTION TO NOTEHOLDERS ON THE SECOND
BUSINESS DAY BEFORE EACH PAYMENT DATE A STATEMENT WITH RESPECT TO ANY PAYMENT TO
BE MADE ON SUCH PAYMENT DATE SETTING FORTH THE INFORMATION SPECIFIED UNDER
"REPORTS TO NOTEHOLDERS" (EACH, A "MONTHLY REPORT"). FOLLOWING EFFECTIVENESS OF
THE REGISTRATION STATEMENT, EACH MONTHLY REPORT WILL BE FILED BY MSAF WITH THE
COMMISSION IN A REPORT ON FORM 8-K. THE MONTHLY REPORTS FOR EACH APRIL 15, JULY
15 AND OCTOBER 15, BEGINNING ON JULY 15, 1998 WILL BE ACCOMPANIED BY A STATEMENT
SETTING FORTH AN ANALYSIS OF COLLECTION ACCOUNT ACTIVITY FOR THE PRECEDING
FISCAL QUARTER ENDED FEBRUARY 28, MAY 31 AND AUGUST 31, RESPECTIVELY, TOGETHER
WITH A DISCUSSION AND ANALYSIS OF SUCH ACTIVITY AND OF ANY SIGNIFICANT
DEVELOPMENTS AFFECTING MSAF GROUP IN SUCH QUARTER (EACH, A "QUARTERLY REPORT").
EACH QUARTERLY REPORT WILL ALSO INCLUDE AN UPDATED DESCRIPTION OF THE AIRCRAFT
THEN IN THE PORTFOLIO AND THE RELATED LESSEES IN SUBSTANTIALLY SIMILAR FORMAT TO
THE DESCRIPTION SET FORTH UNDER "THE INITIAL AIRCRAFT AND LEASES -- MSAF GROUP
PORTFOLIO ANALYSIS". FOLLOWING EFFECTIVENESS OF THE REGISTRATION STATEMENT, EACH
SUCH QUARTERLY REPORT WILL BE FILED WITH THE COMMISSION IN A REPORT ON FORM
10-Q. FINALLY, THE MONTHLY REPORT FOR EACH FEBRUARY 15 WILL BE ACCOMPANIED BY A
STATEMENT SETTING FORTH AN ANALYSIS OF COLLECTION ACCOUNT ACTIVITY FOR THE
PRECEDING FISCAL YEAR ENDED NOVEMBER 30, TOGETHER WITH A DISCUSSION AND ANALYSIS
OF SUCH ACTIVITY AND OF ANY SIGNIFICANT DEVELOPMENTS AFFECTING MSAF GROUP IN
SUCH YEAR (EACH, AN "ANNUAL REPORT"). EACH ANNUAL REPORT WILL ALSO INCLUDE
UPDATED INFORMATION REGARDING THE AIRCRAFT THEN IN THE PORTFOLIO (INCLUDING
ADDITIONAL AIRCRAFT), THE THEN CURRENT LEASES AND THEN CURRENT LESSEES TO
SUBSTANTIALLY THE SAME EFFECT AS THE INFORMATION SET FORTH UNDER "THE INITIAL
AIRCRAFT AND LEASES". FOLLOWING EFFECTIVENESS OF THE REGISTRATION STATEMENT,
EACH ANNUAL REPORT WILL BE FILED WITH THE COMMISSION IN A REPORT ON FORM 10-K
AND THE FINANCIAL DATA RELATING TO ANNUAL COLLECTION ACCOUNT ACTIVITY IN SUCH
ANNUAL REPORTS WILL BE AUDITED BY DELOITTE & TOUCHE LLP. MONTHLY REPORTS,
QUARTERLY REPORTS AND ANNUAL REPORTS ARE REFERRED TO HEREIN AS "CASH REPORTS".
PRIOR TO EFFECTIVENESS OF THE REGISTRATION STATEMENT, MSAF WILL MAKE SUFFICIENT
COPIES OF ANY QUARTERLY REPORTS AND ANNUAL REPORTS AVAILABLE TO THE TRUSTEE FOR
DELIVERY TO NOTEHOLDERS UPON REQUEST. SEE "REPORTS TO NOTEHOLDERS".
UNLESS OTHERWISE STATED, ALL MONETARY AMOUNTS ARE EXPRESSED HEREIN IN
UNITED STATES DOLLARS ("$"). VARIOUS NUMBERS AND PERCENTAGES SET OUT IN THIS
PROSPECTUS HAVE BEEN ROUNDED AND ACCORDINGLY MAY NOT TOTAL EXACTLY.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. MSAF'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS.
MARKET DATA AND CERTAIN INDUSTRY FORECASTS USED THROUGHOUT THIS PROSPECTUS
WERE OBTAINED FROM PUBLICLY AVAILABLE INFORMATION AND INDUSTRY PUBLICATIONS.
INDUSTRY PUBLICATIONS GENERALLY STATE THAT THE INFORMATION CONTAINED THEREIN HAS
BEEN OBTAINED FROM SOURCES BELIEVED TO BE RELIABLE, BUT THAT THE ACCURACY AND
COMPLETENESS OF SUCH INFORMATION IS NOT GUARANTEED. SIMILARLY, SUCH INFORMATION,
WHILE BELIEVED TO BE RELIABLE, HAS NOT BEEN INDEPENDENTLY VERIFIED.
UNTIL FEBRUARY 2, 1999 (90 DAYS AFTER COMMENCEMENT OF THE EXCHANGE OFFER)
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
No person has been authorized to give any information or to make any
representations other than as contained herein, and, if given or made, such
information or representation must not be relied upon as having been authorized
by MSAF. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy by any Person in any jurisdiction in which it is unlawful for
such Person to make such an offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstances create any
implication that the information contained herein is correct as of any time
subsequent to its date.
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EXPLANATORY NOTE
THIS REGISTRATION STATEMENT CONTAINS A PROSPECTUS RELATING TO THE EXCHANGE
OFFER OF UP TO $400,000,000 AGGREGATE INITIAL PRINCIPAL AMOUNT OF SUBCLASS A-1
NOTES DUE MARCH 15, 2023, $340,000,000 AGGREGATE INITIAL PRINCIPAL AMOUNT OF
SUBCLASS A-2 NOTES DUE MARCH 15, 2023, $100,000,000 AGGREGATE INITIAL PRINCIPAL
AMOUNT OF SUBCLASS B-1 NOTES DUE MARCH 15, 2023, $100,000,000 AGGREGATE INITIAL
PRINCIPAL AMOUNT OF SUBCLASS C-1 NOTES DUE MARCH 15, 2023 AND $110,000,000
AGGREGATE INITIAL PRINCIPAL AMOUNT OF SUBCLASS D-1 NOTES DUE MARCH 15, 2023
(COLLECTIVELY THE "NOTES") OF MSAF TOGETHER WITH SEPARATE PROSPECTUS PAGES
RELATING TO CERTAIN MARKET-MAKING TRANSACTIONS IN THE NOTES. THE COMPLETE
PROSPECTUS FOR THE EXCHANGE OFFER FOLLOWS IMMEDIATELY AFTER THIS EXPLANATORY
NOTE. FOLLOWING SUCH PROSPECTUS ARE CERTAIN PAGES OF THE PROSPECTUS RELATING TO
SUCH MARKET-MAKING TRANSACTIONS, INCLUDING AN ALTERNATE COVER PAGE, ALTERNATE
PAGE INCLUDING THE "TABLE OF CONTENTS", A SECTION ENTITLED "CERTAIN RISK FACTORS
- -- TRADING MARKET FOR THE NOTES" TO BE USED IN LIEU OF "CERTAIN RISK FACTORS --
RISKS RELATING TO THE CAPITAL MARKETS -- ABSENCE OF PUBLIC MARKET" SECTION AND
AN ADDITIONAL SECTION ENTITLED "MARKET-MAKING ACTIVITIES OF MS&CO.".
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TABLE OF CONTENTS
PAGE
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Prospectus Summary.............................. 1
Summary Description of the New Notes............ 10
Risk Factors.................................... 20
Consequences of Failure to Exchange........... 20
Exchange Offer Procedures..................... 21
Risks Relating to MSAF Group and
Certain Third Parties....................... 21
Risks Relating to the Aircraft................ 23
Year 2000 Risk................................ 25
Risks Relating to the Leases.................. 28
Risks Relating to the Lessees................. 29
Lease Termination and Aircraft Repossession... 32
Risks Relating to Payments on the Notes....... 33
Risks Relating to the Capital Markets......... 33
Certain Bankruptcy Considerations............. 34
Risks Relating to Tax......................... 34
The Exchange Offer.............................. 35
Terms of the Exchange Offer; Period for
Tendering Old Notes......................... 35
Procedures for Tendering Old Notes............ 35
Acceptance of Old Notes for Exchange; Delivery
of New Notes................................ 37
Interest on the New Notes..................... 37
Book-Entry Transfer........................... 37
Guaranteed Delivery Procedures................ 37
Withdrawal Rights............................. 38
Certain Conditions to the Exchange Offer...... 38
Exchange Agent................................ 39
Fees and Expenses............................. 39
Transfer Taxes................................ 39
Consequences of Failure to Exchange........... 39
The Parties..................................... 41
MSAF Group.................................... 41
Servicer...................................... 42
Administrative Agent.......................... 43
Cash Manager, Trustee, Security Trustee and
Reference Agent............................. 43
Financial Advisor............................. 43
The Initial Aircraft and Leases................. 44
MSAF's Ownership of the Aircraft.............. 44
Appraisers' Reports........................... 44
Portfolio Information......................... 44
MSAF Group Portfolio Analysis................. 49
Acquisition of Additional Aircraft............ 49
Initial Leases................................ 50
Indemnification and Insurance of the
Aircraft.................................... 52
The Lessees................................... 54
The Commercial Aircraft Industry................ 59
Introduction.................................. 59
Demand for Aircraft........................... 59
The World Fleet of Commercial Jet Aircraft
(Excluding Aircraft Manufactured in the
CIS)........................................ 60
Supply of Aircraft............................ 61
Operating Leasing............................. 62
Management of MSAF Group........................ 63
Trustees...................................... 63
PAGE
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Beneficial Ownership of MSAF.................. 64
Servicer...................................... 65
Corporate Management.......................... 69
Selected Consolidated Financial Data............ 72
Management's Discussion and Analysis of Results
of Operations and Financial Condition......... 73
Introduction.................................. 73
Recent Developments........................... 73
Results of Operations -- Eleven Months Ended
October 31, 1998............................ 74
Financial Resources and Liquidity............. 77
Interest Rate Management...................... 81
Description of the Notes........................ 82
General....................................... 82
Registration Requirements..................... 83
Payments...................................... 84
Assumptions................................... 85
Payment of Principal and Interest............. 95
Priority of Payments.......................... 104
Indenture Covenants........................... 107
Operating Covenants........................... 115
Events of Default and Remedies................ 118
Intercreditor Rights.......................... 120
Modification and Waiver....................... 120
Notices to Noteholders........................ 121
Governing Law and Jurisdiction................ 122
Beneficial Interest........................... 122
Cash Management Agreement..................... 122
Accounts...................................... 122
Reports to Noteholders.......................... 126
Book-Entry Registration, Global Clearance and
Settlement.................................... 128
Book-Entry Registration....................... 128
Definitive Notes.............................. 130
CUSIP, ISIN and Common Code Numbers........... 131
Taxation........................................ 132
U.S. Federal Income Tax Considerations........ 132
Plan of Distribution............................ 134
ERISA Considerations............................ 135
Legal Matters................................... 136
Experts......................................... 136
Index to Financial Statements................... F-1
Appendix 1. Index of Defined Terms.............. A-1
Appendix 2. Aircraft Types Data................. A-4
Appendix 3. Monthly Gross Revenues
Based on the Assumptions...................... A-5
Appendix 4. Assumed Portfolio Values for
the Initial Portfolio......................... A-7
Appendix 5. Class A Class Percentages........... A-9
Appendix 6. Class B Class Percentages........... A-12
Appendix 7. Class C Target Principal Balances... A-14
Appendix 8. Class D Target Principal Balances... A-17
Appendix 9. Pool Factors........................ A-20
Appendix 10. Extended Pool Factors.............. A-22
Appendix 11. Appraised Values of Initial
Aircraft at September 30, 1998................ A-25
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AVAILABLE INFORMATION
MSAF is not currently subject to the information reporting requirements of
the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") . MSAF will
become subject to such requirements upon the effectiveness of the Registration
Statement, and in accordance therewith will file reports, proxy statements and
other information with the Commission. Any reports and other information filed
by MSAF with the Commission may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and will also be available for inspection
and copying at the regional offices of the Commission located at 7 World Trade
Center, New York, New York 10048 and at Northwestern Atrium Center, 500 West
Madison Street (Suite 1400), Chicago, Illinois 60661 at prescribed rates. The
Commission maintains a Web site (http://www.sec.gov) that contains reports and
other information, including the Registration Statement (of which this
Prospectus is a part) filed by MSAF.
MSAF has filed with the Commission a Registration Statement on Form S-4
(herein together with all amendments and exhibits thereto, called the
"REGISTRATION STATEMENT") under the Securities Act with respect to the New Notes
being offered by this Prospectus. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain portions of which have been omitted as permitted by
the rules and regulations of the Commission. For further information with
respect to MSAF and the securities offered by this Prospectus, reference is made
to the Registration Statement and the exhibits filed or incorporated as a part
thereof, which are on file at the offices of the Commission and may be obtained
upon payment of the fee prescribed by the Commission, or may be examined without
charge at the offices of the Commission. Statements contained in this Prospectus
as to the contents of any documents referred to are not necessarily complete,
and, in each such instance, are qualified in all respects by reference to the
applicable documents filed with the Commission.
The Old Notes were listed on the Luxembourg Stock Exchange on March 3,
1998, and the New Notes will be listed upon issuance, subject only to notice of
issuance. The constitutive documents of MSAF and the legal notice relating to
the issuance of the Notes have been deposited with the Registrar of the District
Court in Luxembourg (Greffier en Chef du Tribunal d'Arrondissement de et a
Luxembourg) where such documents will be available for inspection and where such
documents will be obtainable upon request. Copies of the Prospectus, the annual
report of independent public accountants and the reports to Noteholders referred
to under "Reports to Noteholders" are available at the office of the listing
agent (the "LISTING AGENT") in Luxembourg: Banque Internationale a Luxembourg,
69, route d'Esch, L-1470 Luxembourg. Financial information regarding MSAF will
be included in MSAF's Quarterly Reports on Form 10-Q and Annual Reports on Form
10-K and will be available at the office of the Listing Agent in Luxembourg
after the respective reports are filed with the Commission.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus. Capitalized terms
used in this Summary without definition have the meanings assigned in the text
of this Prospectus. Unless the context otherwise requires, the terms Initial
Aircraft and Aircraft include any spare engine, the terms Initial Leases and
Leases include any conditional sale agreement and the terms Initial Lessees and
Lessees include the lessee of any spare engine. An Index referencing defined
terms is attached as Appendix 1 hereto. Investors should thoroughly consider
this Prospectus in its entirety, including the information set forth herein
under "Risk Factors", prior to accepting the Exchange Offer.
TRANSACTION OVERVIEW
MSAF. MSAF is a special-purpose vehicle established to purchase and own a
portfolio of aircraft assets and related leases (such portfolio at any time, the
"PORTFOLIO"). MSAF's initial portfolio of aircraft assets consists of 32
aircraft and one spare engine purchased from ILFC (the "INITIAL AIRCRAFT") and
the related leases (the "INITIAL LEASES").
MSAF Assets. MSAF Group agreed to acquire the Initial Aircraft pursuant to
an Asset Purchase Agreement between MSAF and ILFC dated as of November 10, 1997.
As of August 31, 1998, MSAF Group had acquired all of the Initial Aircraft and
their related existing Leases. The Initial Aircraft had an aggregate Initial
Appraised Value of $1,086.69 million at September 30, 1997. As of August 31,
1998, all the Initial Aircraft were subject to lease contracts (or in one case,
a conditional sale agreement) with 29 lessees based in 20 countries. See "The
Initial Aircraft and Leases".
MSAF Notes. MSAF issued $1,050 million in aggregate principal amount of
the Old Notes in four classes: Class A, composed of two subclasses, and Class B,
Class C and Class D, each composed of one subclass. The terms of the New Notes
and the Old Notes are identical in all material respects, except for certain
transfer restrictions and registration rights relating to the Old Notes and
except for certain special interest provisions relating to the Old Notes
summarized below under "-- Summary Description of the New Notes."
Servicer. International Lease Finance Corporation ("ILFC") acts as
Servicer with respect to the Initial Aircraft (the "SERVICER") pursuant to an
incentive fee based servicing agreement among MSAF, Bankers Trust Company, as
Cash Manager, Cabot Aircraft Services Limited ("CABOT"), an indirect
wholly-owned subsidiary of Morgan Stanley Dean Witter & Co. ("MORGAN STANLEY"),
as Administrative Agent, and ILFC dated as of November 10, 1997 (the "SERVICING
AGREEMENT"). ILFC will perform certain aircraft-related services with respect to
the Initial Aircraft including marketing the Initial Aircraft for lease or sale
and monitoring lessee compliance with lease terms including terms relating to
payment, maintenance and insurance. The Servicer agrees to perform its services
pursuant to the Servicing Agreement with a view towards maximizing the present
value of the cash flows over the life of the Initial Aircraft, subject to
certain conditions.
Additional Aircraft. MSAF intends to acquire additional aircraft assets
(the "ADDITIONAL AIRCRAFT" and, together with the Initial Aircraft, the
"AIRCRAFT") and any related existing leases or similar arrangements (the
"ADDITIONAL LEASES" and, together with the Initial Leases and any future leases
or similar arrangements (the "FUTURE LEASES"), the "LEASES") from various
sellers. Additional Aircraft may include, among other things, aircraft, engines
and entities with an ownership or leasehold interest in aircraft or engines.
Additional Aircraft may be subject to different aircraft servicing arrangements
than those in place for the Initial Aircraft. MSAF will finance acquisitions of
Additional Aircraft with external funds, including issuing debt securities in up
to four classes (Class A, Class B, Class C and Class D, each of which may
consist of one or more subclasses) that will rank pari passu in right of payment
of principal and interest with the corresponding classes of the Notes (the
"ADDITIONAL NOTES" and, together with the Notes, the "MSAF NOTES"). Any
acquisition of Additional Aircraft and issuance of Additional Notes and other
debt securities in connection therewith will be subject to various conditions
under the Indenture, including rating agency confirmation that such acquisition
and related issuance of Additional Notes will not result in the lowering or
withdrawal by them of their current rating of the MSAF Notes then outstanding.
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Subordination and Ranking. After the payment of amounts due and owing in
respect of, inter alia, taxes and obligations to Lessees and various service
providers (including, without limitation, the Servicer, the Administrative
Agent, the Cash Manager, the Financial Advisor and the Swap Providers), the cash
flows derived from the Initial Leases and the Initial Aircraft will be applied,
indirectly, towards the payment of amounts due to Noteholders. Payments of
interest on the Class A, Class B, Class C and Class D Notes will be made in
alphabetical order. However, certain amounts of principal on the Class A Notes
will be paid in priority to interest payments on the Class B, C and D Notes,
certain amounts of principal on the Class B Notes will be paid in priority to
interest payments on the Class C and D Notes and certain amounts of principal on
the Class C Notes will be paid in priority to interest on the Class D Notes. See
"-- Overview of Priority of Payments" and "Description of the Notes -- Priority
of Payments".
Ownership of MSAF. 100% of the beneficial interest in MSAF (the
"BENEFICIAL INTEREST") is held indirectly by Morgan Stanley. The transactions
described herein are intended to establish MSAF and its subsidiaries as legal
entities distinct from Morgan Stanley which would be unaffected by the
bankruptcy or insolvency of Morgan Stanley or any of its affiliates. If such
steps are not successful and such entities were to be consolidated with Morgan
Stanley or otherwise affected by any bankruptcy or insolvency of Morgan Stanley
and its affiliates, payments to Noteholders could be materially adversely
affected. See "Risk Factors -- Certain Bankruptcy Considerations".
Governance of MSAF. Three of the six trustees of MSAF and one alternate
trustee (the "CONTROLLING TRUSTEES") are officers of affiliates of Morgan
Stanley. Two trustees (the "INDEPENDENT TRUSTEES") are independent from Morgan
Stanley and are only permitted to vote in trustee meetings on certain
significant decisions relating to insolvency proceedings. Such decisions may
only be approved by a unanimous vote of all the Controlling Trustees and
Independent Trustees. The remaining trustee of MSAF is Wilmington Trust Company,
the Delaware trustee (the "DELAWARE TRUSTEE"). MSAF Group has no employees or
executive officers. Accordingly, MSAF Group will rely upon the Servicer, the
Administrative Agent, the Cash Manager, the Financial Advisor and other service
providers for all asset servicing, executive and administrative functions
pursuant to the respective service provider agreements. See "Management of MSAF
Group".
Insurance. The Lessees are required under the Leases to obtain customary
insurance coverage for any liabilities arising out of the operation of their
respective Aircraft. The Lessees are also required to obtain customary coverage
for damage to, and replacement of spare parts for, the Aircraft. The Servicer is
required to monitor Lessees' compliance with the insurance provisions of the
Leases. In addition, MSAF Group also has in place its own contingent liability
insurance program to cover liability both in excess of the coverage provided by
a Lessee's policy and where a Lessee's policy lapses for any reason. See "The
Initial Aircraft and Leases -- Indemnification and Insurance of the Aircraft".
THE EXCHANGE OFFER
Securities Offered......... Up to $1,050,000,000 principal amount at maturity
of New Notes. The terms of the New Notes and the
Old Notes are identical in all material respects,
except for certain transfer restrictions and
registration rights relating to the Old Notes and
except for certain special interest provisions
relating to the Old Notes summarized below under
"-- Summary Description of the New Notes."
The Exchange Offer......... MSAF is offering, upon the terms and subject to the
conditions of the Exchange Offer, to exchange
$1,000 principal amount of New Notes for each
$1,000 principal amount of Old Notes. See "The
Exchange Offer" for a description of the procedures
for tendering the Old Notes. The issuance of the
New Notes is intended to satisfy obligations of
MSAF contained in the Registration Agreement.
Tenders, Expiration Date;
Withdrawal................. The Exchange Offer was to expire at 5:00 p.m., New
York City time, on December 3, 1998, but was
extended and will now expire at 5:00 p.m.,
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New York City time, on January 18, 1999, or such
later date and time to which it is extended. The
tender of Old Notes pursuant to the Exchange Offer
may be withdrawn at any time prior to the
Expiration Date. Any Old Notes not accepted for
exchange for any reason will be returned without
expense to the tendering Holder thereof as promptly
as practicable after the expiration or termination
of the Exchange Offer.
Federal Income Tax
Consequences............... The exchange pursuant to the Exchange Offer will
not result in any income, gain or loss to the
Holders or MSAF for federal income tax purposes,
See "Certain U.S. Federal Income Tax
Considerations."
Exchange Agent............. Bankers Trust Company is serving as Exchange Agent
("EXCHANGE AGENT") in connection with the Exchange
Offer.
Shelf Registration
Statement.................. Under certain circumstances, certain holders of
Notes (including holders who may not participate in
the Exchange Offer, or who may not freely resell
New Notes received in the Exchange Offer) may
require MSAF to file, and cause to become
effective, a shelf registration statement under the
Securities Act, which would cover resales of Notes
by such holders. See "Description of Notes --
Registration Rights".
CONSEQUENCES OF EXCHANGING OLD NOTES PURSUANT TO THE EXCHANGE OFFER
Based upon interpretations contained in letters issued to third parties by
the staff of the Commission, MSAF believes that any Holder of Old Notes (other
than a broker-dealer, as set forth below, or any Holder who is an "affiliate" of
MSAF within the meaning of Rule 405 under the Securities Act) who exchanges its
Old Notes for New Notes pursuant to the Exchange Offer may offer such New Notes
for resale, resell such New Notes, or otherwise transfer such New Notes without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided such New Notes are acquired in the ordinary course of
the Holder's business and such Holder has no arrangement or understanding with
any person to participate in a distribution of such New Notes. Eligible Holders
wishing to accept the Exchange Offer must represent to MSAF in the Letter of
Transmittal that such conditions have been met and must represent, if such
Holder is not a broker-dealer, or is a broker-dealer but will not receive New
Notes for its own account in exchange for Old Notes, that neither such Holder
nor the person receiving such new Notes, if other than the Holder, is engaged in
or intends to participate in the distribution of such New Notes. Each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must represent that the Old Notes tendered in exchange therefor
were acquired as a result of market-making activities or other trading
activities and must acknowledge that it will deliver a prospectus in connection
with any release of such New Notes; however, by so acknowledging and by delivery
of a prospectus, the broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. See "Plan of
Distribution". To comply with the securities laws of certain jurisdictions, it
may be necessary to qualify for sale or register the New Notes prior to offering
or selling such New Notes. MSAF has agreed, pursuant to the Registration
Agreement and subject to certain specified limitations therein, to register or
qualify the New Notes held by broker-dealers for offer or sale under the
securities or blue sky laws of such jurisdictions as any such Holder reasonably
requests in writing. Unless MSAF is so requested, MSAF does not intend to take
any action to register or qualify the New Notes for resale in any such
jurisdictions. If a Holder of Old Notes does not exchange such Old Notes for New
Notes pursuant to the Exchange Offer, such Old Notes will continue to be subject
to the restrictions on transfer contained in the legend thereon. In general, the
Old Notes may not be offered or sold, unless registered under the Securities
Act, except pursuant to an exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities laws. Any Holder who tenders
in the Exchange Offer with the intention to participate, or for the purpose of
participating, in a distribution of New Notes will not be able to rely on the
position of the staff of the Commission enunciated in Exxon Capital Holdings
Corporation (available May 13, 1988) or similar no-action letters and, in the
absence of an exemption therefrom, must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
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9
secondary resale transaction. Failure to comply with such requirements in such
instance may result in such Holder incurring liability under the Securities Act
for which the Holder is not indemnified by MSAF. See "The Exchange Offer --
Consequences of Failure to Exchange" and "Description of Notes -- Registration
Rights."
THE NOTES
The following table summarizes certain of the principal terms of the Notes.
SUBCLASS A-1 SUBCLASS A-2 SUBCLASS B-1 SUBCLASS C-1 SUBCLASS D-1
NOTES NOTES NOTES NOTES NOTES
------------- ------------------ ------------- -------------- --------------
Aggregate Initial Principal Amount...... $400,000,000 $340,000,000 $100,000,000 $100,000,000 $110,000,000
Ratings
DCR.................................... AA AA A BBB BB
Moody's................................ Aa2 Aa2 A2 Baa2 Ba2
Standard & Poor's...................... AA AA A BBB BB
Interest Rate........................... LIBOR + 0.21% LIBOR + 0.35% LIBOR + 0.65% 6.90% 8.70%
Initial Loan to Value(1)................ 63.8% 63.8% 72.4% 81.0% 90.5%
Initial Loan to Assumed First Year's Net
Revenue(1)(2).......................... 5.81x 5.81x 6.60x 7.38x 8.25x
Assumed Interest Coverage Ratio(2)(3)... 2.81x 2.81x 2.32x 1.93x 1.68x
Assumed Debt Service Coverage
Ratio(2)(4)............................ 1.68x 1.68x 1.68x 1.68x 1.68x
Expected Weighted Average Life
(Years)................................ 2.0 3.8 8.6 10.6 12.1
March 15, March 15,
Expected Final Payment Date............. 2000 September 15, 2005 2013 March 15, 2013 March 15, 2014
March 15, March 15,
Final Maturity Date..................... 2023 March 15, 2023 2023 March 15, 2023 March 15, 2023
- ---------------
(1) "INITIAL LOAN TO VALUE" represents the initial aggregate principal amount of
each subclass of Notes, plus the initial aggregate principal amount of any
other subclass of Notes that ranks equally or senior in priority of payment
("INITIAL LOAN"), expressed as a percentage of the aggregate Initial
Appraised Value (as of September 30, 1997) of the Initial Aircraft plus the
sum of (i) $25 million, the amount of cash held on the date of issuance of
the Old Notes, plus (ii) $20 million, the amount available to be drawn under
Eligible Credit Facilities, excluding the amount of security deposits
reimbursable to Lessees on March 3, 1998. After March 3, 1998, the loan to
value ratio will fluctuate and may be higher or lower than the Initial Loan
to Value ratio. Furthermore, acquisitions of Additional Aircraft and related
issuances of Additional Notes are not subject to loan to value ratio
conditions and, accordingly, an acquisition of Additional Aircraft may
result in an increase in loan to value ratios to levels in excess of the
Initial Loan to Value percentages set forth above.
(2) "ASSUMED FIRST YEAR'S NET REVENUE" means MSAF Group's assumed Gross Revenue
for the 12 months ending February 28, 1999 less MSAF's assumed leasing
costs, Servicer fees, Administrative Agent fees, Cash Manager fees,
Financial Advisor fees and other general and administrative costs assumed to
be incurred by MSAF in the 12 months ending February 28, 1999 in accordance
with the applicable Assumptions. See "Description of the Notes --
Assumptions". In calculating Assumed First Year's Net Revenue, it has been
assumed that MSAF Group's maintenance expenditures will exactly equal MSAF
Group's maintenance reserve receipts from the Initial Lessees. However,
actual net revenues may be significantly lower than assumed net revenues
because, among other things, the amounts payable under the Leases may not be
paid, and MSAF Group's expenses may be higher than assumed (including as a
result of maintenance expenditures being greater than anticipated).
Accordingly, the ratios presented above may be significantly lower.
(3) "ASSUMED INTEREST COVERAGE RATIO" means Assumed First Year's Net Revenue
expressed as a ratio of First Year's Interest. "FIRST YEAR'S INTEREST" means
(i) the interest assumed to be payable on each subclass of Notes and each
subclass that ranks equally with such subclass in accordance with the
Assumptions for the 12 months ending February 28, 1999, plus (ii) the
interest and minimum principal payments assumed to be payable on each
subclass of Notes that ranks senior in priority of payment to the relevant
subclass of Notes in accordance with the Assumptions for the 12 months
ending February 28,
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10
1999. For the same reasons as discussed above in Note 2, the ratios
presented above may be significantly lower. See "Description of the Notes
-- Assumptions".
(4) "ASSUMED DEBT SERVICE COVERAGE RATIO" means Assumed First Year's Net Revenue
expressed as a percentage of First Year's Interest and Minimum and Scheduled
Principal. "FIRST YEAR'S INTEREST AND MINIMUM AND SCHEDULED PRINCIPAL" means
(i) the interest and minimum and scheduled principal payments on each
subclass of Notes in accordance with the Assumptions for the 12 months
ending February 28, 1999 plus (ii) the interest and minimum and scheduled
principal payments assumed to be payable on each subclass of Notes that
ranks equally or senior in priority of payment with or to the relevant
subclass of Notes in accordance with the Assumptions for the 12 months
ending February 28, 1999. For the same reasons as discussed above in Note 2,
the ratios presented above may be significantly lower. See "Description of
the Notes -- Assumptions".
RATINGS OF THE NOTES
The ratings of the Notes address the likelihood of the timely payment of
interest and the ultimate payment of principal and premium, if any, on the Notes
as described herein. Payments of principal and interest on all subclasses of the
Notes will be payable only after any Expenses and certain other amounts have
been paid or provided for in full and only to the extent that Available
Collections are sufficient therefor in accordance with the priority of payments
established for the Notes. In addition, MSAF's ability to pay Step-Up Interest
or principal in full on the Subclass A-1 Notes on the Expected Final Payment
Date (as indicated in the table above for each subclass of Notes, the "EXPECTED
FINAL PAYMENT DATE") or on any other date prior to the Final Maturity Date (as
indicated in the table above, the "FINAL MATURITY DATE") has not been rated by
any of the Rating Agencies. The ratings assigned to the Notes do not address the
effect of any imposition of any withholding tax on any payments under the
Leases, the Notes or otherwise. See "Risk Factors -- Risks Relating to Tax".
A rating is not a recommendation to buy, sell or hold Notes inasmuch as
ratings do not comment as to market price or suitability for a particular
investor and may be subject to revision, suspension or withdrawal at any time by
the assigning Rating Agency. In the event that a rating initially assigned to
any subclass of the Notes is subsequently lowered, suspended or withdrawn for
any reason, no person or entity is obliged to provide any additional support or
credit enhancement with respect to the Notes.
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THE INITIAL AIRCRAFT AND LESSEES
The following pie charts summarize MSAF Group's exposure as of August 31,
1998 to various types of Initial Aircraft, Lessees, ages of Initial Aircraft,
noise restrictions applying to Initial Aircraft and the regions and countries in
which Lessees are based. All percentages have been calculated by reference to
the Initial Appraised Value (as of September 30, 1997) of the Initial Aircraft.
Type of Aircraft Aircraft Manufacture
[PIE CHART] [PIE CHART]
Exposure to Region Exposure to Countries
[PIE CHART] [PIE CHART]
Exposure to Individual Lessees Exposure of Aircraft to Noise
[PIE CHART] [PIE CHART]
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PAYMENT FLOWS(1)
[PAYMENT FLOWS CHART]
- ---------------
(1) Assumes that MSAF Group does not acquire any Additional Aircraft. See "--
Summary Description of the New Notes -- Acquisition of Additional
Aircraft".
(2) MSAF may also establish additional direct and indirect subsidiaries from
time to time for the purpose of directly or indirectly leasing Aircraft
from other MSAF subsidiaries and sub-leasing them to operators where
commercial, tax or other reasons make it desirable to do so.
(3) MSAF may from time to time establish or acquire additional subsidiaries in
connection with the acquisition of Additional Aircraft from various
sellers. The acquisition of Additional Aircraft may take the form of (i)
the acquisition of individual Additional Aircraft directly by MSAF or
indirectly by one or more existing or newly-formed subsidiaries or (ii) the
acquisition by MSAF or one of its subsidiaries of the shares or other
beneficial ownership interests in one or more aircraft-owning subsidiaries
of various sellers.
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OVERVIEW OF PRIORITY OF PAYMENTS
The following chart summarizes the order of priority of payments on the
Notes, the Beneficial Interest and other obligations of MSAF Group as described
in more detail in "Description of the Notes -- Priority of Payments".
[OVERVIEW OF PRIORITY CHART]
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OWNERSHIP STRUCTURE(1)
[OWNERSHIP STRUCTURE CHART]
- ---------------
(1) MSAF may also establish additional direct and indirect subsidiaries from
time to time for the purpose of directly or indirectly leasing Aircraft
from other MSAF subsidiaries and sub-leasing them to operators where
commercial, tax or other reasons make it desirable to do so.
(2) The 100% Beneficial Interest is currently held by a subsidiary of Morgan
Stanley. Such subsidiary may dispose of all or a portion of such Beneficial
Interest in the future to related or unrelated persons.
(3) MSAF may from time to time establish or acquire additional subsidiaries in
connection with the acquisition of Additional Aircraft from various
sellers. The acquisition of Additional Aircraft may take the form of (i)
the acquisition of individual Additional Aircraft directly by MSAF or
indirectly by one or more existing or newly-formed subsidiaries or (ii) the
acquisition by MSAF or one of its subsidiaries of the shares or other
beneficial ownership interests in one or more aircraft-owning subsidiaries
of various sellers.
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15
SUMMARY DESCRIPTION OF THE NEW NOTES
MSAF....................... Morgan Stanley Aircraft Finance is a statutory
business trust organized under the laws of the
State of Delaware pursuant to an amended and
restated trust agreement among MS Financing Inc.,
as depositor, the Controlling Trustees, the
Independent Trustees and the Delaware Trustee,
dated as of March 3, 1998 (the "AMENDED AND
RESTATED TRUST AGREEMENT"). MSAF's principal office
is located care of the Delaware Trustee at 1100
North Market Street, Rodney Square North,
Wilmington, Delaware 19890. See "The Parties --
MSAF Group".
Payment Dates.............. Interest will be payable monthly in arrears on the
15th day of each month, commencing April 15, 1998
(each a "PAYMENT DATE"); provided that if any
Payment Date would otherwise fall on a day which is
not a Business Day, the relevant Payment Date will
be the first following day which is a Business Day.
For the purposes of the Notes, "BUSINESS DAY" means
a day on which (i) U.S. dollar deposits may be
dealt in on the London inter-bank market and (ii)
commercial banks and foreign exchange markets are
open in New York, New York and London, England. See
"Description of the Notes -- Payments".
Record Date................ The record date (the "RECORD DATE") with respect to
each Payment Date will be the close of business on
the day that is 15 days prior to such Payment Date,
whether or not such day is a Business Day. See
"Description of the Notes -- Payments".
Reference Date............. The reference date (the "REFERENCE DATE") with
respect to each Payment Date will be the day that
is two Business Days before the Payment Date on
which such Interest Accrual Period commences. See
"Description of the Notes -- Payment of Principal
and Interest -- Reference Agency Agreement".
Calculation Date........... The calculation date (the "CALCULATION DATE") with
respect to each Payment Date will be the fourth
Business Day immediately preceding each Payment
Date.
Interest Accrual Period.... The period beginning on (and including) March 3,
1998 and ending on (but excluding) the first
Payment Date and each successive period beginning
on (and including) a Payment Date and ending on
(but excluding) the next succeeding Payment Date is
called an "INTEREST ACCRUAL PERIOD"; provided that
the final Interest Accrual Period will end on but
exclude the Final Maturity Date (or, if earlier
with respect to any subclass of Notes, the date on
which such subclass of Notes is paid in full).
Account balances with respect to each Interest
Accrual Period shall be determined by reference to
the balance of funds on deposit in Accounts on the
Calculation Date immediately preceding each Payment
Date. See "Description of the Notes -- Payments".
Accrued Interest........... Accrued interest that, as a result of the
allocation of Available Collections, is not paid on
any Payment Date will bear interest at the then
current stated rate of the Notes to which such
accrued and unpaid interest relates.
Sources of Note Payments... The only source of payment for the Notes and the
other obligations of MSAF Group will be the
payments made by the Lessees under the Leases,
amounts drawn under any available credit or
liquidity enhancement facility, proceeds from
dispositions, if any, of the assets of
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MSAF Group, net payments, if any, under the Swap
Agreements and other hedging instruments, interest
earned on investments of cash in the Accounts and
net cash proceeds received from the sale of
Refinancing Notes. Payments of interest, principal
and premium, if any, on each subclass of Notes will
be made on each Payment Date to holders of such
subclass of Notes on the Record Date for such
Payment Date (the "NOTEHOLDERS" and, together with
the holders of the Additional Notes, the "MSAF
NOTEHOLDERS") and only to the extent of amounts on
deposit in the Collection Account on the
Calculation Date relating to each Payment Date net
of Expenses (other than Permitted Accruals in
respect of Modification Payments) then due and
payable or reasonably anticipated to become due and
payable during the next six months (the "REQUIRED
EXPENSE AMOUNT") and other amounts set forth in
"Description of the Notes -- Priority of Payments"
(the "AVAILABLE COLLECTIONS"). See "Description of
the Notes -- Priority of Payments", "Risk Factors
-- Risks Relating to Payments on the Notes" and "--
Risks Relating to the Capital Markets".
Ratings of the Notes....... Each subclass of Notes has received ratings from
Duff & Phelps Credit Rating Co. ("DCR"), Moody's
Investors Service, Inc. ("MOODY'S") and Standard &
Poor's Ratings Group, a division of The McGraw-Hill
Companies, Inc. ("STANDARD & POOR'S" and, together
with DCR and Moody's, the "RATING AGENCIES"), as
set forth above. See "Description of the Notes --
General -- Ratings".
Listing.................... The Notes were listed on the Luxembourg Stock
Exchange on March 3, 1998, in the case of the New
Notes, subject only to issuance of a Global Note
(as defined) and notice of issuance. See "Listing
and General Information".
Denominations.............. The Notes of each subclass will be available for
purchase in minimum denominations of $100,000 and
integral multiples of $1,000 in excess thereof. See
"Description of the Notes -- General".
MSAF Group................. MSAF and its subsidiaries on a combined basis. See
"The Parties -- MSAF Group".
Notes...................... MSAF will issue the New Notes pursuant to an
indenture between MSAF and Bankers Trust Company,
as trustee (the "TRUSTEE"), dated as of March 3,
1998 (the "INDENTURE"). The Class A Notes are
initially subdivided into two subclasses, the
Subclass A-1 and A-2 Notes. The Class B, C and D
Notes will initially be subdivided into one
subclass each, the Subclass B-1, C-1 and D-1 Notes.
Each of the Subclass A-1, A-2 and B-1 Notes will be
entitled to receive interest from March 3, 1998 at
a rate per annum equal to one month LIBOR on the
applicable Reference Date plus the applicable
margin set forth on the cover page of this
Prospectus. The interest rates on the Subclass A-1,
A-2 and B-1 Notes will be determined for the
initial Interest Accrual Period two Business Days
prior to the scheduled delivery thereof. The
Subclass C-1 and D-1 Notes will be entitled to
receive interest at the fixed rate per annum set
forth on the cover page of this Prospectus.
Additional subclasses of Class A and B Notes may be
issued on a fixed rate basis and additional
subclasses of Class C and D Notes may be issued on
a floating rate basis.
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Status of Notes;
Security................... The Notes will constitute direct obligations of
MSAF. None of the Trustee, the Security Trustee or
any Noteholder has any security interest, mortgage,
charge or other similar interest in any of the
Aircraft. The Security Trustee has been granted a
security interest in 100% of the beneficial
interest in MSA I, a Delaware statutory business
trust ("MSA I"), and in all of the issued and
outstanding capital stock of Aircraft SPC-5, Inc.,
a California corporation ("SPC-5"), and the other
subsidiaries, direct or indirect, of MSAF. The
Security Trustee has been granted a security
interest in the respective interests of each MSAF
Group member in the Leases and in leases within
MSAF Group relating to the Aircraft, in any loans
extended by MSAF to MSA I, SPC-5 and its other
subsidiaries and in any cash contained in the
Accounts. MSAF Group's ability to incur
indebtedness is limited to indebtedness required in
connection with refinancings and acquisitions of
Additional Aircraft and under credit and liquidity
enhancement facilities. See "Description of the
Notes -- Indenture Covenants -- Limitation on
Indebtedness".
MSAF will have the ability, in certain
circumstances, to refinance the Notes through the
issuance by MSAF of new notes (the "REFINANCING
NOTES"). Such Refinancing Notes will rank pari
passu with the applicable subclasses of refinanced
Notes and will never rank higher in priority than
the Class A Notes. MSAF will also have the ability
to finance the acquisition of Additional Aircraft
in part through the issuance of Additional Notes
under the Indenture. The Additional Notes may be
issued in up to four classes (Class A, Class B,
Class C and Class D, each of which may consist of
one or more subclasses) that will rank pari passu
in right of payment of principal and interest with
the corresponding classes of the Notes. See
"Description of the Notes".
Payments on the Notes...... Interest, principal and premium, if any, on each
subclass of Notes will be paid only out of
Available Collections with respect to any Interest
Accrual Period received on or prior to the
Calculation Date relating to such Interest Accrual
Period. On each Payment Date, principal will be
payable in respect of each subclass of Notes to the
extent of Available Collections, if any, on such
Payment Date but only to the extent that funds are
available for such purpose after having made the
payments ranking in priority thereto. The expected
principal payments of the Notes have been
determined on the basis of certain assumptions as
set forth under "Description of the Notes" (the
"ASSUMPTIONS"), including, inter alia, assumptions
regarding the timing and amount of payments under
the Initial Leases, assumptions regarding the terms
of and payments under Future Leases and assumptions
regarding the ability of MSAF to refinance maturing
Subclass A-1 Notes with Refinancing Notes. It is
highly likely that the Assumptions will not
correspond to actual experience and as a result the
actual principal payments received are likely to
vary from the expected principal payments in
respect of such subclass of Notes, and the actual
maturity of any subclass of Notes is likely to
occur earlier or later than its Expected Final
Payment Date. See "Description of the Notes --
Priority of Payments", "Risk Factors -- Risks
Relating to Payments on the Notes" and "-- Risks
Relating to the Capital Markets".
Step-Up Interest........... If the Subclass A-1 Notes are not repaid on or
before the Expected Final Payment Date for such
subclass, such subclass of Notes will accrue
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interest thereafter at a rate equal to the stated
interest rate therefor, plus 0.50% per annum
("STEP-UP INTEREST"). MSAF may also issue certain
subclasses of Additional Notes in connection with
the acquisition of Additional Aircraft and may
issue Refinancing Notes that by their terms provide
they will bear Step-Up Interest after their
Expected Final Payment Date. Payments of Step-Up
Interest will be subordinated to certain other
obligations of MSAF Group, including payment of
Scheduled Principal Payment Amounts with respect to
the Notes and will not be rated by the Rating
Agencies. See "Description of the Notes -- Payment
of Principal and Interest -- Interest".
Priority of Payments....... On each Payment Date, distributions from Available
Collections will be made in accordance with the
priority of payments set forth in "Description of
the Notes -- Priority of Payments". Payments on the
Notes will be subordinated to all fees, costs, or
expenses incurred by any MSAF Group member in the
course of the business activities permitted to be
conducted by it under the Indenture (the
"EXPENSES") and (other than interest payments on
the Class A Notes with respect to which such
amounts are ranked pari passu) certain amounts due
to parties providing interest rate swaps and other
hedging instruments (the "SWAP PROVIDERS").
Furthermore, payments of interest and principal on
the Class D Notes will be effectively subordinated
in priority of payment to payments of interest and
certain principal, respectively, on the Class A, B
and C Notes and payments of interest and principal
on the Class C Notes will be effectively
subordinated in priority of payment to payments of
interest and certain principal, respectively, on
the Class A and B Notes, and payments of interest
and principal on the Class B Notes will be
effectively subordinated in priority of payment to
payments of interest and certain principal on the
Class A Notes.
Redemption of the Notes.... Subject to certain conditions described in
"Description of the Notes -- Payment of Principal
and Interest -- Redemption", each subclass of the
Notes may be redeemed on any Payment Date (after
giving effect to Available Collections) in whole or
in part, at the "REDEMPTION PRICE" plus accrued but
unpaid interest. Within any subclass of Notes being
redeemed in part, the Redemption Price will be
applied pro rata among all such Notes.
The Redemption Price of the Subclass A-1, A-2 and
B-1 Notes redeemed (i) with the application of
funds other than Available Collections (including
proceeds from Refinancing Notes and proceeds from
third parties), will equal the product of the
applicable Redemption Premium set out below and the
principal balance of such subclass (the
"OUTSTANDING PRINCIPAL BALANCE") of Notes being
redeemed and (ii) with the application of Available
Collections, will equal the Outstanding Principal
Balance of the amount of such subclass of Notes
being redeemed, without premium.
The Redemption Price of the Subclass C-1 Notes will
equal the higher of (i) the discounted present
value of Scheduled Principal Payment Amounts and
interest on such subclass from the Redemption Date
to and including the Expected Final Payment Date
for the Subclass C-1 Notes computed by discounting
such payments at a discount rate equal
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to the applicable Treasury Yield plus 0.50% and
(ii) the Outstanding Principal Balance of such
subclass being redeemed.
The Redemption Price of the Subclass D-1 Notes will
equal (i) if such redemption occurs prior to March
15, 2003, the higher of (A) the discounted present
value of Scheduled Principal Payment Amounts and
interest from the Redemption Date through, but not
including, March 15, 2003, plus the product of the
applicable Redemption Premium set out below and the
assumed Outstanding Principal Balance for March 15,
2003, discounted at a rate equal to the applicable
Treasury Yield plus 1.00% and (B) the Outstanding
Principal Balance of the Notes of such subclass
being redeemed or (ii) if such redemption occurs on
or after March 15, 2003, the product of the
applicable Redemption Premium set out below and the
Outstanding Principal Balance of such subclass
being redeemed.
REDEMPTION DATE REDEMPTION PREMIUM
--------------- ---------------------------------------------
SUBCLASS SUBCLASS SUBCLASS SUBCLASS
A-1 NOTES A-2 NOTES B-1 NOTES D-1 NOTES
--------- --------- --------- ---------
After March 3, 1998.......... 101.00% 102.00% 103.00% --
On or after March 15, 1999... 100.50% 101.50% 102.50% --
On or after March 15, 2000... 100.00% 101.00% 102.00% --
On or after March 15, 2001... -- 100.50% 101.50% --
On or after March 15, 2002... -- 100.00% 101.00% --
On or after March 15, 2003... -- 100.00% 100.50% 105.25%
On or after March 15, 2004... -- 100.00% 100.00% 104.50%
On or after March 15, 2005... -- 100.00% 100.00% 103.75%
On or after March 15, 2006... -- -- 100.00% 103.00%
On or after March 15, 2007... -- -- 100.00% 102.25%
On or after March 15, 2008... -- -- 100.00% 101.50%
On or after March 15, 2009... -- -- 100.00% 100.75%
On or after March 15, 2010... -- -- 100.00% 100.00%
On or after March 15, 2011... -- -- 100.00% 100.00%
On or after March 15, 2012... -- -- 100.00% 100.00%
On or after March 15, 2013... -- -- 100.00% 100.00%
On or after March 15, 2014... -- -- -- 100.00%
The Notes may be redeemed on any Payment Date, in
whole, but not in part, without premium, upon the
occurrence of certain adverse tax events affecting
MSAF Group, at a Redemption Price equal to the
Outstanding Principal Balance thereof, plus accrued
and unpaid interest thereon. See "Description of
the Notes -- Payment of Principal and Interest --
Redemption".
Appraised Value............ MSAF Group has obtained from Aircraft Information
Services, Inc., BK Associates, Inc. and Airclaims
Limited (the "APPRAISERS") three desktop appraisals
(the "APPRAISALS") of the value of each of the
Initial Aircraft as of September 30, 1997. The
Appraisers ascertained the value of each Aircraft
on the basis of an open, unrestricted, stable
market environment with a reasonable balance of
supply and demand, and with full consideration of
the Aircraft's "highest and best use", presuming an
arm's-length, cash transaction between willing,
able and knowledgeable parties, acting prudently,
with an absence of duress and with a reasonable
period of time available for marketing, adjusted to
account for the maintenance status of each Aircraft
(with certain assumptions as to use since the last
reported status) (each value so ascertained for the
Aircraft, a "BASE VALUE"). None of the Appraisals
attribute any value to the Lease, the maintenance
reserves, the security deposits or the related
collateral, if any, related to the particular
Aircraft. The aggregate Initial Appraised Value of
the Initial Aircraft at
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September 30, 1997 was $1,086.69 million. As used
herein, "INITIAL APPRAISED VALUE" means the average
of the Base Values of each of the Aircraft,
determined, in the case of the Initial Aircraft, as
of September 30, 1997 and, in the case of any
Additional Aircraft, as of a date not more than six
months prior to the closing date for the issue of
the relevant Additional Notes. An appraisal is only
an estimate of value and should not be relied upon
as a measure of realizable value. The proceeds
received upon a sale of any Aircraft are likely to
be less than, and may be significantly less than,
the Initial Appraised Value thereof. See "Risk
Factors -- Risks Relating to the Aircraft --
Cyclicality of Supply of and Demand for Aircraft;
Risk of Decline in Aircraft Values and Rental
Rates".
Leases..................... At August 31, 1998, the average remaining term to
re-lease, weighted by Initial Appraised Value
(without giving effect to Purchase Options, early
termination options or extension options), of the
Initial Aircraft was approximately 46 months. All
of the Initial Leases will expire under their terms
(without giving effect to Purchase Options, early
termination options or extension options) on or
prior to December 23, 2006. Therefore, MSAF Group
must re-lease all of the Initial Aircraft one or
more times prior to the Final Maturity Date except
to the extent that Aircraft are sold prior to the
Final Maturity Date. Other than one A310 Aircraft
which is subject to a Conditional Sale Agreement,
each Initial Lease is an operating lease for a
fixed term pursuant to which MSAF Group will retain
title to the Aircraft and substantially all of the
risks and rewards associated with ownership,
including the residual value of the Aircraft
(although nine of the Initial Leases (including the
Conditional Sale Agreement) contain, and a certain
portion of the Future Leases may contain, Purchase
Options). See "Risk Factors -- Risks Relating to
the Leases -- Re-leasing" and "The Initial Aircraft
and Leases -- The Initial Leases".
Related Collateral......... MSAF Group holds (either directly or through its
agents), (i) security deposits required to be paid
or provided by the Lessee under each Initial Lease
as security for its obligations under such Initial
Lease, both in cash and as letters of credit and
(ii) certain other letters of credit, third-party
guarantees or bank guarantees or the equivalent
thereof required under the relevant Initial Leases.
No cash maintenance reserves will be transferred to
MSAF upon acquisition of any of the Initial
Aircraft. There are no non-cash maintenance
reserves with respect to the Initial Aircraft.
ILFC Facility.............. Under a Custody and Loan Agreement between ILFC and
MSAF Group dated as of March 3, 1998 (the "ILFC
FACILITY"), ILFC holds substantially all of the
cash security deposits paid by Lessees with respect
to the Initial Aircraft and retains the interest
earnings on such security deposits. Under the ILFC
Facility, ILFC also has agreed to make loans to
MSAF for the purpose of providing MSAF with
liquidity to meet its obligations, including
certain of its obligations under the Notes. MSAF
may draw on the ILFC Facility for loans in a
maximum amount equal to $10 million plus the
aggregate amount of cash security deposits then
held by ILFC as custodian. As of October 31, 1998,
the amount available to be drawn under the ILFC
Facility was approximately $31.0 million. Such
loans shall accrue interest at 3% per annum and are
repayable, to the extent that there are Available
Collections sufficient therefor, after
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payment of all interest and certain principal
amounts with respect to the Notes. As of August 31,
1998, ILFC's short-term unsecured debt was rated
A-1+ by Standard & Poor's. See "Management's
Discussion and Analysis of Results of Operations
and Financial Condition -- Liquidity" for a
discussion of the ILFC Facility.
Morgan Stanley Facility.... Under a Loan Agreement dated as of March 3, 1998
between Morgan Stanley and MSAF (the "MORGAN
STANLEY FACILITY"), Morgan Stanley has agreed to
make loans to MSAF for the purpose of providing
MSAF with liquidity to meet its obligations,
including certain of its obligations under the
Notes. MSAF may draw on the Morgan Stanley Facility
for loans in a maximum amount of $10 million. Such
loans shall accrue interest at 3% per annum and are
repayable, to the extent that there are Available
Collections sufficient therefor, after payment of
all interest and certain principal amounts with
respect to the Notes. See "Management's Discussion
and Analysis of Results of Operations and Financial
Condition -- Liquidity" for a discussion of the
Morgan Stanley Facility.
Lessees.................... As of August 31, 1998, there were 28 aircraft
lessees (excluding any sub-lessees operating the
Aircraft, other than pursuant to a sub-lease from a
subsidiary of MSAF) and one engine lessee (the
"INITIAL LESSEES" and, together with the lessees in
respect of the Additional Leases, if any, and the
Future Leases, if any, the "LESSEES") of the
Initial Aircraft pursuant to the Initial Leases in
20 different countries. At August 31, 1998, six of
the Lessees each accounted for more than 5% of the
Initial Aircraft by Initial Appraised Value,
representing in aggregate approximately 34.6% of
the Initial Aircraft by Initial Appraised Value. No
Lessee accounted for more than 7% of the Initial
Aircraft by Initial Appraised Value. Certain of the
Lessees are in a weak financial condition and some
face or have recently faced serious financial
difficulties. As of August 31, 1998, two Initial
Lessees were in arrears. The aggregate amount of
Rental Payments, maintenance reserves and other
miscellaneous amounts (net of default interest and
certain cash in transit) that were in arrears with
respect to these two Lessees was approximately $1.8
million. The weighted average number of days past
due of such arrears was 28.5. See "Risk Factors --
Risks Relating to the Lessees".
Collection Account......... The "COLLECTION ACCOUNT" is the account into which
all Collections received by or on behalf of MSAF
Group in the course of conducting its business,
including payments made by Lessees under the Leases
(including payments by Lessees of Additional
Aircraft) and any amounts drawn under any credit or
liquidity enhancement facility, will be deposited.
Except as noted below, the Collection Account will
be maintained at a balance at least equal to the
Liquidity Reserve Amount. The "LIQUIDITY RESERVE
AMOUNT" may be funded with cash in the Collection
Account and amounts available to be drawn under
Eligible Credit Facilities and, as of March 3, 1998
was approximately $65.5 million and is intended to
provide a source of liquidity for (i) MSAF Group's
maintenance obligations, (ii) MSAF Group's
obligation to repay Lessee security deposits, (iii)
certain other contingencies in respect of the
Aircraft and (iv) payments of interest and
principal on the Notes. The balance of funds in the
Collection Account may fall below the Liquidity
Reserve Amount at any time and MSAF Group may
continue to make all payments which rank prior to
or pari
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passu with payments of the Minimum Principal
Payment Amount on the Class D Notes under
"Description of the Notes -- Priority of Payments".
See "Description of the Notes -- Accounts". The
"MINIMUM LIQUIDITY RESERVE AMOUNT" may be funded
with cash in the Collection Account and amounts
available to be drawn under Eligible Credit
Facilities and, as of March 3, 1998 was
approximately $15 million. The balance of funds in
the Collection Account may fall below the Minimum
Liquidity Reserve Amount at any time and MSAF may
continue to pay (i) Expenses, (ii) interest on the
most senior class of Notes then Outstanding to
avoid an Event of Default and (iii) Swap Payments.
The ILFC Facility and the Morgan Stanley Facility
represented approximately $31.2 million and $10
million, respectively, of the Liquidity Reserve
Amount as of March 3, 1998. The balance of the
Liquidity Reserve Amount of $25 million is funded
with cash.
Expense Account............ The "EXPENSE ACCOUNT" is the account into which the
Administrative Agent will deposit the Required
Expense Amount (other than certain Expenses
transferred directly to payees from the Collection
Account) on each Payment Date. See "Description of
the Notes -- Accounts".
Servicer................... ILFC is the lease and aircraft manager and the
re-leasing and marketing agent for the Initial
Aircraft under the Servicing Agreement. ILFC
performs certain aircraft-related services with
respect to the Initial Aircraft including marketing
the aircraft for lease or sale and monitoring
lessee compliance with lease terms including terms
relating to payment, maintenance and insurance. The
Servicer agrees to perform its services pursuant to
the Servicing Agreement with a view towards
maximizing the present value of the cash flows over
the life of the Initial Aircraft, subject to
certain conditions. If a conflict of interest
arises regarding ILFC's management of Initial
Aircraft and other assets owned or managed by ILFC,
ILFC agrees to perform the Services in good faith
and without discrimination. See "Risk Factors --
Risks Relating to MSAF Group and Certain Third
Parties -- Conflicts of Interest of ILFC".
Cash Manager............... Bankers Trust Company acts as Cash Manager (the
"CASH MANAGER") pursuant to a Cash Management
Agreement among MSAF Group, the Cash Manager and
the Security Trustee dated as of March 3, 1998 (the
"CASH MANAGEMENT AGREEMENT"). The Cash Manager
invests the funds held by MSAF Group in the
Accounts in certain prescribed investments on
permitted terms.
Administrative Agent....... Cabot acts as Administrative Agent (the
"ADMINISTRATIVE AGENT") pursuant to an
administrative agency agreement among MSAF Group,
the Administrative Agent and the Security Trustee,
dated as of March 3, 1998 (the "ADMINISTRATIVE
AGENCY AGREEMENT"). The Administrative Agent
provides certain corporate administrative, bank
account management, calculation and accounting
services to MSAF Group. See "Management of MSAF
Group -- Corporate Management". In addition, it
monitors the performance of the Servicer (including
the Servicer's compliance with the Servicing
Agreement) and reports on such performance to MSAF
Group.
Financial Advisor.......... Morgan Stanley & Co. Incorporated acts as Financial
Advisor (the "FINANCIAL ADVISOR") pursuant to a
financial advisory agreement between MSAF Group and
the Financial Advisor, dated as of March 3,
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1998 (the "FINANCIAL ADVISORY AGREEMENT"). The
Financial Advisor assists MSAF Group in developing
and implementing its interest rate risk management
policies and developing models for the purpose of
analyzing the financial impact of aircraft lease,
sale and capital investment decisions.
Acquisition of Additional
Aircraft................. MSAF Group may at any time acquire Additional
Aircraft and related Additional Leases. Cash flows
derived from the Additional Aircraft, if any, and
the related Leases will be available to satisfy
MSAF's payment obligations, including payments of
interest, principal and premium, if any, on the
MSAF Notes.
An acquisition of Additional Aircraft may take the
form of the acquisition of individual Additional
Aircraft and the related Additional Leases or the
acquisition of the shares of one or more
aircraft-owning subsidiaries of the sellers. There
is no limit on the value of Additional Aircraft
that may be acquired. Any acquisition of Additional
Aircraft will be subject to certain conditions
under the Indenture. See "Risk Factors -- Risks
Relating to the Aircraft -- Risks Relating to
Additional Aircraft", "The Parties -- MSAF Group",
"The Initial Aircraft and Leases -- Acquisition of
Additional Aircraft" and "Description of the Notes
-- Indenture Covenants -- Limitation on Aircraft
Acquisitions".
Issuance of Additional
Notes...................... In connection with the acquisition of Additional
Aircraft, Additional Notes may be issued in up to
four classes (Class A, Class B, Class C and Class
D, each of which will consist of one or more
subclasses) that will rank pari passu in right of
payment of principal and interest with the
corresponding class of the Notes. The Additional
Notes may be issued and sold through one or more
public offerings or private placements of
securities or otherwise. The issuance of Additional
Notes will be subject to certain conditions under
the Indenture, including, inter alia, confirmation
by the Rating Agencies that the issuance of such
notes will not result in the lowering or withdrawal
by them of their current ratings on any subclass of
MSAF Notes then outstanding. See "Description of
the Notes -- Indenture Covenants -- Limitation on
Indebtedness".
Aircraft Dispositions...... MSAF Group may sell Aircraft (i) pursuant to the
exercise of Purchase Options held by Lessees
(including the Conditional Sale Agreement), (ii)
within MSAF Group, without limitation, provided
that such sale does not materially adversely affect
the MSAF Noteholders and (iii) in other
circumstances, provided that any such sale does not
result in a default under the Indenture's portfolio
concentration limits and certain other conditions
are met, including conditions with respect to
target prices for the Aircraft. See "Description of
the Notes -- Indenture Covenants -- Limitation on
Aircraft Sales".
Operating Covenants........ MSAF Group may not enter into any Future Lease
(other than a renewal, extension or restructuring
of any Lease) unless after entering into such
Future Lease, MSAF Group is in compliance with
certain criteria in respect of, inter alia,
geographic and other concentration limits (the
"RE-LEASING GUIDELINES"); provided that MSAF Group
may enter into a Future Lease not meeting such
criteria if the Rating Agencies shall have
confirmed in writing that entering into such Lease
will not result in the lowering or withdrawal by
them of their then current ratings
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on any subclass of the Notes then outstanding. See
"Description of the Notes -- Operating Covenants".
Certain Taxation Matters... Neither MSAF nor any of its subsidiaries will be
obliged to make any additional payments with
respect to the Notes or any inter-company loans,
and thus no payments will be passed through to the
Noteholders, in respect of any withholding or
deduction required to be made under applicable law
from payments on the Notes or the inter-company
loans. If any withholding or deduction is required
with respect to the Notes and the Notes are not
redeemed, the net amount of interest received by
the Noteholders will be reduced by the amount of
such withholding or deduction. See "Risk Factors --
Risks Relating to Tax" and "Taxation".
Certain ERISA Matters...... The Notes are expected to be eligible for purchase
under certain circumstances by an employee benefit
plan or other plan subject to Title I of the
Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and/or Section 4975 of the
United States Internal Revenue Code of 1986, as
amended (the "CODE"). See "ERISA Considerations".
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RISK FACTORS
The following summarizes certain risks involved in an investment in the
Notes which may materially affect the ability of MSAF Group to pay the interest,
principal and premium, if any, on the Notes in full at or before their
respective Final Maturity Dates. Investors should read and carefully consider,
among other things, the following factors prior to accepting the Exchange Offer.
There can be no assurance that payments with respect to the Aircraft will
be adequate to pay the interest, principal and premium, if any, on the Notes in
accordance with their terms.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legends thereon. In general,
the Old Notes may not be offered or sold, unless registered under the Securities
Act, except pursuant to an exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities laws. MSAF does not intend to
register the Old Notes under the Securities Act.
MSAF believes that, based upon interpretations contained in letters issued
to third parties by the staff of the Commission, New Notes issued pursuant to
the Exchange Offer in exchange for Old Notes may be offered for resale, resold
or otherwise transferred by each Holder thereof (other than a broker-dealer, as
set forth below, or any such Holder which is an "affiliate" of MSAF within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act provided
that such New Notes are acquired in the ordinary course of such Holder's
business and such Holder has no arrangement or understanding with any person to
participate in the distribution of such New Notes. Eligible Holders wishing to
accept the Exchange Offer must represent to MSAF in the Letter of Transmittal
that such conditions have been met and must represent, if such Holder is not a
broker-dealer, or is a broker-dealer but will not receive New Notes for its own
account in exchange for Old Notes, that neither such Holder nor the person
receiving such New Notes, if other than the Holder, is engaged in or intends to
participate in the distribution of such New Notes. If any Holder has any
arrangement or understanding with respect to the distribution of the New Notes
to be acquired pursuant to the Exchange Offer, such Holder (i) will not be able
to rely on the applicable interpretations of the staff of the Commission and
(ii) in the absence of an exemption therefrom, must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any resale transaction. Each broker-dealer that receives New Notes for its own
account pursuant to the Exchange Offer must represent that the Old Notes
tendered in exchange therefor were acquired as a result of market-making
activities or other trading activities and must acknowledge that it will deliver
a prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with the resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. MSAF has agreed that, starting on the
Expiration Date, it will make this Prospectus available to any broker-dealer for
use in connection with any such resale. See "Plan of Distribution". However, to
comply with the securities laws of certain jurisdictions, if applicable, the New
Notes may not be offered or sold unless they have been registered or qualified
for sale in such jurisdictions or an exemption from registration or
qualification is available and is complied with. MSAF has agreed, pursuant to
the Registration Agreement and subject to certain specified limitations therein,
to register or qualify the New Notes for offer or sale under the securities or
blue sky laws of such jurisdictions as any holder of the Notes reasonably
requests in writing. Unless so required, MSAF does not intend to register or
qualify the sale of the New Notes in any such jurisdictions. In addition, the
tender of Old Notes pursuant to the Exchange Offer will reduce the principal
amount of the Old Notes outstanding, which may have an adverse effect upon, and
increase the volatility of, the market price of the Old Notes due to a reduction
in liquidity.
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EXCHANGE OFFER PROCEDURES
To participate in the Exchange Offer, and avoid the restrictions on Old
Notes, each Holder of Old Notes (which term, for purposes of the Exchange Offer,
includes any participant in the Book-Entry Transfer Facility (as defined) system
whose name appears on a security position listing as a holder of such Old Notes)
who wishes to tender Old Notes for exchange pursuant to the Exchange Offer must
transmit to the Exchange Agent on or prior to the Expiration Date either (i) a
properly completed Letter of Transmittal, or (ii) an Agent's Message (as
defined) transmitted by means of the Book-Entry Transfer Facility's ATOP system
(as defined) and received by the Exchange Agent and forming part of a Book-Entry
Confirmation, in which such Holder acknowledges and agrees to be bound by the
terms of the Letter of Transmittal. In addition, in order to deliver Old Notes
(i) a timely Book-Entry Confirmation of such Old Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the procedure for
book-entry transfer described below, must be received by the Exchange Agent
prior to the Expiration Date or (ii) the Holder must comply with the guaranteed
delivery procedures described below. See "The Exchange Offer."
RISKS RELATING TO MSAF GROUP AND CERTAIN THIRD PARTIES
HOLDING ENTITY RISK
Substantially all of the assets of MSAF are the beneficial interest in MSA
I, which owns 31 Aircraft and the spare engine, and 100% of the share capital of
SPC-5, which owns one Aircraft (collectively, the "AIRCRAFT-OWNING
SUBSIDIARIES"). None of the Trustee, the Security Trustee or any Noteholder has
any security interest in the Aircraft. Accordingly, MSAF's ability to make
payments on the Notes will be affected by the obligations of Aircraft-Owning
Subsidiaries and MSAF Group's other subsidiaries to creditors other than
Noteholders, including Lessees and tax authorities. To the extent that these
obligations to Lessees and other creditors significantly exceed expectations, or
to the extent that unforeseen and significant tax liabilities arise, there may
be a significant adverse impact upon payments on the Notes.
LACK OF SECURITY INTEREST IN AIRCRAFT
As stated above, none of the Trustee, the Security Trustee or any
Noteholder has any security interest, mortgage, charge or other similar interest
in any of the Aircraft. As a result, such parties do not have available to them
certain rights upon an Event of Default which would have been available to them
had their interests in the Aircraft been secured by such assets. MSAF Group
will, however, pledge to the Security Trustee as security for MSAF's obligations
under the Notes, 100% of the beneficial interest in MSA I, 100% of the share
capital of SPC-5, all of MSAF's ownership interest in MSAF's other subsidiaries,
the respective interests of each MSAF Group member in the Leases and in leases
within MSAF Group relating to the Aircraft, any intercompany loans from MSAF to
the Aircraft-Owning Subsidiaries and any cash contained in the Accounts.
DELEGATION OF RESPONSIBILITIES
Except to the limited extent described herein, neither the Trustee nor any
Noteholder has any right to participate in the management or affairs of MSAF
Group. In particular, such parties cannot supervise the functions relating to
the Leases and the re-lease of the Aircraft, which functions have generally been
delegated to the Servicer under the Servicing Agreement. See "Management of MSAF
Group -- Corporate Management", "Description of the Notes -- Indenture
Covenants" and "-- Events of Default and Remedies".
MSAF Group will have no executive management resources of its own (although
MSAF will have a Board of Controlling Trustees) and, as such, MSAF Group will
rely upon the Servicer, the Administrative Agent, the Cash Manager, the
Financial Advisor and other service providers for all asset servicing, executive
and administrative functions pursuant to the respective service provider
agreements. While MSAF Group has retained ILFC as the Servicer, Cabot as the
Administrative Agent, Bankers Trust Company as the Cash Manager and Morgan
Stanley & Co. Incorporated as the Financial Advisor, there can be no assurance
that MSAF Group will continue its arrangements with these organizations until
the Notes are paid in full or that such organizations will continue their
relationship with MSAF Group until such time. Failure of these
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27
foregoing organizations to perform their respective contractual obligations to
MSAF Group could have a material adverse effect upon MSAF Group's operations,
which could adversely affect MSAF's ability to make payments on the Notes.
Furthermore, MSAF's ability to terminate the Servicing Agreement is limited. In
the event that the Servicer, the Administrative Agent, the Cash Manager or the
Financial Advisor were to resign or be terminated pursuant to their respective
contractual arrangements with, or on behalf of, MSAF Group, there can be no
assurance that suitable replacement service providers could be found, or found
in a timely manner, and engaged on terms acceptable to MSAF Group or that would
not cause a lowering in or withdrawal of the then current rating relating to the
Notes. The loss of the Servicer, the Administrative Agent, the Cash Manager or
the Financial Advisor under such circumstances could have a material adverse
effect on MSAF's ability to make payments on the Notes.
Accordingly, no investor should accept the Exchange Offer unless such
investor accepts the terms (summarized in this Prospectus) upon which the
various services are to be provided by the Servicer, the Administrative Agent,
the Cash Manager, and the Financial Advisor pursuant to the Servicing Agreement,
the Administrative Agency Agreement, the Cash Management Agreement and the
Financial Advisory Agreement, respectively. See "Management of MSAF Group --
Corporate Management".
CONFLICTS OF INTEREST OF ILFC
In addition to acting as Servicer with respect to the Initial Aircraft for
a term of 25 years, ILFC also participates in the management of certain aircraft
assets owned by itself, its affiliates and other third parties. ILFC will from
time to time have conflicts of interest in performing its obligations to MSAF
Group and the other entities to which it provides management services and with
respect to the aircraft for which it provides such services. Such conflicts may
be particularly acute in situations involving ILFC's or its affiliates' own
aircraft.
As of December 31, 1997, and giving effect to MSAF's acquisition of all the
Initial Aircraft, the portfolio of aircraft managed by ILFC and its affiliates
for third parties (including MSAF Group) comprised 43 aircraft and one spare
engine. The portfolio of aircraft owned by ILFC and its affiliates comprised 297
aircraft. On September 2, 1997, ILFC announced that it had placed new aircraft
orders with both Airbus Industrie G.I.E. ("AIRBUS") and The Boeing Company
("BOEING"). The order with Airbus is for 65 aircraft and the order with Boeing
is for 61 aircraft. ILFC has committed to purchase a total of 335 aircraft from
all aircraft manufacturers, deliverable through 2006.
From time to time, ILFC and its affiliates will acquire ownership or
management interests in additional new and used aircraft. ILFC and its
affiliates may also participate in the formation and operation of vehicles with
similar investment and operational objectives to those of MSAF Group. As a
result of ILFC's various interests in other aircraft assets, it is possible
that, at various times when the Initial Aircraft are being marketed for re-lease
or sale, ILFC's aircraft assets will be in competition with the Initial Aircraft
and ILFC will have conflicts of interest. Particularly acute conflicts of
interest will arise when a lessee in financial distress needs to re-lease some
of its aircraft and its fleet consists of a mixture of ILFC-owned aircraft and
ILFC-managed Initial Aircraft.
Pursuant to the terms of the Servicing Agreement, ILFC has agreed to
perform the services required thereby with reasonable care and diligence at all
times as if it were the owner of the Initial Aircraft (the "ILFC SERVICES
STANDARD"). If a conflict of interest arises regarding ILFC's management of (a)
two particular Initial Aircraft or (b) Initial Aircraft, on the one part, and
other assets then managed by ILFC, on the other part, the Servicer is required
to perform the services in good faith. To the extent that (a) the two particular
Initial Aircraft or (b) the Initial Aircraft and the other assets then managed
by ILFC are substantially similar in terms of objectively identifiable
characteristics that are relevant for purposes of the particular services to be
performed, the Servicer will not discriminate between (a) the Initial Aircraft
or (b) any of the Initial Aircraft and any other assets then managed by ILFC
(the "ILFC CONFLICTS STANDARD").
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LIMITATION OF LIABILITY ON THE PART OF THE SERVICER
Pursuant to the Servicing Agreement, the Servicer will not be liable to
MSAF Group for any damages, losses, liabilities or expenses (including
reasonable legal fees, expenses and related charges and costs of investigation)
("LOSSES") arising (i) as a result of an Initial Aircraft being sold, leased or
purchased on less favorable terms than might have been achieved at any time,
provided such transactions were entered into on the basis of a commercial
decision of the Servicer, or (ii) in respect of the Servicer's obligation to
apply the ILFC Conflicts Standard in respect of its performance of the services,
except, in either situation, in the case of wilful misconduct or fraud on the
part of the Servicer. MSAF Group shall indemnify, reimburse and hold harmless
the Servicer on an after-tax basis for any Loss arising as a result of the
performance of any of the Servicer's obligations as Servicer or as a result of
any action which the Servicer is requested to take or refrain from taking by
MSAF, unless (i) such Loss has arisen as a result of the wilful misconduct of
the Servicer,(ii) such Loss has directly resulted from a breach by the Servicer
of the express terms and conditions of the Servicing Agreement or (iii) such
Loss is a Loss for which the Servicer has indemnified MSAF and its affiliates
and arises as a result of any material misstatements or omissions in any public
filings relating to information on the Initial Aircraft, the services and the
Servicer provided by the Servicer for disclosure in such public filings.
The duties and obligations of the Servicer will be limited to those
expressly set forth in the Servicing Agreement and the Servicer will not have
any fiduciary or other implied duties or obligations to MSAF Group or any other
person, including any Noteholder.
RISKS RELATING TO THE AIRCRAFT
CYCLICALITY OF SUPPLY OF AND DEMAND FOR AIRCRAFT; RISK OF DECLINE IN
AIRCRAFT VALUES AND RENTAL RATES
The aircraft leasing market is affected by various cyclical factors that
are not within the control of MSAF Group such as: interest rates, the
availability of credit, fuel costs and general economic conditions affecting
lessee operations; manufacturer production levels; passenger demand; retirement
and obsolescence of aircraft models; manufacturers merging or exiting the
industry or ceasing to produce aircraft types; re-introduction into service of
aircraft previously in storage; governmental regulation; and air traffic control
infrastructure constraints. The availability of commercial jet aircraft for
lease or sale has periodically experienced cycles of oversupply and undersupply,
producing sharp decreases and increases in aircraft values and lease rates. The
aircraft leasing market may currently be experiencing a cyclical peak but at the
times when Aircraft are being marketed for re-lease or sale, there can be no
assurance that prevailing industry conditions will allow re-lease or, where
applicable, sale, on satisfactory terms. Furthermore, there currently exists an
oversupply of certain types of used Stage 3 aircraft, in particular, certain
widebody aircraft such as the A300 and A310 of which there are four among the
Initial Aircraft, representing in aggregate 12.83% of the Initial Aircraft by
Initial Appraised Value.
In addition to general industry factors that may affect aircraft values and
lease rates, the value of specific aircraft will depend on a number of other
factors that are not within the control of MSAF Group, such as the particular
maintenance and operating history of the aircraft, the number of operators using
the type of aircraft and the supply of such type of aircraft, whether the
aircraft is subject to a Lease and any regulatory and legal requirements that
must be satisfied before the aircraft can be sold. Values of aircraft may be
adversely affected by changes in the competitive and financial position of the
relevant commercial aircraft manufacturer, by the withdrawal of such
manufacturer from that market or by unexpected manufacturing defects that may
surface subsequently. For example, the bankruptcy of Fokker N.V. in 1996 and the
discontinuation of its aircraft manufacturing operations have resulted in
significant reductions of values and lease rates for Fokker aircraft, which
reductions are likely to continue. Three Fokker 70s represent 5.01% of the
Initial Aircraft by Initial Appraised Value. Only 46 Fokker 70s were ever sold
and the potential customer base is very small. Additionally, following the
merger between Boeing and McDonnell Douglas Corporation, Boeing announced on
November 3, 1997 that it will discontinue production of MD-80 aircraft in mid
1999. This is likely to adversely affect the value and rental rates of MSAF
Group's MD-80 Aircraft. One MD-82 and two MD-83s represent in aggregate 5.59% of
the Initial Aircraft by Initial Appraised Value.
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Currently, a significant threat to used commercial aircraft values and
lease rates is the supply effects of the significant numbers of new aircraft
ordered recently from Boeing and Airbus at discounted prices. Despite the
cyclically high demand for aircraft experienced over the last few years and the
significant consolidation in the aircraft manufacturing industry, competition
between Boeing and Airbus has resulted in decreases in the price of new aircraft
when adjusted for inflation, which in turn has led airlines and others to order
increasing quantities of new aircraft. Assuming most of the aircraft currently
on order from Boeing and Airbus are delivered, the displacement effect of such
new aircraft will depress used aircraft values and lease rates, particularly in
geographic regions such as Asia where there is currently perceived to be a
significant excess of commercial aircraft capacity. Since the most recent
cyclical low of 483 new aircraft delivered in 1995, Boeing and Airbus have both
announced and implemented increased production levels. This means that new jet
aircraft production levels are likely to increase to approximately 900 newly
delivered aircraft by 1999. This level of production is above the long-term
requirement implied by industry forecasts, including those published by Boeing
and Airbus and assumes aircraft retirements significantly in excess of those
seen historically to be sustainable. Decreases in the values and rental rates
achievable on used commercial aircraft as a result of the above factors may have
a material adverse effect on MSAF Group's operations and cash flows.
RISKS ASSOCIATED WITH APPRAISED VALUES
The Initial Appraised Value of the Initial Aircraft and the appraised
values expected to be obtained for the Initial Aircraft going forward assume an
"open, unrestricted stable market environment with a reasonable balance of
supply and demand" and certain other factors set out in the definition of Base
Value. As discussed above, at any point in the aircraft leasing market cycle,
there will be imbalances of aircraft supply and demand generally and there may
be particularly pronounced imbalances for specific aircraft types. Accordingly,
given the current peak in the cycle, certain of the Initial Aircraft may have
current market values approximating appraised Base Values while others, such as
Fokker aircraft and older Airbus equipment, have current market values that
remain below, and in certain cases significantly below, appraised Base Values.
At a cyclical low, the current market value of most aircraft types is likely to
be less than, and in many cases significantly less than, appraised Base Values.
Accordingly, investors should not place undue reliance on appraised Base Values
as an accurate representation of market or realizable values at any one point in
time.
The Scheduled Principal Payments payable on the Class A Notes will be
accelerated if there is a significantly greater than expected decline in Base
Values as demonstrated by the appraisals of the Aircraft which MSAF will obtain
at least annually. See "Description of the Notes -- Payment of Principal and
Interest -- Principal Amortization". These accelerated principal payments on the
Class A Notes may have the effect of suspending Scheduled Principal Payments on
more junior Notes and extending the weighted average lives of such junior Notes.
Investors should note that aircraft appraisers have recently been reducing their
appraised values for aircraft, reflecting the supply effects of new aircraft
orders, manufacturers' price discounting and more specific factors for certain
aircraft types such as Fokker aircraft and older widebody aircraft. See "--
Cyclicality of Supply and Demand for Aircraft; Risk of Decline in Aircraft
Values and Rental Rates". There can be no assurance that aircraft appraisers
will not reduce appraised values of the Aircraft significantly in the future
with a material adverse effect on the expected average lives of MSAF's more
junior Notes.
Any reduction in Aircraft values or rental rates may adversely affect MSAF
Group's rental rates and may adversely affect MSAF's ability to make payments on
the Notes.
TECHNOLOGICAL RISKS
MSAF Group's ability to lease or sell the Aircraft may be adversely
affected to the extent that the availability for lease or sale of newer, more
technologically advanced aircraft or the introduction of increasingly stringent
noise or emissions regulations make the Aircraft less competitive. This risk is
particularly significant for MSAF Group given its need to repay principal and
interest on the Notes over a relatively long period, which will require that
many of the Aircraft be leased or sold close to the end of their useful economic
life. Furthermore, the extent to which MSAF Group is able to manage these
technological risks through modifications to Aircraft and sale of the Aircraft
is expected to be limited and any sales of
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Aircraft will depend on MSAF Group's ability to satisfy the criteria set forth
under "Description of the Notes -- Indenture Covenants".
YEAR 2000 RISK
Many existing computer systems use only two digits to identify a year in
the date field. These systems were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000. MSAF has recently begun a process of assessing the potential impact of
this issue on its operations. Because all of its operational functions have been
delegated to the Servicer, Administrative Agent, Cash Manager and other service
providers in accordance with the terms of their respective service agreements,
MSAF has no information systems of its own. MSAF may, however, suffer a material
adverse impact on its business and results of operations if information
technology upon which the Servicer, Administrative Agent, Cash Manager and other
service providers rely is not Year 2000 compliant. The Servicer, Administrative
Agent, Cash Manager and other service providers are in the process of reviewing
their Year 2000 exposure and identifying the steps that will need to be taken to
ensure that their systems are Year 2000 compliant.
MSAF may also suffer an adverse impact on its business and results of
operations if its suppliers, financial institutions, technical advisors, Lessees
and others with which it conducts business are not Year 2000 compliant. The
Servicer is currently contacting the third parties with which it deals on behalf
of MSAF to determine the extent of such third parties' exposure to Year 2000
risks and the status of their Year 2000 compliance efforts.
In addition, aircraft and air traffic control infrastructure depend heavily
upon microprocessors and software technology. Major manufacturers, including
Boeing, have begun a Year 2000 review of the systems employed on their aircraft
and are expected to advise owners, operators and service providers of the steps
to be taken to address any Year 2000 problems that are identified. Among the
aircraft systems that have been identified as being susceptible to Year 2000 are
certain on-board aircraft management and navigation systems. The Servicer is
also contacting aircraft and aircraft parts manufacturers and suppliers to
determine the extent to which their products are Year 2000 compliant. These
efforts are still at a relatively early stage and thus, the nature and the
extent of the risks posed by the potential failure of aircraft and aircraft
control systems as a result of Year 2000 problems has not been fully determined.
Any failure of the systems employed by MSAF's Aircraft to be Year 2000 compliant
could have a material adverse effect on MSAF's business and results of
operations. Moreover, it is currently not clear whether or to what extent
manufacturers, owners or lessees will be responsible for the costs necessary to
bring aircraft systems into Year 2000 compliance.
Because the assessment of the Year 2000 risks relevant to MSAF is still at
an early stage, MSAF is currently not able to make any estimate of the amount,
if any, it may be required to spend to remediate Year 2000 problems. Such
expenditures could, however, have an adverse impact on MSAF's business and
results of operations.
AIRCRAFT TYPE CONCENTRATIONS
The Initial Aircraft include 14 aircraft types, five of which represent
together 59.80% of the Initial Aircraft by Initial Appraised Value: Boeing
767-300s constitute 18.32%, Boeing 737-300s constitute 14.18%, Boeing 757-200s
constitute 10.87%, Boeing 737-400s constitute 7.50% and Airbus A320-200s
constitute 8.93%. Also, narrowbody Aircraft constitute 58.43% of the Initial
Aircraft by Initial Appraised Value. See "The Initial Aircraft and Leases --
Portfolio Information".
RISKS RELATING TO ADDITIONAL AIRCRAFT
MSAF Group may acquire Additional Aircraft and related Additional Leases.
The cash flows derived from Additional Aircraft and Additional Leases are
expected to be, together with the cash flows derived from the Initial Aircraft
and the Initial Leases as well as any Future Leases, the principal source of
payment of interest, principal and premium, if any, on the MSAF Notes. Depending
on the extent to which MSAF Group exercises its ability to acquire Additional
Aircraft under the Indenture, the cash flows derived from Additional
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Aircraft may become a more important source of payment for the Notes than the
cash flows derived from the Initial Aircraft. However, because the Additional
Aircraft, if any, have not been identified as of the date of this Prospectus,
the statements contained under "-- Risks Relating to the Aircraft", "-- Risks
Relating to the Leases" and "-- Risks Relating to the Lessees" are necessarily
based primarily on risks associated with the Initial Aircraft, the related
Leases and the Lessees thereunder.
The servicing arrangements with the Servicer do not apply to any Additional
Aircraft and additional servicing arrangements will need to be procured upon
acquisition of Additional Aircraft. There can be no assurance that such
additional arrangements will be with an existing servicer or on similar terms to
an existing servicing agreement.
It is expected that most, if not all, of the risks described herein will be
relevant, and may be relevant to a significantly greater extent, to any
Additional Aircraft acquired by MSAF Group. Under the Indenture, the issuance of
Additional Notes to acquire Additional Aircraft is subject to conditions that
are designed to protect the ability of MSAF to meet its obligations under the
Notes. Despite these protections, there can be no assurance that the acquisition
of Additional Aircraft and Additional Leases will not increase some or all of
the risks identified herein or expose MSAF Group to other risks not so
identified and that such increase or additional risks will not adversely affect
MSAF's ability to make payments on the Notes.
COMPETING AIRCRAFT AVAILABLE FOR LEASE; MSAF'S OPERATIONAL AND FINANCIAL
RESTRICTIONS
In connection with re-leasing of the Aircraft, MSAF Group may encounter
competition from, inter alia, other aircraft leasing companies (including ILFC),
airlines, aircraft manufacturers, aircraft owners, financial institutions,
aircraft brokers, special purpose vehicles formed for the purpose of acquiring,
leasing and selling aircraft and public and private limited partnerships and
funds with investment objectives similar to those of MSAF Group. MSAF Group will
be subject to restrictions in the Indenture and the constituent documents of
MSAF Group that will impair MSAF Group's operational flexibility. For instance,
MSAF will not be able to grant privileged rental rates to airlines in return for
equity investments in order to place aircraft on lease and minimize the number
of aircraft on the ground. Certain competing aircraft lessors enter into similar
arrangements with troubled lessees in order to restructure the obligations of
those lessees while maximizing the number of aircraft remaining on viable leases
to such lessees and minimizing the overall cost. In addition, certain competing
aircraft lessors (including ILFC) have, or have access to, financial resources
substantially greater than those of MSAF Group, may have a lower overall cost of
capital and may provide financial services or other inducements to potential
lessees that MSAF Group cannot provide. MSAF Group will also be subject to
certain limitations as to eligible Lessees and geographic diversification of the
Lessees that must be satisfied in order to maintain the ratings of the Notes.
MSAF Group's competitors may not be subject to such limitations.
RISKS RELATING TO AIRCRAFT PURCHASE OPTIONS
Six Lessees with respect to eight Initial Aircraft, representing 27.37% of
the Initial Aircraft by Initial Appraised Value, have options to purchase
(including pursuant to the Conditional Sale Agreement) such Aircraft ("PURCHASE
OPTIONS"). To the extent that the applicable purchase price is less than the
Note Target Price assumed for any such Aircraft on any option exercise date, the
Assumptions have assumed that the applicable Purchase Option will be exercised.
The present value of all amounts payable with respect to the Initial Aircraft
subject to the Conditional Sale Agreement (discounted to March 3, 1998 at 6.7%)
is approximately $8.8 million less than the Note Target Price for such Initial
Aircraft on March 3, 1998. In addition, to the extent that, at the time any
option is exercised, principal of the Notes has not been repaid in line with the
Assumptions, exercise of a Purchase Option may result in proceeds less than the
then applicable Note Target Price being realized from such exercise, which will
affect the amount and timing of principal payments to certain Noteholders and
may extend the average lives of the Notes.
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AIRCRAFT LIENS
Liens which secure the payment of, inter alia, airport taxes, customs
duties, air navigation charges (including charges imposed by Eurocontrol),
landing charges, crew wages, repairer's charges or salvage ("LIENS") are likely,
depending on the jurisdiction in question, to attach to the Aircraft in the
normal course of operation. The sums which such Liens secure may be substantial
and may, in certain jurisdictions or for limited types of Liens (particularly
fleet liens), exceed the value of the Aircraft in respect of which the Lien is
being asserted. In some jurisdictions, aircraft Liens may give the holder
thereof the right to detain or, in limited cases, sell or cause the forfeiture
of the Aircraft, and, until discharged, such Liens could adversely affect the
ability of MSAF Group to repossess, re-lease or sell the Aircraft. There can be
no assurance that the Lessees will comply with their obligations under the
Leases to discharge Liens arising during the terms of the Leases.
REGISTRATION OF AIRCRAFT
All of the Aircraft which are being or will be operated must be duly
registered at all times with the appropriate aviation authority. Generally,
failure to maintain the registration of any Aircraft which is on lease would be
a default under the applicable Initial Lease, entitling MSAF Group to exercise
its rights and remedies thereunder. If an Aircraft were to be operated without a
valid registration, the Lessee operator or, in some cases, the owner or lessor
may be subject to penalties which could constitute or result in a Lien being
placed on such Aircraft. Loss of registration could have other adverse effects,
including inability to operate the Aircraft and loss of insurance, which in turn
could have a material adverse effect on the ability of MSAF Group to pay
interest and principal on the Notes. However, there can be no assurance that
Future Leases will contain such terms or that Lessees will comply with such
terms.
GOVERNMENT REGULATION
In addition to the general requirements regarding maintenance of the
Aircraft, aviation authorities from time to time issue Airworthiness Directives
("ADS") requiring the operators of aircraft to take particular maintenance
actions or make particular modifications with respect to all aircraft of certain
designated types. Certain manufacturer recommendations may also be issued. To
the extent that a Lessee fails to perform ADs required to maintain its
Certificate of Airworthiness or other manufacturer requirements in respect of an
Aircraft (or if the Aircraft is not currently subject to a Lease), MSAF Group
may have to bear (or, to the extent required under the relevant Lease, share)
the cost of compliance. Other governmental regulations relating to noise and
emissions levels may be imposed not only by the jurisdictions in which the
Aircraft are registered, possibly as part of the airworthiness requirements, but
also in other jurisdictions where the Aircraft operate. A number of
jurisdictions have adopted, or are in the process of adopting, noise regulations
which ultimately will require all aircraft to comply with the most restrictive
currently applicable standards. Such regulations restrict the future operation
of aircraft that do not meet Stage 3 noise requirements and ultimately will
prohibit the operation of such aircraft in the relevant jurisdictions early in
the next century (and by December 31, 1999 in the case of the United States).
Although all of the Initial Aircraft meet Stage 3 requirements, certain of the
Additional Aircraft may not meet Stage 3 requirements. There can be no assurance
that no new ADs or more stringent noise or emissions reduction requirements will
not be adopted in the future that could result in significant costs to MSAF
Group or adversely affect the value of, or its ability to re-lease, Aircraft.
Certain organizations and jurisdictions are now considering tightening noise and
emissions certification requirements for newly manufactured aircraft.
Finally, the effects of deregulation of commercial aviation in the United
States and the European Union ("EU") where Lessees currently, or may in the
future, operate aircraft, may contribute to further uncertainty in the
commercial aviation industry.
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RISKS RELATING TO THE LEASES
RE-LEASING
Upon termination of any Lease, the Servicer will be obligated pursuant to
the terms of the Servicing Agreement on behalf of MSAF Group to re-lease the
related Initial Aircraft. There can be no assurance, however, that MSAF Group
will be able to obtain rental payments and lease terms (including maintenance
and redelivery condition agreements) in the future comparable to those contained
in the Initial Leases. MSAF Group's ability to re-lease Initial Aircraft, as
well as its ability to obtain such rental payments and such terms, may be
adversely affected by, among other things, restrictions imposed by the
Indenture, the economic condition of the airline industry, the supply of
competing aircraft, other matters affecting the demand for particular aircraft
types and competition from lessors offering leases on more favorable terms than
MSAF Group.
The number and types of Initial Aircraft that MSAF Group must place with
lessees through December 31, 2002 is presented in the table below, which shows
the years in which the Leases are contracted to expire (including expirations of
Leases that are assumed to result from letters of intent). The table assumes
that no Initial Lease terminates prematurely and that there are no sales of
Initial Aircraft or purchases of Additional Aircraft. See "-- Risks Relating to
the Lessees" and "-- Lease Termination and Aircraft Repossession" below. More
Initial Aircraft will need to be re-leased if any such Initial Aircraft become
available through premature terminations of Leases.
MSAF GROUP LEASE PLACEMENT REQUIREMENT AT AUGUST 31, 1998
YEAR ENDING DECEMBER 31,
------------------------------------
AIRCRAFT TYPE 1998 1999 2000 2001 2002
- ------------- ---- ---- ---- ---- ----
A310................................................ -- 2 -- -- --
A320................................................ -- 1 -- -- --
A321................................................ -- -- 1 -- --
B737................................................ -- 1 1 3 2
B757................................................ 1 1 -- -- --
B767................................................ -- -- 1 1 --
MD82................................................ -- -- -- -- --
MD83................................................ -- -- -- 1 --
Engine.............................................. -- -- -- -- 1
As illustrated by the table above, the terms of the Initial Leases with
respect to 16 Aircraft and the spare engine, representing approximately 48.11%
of the Portfolio by Initial Appraised Value, are scheduled to expire before
December 31, 2002. There can be no assurance that MSAF Group will be able to
re-lease such Initial Aircraft or any other Initial Aircraft upon the expiration
of the Initial Leases or any Future Leases without incurring significant periods
of downtime or without any adverse effect on the rental rates it is able to
obtain, especially during any period of downturn in demand for aircraft on
operating lease, and that the ability of MSAF to make payments of interest,
principal and premium, if any, on the Notes will not be adversely affected
thereby.
FUNDING OF MAINTENANCE RESERVES
The standards of maintenance observed by the various Lessees and the
condition of the Aircraft at the time of sale or lease may affect the future
values and rental rates for the Aircraft. Under the Initial Leases, it is
primarily the responsibility of the relevant Lessee to maintain the Aircraft and
to comply with all governmental requirements applicable to the Lessee and the
Aircraft, including, without limitation, operational, maintenance, and
registration requirements and in most cases, manufacturer recommendations or ADs
(although in certain cases MSAF Group has agreed to share the cost of complying
with certain ADs and manufacturer service bulletins). Failure of a Lessee to
perform required or recommended maintenance with respect to an Aircraft during
the term of such Lease could result in a grounding of such Aircraft and is
likely
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to require MSAF Group to incur costs, which could be substantial, to restore
such Aircraft to an acceptable maintenance condition prior to sale or
re-leasing. In most cases, the Initial Leases impose an associated liability on
the Lessor to reimburse the Lessee for maintenance performed on the related
Aircraft, based on formulas tied to the extent of any maintenance reserve
payments made by the Lessees which serve as security for the Lessee's obligation
to maintain the Aircraft. In some cases, MSAF Group is obliged to contribute to
the cost of maintenance work performed by the Lessee.
There can be no assurance that MSAF Group's operational cash flow and
available liquid resources will be sufficient to fund maintenance requirements,
particularly as the Aircraft age. Actual rental and maintenance payments by
Lessees and other cash received by MSAF Group may be significantly less than
projected as a result of numerous factors including defaults and any inability
of MSAF Group to obtain satisfactory maintenance terms in Leases. An increasing
number of aircraft operators do not provide for any maintenance payments to be
made by Lessees as security for their maintenance obligations. Any significant
variations in such factors may materially adversely affect the ability of MSAF
Group to make payments of interest, principal and premium, if any, on the Notes
because MSAF Group's maintenance obligations are an Expense that ranks senior to
all payments on the Notes.
LIABILITY, LOSS AND INSURANCE
The Lessees are required under the Initial Leases to indemnify the related
lessor for, and insure against, liabilities arising out of use and operation of
the Initial Aircraft, including third party claims for death or injury to
persons and damage to property for which MSAF Group may be deemed liable. Any
insurance proceeds received by MSAF Group in respect of such claims shall be
paid first to the applicable lessor in the event of loss of the Aircraft, to
effect repairs or in the case of liability insurance, for indemnification of
third party liabilities, with the balance, after deduction for all amounts due
and payable by the Lessee under the applicable lease, to be paid to the Lessee.
The Lessees are also required to maintain public liability, property damage and
hull all risks insurance on the Aircraft at agreed levels subject to standard
market hull deductibles based on aircraft type which generally range from
$500,000 to $1,000,000. There can be no assurance that one or more catastrophic
events will not exceed coverage limits. Any inadequate insurance coverage or
default by the Lessees in fulfilling their indemnification or insurance
obligations will affect the proceeds that would be received upon an event of
loss under the respective Leases or claim under the relevant liability
insurance.
MSAF Group may arrange separate political risk repossession insurance for
its own benefit, covering (a) confiscation, nationalization and requisition of
title of the relevant Aircraft by the government of the country of registry and
denegation and deprivation of legal title and rights, and (b) the failure of the
authorities in that country to allow de-registration and export of the Aircraft,
subject to the conditions of the policies.
REQUIREMENT FOR CERTAIN LICENSES AND APPROVALS
A number of Leases require specific licenses, consents or approvals for
different aspects of the Leases. These include consents from governmental or
regulatory authorities to certain payments under the Leases and to the import,
re-export or de-registration of the Aircraft. No assurance can be given that
such requirements may not be increased by subsequent changes in applicable law
or administrative practice or that a consent, once given, will not be withdrawn.
Furthermore, consents needed in connection with future re-leasing or sale of an
Aircraft may not be forthcoming. Any such event could have an adverse impact on
MSAF Group's ability to re-lease or sell Aircraft.
RISKS RELATING TO THE LESSEES
LESSEE DEFAULTS AND OTHER CREDIT PROBLEMS
The ability of each Lessee to perform its obligations under its Lease will
depend primarily on such Lessee's financial condition. A Lessee's financial
condition may be affected by various factors beyond the control of MSAF Group,
including competition, fare levels, passenger demand, operating costs (including
the price and availability of jet fuel and labor costs), economic conditions in
the countries in which the Lessee
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operates and environmental and other governmental regulation of or affecting the
air transportation business. Many of MSAF Group's existing Lessees under the
Initial Leases are in a weak financial position and investors should expect this
to be the case with future Lessees of the Initial Aircraft and any Additional
Aircraft. As a result, a large proportion of Lessees over time may consistently
be significantly in arrears in their Rental Payments or maintenance payments and
there can be no assurance as to the extent to which Lessees will be able to
perform their financial and other obligations under the Leases.
As of August 31, 1998, two Initial Lessees were in arrears. The amounts
outstanding and overdue in respect of Rental Payments, Maintenance Reserves, and
other miscellaneous amounts due under the Initial Leases (net of default
interest and certain cash in transit) with respect to these two Lessees amounted
to approximately $1.8 million. The weighted average number of days past due of
such arrears was 28.5.
In addition, certain Lessees may experience periodic difficulties in
meeting their maintenance obligations under the Leases. Such difficulties may
arise from, inter alia, the failure of the applicable Lessee to have in place a
sufficiently well established maintenance program, adverse climate and other
environmental conditions in the locations where the related Aircraft are
operated or financial and labor difficulties experienced by the relevant Lessee.
A continuous failure by a Lessee to meet its maintenance obligations under the
relevant Lease (a) could result in a grounding of the Aircraft, (b) in the event
of a re-lease of such Aircraft would likely cause MSAF Group to incur costs,
which may be substantial, in restoring such Aircraft to an acceptable
maintenance condition and (c) would be likely to affect the value of the
Aircraft adversely.
The environment for airlines and freight operators has, in almost all
geographic regions, been extremely favorable in the past few years and the
current level of defaults and Lessee arrears should not be seen as
representative of the level to be expected as economic conditions deteriorate.
There can be no assurance that defaults and amounts in arrears will not
increase, and increase significantly, as the market for aircraft on operating
lease experiences its next cyclical downturn, particularly in regions such as
Asia, where demand for aircraft on operating lease has been high but where there
are soon expected to be acute economic difficulties. Increasing levels of Lessee
defaults and arrears will adversely affect MSAF's ability to make payments on
the Notes.
LESSEE CONCENTRATIONS
European Concentration
At August 31, 1998, the Lessees of 50.96% of the Initial Aircraft by
Initial Appraised Value were operators based in Europe with 38.21% based in
"developed" European markets and 12.75% based in "emerging" European markets
including Russia (using MSCI designations). See "Description of the Notes --
Operating Covenants -- Concentration Limits -- Region Covenants".
The economy of Russia has recently experienced severe economic and
financial difficulties, including the significant devaluation of the rouble
against the dollar (the currency in which lease payments are payable). The
downturn in Russia's economy is likely to undermine business confidence, reduce
demand for air travel and have an adverse impact on the results of operations of
MSAF Group's one Lessee in Russia (3.41% of the Initial Aircraft by Initial
Appraised Value).
The commercial aviation industry in European countries, as in the rest of the
world generally, is highly sensitive to general economic conditions. Because a
substantial portion of airline travel (business and especially leisure) is
discretionary, the industry has tended to suffer severe financial difficulties
during economic downturns. Accordingly, the financial prospects for European
Lessees can be expected to depend largely on the level of economic activity in
Europe generally and in the specific countries in which such Lessees operate. A
recession or other worsening of economic conditions in one or more of these
countries may have a material adverse effect on the ability of European Lessees
to meet their financial and other obligations under the Leases. In addition,
commercial airlines in Europe face, and can be expected to continue to face,
increased competitive pressures, in part as a result of the deregulation of the
airline industry by the EU. There can be no assurance that competitive pressures
resulting from such deregulation will not have a material adverse impact on the
operations of such Lessees.
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Asia Pacific Region Concentration
At August 31, 1998, the Lessees of 12.89% of the Initial Aircraft by
Initial Appraised Value were based in the Asia Pacific region, including Korea,
China and Taiwan, all of which are in "emerging" markets (using MSCI
designations).
Trading conditions in the civil aviation industry in Asia have been
adversely affected by the severe economic and financial difficulties experienced
recently in the region. The economies of the region have experienced
particularly acute difficulties resulting in many business failures, significant
depreciation of local currencies against the dollar (the currency in which
Initial Lease payments are payable), sovereign and corporate credit ratings
downgrades and internationally organized financial stability measures. The
downturn in the region's economies is likely to undermine business confidence,
reduce demand for air travel and have an adverse impact on the results of
operations of MSAF Group's Lessees in the region, and consequently on MSAF
Group's revenues and cash flows. Several airlines in the region, including
certain Lessees, have recently announced their intention to reschedule their
aircraft purchase obligations, eliminate certain routes and reduce employees.
The downturn in Asia is likely to be exacerbated by the large number of aircraft
currently on order by Asian airlines. Since 1990, the Asian market has
demonstrated the most significant growth rates, albeit from a relatively smaller
base, compared with other regional markets and the recessionary conditions that
are now expected to prevail in large parts of the region for a significant
period of time will have a significant adverse impact on global aircraft demand.
In particular, one Lessee, China Airlines, may experience heightened
difficulties in the short term as a result of the crash of one of its A300
aircraft on February 16, 1998 and the consequent grounding by the Taiwanese
civil aviation authorities of all of its A300 aircraft. China Airlines is likely
to suffer a significant loss of revenue for so long as such aircraft are
grounded and, in the longer term, its business and operations may suffer from,
among other things, the negative impact on consumer confidence caused by the
crash. Among the grounded aircraft is one of the Initial Aircraft, although
under the terms of the relevant Initial Lease the Lessee is obliged to continue
to make all Rental Payments.
Latin American Concentration
At August 31, 1998, the Lessees with respect to 17.67% of the Initial
Aircraft by Initial Appraised Value were based in Latin America. As in Asia, the
prospects for Lessee operations in these countries can be expected to depend in
part on the general level of political stability and economic activity and
policies in those countries. Although certain countries in Latin America have
experienced substantial improvement in their economies in the past several years
which has resulted in increased political stability, overall increased economic
growth, lower inflation rates and revitalized economies, there can be no
assurance that such progress can be maintained or that further progress will be
made.
The economy of the Latin American region as a whole and of particular Latin
American countries may be materially affected by developments in other countries
in Latin America and also by developments in countries in other regions of the
world that are perceived to demonstrate similar "emerging market"
characteristics. The downturn in Asia and in Russia has recently begun to
undermine business confidence in Latin America and to adversely affect the
economies of Latin American countries. Brazil has experienced significant
downturns in its financial markets, with large decreases in financial asset
prices and considerable pressure for a devaluation of the Brazilian currency.
Three of the Initial Lessees and 11.36% of the Initial Aircraft by Initial
Appraised Value operate in Brazil. The loss of confidence in the Brazilian
markets and currency has been associated with the economic crises currently
affecting "emerging markets" in Asia. The Brazilian government has responded to
these pressures with a series of austerity measures including increased interest
rates, public spending cuts and tax increases. This has led to widespread
expectations that economic growth in Brazil will be significantly reduced
through at least 1998 with the real possibility of a recession that may
adversely affect the operations of MSAF Group's Brazilian Lessees.
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North American Concentration
At August 31, 1998, the Lessees with respect to 6.47% of the Initial
Aircraft by Initial Appraised Value were based in North America. As in Europe,
the commercial aviation industry in North America is highly sensitive to general
economic conditions. Because a substantial portion of airline travel (business
and especially leisure) is discretionary, the industry has tended to suffer
severe financial difficulties during economic downturns. Over the last several
years, nearly half of the major North American passenger airlines have filed
Chapter 11 bankruptcy proceedings and several major U.S. airlines have ceased
operations altogether, including a recent former lessee of MSAF Group. While
airline profitability in the region has improved, increasing competition from
low-cost, low-fare air carriers, in conjunction with an inability to reduce
labor and other costs to sustainable levels, continues to put pressure on North
American airline margins. Of MSAF Group's two North American Initial Lessees,
one has in the past several years emerged from bankruptcy and there can be no
assurance that such Lessee will not re-enter, or that other Lessees in this
region will not enter, bankruptcy, insolvency or other similar proceedings. Such
proceedings may adversely affect the ability of such Lessees to make timely and
full Rental Payments under their respective Leases.
LEASE TERMINATION AND AIRCRAFT REPOSSESSION
MSAF Group's rights and remedies in the event of a default under each Lease
include termination and repossession. If a defaulting Lessee contests such
termination and repossession or is bankrupt or under court protection, however,
it may be difficult, expensive and time-consuming for MSAF Group to enforce its
rights and the relevant Aircraft may be off-lease for a prolonged period. MSAF
Group may incur direct costs associated with repossession of an Aircraft,
including legal and similar costs and the direct costs of returning the Aircraft
to an appropriate jurisdiction and any necessary maintenance to make the
Aircraft available for re-leasing or sale. Maintenance costs with respect to
repossessed aircraft may be significant. Repossession does not necessarily imply
an ability to export or deregister and profitably redeploy the Aircraft. In
cases where a Lessee or other operator flies only domestic routes, repossession
may be more difficult, especially if the jurisdiction permits the Lessee or such
other operator to resist deregistration and the Aircraft is registered in such
jurisdiction. In addition, in connection with the repossession of an aircraft,
the aircraft owner may also find it necessary to pay debts secured by
outstanding Liens or taxes to the extent not paid by the Lessee or other
operator. Significant costs may also be incurred in retrieving or recreating
aircraft records, required for reregistration of the Aircraft and obtaining a
Certificate of Airworthiness for the Aircraft.
MSAF Group may suffer adverse consequences as a result of a Lessee default
and the related termination of the Lease and repossession of the related
Aircraft. MSAF Group's rights upon a Lessee default also may be subject to the
limitations of applicable law, including the need to obtain a court order for
repossession of the Aircraft and/or consents for deregistration or re-export of
the Aircraft. When a defaulting Lessee is in bankruptcy, protective
administration, insolvency or similar event, additional limitations may apply.
Certain jurisdictions will give rights to the trustee in bankruptcy or a similar
officer to assume or reject the Lease or to assign it to a third party, or will
entitle the Lessee or another third party to retain possession of the Aircraft
(without performing the obligations under the relevant Lease). Accordingly, MSAF
Group may be delayed in, or prevented from, enforcing certain of its rights
under a Lease and in re-leasing the affected Aircraft. Further, the premature
termination of Leases may, in certain circumstances, lead MSAF Group to incur
swap breakage costs under its agreements with Swap Providers.
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RISKS RELATING TO PAYMENTS ON THE NOTES
CASH FLOW FROM AIRCRAFT AND LEASES NOT PREDICTABLE; FAILURE OF ACTUAL
EXPERIENCE TO MATCH ASSUMPTIONS
The expected repayment of the Notes described in this Prospectus was
arrived at on the basis of the Assumptions. It is highly unlikely that the
Assumptions will be consistent with MSAF Group's experience for numerous
reasons. Any inability of MSAF Group to find financially able and willing
Lessees of the Aircraft at acceptable rental rates will affect the timing and
amount of proceeds realized from Leases of Aircraft. In addition, other economic
and political factors, such as prevailing interest rates and the availability of
credit and market demand for aircraft, cannot be assured. Rental payments,
insurance recoveries, maintenance reserve payments, expenses and liabilities
will often be dependent upon the actions of third parties, which are difficult
to predict and are generally not within MSAF Group's control. Accordingly,
collections and other realizations with respect to certain Leases and Aircraft
could occur at substantially different times and levels than expected and may
not occur at all. As a result, there can be no assurance that MSAF Group will be
able to repay the initial Outstanding Principal Balance on any subclass of the
Notes.
SUBORDINATION PROVISIONS
The Expenses and certain other payments will be senior in priority of
payment to the Notes and will be paid out of funds on deposit in the Collection
Account before any payments are made on the Notes, as more fully described
below. Under certain circumstances, the rights of the Noteholders, as holders of
each subclass of Notes, to receive payments of principal in respect of such
subclass of Notes and to exercise remedies upon default will be subordinated to
the rights of the Noteholders with respect to the most senior class of Notes
then outstanding. Upon the occurrence of an Event of Default, the security
trustee (the "SECURITY TRUSTEE"), acting on behalf of the Noteholders and each
other secured creditor under a Security Trust Agreement dated as of March 3,
1998 among Bankers Trust Company, in its capacity as Security Trustee, the
Trustee and the service providers described therein (the "SECURITY TRUST
AGREEMENT"), shall have the exclusive right to direct the Administrative Agent
in the exercise of remedies. The Security Trustee will have sole discretion as
to the exercise and enforcement of any and all remedies with respect to the
Collateral. Accordingly, if an Event of Default occurs and is continuing, the
holders of each class of Notes will not be permitted to enforce certain rights
with respect to such default until all amounts owing under any Notes outstanding
("OUTSTANDING") ranking senior thereto and certain other amounts have been paid
in full.
RISKS RELATING TO THE CAPITAL MARKETS
ABSENCE OF PUBLIC MARKET
The New Notes are being offered to the holders of the Old Notes. The Old
Notes were issued to a limited number of institutional investors. The New Notes
are new securities for which there is currently no market. MSAF does not intend
to apply for listing of the New Notes on any securities exchange (other than the
Luxembourg Stock Exchange) or to seek approval for quotation through any
automated quotation system. There can be no assurance that an active public
market for the New Notes will develop. If a market for the New Notes were to
develop, future trading prices of such securities will depend upon many factors,
including general economic conditions and the financial condition, performance
and prospects of MSAF.
REFINANCING OF CERTAIN NOTES
The Subclass A-1 Notes and certain subclasses of Refinancing Notes and
Additional Notes are expected to reach their Expected Final Payment Dates before
MSAF has received sufficient Available Collections to pay all of the principal
on such Notes. MSAF will attempt to refinance the Subclass A-1 Notes and such
subclasses of Refinancing Notes and Additional Notes with the net cash proceeds
realized from public offerings and sales of Refinancing Notes. The Refinancing
Notes will rank pari passu with the remaining outstanding subclasses of Notes
belonging to the same class as the Notes to be refinanced but their interest
rate, average life, principal payment provisions, redemption provisions and
other economic terms will be determined by the Controlling Trustees of MSAF at
the time of issuance and may be substantially different
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from those applicable to the Notes to be refinanced. No assurance can be given,
however, as to MSAF's ability to refinance Notes in this manner. Any attempt to
issue Refinancing Notes may be adversely affected by conditions in the capital
markets generally or the market's then current perception of the commercial
aviation industry, the operating lease business or MSAF Group in particular. Any
failure to sell Refinancing Notes on acceptable terms at the required times will
result in failure to refinance the Subclass A-1 Notes and any similar subclass
of Refinancing Notes and Additional Notes. This may increase the overall cost of
borrowing under Refinancing Notes or Additional Notes, may affect the liquidity
and market prices of the Notes generally and may affect the timing of repayment
of principal on lower ranked Notes as a result of the need to make principal
payments from operational cash flow on the Subclass A-1 Notes and any similar
subclass of Refinancing Notes and Additional Notes earlier than expected.
CERTAIN BANKRUPTCY CONSIDERATIONS
If Morgan Stanley or any of its affiliates were to become a debtor in a
proceeding under the U.S. Bankruptcy Code and a creditor or
trustee-in-bankruptcy of such debtor or such debtor itself were to request a
court to order that the assets and liabilities of Morgan Stanley or any such
affiliate should be substantively consolidated with those of MSAF Group, delays
in payments on the Notes could result. In addition, a creditor of Morgan Stanley
or any of its affiliates may seek to attach MSAF's assets, including the
Aircraft. Should the bankruptcy court rule in favor of any such creditor or
trustee-in-bankruptcy or such debtor, such court could substantively consolidate
MSAF Group with Morgan Stanley or any such affiliate or otherwise consider MSAF
and the Aircraft-Owning Subsidiaries to be part of Morgan Stanley's or such
affiliate's estate or take other actions that would be adverse to the
Noteholders and that could result in reductions in payments on the Notes.
Davis Polk & Wardwell has delivered a reasoned opinion to Morgan Stanley
and MSAF Group to the effect that, based on various assumptions and
qualifications set forth in the opinion, in a proceeding under Chapter 11 of the
Bankruptcy Reform Act of 1978, as amended (the "U.S. BANKRUPTCY CODE") relating
to Morgan Stanley or the subsidiary of Morgan Stanley that owns the Beneficial
Interest, a court properly presented with the facts and exercising reasonable
discretion and applying New York law would not grant an order consolidating the
assets and liabilities of MSAF Group with those of Morgan Stanley or such
subsidiary.
There is no case law directly on point, however, and there can be no
assurance that a court would not decide differently from the views expressed in
counsel's opinion and such opinion represents only the best judgment of counsel
and is not binding in the courts. In particular, such opinion depends on certain
factual assumptions and the occurrence of different facts could lead a court to
reach a different conclusion. The assumptions and qualifications contained in
this opinion include an assumption that the representations and warranties set
forth in the Amended and Restated Trust Agreement and the Administrative Agency
Agreement are and will continue to be accurate and that the parties thereto will
continue to be in compliance with their obligations thereunder.
RISKS RELATING TO TAX
Neither the Trustee nor MSAF will make any additional payments to
Noteholders in respect of any withholding or deduction required to be made by
applicable law with respect to payments made on the Notes. In the event that
MSAF is or will be required to make a withholding or deduction, it will use
reasonable efforts to avoid the application of such withholding taxes and may in
certain circumstances redeem the Notes in the event such withholding taxes
cannot be avoided. In the event any withholding taxes are imposed with respect
to the Notes and MSAF does not redeem the Notes, the net amount of interest
received by Noteholders will be reduced by the amount of the withholding or
deduction.
MSAF believes that it will not become subject to any material taxes in any
of the jurisdictions in which any of the Lessees are organized or operate under
the present tax laws of such jurisdictions. However, there can be no assurance
that other Leases to which MSAF Group may become a party as a result of the
re-leasing of the Aircraft or acquisition of Additional Aircraft will not result
in the imposition of withholding or other taxes.
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), MSAF will accept for exchange Old Notes which are properly
tendered on or prior to the Expiration Date and not withdrawn as permitted
below. As used herein, the term "Expiration Date" means 5:00 p.m., New York City
time, on December 3, 1998; provided, however, that if MSAF, in its sole
discretion, has extended the period of time for which the Exchange Offer is
open, the term "Expiration Date" means the latest time and date to which the
Exchange Offer is extended. As of January 12, 1999, the Expiration Date was
extended further to 5:00 p.m., New York City time on January 18, 1999 (the
Exchange Offer was initially extended on December 3, 1998) and may be further
extended as described herein.
As of the date of this Prospectus, $1,050,000,000 aggregate initial
principal amount of the Old Notes were outstanding. This Prospectus, together
with the Letter of Transmittal, is first being sent on or about the date set
forth on the cover page hereof to all Holders of Old Notes known to MSAF. MSAF's
obligations to accept Old Notes for exchange pursuant to the Exchange Offer is
subject to certain conditions as set forth under "Certain Conditions to the
Exchange Offer" below.
MSAF expressly reserves the right, at any time or from time to time, to
extend the period of time during which the Exchange Offer is open, and thereby
delay acceptance of any Old Notes, by giving oral or written notice of such
extension to the Exchange Agent and notice of such extension to the Holders as
described below. During any such extension, all Old Notes previously tendered
will remain subject to the Exchange Offer and may be accepted for exchange by
MSAF. Any Old Notes not accepted for exchange for any reason will be credited to
an account maintained with the Book-Entry Transfer Facility without expense to
the tendering Holder thereof as promptly as practicable after the expiration or
termination of the Exchange Offer. Notwithstanding the foregoing, pursuant to
the Registration Agreement, MSAF has agreed to keep the Exchange Offer open for
not less than 20 business days commencing from the date notice thereof is mailed
to the holders of the Old Notes (or longer if required by applicable law).
MSAF expressly reserves the right to amend or terminate the Exchange Offer,
and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions of the Exchange Offer
specified below under "Certain Conditions to the Exchange Offer." MSAF will give
oral or written notice of any extension, amendment, non-acceptance or
termination to the Holders of the Old Notes as promptly as practicable, such
notice in the case of any extension to be issued by means of a press release or
other public announcement no later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the Indenture in connection with the Exchange Offer. MSAF intends to conduct the
Exchange Offer in accordance with the applicable requirements of the Exchange
Act and the rules and regulations of the Commission thereunder.
PROCEDURES FOR TENDERING OLD NOTES
The tender to MSAF of Old Notes by a Holder thereof as set forth below and
the acceptance thereof by MSAF will constitute a binding agreement between the
tendering Holder and MSAF upon the terms and subject to the conditions set forth
in this Prospectus and in the accompanying Letter of Transmittal. Except as set
forth below, a Holder (which term, for purposes of the Exchange Offer, includes
any participant in the Book-Entry Transfer Facility system whose name appears on
a security position listing as a holder of such Old Notes) who wishes to tender
Old Notes for exchange pursuant to the Exchange Offer must transmit to the
Exchange Agent on or prior to the Expiration Date either (i) a properly
completed and duly executed Letter of Transmittal or a facsimile thereof,
including all other documents required by such Letter of Transmittal, to the
Exchange Agent at the address set forth below under "Exchange Agent" or (ii) a
computer-generated message (an "AGENT'S MESSAGE"), transmitted by means of the
Book-Entry Transfer Facility's ATOP (as defined below) system and received by
the Exchange Agent and forming part of a Book-Entry Confirmation,
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in which such Holder acknowledges and agrees to be bound by the terms of the
Letter of Transmittal. In addition, in order to deliver Old Notes (i) a timely
confirmation of a book-entry transfer (a "BOOK-ENTRY CONFIRMATION") of such Old
Notes into the Exchange Agent's account at The Depository Trust Company (the
"BOOK-ENTRY TRANSFER FACILITY") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date or (ii) the Holder must comply with the guaranteed delivery
procedures described below.
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY
IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, WITH RETURN RECEIPT
REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL SHOULD BE SENT TO MSAF.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a Holder of the Old Notes who has not
completed the box entitled "Special Issuance Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution (as defined
below). In the event that signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantees
must be by a firm which is a member of a registered national securities exchange
or a member of the National Association of Securities Dealers, Inc. or by a
commercial bank or trust company having an office or correspondent in the United
States (collectively, "ELIGIBLE INSTITUTIONS").
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
MSAF in its sole discretion, which determination shall be final and binding.
MSAF reserves the absolute right to reject any and all tenders of any particular
Old Notes not properly tendered or to not accept any particular Old Notes which
acceptance might, in the judgment of MSAF or its counsel, be unlawful. MSAF also
reserves the absolute right in its sole discretion to waive any defects or
irregularities or conditions of the Exchange Offer as to any particular Old
Notes either before or after the Expiration Date (including the right to waive
the ineligibility of any Holder who seeks to tender Old Notes in the Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offer as
to any particular Old Notes either before or after the Expiration Date
(including the Letter of Transmittal and the instructions thereto) by MSAF shall
be final and binding on all parties. Unless waived, any defects or
irregularities in connection with the tenders of Old Notes for exchange must be
cured within such reasonable period of time as MSAF shall determine. Neither
MSAF, the Exchange Agent nor any other person shall be under any duty to give
notification of any defect or irregularity with respect to any tender of Old
Notes for exchange, nor shall any of them incur any liability for failure to
give such notification.
If the Letter of Transmittal is signed by a person or persons other than
the Holders of Old Notes, such Letter of Transmittal must be accompanied by
appropriate powers of attorney, in either case signed exactly as the name or
names of the Holders that appear on the security position listing maintained by
DTC.
If the Letter of Transmittal or powers of attorney are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
person should so indicate when signing and, unless waived by MSAF, proper
evidence satisfactory to MSAF of its authority to so act must be submitted.
By tendering (including transmission of an Agent's Message), each Holder of
Old Notes will represent to MSAF that, among other things, (i) the New Notes
acquired pursuant to the Exchange Offer are being obtained in the ordinary
course of business of the person receiving such New Notes, whether or not such
person is such Holder, (ii) neither the Holder of Old Notes nor any such other
person has an arrangement or understanding with any person to participate in the
distribution of such New Notes, (iii) if the Holder is not a broker-dealer, or
is a broker-dealer but will not receive New Notes for its own account in
exchange for Old Notes, neither the Holder nor any such other person is engaged
in or intends to participate in the distribution of such New Notes and (iv)
neither the Holder nor any such other person is an "affiliate" of MSAF, within
the meaning of Rule 405 under the Securities Act. By tendering (including
transmission of an Agent's
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Message) each Holder of Old Notes that is a broker-dealer (whether or not it is
also an "affiliate") that will receive New Notes for its own account pursuant to
the Exchange Offer will represent that Old Notes to be exchanged for New Notes
were acquired by it as a result of market-making activities or other trading
activities and will acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Notes; however, by so acknowledging and by delivering a prospectus, it will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
MSAF will accept, promptly after the Expiration Date, all Old Notes properly
tendered and will issue the New Notes promptly after acceptance of the Old
Notes. See "Certain Conditions to the Exchange Offer" below. For purposes of the
Exchange Offer, MSAF shall be deemed to have accepted properly tendered Old
Notes for exchange when, as and if MSAF has given oral or written notice thereof
to the Exchange Agent.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of Book-Entry Confirmation of such Old Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
book-entry transfer procedures described below and either (i) a properly
completed and duly executed Letter of Transmittal or facsimile thereof,
including all other documents required by such Letter of Transmittal or (ii) a
properly transmitted Agent's Message. If any tendered Old Notes are not accepted
for any reason set forth in the terms and conditions of the Exchange Offer, such
unaccepted or non-exchanged Old Notes will be credited to an account maintained
with such Book-Entry Transfer Facility as promptly as practicable after the
expiration or termination of the Exchange Offer.
INTEREST ON THE NEW NOTES
Holders of Old Notes that are accepted for exchange will not receive
accrued interest thereon at the time of exchange. However, each New Note will
bear interest from the most recent date to which interest has been paid on the
Old Notes or New Notes, or if no interest has been paid on the Old Notes or New
Notes.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer promptly after the date of this Prospectus. All deliveries of Old
Notes must be made by book-entry transfer to the account maintained by the
Exchange Agent at the Book-Entry Transfer Facility. Any financial institution
that is a participant in the Book-Entry Transfer Facility's systems may make
book-entry delivery of Old Notes by causing the Book-Entry Transfer Facility to
transfer such Old Notes into the Exchange Agent's account in accordance with the
Book-Entry Transfer Facility's Automated Tender Offer Program ("ATOP")
procedures for transfer. Holders of Old Notes who are unable to deliver
confirmation of the book-entry tender of their Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility or all other documents
required by the Letter of Transmittal to the Exchange Agent on or prior to the
Expiration Date, must tender their Old Notes according to the guaranteed
delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
If a Holder of the Old Notes desires to tender such Old Notes and time will
not permit such Holder's required documents to reach the Exchange Agent on or
prior to the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) on or prior to the Expiration Date, the
Exchange Agent receives from such Eligible Institution either a properly
completed and duly executed Letter of Transmittal (or a facsimile thereof) or a
properly transmitted Agent's Message and Notice of Guaranteed Delivery,
substantially in the form provided by MSAF (by telegram, telex, facsimile
transmission, mail or hand delivery), setting forth the name and address of such
Holder of Old Notes and the amount of Old Notes tendered, stating that the
tender
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is being made thereby and guaranteeing that within five New York Stock Exchange
("NYSE") trading days after the date of execution of the Notice of Guaranteed
Delivery, a Book-Entry Confirmation and all other documents required by the
Letter of Transmittal will be deposited by the Eligible Institution with the
Exchange Agent, and (iii) a Book-Entry Confirmation and all other documents
required by the Letter of Transmittal, are received by the Exchange Agent within
five NYSE trading days after the date of execution of the Notice of Guaranteed
Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, either (i) a written notice of withdrawal
must be received by the Exchange Agent at one of the addresses set forth below
under "Exchange Agent" or (ii) the appropriate procedures of the Book-Entry
Transfer Facility's ATOP system must be complied with. Any such notice of
withdrawal must specify the name of the person having tendered the Old Notes to
be withdrawn and identify the Old Notes to be withdrawn (including the principal
amount of such Old Notes). Any notice of withdrawal must specify the name and
number of the account at the Book-Entry Transfer Facility to be credited with
the withdrawn Old Notes and otherwise comply with the procedures of such
facility. All questions as to the validity, form and eligibility (including time
of receipt) of such notices will be determined by MSAF, whose determination
shall be final and binding on all parties. Any Old Notes so withdrawn will be
deemed not to have been validly tendered for exchange for purposes of the
Exchange Offer. Any Old Notes which have been tendered for exchange but which
are not exchanged for any reason will be credited to an account maintained with
Book-Entry Transfer Facility for the Old Notes as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Old Notes may be retendered by following one of the procedures
described under "Procedures for Tendering Old Notes" above at any time on or
prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, MSAF shall not
be required to accept for exchange, or to issue New Notes in exchange for, any
Old Notes and may terminate or amend the Exchange Offer, if at any time before
the acceptance of such Old Notes for exchange or the exchange of the New Notes
for such Old Notes, such acceptance or issuance would violate applicable law or
any interpretation of the staff of the Commission.
The foregoing condition is for the sole benefit of MSAF and may be asserted
by MSAF regardless of the circumstances giving rise to such condition or may be
waived by MSAF in whole or in part at any time and from time to time in its sole
discretion. The failure by MSAF at any time to exercise the foregoing rights
shall not be deemed a waiver of any such right and each such right shall be
deemed an ongoing right which may be asserted at any time and from time to time.
In addition, MSAF will not accept for exchange any Old Notes tendered, and
no New Notes will be issued in exchange for any such Old Notes, if at such time
any stop order shall be threatened or in effect with respect to either the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939, as
amended.
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EXCHANGE AGENT
Bankers Trust Company has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal should be delivered to the
Exchange Agent at one of the addresses set forth below. Questions and requests
for assistance, requests for additional copies of this Prospectus or of the
Letter of Transmittal and requests for Notices of Guaranteed Delivery should be
directed to the Exchange Agent, addressed as follows:
Delivery To: Bankers Trust Company, as Exchange Agent
By Facsimile: By Overnight Mail or Courier: By Hand Delivery:
BT Services Tennessee, Inc. BT Services Tennessee, Inc. Bankers Trust Company
Reorganization Unit Corporate Trust & Agency Corporate Trust & Agency
P.O. Box 292737 Group Group
Nashville, Tennessee Reorganization Unit Attn: Reorganization
37229-2737 648 Grassmere Park Road Department
Nashville, Tennessee 37211 Receipt & Delivery Window
123 Washington Street, 1st
Floor
New York, New York 10006
Facsimile Transmission Confirm by Telephone: Information:
Number: (615) 835-3572 (800) 735-7777
(615) 835-3701
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE WILL NOT
CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
The principal solicitation is being made by mail; however, additional
solicitation may be made by telegraph, telephone or in person by the Financial
Advisor, on behalf of MSAF. No additional compensation will be paid to the
Financial Advisor who engages in soliciting tenders. MSAF will not make any
payment to brokers, dealers, or others soliciting acceptances of the Exchange
Offer. MSAF however, will pay the Exchange Agent reasonable and customary fees
for its services and will reimburse it for its reasonable out-of-pocket expenses
in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by MSAF and are estimated in the aggregate to be $500,000.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith. If, however, a transfer tax is
imposed for any reason other than the transfer of Old Notes to MSAF or its order
pursuant to the Exchange Offer, the amount of any such transfer taxes (whether
imposed on the Holder or any other person) will be payable by the tendering
Holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted, the amount of such transfer taxes will be billed directly to
such tendering Holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legends thereon. In general,
the Old Notes may not be offered or sold, unless registered under the Securities
Act, except pursuant to an exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities laws. MSAF does not intend to
register the Old Notes under the Securities Act.
MSAF believes that, based upon interpretations contained in letters issued
to third parties by the staff of the Commission, New Notes issued pursuant to
the Exchange Offer in exchange for Old Notes may be offered
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for resale, resold or otherwise transferred by each Holder thereof (other than a
broker-dealer, as set forth below, or any such Holder which is an "affiliate" of
MSAF within the meaning of Rule 405 under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities Act
provided that such New Notes are acquired in the ordinary course of such
Holder's business and such holder has no arrangement or understanding with any
person to participate in the distribution of such New Notes. Eligible Holders
wishing to accept the Exchange Offer must represent to MSAF in the Letter of
Transmittal that such conditions have been met and must represent, if such
Holder is not a broker-dealer, or is a broker-dealer but will not receive New
Notes for its own account in exchange for Old Notes, that neither such Holder
nor the person receiving such New Notes, if other than the Holder, is engaged in
or intends to participate in the distribution of such New Notes. If any Holder
has any arrangement or understanding with respect to the distribution of the New
Notes to be acquired pursuant to the Exchange Offer, such Holder (i) will not be
able to rely on the applicable interpretations of the staff of the Commission
and (ii) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transaction. Each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must represent that the Old Notes tendered in exchange therefor
were acquired as a result of market-making activities or other trading
activities and must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with the resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities. MSAF has
agreed that, starting on the Expiration Date and ending on the close of business
on the 180th day following the Expiration Date, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution". However, to comply with the securities laws of certain
jurisdictions, if applicable, the New Notes may not be offered or sold unless
they have been registered or qualified for sale in such jurisdictions or an
exemption from registration or qualification is available and is complied with.
MSAF has agreed, pursuant to the Registration Agreement and subject to certain
specified limitations therein, to register or qualify the New Notes for offer or
sale under the securities or blue sky laws of such jurisdictions as any holder
of the Notes reasonably request in writing. Unless so requested, MSAF does not
intend to register or qualify the sale of the New Notes in any such
jurisdictions. In addition, the tender of Old Notes pursuant to the Exchange
Offer will reduce the principal amount of the Old Notes outstanding, which may
have an adverse effect upon, and increase the volatility of, the market price of
the Old Notes due to a reduction in liquidity.
40
46
THE PARTIES
MSAF GROUP
MSAF is a special-purpose statutory business trust formed on October 30,
1997 under the laws of Delaware for an unlimited duration for certain limited
purposes, including owning all of the beneficial interest in or share capital
of, as applicable, the Aircraft-Owning Subsidiaries and acquiring, financing,
re-financing, owning, leasing, re-leasing, selling, maintaining and modifying
the Initial Aircraft and any Additional Aircraft. MSAF Group may also enter into
certain hedging contracts as described under "Management's Discussion and
Analysis of Results of Operation and Financial Condition -- Interest Rate
Management", and establish and provide loans or guarantees to, or in respect of,
its subsidiaries and any entities that may be established or acquired in the
future in connection with acquisitions of Additional Aircraft ("FUTURE MSAF
GROUP ENTITIES").
MSAF initially has four direct subsidiaries: MSA I (formed on October 30,
1997), in which it holds all of the beneficial interest, and SPC-5 (incorporated
on August 8, 1997), Greenfly (Ireland) Limited (incorporated on September 22,
1997), and Redfly (UK) Limited (incorporated on November 19, 1997), in each of
which it holds 100% of the capital stock.
All of the Beneficial Interest is owned by a wholly-owned subsidiary of
Morgan Stanley although such subsidiary may transfer all or a portion of such
Beneficial Interest to related or unrelated third parties in the future.
Prior to the issuance of the Old Notes, MSAF Group received approximately
$920 million in non-interest bearing loans from Morgan Stanley Financing Inc.
("MSF"), a wholly-owned subsidiary of Morgan Stanley, which were utilized to
purchase 31 of the 32 Initial Aircraft. At the time of the issuance of the Old
Notes, the loans were automatically converted into a beneficial interest. A
beneficial interest distribution of approximately $976 million was paid to MSF,
which included repayment of the interest free loans and a distribution of
approximately $56 million (comprising $21 million in lease rentals accrued to
the date of issuance of the Old Notes with the balance representing finance and
other charges paid to MSF).
In connection with the issuance of the Old Notes, MSAF paid approximately
$7.1 million in subscription discounts and commissions to subsidiaries of Morgan
Stanley.
There are six trustees of MSAF. The Delaware Trustee is Wilmington Trust
Company. The Controlling Trustees are three individuals appointed by a
subsidiary of Morgan Stanley. The Independent Trustees are two individuals, each
of whom will not be an officer, director, employee or affiliate of Morgan
Stanley. One of the Independent Trustees is a partner of Shearman & Sterling, a
law firm that regularly provides legal services to Morgan Stanley and its
affiliates. The controlling or independent trustees or directors, as applicable,
of each Aircraft-Owning Subsidiary are the same persons as the Controlling
Trustees and the Independent Trustees, unless otherwise required by any
provisions of local law mandating a particular citizenship for trustees or
directors. Neither MSAF nor any of the Aircraft-Owning Subsidiaries has any
employees or executive officers. Accordingly, the Controlling Trustees rely upon
the Servicer, the Administrative Agent, the Cash Manager, the Financial Advisor
and the other service providers for all asset servicing, executive and
administrative functions pursuant to the respective service provider agreements.
Transactions or proceedings relating to certain insolvency proceedings of MSAF
may only be approved by a unanimous vote of all the Controlling Trustees and
Independent Trustees.
Neither MSAF nor any of its subsidiaries is involved in or subject to any
legal or arbitration proceedings relating to claims or amounts which are
material in the context of the issue of the Notes nor is MSAF aware that any
such proceedings are pending or threatened.
MSAF's registered office is located at 1100 North Market Street, Rodney
Square North, Wilmington, Delaware 19890-0001 care of Wilmington Trust Company,
attention: Corporate Trust Administration and its telephone number is
1-302-651-1000.
41
47
SERVICER
ILFC provides various aircraft-related services to MSAF Group as Servicer
under the Servicing Agreement.
ILFC is engaged in the leasing and management of commercial jet aircraft
under operating leases for its own portfolio as well as for third party lessors.
As of December 31, 1997, and giving effect to MSAF Group's acquisition of all
the Initial Aircraft, the portfolio of aircraft managed by ILFC (the "ILFC
MANAGED PORTFOLIO") comprised 364 aircraft, of which ILFC and its affiliates
owned 297, valued at greater than $17 billion and operated by approximately 100
airlines in more than 49 countries throughout the world. On September 2, 1997,
ILFC announced that it had placed new aircraft orders with Airbus, for 65
aircraft, and with Boeing, for 61 Aircraft. ILFC has committed to purchase a
total of 335 aircraft from manufacturers, deliverable through 2006. In addition,
ILFC is engaged in the remarketing of commercial jets for its own account, for
airlines and for third party lessors.
ILFC is headquartered in Los Angeles, California, from where its staff of
approximately 75 employees handles all of the leasing, management and
remarketing relationships. ILFC's management services include collecting rental
payments, arranging and monitoring aircraft maintenance performed by others,
technical inspection of aircraft, arranging and monitoring insurance, arranging
for aircraft valuations, registration and deregistration of aircraft, monitoring
compliance with lease agreements and enforcement of lease provisions against
lessees, confirming compliance with applicable ADs and facilitating delivery and
redelivery of aircraft. ILFC may also arrange the sale of its customers'
aircraft to third parties. See "Risk Factors -- Risks Relating to MSAF Group and
Certain Third Parties".
The table below sets forth the different aircraft comprising the ILFC
Managed Portfolio as of December 31, 1997 by manufacturer and by whether the
aircraft are owned and managed by affiliates of ILFC or simply managed for third
parties (including MSAF Group), and giving effect to MSAF Group's acquisition of
all the Initial Aircraft as of August 31, 1998.
OTHER MANAGED
AIRCRAFT TYPE AND CLASS MSAF GROUP ILFC FLEET(1) THIRD PARTIES TOTAL
----------------------- ---------- ------------- ------------- -----
Airbus
A300.................................... 1 7 -- 8
A310.................................... 3 12 -- 15
A319.................................... -- 4 1 5
A320.................................... 3 38 -- 41
A321.................................... 1 13 -- 14
A330.................................... -- 11 -- 11
A340.................................... -- 9 -- 9
Boeing
B737-300/400/500........................ 10 114 8 132
B747-200................................ -- 3 -- 3
B747-300................................ 1 2 -- 3
B747-400................................ -- 9 -- 9
B757-200................................ 3 50 -- 53
B767-200................................ 1 4 -- 5
B767-300................................ 3 32 1 36
McDonnell Douglas Corporation
MD11.................................... -- 6 -- 6
MD82.................................... 1 -- -- 1
MD83.................................... 2 7 -- 9
MD87.................................... -- 1 -- 1
Fokker N.V.
F70..................................... 3 -- -- 3
--- --- --- ---
Total................................... 32 321 10 364
=== === === ===
Body Type:
Widebody................................ 9 95 1 105
Narrowbody.............................. 23 226 9 259
Stage Compliance:
Stage 3................................. 32 321 10 364
- ---------------
42
48
(1) Certain aircraft included in the ILFC fleet are owned by joint ventures or
pursuant to sale leaseback or other arrangements in which unaffiliated
parties have interests.
ADMINISTRATIVE AGENT
Cabot, an indirect wholly-owned subsidiary of Morgan Stanley, acts as
Administrative Agent to MSAF Group and will provide administrative services
including monitoring compliance by the Servicer with the Servicing Agreement and
by any servicer of Additional Aircraft under their respective servicing
agreements.
CASH MANAGER, TRUSTEE, SECURITY TRUSTEE AND REFERENCE AGENT
Bankers Trust Company acts as Cash Manager. Subject to certain limitations
and at the direction of MSAF Group, the Cash Manager is authorized to invest the
funds held by MSAF Group in the Collection Account and the Lessee Funded Account
in certain prescribed investments. Bankers Trust Company also acts as Trustee
under the Indenture, as Security Trustee under the Security Trust Agreement and
as initial Reference Agent under the Reference Agency Agreement.
FINANCIAL ADVISOR
Morgan Stanley & Co. Incorporated, a wholly owned subsidiary of Morgan
Stanley, acts as the Financial Advisor. The Financial Advisor is responsible for
assisting MSAF Group in developing and implementing its interest rate risk
management policies and developing models for the purposes of analyzing the
financial impact of Aircraft lease, sale and capital investment decisions.
43
49
THE INITIAL AIRCRAFT AND LEASES
MSAF'S OWNERSHIP OF THE AIRCRAFT
Substantially all of the assets of MSAF consist of 100% of the beneficial
interest in MSA I, 100% of the issued and outstanding capital stock of SPC-5,
Greenfly (Ireland) Limited and Redfly (UK) Limited and certain loans made to MSA
I and SPC-5. Assuming all of the Remaining Aircraft are delivered to MSAF Group,
MSAF will indirectly own (i) the Initial Aircraft, (ii) the rights under the
related Initial Leases and (iii) cash and cash equivalents on deposit in the
Collection Account. As of September 30, 1997, the Initial Aircraft had an
Initial Appraised Value of $1,086.69 million. The Initial Appraised Value is
equal to the average of the opinions of the Appraisers as to the Base Value of
each Initial Aircraft as of September 30, 1997 without taking into account the
value of the Initial Leases, maintenance reserves or security deposits.
MSAF believes, after due inquiry, that all of the Initial Aircraft were
originally purchased by ILFC directly from the manufacturers of the Initial
Aircraft. MSAF further believes that ILFC would have made those purchases at
prices which represented discounts to the manufacturers' posted list prices.
APPRAISERS' REPORTS
The Appraisers have provided Appraisals of the value of each of the Initial
Aircraft at normal utilization rates in an open, unrestricted and stable market
as of September 30, 1997, adjusted to account for the reported maintenance
standard of the Initial Aircraft. The Appraisals were not based on a physical
inspection of the Initial Aircraft. The Appraisals explain the methodology used
to determine the values for the Initial Aircraft. See "Risk Factors -- Risks
Relating to the Aircraft -- Risks Associated With Appraised Values". Based on
the Appraisals, the aggregate Base Values calculated by each of the three
Appraisers for the Initial Aircraft are $1,112.06 million in the case of BK
Associates, Inc., $1,128.37 million in the case of Aircraft Information
Services, Inc. and $1,019.64 million in the case of Airclaims Limited. The
Initial Appraised Values for the Initial Aircraft by type and class are set out
below. The Initial Appraised Value should not be relied upon as a measure of the
market or realizable value of any Initial Aircraft. See "Risk Factors -- Risks
Relating to the Aircraft -- Cyclicality of Supply of and Demand for Aircraft;
Risk of Decline in Aircraft Values and Rental Rates" and "-- Risks Associated
With Appraised Values".
PORTFOLIO INFORMATION
THE INITIAL AIRCRAFT
All of the Initial Aircraft hold or are capable of holding a noise
certificate issued under Chapter 3 of Volume 1, Part II of Annex 16 of the
Chicago Convention (the "CHICAGO CONVENTION") or have been shown to comply with
the Stage 3 noise levels set out in Section 36.5 of Appendix C of Part 36 of the
United States Federal Aviation Regulations ("STAGE 3 AIRCRAFT").
44
50
The following table sets forth the exposure of the Initial Aircraft by type
of aircraft calculated by reference to the number of Initial Aircraft and their
Initial Appraised Value.
% OF CURRENT
NUMBER OF ENGINE PORTFOLIO BY INITIAL
MANUFACTURER TYPE OF AIRCRAFT AIRCRAFT BODY TYPE STAGE APPRAISED VALUE
- ------------ ---------------- ----------- ---------- ------ --------------------
Boeing (62.74%)................ 767-200ER 1 Widebody 3 3.60%
767-300ER(1) 3 Widebody 3 18.32
757-200ER 3 Narrowbody 3 10.87
747-300B 1 Widebody 3 6.25
737-300 6 Narrowbody 3 14.18
737-400 3 Narrowbody 3 7.50
737-500 1 Narrowbody 3 2.02
Airbus (26.10%)................ A321-100 1 Narrowbody 3 4.33
A320-200 3 Narrowbody 3 8.93
A310-300 3 Widebody 3 7.83
A300-600R 1 Widebody 3 5.00
McDonnell Douglas
Corporation (5.59%).......... MD82 1 Narrowbody 3 1.75
MD83 2 Narrowbody 3 3.84
Fokker N.V.(5.01%)............. F70 3 Narrowbody 3 5.01
General Electric
Company (0.56%).............. CF6-80C2B6F engine -- 3 .56
----------- ------
Total........................ 32 + engine 100.00%
=========== ======
- ---------------
(1) One of these Aircraft is not currently capable of extended range missions
but ILFC has agreed to pay for the cost of an extended range modification to
such Aircraft upon MSAF's request at any time following the termination or
expiration of the Initial Lease for such Aircraft. The Appraisals of such
Aircraft assume that such extended range modification has been carried out.
45
51
The following table sets forth the exposure of the Initial Aircraft to the
Initial Lessees calculated by reference to the Initial Appraised Value of the
Initial Aircraft.
% OF CURRENT
NUMBER OF PORTFOLIO BY INITIAL
LESSEE(1) AIRCRAFT APPRAISED VALUE
- --------- ----------- --------------------
Air Pacific Limited ("AIR PACIFIC")......................... 1 6.60%
Unijet Leisure Limited ("UNIJET")........................... 1 6.42
"VARIG", S.A. (Viacao Aerea Rio-Grandense) ("VARIG")........ 1 6.25
TransAer ("TRANSAER")....................................... 1 2.99
Asiana Airlines, Inc. ("ASIANA")............................ 1 5.30
Malev Hungarian Airlines, PLC ("MALEV")..................... 3 5.01
China Airlines, Ltd. ("CHINA AIRLINES")..................... 1 5.00
Flightlease AG ("FLIGHTLEASE")(2)........................... 2 4.84
Alaska Airlines, Inc. ("ALASKA AIRLINES")................... 1 2.73
Onur Air Tasimacilik A.S. ("ONUR AIR")...................... 1 4.33
Aerovias de Mexico, S.A. de C.V. ("AERO MEXICO")............ 1 4.14
Britannia Airways Limited ("BRITANNIA")(3).................. 1 3.60
Transaero Airlines ("TRANSAERO")............................ 1 3.41
Guyana Airways Corporation ("GUYANA AIRWAYS")............... 1 3.31
Passaredo, Transportes Aeros ("PASSAREDO")(4)............... 1 2.99
Monarch Airlines Limited ("MONARCH")........................ 1 2.97
Transavia Airlines C.V. ("TRANSAVIA")....................... 1 2.95
China Hainan Airlines ("CHINA HAINAN")...................... 1 2.58
Transportes Aereos Portugueses, S.A. ("TAP")................ 1 2.42
Flugleidir H.F. ("ICELANDAIR")(5)........................... 1 2.09
Societe D'Exploitation Aeropostale S.A. ("AEROPOSTALE")..... 1 2.02
Trans World Airlines, Inc. ("TWA").......................... 2 3.74
Air Liberte, S.A. ("AIR LIBERTE")........................... 1 1.85
Caledonian Airways ("CALEDONIAN")........................... 1 2.97
Olympic Airways ("OLYMPIC")................................. 1 2.60
Transportes Aereos Ejecutivos SA de CV ("TAESA")............ 1 2.16
Viacio Aerea Sao Paulo SA ("VASP").......................... 1 2.11
Braathans SAFE Sverige AB ("TRANSWEDE")..................... 1 2.02
Koninklijke Luchtvaart Maatschappij N.V. ("KLM")............ engine 0.56
----------- ------
Total..................................................... 32 + engine 100.00%
=========== ======
- ---------------
(1) Total number of Initial Lessees = 29.
(2) As part of the recent restructuring of its business by SAir Group Ltd.
(formerly Swiss Air, Swiss Air Transport Company Ltd.) ("SWISS AIR"), the
leasehold interest in all of the aircraft previously leased by Swiss Air has
been transferred to its wholly-owned subsidiary Flightlease. The applicable
Initial Aircraft will continue to be operated by an airline affiliate of
Swiss Air.
(3) The Initial Aircraft leased to Britannia is subleased to Ansett Australia
Limited ("ANSETT").
(4) Passaredo leases the applicable Initial Aircraft from Navasota, which is
party to the Conditional Sale Agreement with MSAF Group. See "-- Initial
Leases -- Conditional Sale Agreement".
(5) The Initial Aircraft leased to Icelandair is subleased to Falcon Air AB
("FALCON").
46
52
The following table sets forth the exposure of the Initial Aircraft to
countries in which the Initial Lessees are domiciled calculated by reference to
the Initial Appraised Value of the Initial Aircraft.
% OF CURRENT
NUMBER OF PORTFOLIO BY INITIAL
COUNTRY(1) AIRCRAFT APPRAISED VALUE
- ---------- ----------- --------------------
United Kingdom.............................................. 4 15.96
United States............................................... 3 6.47
Brazil...................................................... 3 11.36
Turkey...................................................... 1 4.33
Fiji........................................................ 1 6.60
Ireland..................................................... 1 2.99
Korea....................................................... 1 5.30
Hungary..................................................... 3 5.01
Taiwan...................................................... 1 5.00
Switzerland................................................. 2 4.84
Mexico...................................................... 2 6.31
France...................................................... 2 3.87
The Netherlands............................................. 1 + engine 3.51
Russia...................................................... 1 3.41
Guyana...................................................... 1 3.31
China....................................................... 1 2.58
Portugal.................................................... 1 2.42
Iceland..................................................... 1 2.09
Greece...................................................... 1 2.60
Sweden...................................................... 1 2.02
----------- ------
Total..................................................... 32 + engine 100.00%
=========== ======
- ---------------
(1) Total number of countries = 20.
The following table sets forth the exposure of the Initial Aircraft by
regions in which the Initial Lessees are domiciled calculated by reference to
number of Initial Aircraft and their Initial Appraised Value.
% OF CURRENT
NUMBER OF PORTFOLIO BY INITIAL
REGION(1) AIRCRAFT APPRAISED VALUE
- --------- ----------- --------------------
Developed Markets
Europe.................................................... 13 + engine 38.21%
North America............................................. 3 6.47
Emerging Markets
Europe and Middle East.................................... 5 12.75
Latin America............................................. 5 17.67
Asia...................................................... 3 12.89
Other....................................................... 3 12.00
----------- ------
Total..................................................... 32 + engine 100.00%
=========== ======
- ---------------
(1) Regions are defined according to MSCI designations. See "Description of the
Notes -- Operating Covenants -- Concentration Limits -- Region Covenants".
47
53
The following table sets forth the exposure of the Initial Aircraft by year
of aircraft manufacture calculated by reference to the Initial Appraised Value
of the Initial Aircraft. The weighted average age of the fleet as of August 31,
1998 is approximately 7.3 years.
% OF CURRENT
NUMBER OF PORTFOLIO BY INITIAL
YEAR OF MANUFACTURE AIRCRAFT APPRAISED VALUE
- ------------------- ----------- --------------------
1985........................................................ 2 4.84%
1986........................................................ 1 2.99
1987........................................................ 3 7.71
1988........................................................ 5 15.70
1989........................................................ 3 7.15
1990........................................................ 2 10.31
1992........................................................ 3 7.99
1993........................................................ 6 19.73
1994........................................................ 2 10.74
1995........................................................ 2 + engine 5.12
1996........................................................ 3 7.72
----------- ------
Total..................................................... 32 + engine 100.00%
=========== ======
The following table sets forth the exposure of the Initial Aircraft by seat
category calculated by reference to the Initial Appraised Value of the Initial
Aircraft, excluding the spare engine and one Aircraft which is a freighter
aircraft. Passenger Aircraft are assumed to be configured with the typical
number of seats as set forth in Appendix 2.
% OF CURRENT
NUMBER OF PORTFOLIO BY INITIAL
SEAT CATEGORY AIRCRAFT TYPES AIRCRAFT APPRAISED VALUE
------------- -------------- --------- --------------------
51-120................ F-70, B737-500 4 7.04%
121-170............... B737-300/300QC/400, A320-200, MD82/83 14 34.11
171-240............... B757-200, A321-100, B767-200ER,
B767-300ER, A300-600R, A310-300 12 49.95
351+.................. B747-300 1 6.25
-- -----
Total............... 31 97.36%
== =====
48
54
MSAF GROUP PORTFOLIO ANALYSIS
Further particulars of the Initial Aircraft as of August 31, 1998 (except
for Initial Appraised Values, which are as of September 30, 1997) are contained
in the table below.
COUNTRY ENGINE SERIAL DATE OF
REGION(1) OF INITIAL LESSEE INITIAL LESSEE TYPE CONFIGURATION NUMBER MANUFACTURE
--------- ----------------- -------------- ---- ------------- ------ -----------
Europe.................. France Aeropostale B737-300QC CFM 56-3C1 23788 5/87
(Developed) France Air Liberte MD83 JT8D-219 49822 12/88
Greece Olympic B737-400 CFM 56-3C1 25371 1/92
Portugal TAP B737-300 CFM 56-3B2 25161 2/92
Sweden Transwede B737-500 CFM 56-3B1 25165 4/93
Switzerland Flightlease A310-300 JT9D-7R4E1 410 11/85
Switzerland Flightlease A310-300 JT9D-7R4E1 409 11/85
The Netherlands Transavia B737-300 CFM 56-3C1 27635 5/95
The Netherlands KLM engine CF6-80C2B6F 704279 6/95
United Kingdom Britannia B767-200ER CF6-80A 23807 8/87
United Kingdom Caledonian A320-200 V2500-Al 393 2/93
United Kingdom Monarch A320-200 CFM 56-5A3 279 2/92
United Kingdom Unijet B767-300ER CF6-80C2B6F 26256 4/93
Ireland TransAer A320-200 V2500-A1 414 5/93
North America........... United States Alaska Airlines B737-400 CFM 56-3C1 25104 5/93
(Developed) United States TWA MD-83 JT8D-219 49824 3/89
United States TWA MD-82 JT8D-217C 49825 3/89
Europe and
Middle East............. Hungary Malev F-70 TAY MK620-15 11569 3/96
(Emerging) Hungary Malev F-70 TAY MK620-15 11565 2/96
Hungary Malev F-70 TAY MK620-15 11564 12/95
Russia Transaero B757-200ER RB211-535-E4-37 24367 2/89
Turkey Onur Air A321-100 V2530-A5 597 5/96
Asia.................... China China Hainan B737-300 CFM 56-3C1 26295 12/93
(Emerging) Korea Asiana B767-300 CF6-80C2B6F 24798 10/90
Taiwan China Airlines A300-600R PW 4158 555 3/90
Latin America........... Brazil Varig B747-300B CF6-80C2 24106 4/88
(Emerging) Brazil Passaredo A310-300 JT9D-7R4E1 437 11/86
Brazil VASP B737-300 CFM 56-3B2 24299 11/88
Mexico Aero Mexico B757-200ER PW 2037 26272 3/94
Mexico TAESA B737-400 CFM 56-3B2 24234 10/88
Other................... Fiji Air Pacific B767-300ER CF6-80C2B4 26260 9/94
Iceland Icelandair B737-300F CFM 56-3B2 23811 10/87
Guyana Guyana Airways B757-200ER RB211-535-E4 24260 12/88
Total
INITIAL
APPRAISED
VALUE AT
SEPTEMBER 30,
1997
REGION(1) ($000'S)
--------- -------------
Europe.................. $ 21,973
(Developed) 20,097
28,263
26,310
21,973
26,273
26,310
32,053
6,037
39,067
32,310
32,260
69,780
32,520
North America........... 29,713
(Developed) 21,627
19,010
Europe and
Middle East............. 18,533
(Emerging) 18,423
17,530
37,090
47,030
Asia.................... 28,073
(Emerging) 57,627
54,377
Latin America........... 67,953
(Emerging) 32,543
22,973
44,993
23,527
Other................... 71,727
22,697
36,017
----------
$1,086,690
==========
- ---------------
(1) Regions are defined according to MSCI designations. See "Description of the
Notes -- Operating Covenants -- Concentration Limits -- Region Covenants".
ACQUISITION OF ADDITIONAL AIRCRAFT
MSAF Group may acquire additional commercial passenger or freight aircraft
from various sellers. Cash flows derived from the Additional Aircraft, if any,
and the related Leases will be available to satisfy MSAF's payment obligations,
including payments of interest, principal and premium, if any, on the Notes and
any Additional Notes. See "Risk Factors -- Risks Relating to the Aircraft --
Risks Relating to Additional Aircraft". There is no limit on the aggregate value
of Additional Aircraft that may be acquired or on the period in which such
Additional Aircraft must be acquired. Any acquisition of Additional Aircraft and
related issuance of Additional Notes will be subject to certain conditions under
the Indenture. See "Description of the Notes -- Indenture Covenants --
Limitation on Indebtedness" and "-- Limitation on Aircraft Acquisitions".
49
55
INITIAL LEASES
GENERAL
All Leases of the Initial Aircraft will be managed by the Servicer pursuant
to the Servicing Agreement. References in this Prospectus to "LESSOR" will mean
the relevant subsidiary of MSAF which leases the Aircraft to the operator.
The following description relates only to the leases (the "CONTRACT
LEASES") related to the aircraft MSAF agreed to acquire pursuant to the Asset
Purchase Agreement (the "CONTRACT AIRCRAFT") (other than the Conditional Sale
Agreement with respect to one A310 Aircraft. See "-- Conditional Sale Agreement"
below). MSAF believes that the following description of the Contract Leases is
representative of the Initial Leases.
Any Additional Leases acquired in connection with the acquisition of
Additional Aircraft and any Future Leases entered into in connection with the
re-lease of any Aircraft may differ from the description of the Initial Leases
set forth below. However, any Additional Leases or Future Leases will be
required to comply with the Operating Covenants. See "Description of the Notes
- -- Operating Covenants".
Except for the Conditional Sale Agreement, the Contract Leases are all
operating leases under which MSAF generally will retain the benefit, and bear
the risk, of the residual value of the Contract Aircraft upon expiry or early
termination of the Contract Lease (although in the case of certain Contract
Aircraft MSAF has granted an option to purchase such Aircraft to the Lessee or
an affiliate and/or to extend or shorten the term of the related Lease. See "--
Lessees' Options" below). Under the Contract Leases, the Lessees have agreed to
lease the Contract Aircraft for a fixed term (but subject, in some cases, to the
aforementioned right to terminate the Lease early and/or to extend the Lease
term. See "-- Lessees' Options" below). Although the Contract Lease
documentation is fairly standardized in many respects, significant variations do
exist as a result of Lessee negotiation.
LEASE PAYMENTS AND SECURITY
Each Contract Lease requires the Lessee to pay periodic rentals during the
Lease term. Certain of the Contract Leases require the Lessee to pay periodic
amounts by way of maintenance reserves. See "-- Maintenance and Maintenance
Reserves" below.
The Lessees are required to make payments to the Lessor without set-off or
counterclaim, and each Lease includes an obligation of the Lessee to gross-up
payments under the Lease where payments are subject to certain withholding and
other taxes, although, in certain cases, such amount will be limited to the
extent of the amount that would have been payable, if any, if the Lease had
never been transferred from ILFC to MSAF Group. The Contract Leases also contain
indemnification of the Lessor for certain taxation liabilities (including, in
some Leases, value added tax and stamp duties, but generally excluding net
income tax or its equivalent imposed on the Lessor) and taxation of indemnity
payments. The Lessees also are obliged to pay default interest on any overdue
amounts. In some cases, the Lessee may exercise certain remedies if the Lessor
breaches its covenant of quiet enjoyment.
Under the Contract Leases, the Lessees are liable through various
operational indemnities for operating expenses accrued or payable during the
term of the respective Lease, which would normally include maintenance,
operating, overhaul, airport and navigation charges, certain taxes, licenses,
consents and approvals, Aircraft registration and hull all risks and public
liability insurance premiums. The Lessees are obliged to remove liens on the
Aircraft other than certain liens permitted under the Initial Leases.
Under all but three of the Contract Leases, the Lessee has provided
security for its obligations in the nature of security deposits. In the case of
29 of such Leases, the Lessee has provided cash security deposits and in the
case of the other Lease, the Lessee has provided a letter of credit. Under one
of the Leases, the Lessee has also provided a letter of credit to secure
payments to certain aviation authorities and Eurocontrol. Under one Lease, the
Lessee has procured the issuance to the Lessor of a general guarantee by its
parent company in respect of the Lessee's payment and performance obligations.
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RENTALS
All of the rental payments are payable on a fixed rate basis and are not
adjustable by reference to market interest rate changes. Rentals under most of
the Leases are payable monthly in advance. Rentals under the balance of the
Leases are payable quarterly in advance. One Lease requires a base rental to be
paid monthly in advance and a separate payment for flight hours flown and
revenue sector passenger flown rent to be paid monthly in arrears, subject to a
guaranteed minimum rental payable.
OPERATION OF THE CONTRACT AIRCRAFT
The Contract Leases require the Lessees to operate the Aircraft in
compliance with all laws and regulations applicable to the Aircraft. The
Aircraft generally must remain in the possession of the Lessees, and any
subleases of the Aircraft generally must be approved by the Lessor. Under most
of the Leases, the Lessees may enter into charter or "wet lease" arrangements in
respect of the Aircraft (i.e., a lease with crew and services provided by the
Lessee), provided the Lessee does not part with operational control of the
Aircraft. Under certain Leases, the Lessee is permitted to enter into subleases
to specified operators without the Lessor's consent, provided certain conditions
are met. As of the date of this Prospectus, Britannia subleases its Aircraft to
Ansett and Icelandair subleases its Aircraft to Falcon.
All of the Contract Leases permit the Lessees to subject the engines, and
other equipment or components in certain cases, to removal or replacement and,
in certain cases, to pooling arrangements (temporary borrowing of equipment), in
some cases with permitted entities (which may include certain manufacturers,
suppliers, other airlines or aircraft operators) without the Lessor's consent
but subject to conditions and criteria set forth in the Lease. Under all of the
Contract Leases, the Lessees may deliver possession of the Aircraft, engines and
other equipment or components to the manufacturer thereof for testing or similar
purposes, or to a third party for service, maintenance, repair or other work
required or permitted under the Lease. The Lessor's ability to repossess the
Aircraft or engines, equipment or components from any such sublessee,
transferee, manufacturer, or other person may be restricted by liens or similar
rights of detention and by applicable bankruptcy and insolvency laws.
MAINTENANCE AND MAINTENANCE RESERVES
The Contract Leases contain detailed provisions specifying maintenance
standards and the required condition of the Aircraft upon redelivery. In
addition, under certain of the Leases, depending upon the specific maintenance
condition of the Aircraft or specified items (airframe, engines, certain
components, auxiliary power unit or landing gear) at redelivery, the Lessee may
be required to make certain adjustment payments to the Lessor. During the term
of each Lease, the Lessee is required to ensure that the Aircraft is maintained
in accordance with an agreed maintenance program designed to ensure that the
Aircraft meets applicable airworthiness and other regulatory requirements in the
jurisdiction in which the Aircraft is registered or, in the case of the Contract
Lease for the spare engine (the "ENGINE LEASE"), the jurisdiction of the Lessee.
Under the Contract Leases, the agreed maintenance program is generally performed
by the Lessee. Under most of the Leases, the Lessee is required to provide
monthly maintenance reserves. In cases where the Lessee has paid maintenance
reserves, such payments are used to reimburse the Lessee for significant
maintenance charges, including major airframe and engine overhauls.
Under the balance of the Contract Leases there is no provision for the
payment of maintenance reserves. In these cases the Lessor must rely on the
credit of the Lessee or, if available, any credit support, and the ability of
the Lessee to return the Aircraft in the condition required by the Lease upon
termination, to make any required payments based on the Aircraft's return
condition upon termination of the related Lease and to perform scheduled
maintenance throughout the Lease term.
The Lessees are required under the Contract Leases to comply with ADs of
the applicable aviation authorities specified in the Leases and with
manufacturer's service bulletins and the Lessees primarily bear the cost of
compliance. However, under some of the Leases, the Lessor may be required by the
Lease to contribute to the cost of certain ADs or manufacturer's service
bulletins or to the cost above a specified threshold.
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LESSEES' OPTIONS
Purchase Options with respect to nine of the Contract Aircraft have been
granted to Lessees (or affiliates) pursuant to either the applicable Lease or a
separate purchase option agreement. Five of the Purchase Options are presently
exercisable. The duration of some Purchase Options depends on whether the Lessee
exercises a separate option to extend the Lease. Assuming that all Lease
extension options are exercised, the latest date on which a Purchase Option may
be exercised is June 8, 2008 for a purchase on March 8, 2009. Under the
Assumptions, none of the Contract Aircraft (other than the Aircraft subject to
the Conditional Sale Agreement) is subject to a Purchase Option where the
purchase price is less than the Note Target Price for such Contract Aircraft on
the earliest exercise date. Upon the exercise of a Purchase Option, in two cases
the Lessor is relieved of an obligation to contribute to the costs of complying
with ADs and, conversely, in seven cases the Leases provide that the Lessor
refund unused maintenance reserves and/or security deposits to the Lessee.
Fifteen of the Contract Leases include options for the Lessee to extend the
term of the Lease (including in one Lease an extension which could accommodate a
D-check (a major overhaul of the airframe which occurs every 5 to 8 years and
usually costs between $1.0 million to $4.0 million depending on the aircraft
type, condition and age)) and one other Lease allows the Lessee to extend the
term solely to accommodate a D-check. The rent payable during the extension
period under these Leases varies from Lease to Lease. Seven of the Leases
contain provisions under which the relevant Lessee may terminate its Lease prior
to its scheduled expiration date, subject, in certain instances, to specified
conditions and the payment of a fee.
The Engine Lease has no purchase option. The term of the Engine Lease may
be extended by five successive one-year terms which have not yet been exercised.
At the end of the fifth and sixth years of the term, the Lessee may terminate
the Engine Lease with 12 months' notice and payment of a fee.
CONDITIONAL SALE AGREEMENT
MSAF Group has entered into a conditional sale agreement (the "CONDITIONAL
SALE AGREEMENT") with Navasota Holdings Inc., a British Virgin Islands
corporation ("NAVASOTA"), pursuant to which MSAF Group will be obliged, assuming
that Navasota complies with its payment and other obligations, to transfer title
to an A310 Aircraft on December 15, 2003, although Navasota may prepay all
purchase price instalments under the Conditional Sale Agreement at any time.
Navasota has entered into an operating lease (the "PASSAREDO LEASE") with
Passaredo. All payments under both the Conditional Sale Agreement and the
Passaredo Lease are unconditionally guaranteed by six Brazilian tour operators
for whose benefit Passaredo will use the Aircraft to operate charter flights.
The present value of all amounts payable with respect to the A310 Aircraft
(discounted to March 3, 1998 at 6.7%) is $8.8 million less than the Note Target
Price for such Contract Aircraft on March 3, 1998.
INDEMNIFICATION AND INSURANCE OF THE AIRCRAFT
GENERAL
The Lessees are required under the Initial Leases to bear responsibility
(through an operational indemnity) and carry insurance for any liabilities
arising out of the operation of the Aircraft, including any liabilities for
death or injury to persons and damage to property that ordinarily would attach
to the operator of the Aircraft, subject to customary exclusions. In addition,
the Lessees are required to carry other types of insurance that are customary in
the air transportation industry, including all risks aircraft hull and hull war
risks insurance (in each case at a value stipulated in the relevant Lease,
subject to adjustment in certain circumstances) and aircraft spares insurance
(on a replacement cost basis), in each case subject to customary deductibles.
The Servicer is required to monitor the performance of the obligations of the
Lessees with the insurance provisions of the Initial Leases. In addition, MSAF
Group also has in place its own contingent liability coverage. This operates
both to cover a liability that is in excess of the coverage provided by a
Lessee's policy and where a Lessee's policy lapses for any reason (including an
early termination of a Lease and repossession of an Aircraft). MSAF's contingent
third-party liability insurance covers all of the Aircraft and its contingent
hull and hull war risks insurance covers certain of the Aircraft. The amount of
such contingent
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liability policies may or may not be the same as required under the relevant
Lease. The amount of third-party contingent liability insurance is subject to
certain limitations imposed by the air transportation insurance industry.
In the event that any of the existing insurance policies are canceled or
terminated and in the case of the re-lease of an Aircraft, MSAF may from time to
time engage insurance experts, to advise and recommend to ILFC, as Servicer, the
appropriate amount of insurance coverage MSAF should procure.
LIABILITY INSURANCE
Third party liability insurance is required under the Initial Leases for a
combined single limit for bodily injury and property damage in minimum amounts
ranging between $250 million and $1.25 billion for each Initial Aircraft. In
general, liability coverage on each Initial Aircraft includes third party legal
liability, passenger legal liability, baggage legal liability, cargo legal
liability, mail and aviation general third party (including products) legal
liability.
In some jurisdictions liabilities for risks that are insured against by the
Lessees also may attach to MSAF Group as owner of the Initial Aircraft
irrespective of whether it is in any way responsible for the loss for which
liability is asserted. In addition, claimants may assert claims against MSAF
Group on the basis of alleged responsibility for a loss, even if such claim is
not ultimately sustained. Under the Initial Leases, the Lessees are currently
obligated to indemnify the Lessor against claims, including the costs of
defending against such claims, by third parties against them for such
liabilities while the Initial Aircraft are owned by MSAF and under lease to the
Lessees.
The indemnified losses include both operating costs relating to the actual
operation of the Initial Aircraft as well as losses to persons and property
resulting from the operation of the Initial Aircraft. The latter types of losses
are generally covered by the Lessees' liability insurance.
AIRCRAFT PROPERTY INSURANCE
In addition to liability insurance, the Lessees are obligated under the
Initial Leases to carry other types of insurance that are customary in the air
transportation industry, including all risks aircraft hull and hull war risks
insurance (in each case at a value stipulated in the relevant Lease, subject to
adjustment in certain circumstances) and aircraft spares insurance (on a
replacement cost basis), in each case subject to customary deductibles. In
addition to such stipulated lease value coverage obtained by the Lessees, MSAF
Group has also purchased declining "total loss only" coverage with respect to
certain Initial Aircraft. As of January 10, 1998, in no case was the sum of the
stipulated lease value and MSAF Group's additional coverage in place for all
risks aircraft hull and hull war risks insurances less than 96% of the Initial
Appraised Value of the applicable Initial Aircraft, and on average the sum of
such coverages in place for each Initial Aircraft was approximately 118% of the
Initial Appraised Value of the applicable Initial Aircraft. In most cases, the
Lessor is permitted to increase the insured value above the stipulated lease
value consistent with industry practice with the Lessee being responsible for
any increased premium that results. Permitted deductibles range from $500,000 to
$1,000,000; however, the deductible generally applies only in the case of a
partial loss. In the case of a total loss of an Initial Aircraft, no deductible
would be applied against the insurance proceeds received.
The Initial Leases include provisions defining an event of loss or a
casualty occurrence such that where a total loss of the airframe occurs, with or
without loss of the engines installed on the airframe, the agreed value is
payable by the Lessee. This payment is generally funded with insurance proceeds.
However, the air transportation insurance industry practice is to treat only a
loss of greater than 75% of the value of the Aircraft, including the engines, as
a total loss. In such a case, the Lessee would be responsible for the payment of
the difference between the insurance proceeds and the stipulated Lease value.
Where insurance proceeds do cover a total loss, most Leases require the Lessor
to pay to the Lessee the balance of the insurance proceeds received under the
hull all risks or war risks policy after deduction of all amounts payable by the
Lessee to the Lessor under the Lease.
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All insurance certificates contain a breach of warranty endorsement so that
the additional insureds continue to be protected even if the Lessee violates one
or more of the terms, conditions or warranties of the insurance policies,
provided that such additional insured has not caused, contributed to or
knowingly condoned such breach.
The insurance advisor will confirm to MSAF Group, inter alia, that the
insurance requirements currently detailed in the insurance certificates meet
customary practices.
The Leases require the Lessee to maintain as part of its hull war and
allied perils insurance coverage for confiscation or requisition of the
applicable Initial Aircraft (including confiscation or requisition by the
relevant state of registration), although in certain countries (including France
and the People's Republic of China) such insurance may not be obtainable.
THE LESSEES
As of August 31, 1998, there were 29 Initial Lessees in 20 different
countries.
PAYMENT HISTORY
As a general matter, weakly capitalized airlines are more likely than well
capitalized airlines to seek operating leases and at any point in time,
investors should expect varying numbers of Lessees to be experiencing payment
difficulties.
As of August 31, 1998, two Initial Lessees were in arrears. The amounts
outstanding and overdue in respect of Rental Payments, Maintenance Reserves and
other miscellaneous amounts due under the Initial Leases (net of default
interest and certain cash in transit) with respect to these two Lessees amounted
to approximately $1.8 million representing 17.4% of average monthly revenue. The
weighted average number of days past due of such arrears was 28.5.
In certain cases, MSAF Group may respond to the needs of Lessees in
financial difficulty including, in certain instances, restructuring the
applicable Leases. Such restructurings may involve reduced rental payments for a
specified period (which may be several months). In addition, certain
restructurings may involve the voluntary termination of a Lease prior to its
expiration and the arrangement of subleases from the Lessee to another aircraft
operator.
DESCRIPTION OF THE INITIAL LESSEES
The table below sets forth certain available information with respect to
the country of domicile, first year of operation, service type, nature of
ownership and fleet size and composition of each Initial Lessee. See "--
Portfolio Information" above for additional tables setting forth the exposure of
the Initial Aircraft (as a percentage of Initial Appraised Value) to each
Initial Lessee and the countries in which the Initial Lessees are domiciled.
BEGAN SERVICE OPERATING
LESSEE DOMICILE OPERATION TYPE OWNERSHIP FLEET(1)
- ------ -------- --------- ------- --------- ---------
Aero Mexico Mexico 1934 Scheduled Cintra (90%) 7 B757-200
Staff (10%) 2 B767-200ER
2 B767-300ER
2 DC-9-31
15 DC-9-32
10 MD-82
8 MD-83
3 MD-87
10 MD-88
Aeropostale France 1986 Scheduled, Groupe Air France (50%) 2 B727-200F
Chartered and Groupe La Poste (50%) 4 B737-200C
Postal 15 B737-300QC
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BEGAN SERVICE OPERATING
LESSEE DOMICILE OPERATION TYPE OWNERSHIP FLEET(1)
- ------ -------- --------- ------- --------- ---------
Air Pacific Fiji 1951 Scheduled Government of Fiji (72%) 1 B737-300
Qantas (18%) 1 B737-500
Air New Zealand (2%) 1 B747-200B
Others (including 1 B767-300ER
EIE Corp.) (3%)
Pacific Islands
governments (5%)
Air Liberte France 1987 Scheduled and British Airways (67%) 3 B737-200
Chartered Banque Rivaud (33%) 2 DC-10-30
1 DC-10-30ER
8 MD-83
Alaska Airlines United States 1932 Scheduled Public (100%) 28 B737-400
4 B737-200C
4 B737-200QC
10 MD-82
31 MD-83
Asiana Republic of Korea 1988 Scheduled and Kumho Group (62%) 19 B737-400
Chartered Korean Development Bank 4 B737-500
(13%) 8 B747-400
Korea Long Term Credit 3 B747-400F
Bank (6%) 8 B767-300
Pacific Investment Capital 8 B767-300ER
(19%)
Britannia United Kingdom 1961 Chartered Thomson Travel Holdings 19 B757-200
(100%) 4 B767-200EM
2 B767-200ER
3 B767-300ER
Caledonian United Kingdom 1969 Chartered Inspirations plc (100%) 1 DC-10-30
5 A320-230
1 TriStar-1
4 TriStar-100
1 DC-10-30
1 TriStar-50
China Airlines Republic of China 1959 Scheduled and China Civil Aviation 10 A300-620R
(Taiwan) Chartered Development Foundation 6 A300-B4-220
(82%) 6 B737-400
Other (18%) 8 B747-200
6 B747-400
1 B747-SP
1 MD-11
2 Beechjet 400
China Hainan People's Republic 1991 Scheduled and Corporate (including 6 B737-300
of China Executive China Southern Airlines, 4 B737-400
Charters American Aviation 9 Fairchild-23
Investment and 1 Learjet-55
Hainan Island) (75%) 1 Learjet-60
Individuals (20%)
People's Republic of China
(5%)
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BEGAN SERVICE OPERATING
LESSEE DOMICILE OPERATION TYPE OWNERSHIP FLEET(1)
- ------ -------- --------- ------- --------- ---------
Flightlease Switzerland 1931 Scheduled Swiss Air (100%) 8 A310-320
8 A319-110
18 A320-210
8 A321-110
2 B747-200F
5 B747-300
1 DC-10
15 MD-11
Guyana Airways Guyana 1939 Scheduled and Government of Guyana 1 B757-200
Chartered (100%) 2 DHC-6 Twin Otter
Icelandair Iceland 1937 Scheduled and Public (100%) 1 B737-300F
Chartered 4 B737-400
5 B757-200
KLM The Netherlands 1919 Scheduled Dutch Government (25%) 19 B737-300
Public (75%) 19 B737-400
10 B747-200B
1 B747-200SF
3 B747-300
19 B747-400
10 B767-300ER
9 MD-11
Malev Hungary 1946 Scheduled and Government of Hungary (64%) 6 B737-200A
Chartered Alitalia (30%) 4 B737-300
SIMEST (5%) 2 B737-400
Employees (1%) 2 B767-200ER
5 F70
3 TV-134
7 TV-154
Monarch United Kingdom 1967 Scheduled and Cosmos Guide Holding 4 A300-600R
Chartered International NV (100%) 7 A320-210
6 B757-200
1 DC10-30
1 A321-230
Olympic Greece 1957 Scheduled Government (100%) 2 A300-600R
11 B737-200
4 B747-200B
7 B737-400
1 A300-B4-200
2 B727-200
1 B737-300
5 A300-B4-100
Onur Air Turkey 1992 Scheduled Ten Tour International and 4 A300-B4-100
Marmara (100%) 1 A320-210
2 A320-230
3 A321-130
5 MD-88
Passaredo Brazil 1995 Scheduled Passaredo Group (100%) 3 EMB-120-QC
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BEGAN SERVICE OPERATING
LESSEE DOMICILE OPERATION TYPE OWNERSHIP FLEET(1)
- ------ -------- --------- ------- --------- ---------
TAESA Mexico 1987 Scheduled and Alberto Abed (60%) 1 B727-100C
Chartered Abed family (10%) 1 B727-100
Others (10%) 1 Falcon-900
2 Learjet 25-B
1 Learjet 31-A
1 Learjet 35-A
2 Gulfstream II
1 Gulfstream IV
3 Jetstar-8
1 Jetstar-731
2 B737-200
2 DC-9-14
2 DC-9-15
1 Jetstar-II
1 Challenger-601-3A
1 C550&C551-550
1 B727-200
2 B737-300
1 B757-200
1 Learjet-24D
TAP Portugal 1945 Scheduled Government (61%); 5 A310-300
Swiss Air (10%); 6 A319-110
SPAC and Others (29%) 6 A320-210
1 A320-230
7 B737-300
3 B737-200Adv
TransAer Ireland 1991 Chartered Translift Holding (100%) 1 A300-B4-200
2 A320-230
1 B727-200Adv
Transaero Russia 1990 Scheduled and Aeroflot (5%) 1 An-124
Chartered Employees (15%) 3 B737-200A
Other (including 5 B757-200
Moscow City Government, 1 I1-86
Ilyushin and Yakovlev 3 DC-10-30
Design Bureaux,
State Property
Committee, Aeronavigatsiya
State Research Institute
and Aerotrans Dispatcher
Service Centre) (80%)
Transavia The Netherlands 1965 Scheduled and KLM (80%) 12 B737-300
Chartered PARNIB Holding NV (20%) 4 B757-200
Transwede SAFE Sverige Sweden 1985 Scheduled Braathens (100%) 4 Fokker 100
AB 1 B737-300
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BEGAN SERVICE OPERATING
LESSEE DOMICILE OPERATION TYPE OWNERSHIP FLEET(1)
- ------ -------- --------- ------- --------- ---------
TWA United States 1930 Scheduled Public (50%) 15 B727-200
Employees (45%) 18 B727-200A
Prince Al-Waleed bin Talal 9 B747-100
(5%) 3 B747-200B
15 B757-200
12 B767-200EM
2 B767-300ER
7 DC-9-15
18 DC-9-31
14 DC-9-32
1 DC-9-33CF
3 DC-9-34
3 DC-9-41
12 DC-9-51
1 MD-81
37 MD-82
31 MD-83
Unijet United Kingdom 1992 Charter British Air Transport 2 A320-200
Holdings Ltd. (100%) 1 A321-200
2 B767-300ER
Varig Brazil 1927 Scheduled Rio Grande do Sul 1 B727-100C
State Government (1%) 2 B727-100F
Ruben Berta Foundation 2 B727-100QC
(55%) 30 B737-300
Public (44%) 19 B737-200A
1 B747-200SF
5 B747-300
6 B767-200ER
6 B767-300ER
7 DC-10-30
2 DC-10-30F
9 MD-11
VASP Brazil 1933 Scheduled Canhedo Group (60%) 3 A300-B2-200FF
Varig (12.75) 6 B737-200
1 B737-200F
1 B737-200C
12 B737-200
1 B737-200C
3 B737-300
1 B727-200
3 B727-200F
9 MD-11GE
1 MD-11-73CF
- ---------------
(1) Source: Airclaims Limited.
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THE COMMERCIAL AIRCRAFT INDUSTRY
INTRODUCTION
The demand for air travel as measured by the number of fare paying
passengers carried multiplied by the distance flown in miles (revenue passenger
miles ("RPMS")) has increased since 1970 in every year but one, 1991, in which
there was a decline of 3.1% principally due to a worldwide economic slowdown
exacerbated by the Gulf War.
As shown below on the table entitled "WORLD TRAFFIC GROWTH" (excluding
domestic CIS), the compound annual growth rate in RPMs from 1970 to 1997 was
approximately 6.8%. However, the rate of increase varies regionally. In the
period since 1990 the highest rates of annual increase in RPMs have been on
certain routes in Asia, although these growth rates are expected to suffer as a
result of the economic crises that have recently affected many of the Asian
economies. The lowest rates of annual increase in RPMs have been on domestic
routes within the United States and Europe. Asia constitutes 23.8% of the world
market, as measured by RPMs in 1996, and the United States and Europe represent
37.1% and 25.8%, respectively.
WORLD TRAFFIC GROWTH
ANNUAL GROWTH
WORLD TRAFFIC WORLD TRAFFIC
YEAR IN RPMS IN RPMS
- ---- ------------- -------------
(BILLIONS) (%)
1970........................................................ 287 --
1980........................................................ 645 8.4
1990........................................................ 1,154 6.0
1991........................................................ 1,118 (3.1)
1992........................................................ 1,236 10.6
1993........................................................ 1,282 3.7
1994........................................................ 1,398 9.0
1995........................................................ 1,494 6.9
1996........................................................ 1,605 7.4
1997........................................................ 1,716 6.9
- ---------------
Source: Airline Monitor.
Demand for air travel has been cyclical as the rate of growth has
historically been most influenced by global and regional economic growth and a
decline in the real cost of air travel. However, other factors can also have an
impact on demand such as global and regional political instability or a sharp
rise in the cost of jet fuel for example. In the long term, technological
developments in the field of transport and communications like high-speed rail
travel and video-conferencing may also have an adverse impact on growth.
DEMAND FOR AIRCRAFT
The demand for air travel as evidenced by the growth in RPMs is met by the
availability of aircraft capacity (as measured typically by available seat miles
("ASMS")). Over time, an increase in RPMs will lead to an increase in ASMs as
new aircraft capacity is added to the world fleet to meet the increased demand.
The other primary factor contributing to the demand for aircraft is the need to
replace aircraft that are retired at the end of their useful economic lives or
are written off for other reasons, including casualties or technical
obsolescence as a result of noise or emission legislation such as the Stage 2
bans introduced in the United States and the European Union.
Over the last four years, new capacity grew at a slower rate than demand,
which has led to a significant reduction in the number of used aircraft
available for lease or sale and ultimately to an increase in the number of new
aircraft ordered from the manufacturers. However, higher load factors and to a
lesser extent, utilization rates over the last five years have resulted in a
lower increase in demand than the change in RPMs would have
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historically indicated. In addition, the number of aircraft retired has remained
low over this period as aircraft have continued in service longer than
previously expected.
The cyclicality of aircraft supply and demand can be illustrated by
reference to the number of aircraft in the world fleet that are available for
sale or lease ("AOG"), as shown in the following table.
PERCENTAGE OF WORLD FLEET
AIRCRAFT AVAILABLE FOR SALE OR LEASE (WESTERN-BUILT AIRCRAFT)
TOTAL AIRCRAFT
IN WORLD AIRCRAFT AVAILABLE % OF
AIRLINE FLEET(1) FOR SALE OR LEASE TOTAL
---------------- ------------------- -----
1990................................................ 8,912 545 6.1
1991................................................ 9,326 727 7.8
1992................................................ 9,992 661 6.6
1993................................................ 10,514 705 6.7
1994................................................ 10,991 534 4.9
1995................................................ 11,377 473 4.2
1996................................................ 11,803 279 2.4
1997................................................ 12,271 333 2.7
- ---------------
Source: Airline Monitor.
(1) Excludes aircraft owned privately, by governments, brokers or manufacturers
There are three basic categories of passenger jet aircraft; regional jets,
narrowbody aircraft, which have a single aisle, and widebody aircraft, with twin
aisles.
Regional jets typically have a seating capacity of 35-100 seats and are
used in service to replace turbo-props on very short-haul, domestic routes.
These routes average less than 500 nautical miles. An example of a regional jet
is the Fokker 70.
Narrowbody aircraft currently have a seating capacity of approximately 100
to 250 and typically are used to service short and medium-haul routes. While
such routes may extend up to 3,500 nautical miles, they average between 500 and
1,500 nautical miles. Examples would be the B737 series of aircraft as well as
the A320, the MD-80 series and the B757.
Widebody aircraft currently have a seating capacity of approximately 200 to
450 and are used typically to service long-haul routes of greater than 3,500
nautical miles, although some operators also use widebody aircraft to service
short to medium-haul routes with high passenger densities relative to airport
capacity. Examples would be the B747, B767, A300 and A310 series of aircraft.
Commercial freighter aircraft are almost all variants of passenger models,
and many freighter aircraft are conversions of aircraft previously in passenger
service.
THE WORLD FLEET OF COMMERCIAL JET AIRCRAFT (EXCLUDING AIRCRAFT MANUFACTURED IN
THE CIS)
There were, as of December 31, 1997, 13,038 aircraft of all types in
service of which 12,271 were operated by commercial airlines. Approximately
three-quarters of the aircraft are narrowbody aircraft with the balance being
widebody aircraft.
Of the narrowbody aircraft in operation, approximately 20% were more than
25 years old and are expected to be replaced over the next 10 years. The two
remaining large (i.e., non-regional) aircraft manufacturers, Airbus and Boeing,
continue to upgrade their narrowbody products and in particular, Boeing has
recently introduced a new series of the B737 aircraft, announced the phase-out
of the MD-80 and MD-90 series and is launching an upgraded B757.
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Only approximately 5% of the widebody aircraft in service are more than 25
years old. However there has been considerable product innovation in this sector
over the last ten years with the introduction of six new types of aircraft, the
MD11, B767-300ER, B747-400, B777, A330 and A340, most of which have several
engine configurations. This has led to the growth in particular of the
long-range, widebody, twin-engined sector and has resulted in a continued weak
market for earlier widebody models such as the A300-B4, A310-200, B747-100,
B747-200 and DC-10. The newer models have lower operating costs and allow
airlines to develop new long-haul routes more efficiently as well as to increase
service frequency on established routes. These factors could result in earlier
models of these widebody aircraft being retired or converted to freighters
before the end of their operating lives.
Of the 1,895 freighters in service as of January 1, 1998, 1,267 were
delivered new in freighter configuration; the remaining 628 aircraft having been
converted from passenger aircraft. Some aircraft delivered new with freighter
capability include aircraft in a mixed passenger/freight configuration, known as
"combi" aircraft. As of January 1, 1998, approximately 317 such "combi" aircraft
were in service.
SUPPLY OF AIRCRAFT
NEW AIRCRAFT SUPPLY
There has been a long-term trend toward consolidation of the commercial
aircraft manufacturing industry as evidenced by the recent merger between Boeing
and McDonnell Douglas Corporation, leaving just Boeing and Airbus as
manufacturers of large commercial jet aircraft currently. The long lead time,
high capital cost and technological sophistication required to bring a new
aircraft model to the market create significant barriers to entry into this
sector of the industry.
However, despite the bankruptcy in 1996 of Fokker N.V., there are several
new participants in the rapidly growing regional jet market. As a result, the
regional jet market is somewhat fragmented with three manufacturers (British
Aerospace plc, Bombardier and Embraer) currently producing a total of four
different types of jet aircraft. Fairchild Dornier has entered the regional jet
market and has begun test flying a prototype aircraft. Boeing is also planning
to relaunch the MD95 as the B717, with first deliveries scheduled for 1999. A
consortium of Airbus Industrie Asia, Aviation Industries of China and Singapore
Technologies is planning an aircraft which is expected to take first delivery in
2002.
The manufacturers of commercial jet aircraft in the CIS are currently not a
material factor in supplying the requirements of operators outside the CIS and
the former Eastern Bloc countries.
Although most new aircraft are ordered under long-term, multi-aircraft
contracts, the volume of aircraft production has varied significantly over the
years resulting in an aircraft delivery cycle that often does not match the
airline demand cycle. In 1991, the large aircraft manufacturers reached their
highest production capacity ever delivering 830 new aircraft as the demand for
air travel experienced an all time low. Deliveries reduced over the subsequent
four years with 483 aircraft delivered in 1995. Approximately 900 aircraft are
currently scheduled for delivery in each of 1998 and 1999.
USED AIRCRAFT SUPPLY
The supply of used aircraft depends on the level of utilization of the
existing worldwide fleet, the proportion of this fleet that is not in revenue
earning service and the net change in this fleet based on manufacturers'
production levels and aircraft retirements. Used aircraft are typically supplied
by airlines and intermediaries such as brokers or lessors, although
manufacturers have sometimes agreed to purchase used aircraft as a trade-in
against delivery of new aircraft. According to the Airline Monitor, as of
December 31, 1997, there were approximately 333 commercial jet aircraft
available for sale or lease of which approximately 79.9% (266 aircraft) were
Stage 2 aircraft and approximately 20.1% (67 aircraft) Stage 3 aircraft.
Approximately 65% (216 aircraft) were narrowbodies and 35% (117 aircraft)
widebodies.
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OPERATING LEASING
Operating leasing has grown:
(a) to facilitate the matching of excess aircraft supply and demand in
different geographical regions;
(b) to meet the need for short-medium term capacity (i.e. for less than
the useful life of an aircraft); and
(c) to meet the financing gap for under-capitalized airlines, typically
where financing was not otherwise available.
Until the mid-1970s, almost all commercial aircraft were either owned by
their airline operators or leased under finance leases from financial
institutions, except for short-term leases of surplus aircraft from one airline
to another. In general, airlines enter into such transactions seeking an
economical use for the surplus capacity that has resulted from the replacement
of older aircraft with the new models and cyclical or seasonal declines in the
markets being served. Beginning in the mid-1970s, however, leasing companies
were willing to purchase aircraft and undertake the risk of finding a buyer or
lessee for such aircraft.
Operating lessors typically acquired aircraft for lease through purchases
of used aircraft, often through sale-leaseback arrangements with the operators
of such aircraft. In the mid-1980s a number of leasing companies, principally
ILFC and GPA Group plc ("GPA"), started to acquire new aircraft directly from
manufacturers, with or without lease commitments for such aircraft. Several
additional leasing companies have become significant purchasers of new aircraft
and their combined jet aircraft orders and options constituted approximately 24%
of outstanding jet orders as of January 1, 1998.
The number of airlines taking aircraft on operating and finance leases has
increased from 139 out of a worldwide total of 305 in 1980 (approximately 46% of
total airlines) to 479 out of a worldwide total of 651 as of January 1, 1998
(approximately 74% of total airlines).
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MANAGEMENT OF MSAF GROUP
Except to the limited extent described herein, particularly upon an Event
of Default, neither the Trustee nor any Noteholder has any right to participate
in the management or affairs of MSAF Group. In particular, such parties cannot
supervise the functions relating to the Leases and the re-lease of the Initial
Aircraft, which functions have generally been delegated to the Servicer under
the Servicing Agreement. See "Risk Factors -- Risks Relating to MSAF Group and
Certain Third Parties -- Delegation of Responsibilities", "Description of the
Notes -- Indenture Covenants" and "-- Events of Default and Remedies".
TRUSTEES
There are six trustees of MSAF, including the Delaware Trustee. The
Controlling Trustees listed below manage MSAF. Two of the trustees must be
Independent Trustees. The controlling or independent trustees or directors, as
applicable, of each Aircraft-Owning Subsidiary are the same persons as the
Controlling Trustees and the Independent Trustees, unless otherwise required by
any provisions of local law mandating a particular citizenship for trustees or
directors. The initial Controlling Trustees and Independent Trustees were
appointed by a subsidiary of Morgan Stanley. Any succeeding or additional
Controlling Trustees and Independent Trustees will be appointed by a majority of
the then standing Controlling Trustees. Transactions or proceedings involving
certain insolvency proceedings of MSAF may only be approved by a unanimous vote
of all Controlling Trustees and all Independent Trustees.
The Controlling Trustees and the Independent Trustees, their respective
ages and principal activities are as follows:
NAME AGE TITLE
---- --- -----
Karl Essig................................... 46 Controlling Trustee
Alexander C. Frank........................... 40 Controlling Trustee
A. Maurice Mason............................. 34 Controlling Trustee
C. Scott Peterson............................ 37 Alternate Controlling Trustee
Juan C. O'Callahan........................... 64 Independent Trustee
Alexander C. Bancroft........................ 60 Independent Trustee
Karl Essig is a Managing Director in the International Securitisation Group
at Morgan Stanley & Co. International Limited. Mr. Essig joined Morgan Stanley
in August of 1980 and has worked in the London, New York and Tokyo offices on
corporate finance, capital markets and derivatives transactions. In 1986 he
founded Morgan Stanley's Asset-Backed Finance Group which he headed for five
years. In 1992, Mr. Essig moved to London and established the International
Securitisation Group, which he currently heads. Mr. Essig is a graduate of
Stanford University and the Yale School of Management.
Alexander C. Frank is a Managing Director in the Corporate Treasury
Department, and the Treasurer of Morgan Stanley. Mr. Frank joined Morgan Stanley
in 1985 and has worked in the New York and London offices, in the firm's
Corporate Treasury and Corporate Tax Departments. In 1990 he established Morgan
Stanley Treasury's European Capital and Financing activity in London. In 1993
Mr. Frank assumed responsibility for the firm's Global Capital and Finance
function and became the Treasurer for North and South American activities. Mr.
Frank is a graduate of Dartmouth College and the University of Michigan School
of Business Administration.
A. Maurice Mason is an Executive Director in the International
Securitisation Group at Morgan Stanley & Co. International Limited. He joined
Morgan Stanley's Investment Banking Division in 1994 where he was responsible
for Morgan Stanley's corporate finance activities in the European transportation
sector. In 1997 he transferred to the International Securitisation Group where
he is responsible for the aviation finance sector. Prior to joining Morgan
Stanley, he spent over six years in the capital markets group at GPA. Mr. Mason
received a BA, BAI degree from Trinity College, Dublin.
C. Scott Peterson is a Managing Director in the International
Securitisation Group at Morgan Stanley & Co. International Limited. Mr. Peterson
joined Morgan Stanley in 1988 in the Mortgage-Backed Finance
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Group. In 1989 he joined the Asset-Backed Finance Group and subsequently
established the Equipment Finance Group to focus on transactions backed by
aircraft and other capital equipment. In 1993 he initiated the liability
management effort and led both the Equipment Finance and Liability Management
Groups until his transfer to London in 1996. Mr. Peterson received a BSc from
Oregon State University in 1982 and an MBA from The Wharton School in 1988.
Juan C. O'Callahan is principal of JOCR, an aviation consultancy based in
Connecticut. He joined The Boeing Company in 1961 after a career as a fighter
pilot with the United States Marine Corps and has since worked at Pacific Air
Lines, World Airways and GPA (having founded TAI, a forecasting and valuation
consultancy that was acquired by GPA in 1982). He has served on the boards of
America West Inc., Avitas Inc. and WorldCorp Inc., and is currently a director
of Pembroke Capital Limited. Mr. O'Callahan is a graduate of the University of
Pittsburgh, where he obtained a BSc in Aeronautical Engineering.
Alexander C. Bancroft is a partner of the law firm of Shearman & Sterling.
He specializes in the legal aspects of the financing of aircraft and other
transportation equipment. He joined Shearman & Sterling in 1964 after military
service and became a partner in 1973. Mr. Bancroft is a graduate of Harvard
College and Harvard Law School.
The Independent Trustees will be entitled to participate in all meetings of
the Controlling Trustees but will not be entitled to vote on any matter except
that the Independent Trustees will be entitled to vote on any action (i) to
cause MSAF or any subsidiary of MSAF to institute any proceeding seeking
liquidation or insolvency or similar proceeding, (ii) to consent to any
liquidation, insolvency or similar proceeding instituted against MSAF or any
subsidiary of MSAF, (iii) to take certain other actions related to insolvency
matters, and (iv) to sell, transfer, or otherwise dispose of, directly or
indirectly, any aircraft where the proceeds received from such sale or transfer
are less then certain targets set forth in the Indenture, and the unanimous
consent of all the Controlling Trustees and the Independent Trustees shall be
required to take any action specified in clauses (i), (ii) or (iii) above. See
"Description of the Notes -- Indenture Covenants -- Bankruptcy and Insolvency".
As is common with many other special purpose companies, MSAF will not have
any employees or executive officers. Accordingly, the Controlling Trustees will
rely upon the Servicer, the Administrative Agent, the Cash Manager, the
Financial Advisor and the other service providers for all asset servicing,
executive and administrative functions pursuant to the respective service
provider agreements. See "Risk Factors -- Risks Relating to MSAF Group and
Certain Third Parties". Certain individuals other than the Controlling Trustees
and the Independent Trustees listed above may serve as controlling or
independent trustees or directors of various subsidiaries of MSAF Group where
provisions of local law mandate a particular citizenship for trustees or
directors.
All trustees will be compensated for travel and other expenses incurred by
them in the performance of their duties. MSAF will pay each Independent Trustee
$50,000 per annum for their services in such capacity. The Controlling Trustees
appointed by a subsidiary of Morgan Stanley as the depositor of MSAF will not
receive remuneration from MSAF for their services.
The Controlling Trustees have not received any additional cash or non-cash
compensation as salary or bonus for their services as Controlling Trustees. In
the future, however, Controlling Trustees may receive an interest in the
Beneficial Interest. None of the trustees of MSAF currently has an employment
contract with MSAF.
BENEFICIAL OWNERSHIP OF MSAF
All of the Beneficial Interest is currently owned by a wholly-owned direct
subsidiary of Morgan Stanley but all or a portion of the Beneficial Interest may
be transferred to related or unrelated third parties in the future.
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SERVICER
The Servicer and its affiliates have not assumed and are not responsible
for, or guarantors of, and shall not assume or be responsible for, or guarantors
of, any liabilities of MSAF or any of its affiliates, including, without
limitation, any payments due with respect to the Notes. Any Additional Aircraft
may be serviced by different servicers or on different terms from those
applicable to the servicing of the Initial Aircraft.
The Servicer will provide services with respect to the Initial Aircraft
pursuant to the terms of the Servicing Agreement on behalf of MSAF Group (except
in certain circumstances described below where a substitute servicer may perform
such services). The Servicing Agreement (a) sets forth the various duties of the
Servicer with respect to the management and administration of the Initial
Aircraft and the Initial Leases and the Future Leases with respect to the
Initial Aircraft, (b) sets forth certain aircraft marketing activities to be
performed by the Servicer and (c) sets forth certain aircraft management-related
obligations of the Servicer in connection with offers and sales by MSAF Group of
Refinancing Notes or Additional Notes.
The Servicer will provide the services in accordance with the express terms
of the Servicing Agreement, which, inter alia, provides that the Servicer will
act in accordance with applicable law and with directions given by MSAF Group
from time to time in accordance with the Servicing Agreement. In addition, under
the Servicing Agreement, the Servicer will agree to perform its services in
accordance with the ILFC Services Standard and the ILFC Conflicts Standard.
The duties and obligations of the Servicer will be limited to those
expressly set forth in the Servicing Agreement and the Servicer will not have
any fiduciary or other implied duties or obligations to MSAF Group or any other
person, including any Noteholder.
In addition to managing the Initial Aircraft, ILFC also manages aircraft
assets owned by ILFC and other third parties. In the course of conducting such
activities, ILFC will from time to time have conflicts of interest in performing
its obligations on behalf of MSAF Group. See "Risk Factors -- Risks Relating to
MSAF Group and Certain Third Parties -- Conflicts of Interest of ILFC".
Pursuant to the Servicing Agreement, the Servicer will not be liable to
MSAF Group for any Losses arising (i) as a result of an Initial Aircraft sold,
leased or purchased on less favorable terms than might have been achieved at any
time, provided such transactions were entered into on the basis of a commercial
decision of the Servicer, or (ii) in respect of the Servicer's obligation to
apply the ILFC Conflicts Standard in respect of its performance of the services,
except, in either situation, in the case of wilful misconduct or fraud on the
part of the Servicer. See "Risk Factors -- Risks Relating to MSAF Group and
Certain Third Parties -- Limitation of Liability on the Part of the Servicer".
AIRCRAFT SERVICES
Pursuant to the Servicing Agreement, the Servicer has, inter alia,
undertaken:
- to employ or otherwise engage such staff (including in-house legal
staff) and maintain such supporting resources as the Servicer shall deem
necessary in accordance with its usual business practices with respect to
its own aircraft, both in number and quality to enable it to perform the
Services;
- to grant MSAF Group and its agents, including the Administrative Agent
and auditors, access to certain information and personnel of the Servicer
under specified circumstances to enable MSAF Group to monitor the
Servicer's compliance with the Servicing Agreement and otherwise for the
purposes of MSAF Group's business; and
- not to commingle with its own funds any funds of MSAF Group other than
security deposits held pursuant to the Servicing Agreement and
misdirected funds from Lessees (which shall be promptly redirected to an
MSAF Group bank account).
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The main categories of services being provided by the Servicer pursuant to
the Servicing Agreement in respect of the Initial Aircraft (the "SERVICES") are:
- Lease marketing services, including, subject to the terms of the
Indenture and the Servicing Agreement, remarketing, lease negotiation and
execution (including, without limitation, negotiating final Lease terms);
- Initial Aircraft assets management services, including lease rent
collection, aircraft maintenance, insurance, contract compliance of, and
enforcement against, Lessees, and accepting delivery and redelivery of
aircraft;
- Initial Aircraft sales services as, when and to the extent directed by
MSAF Group;
- monitoring of maintenance and provision of records and information with
respect to the Initial Aircraft;
- arranging for valuations and monitoring regulatory developments;
- providing to MSAF Group certain data and information relating to the
Initial Aircraft;
- assistance in connection with the public or private offerings of any
securities of MSAF or any of its affiliates, including assisting in
public disclosure relating to the Servicer and its affiliates contained
in any disclosure document, certain Initial Aircraft-related
participation in marketing activities solely with respect to the Initial
Aircraft and the Servicer and the Services, and providing MSAF Group,
underwriters, rating agencies and/or other advisors with the reasonable
opportunity to conduct due diligence with respect to the Servicer as it
relates to the Initial Aircraft;
- legal and other professional services with respect to the lease, sale or
financing of the Initial Aircraft, any amendment or modification of any
Lease, the enforcement of the rights of any person within MSAF Group
under any Lease, any disputes that arise with respect to the Initial
Aircraft or for any other purpose that the Servicer reasonably determines
is necessary in connection with the performance of the Services; and
- periodic reporting of operational information relating to the Initial
Aircraft.
OPERATING GUIDELINES
Under the Servicing Agreement, the Servicer will be entitled to exercise
such authority as is necessary to give it a practicable and working level of
autonomy, responsibility and authority in performing the Services, while at the
same time MSAF Group through the Administrative Agent will establish monitoring
and control procedures which are expected to enable it properly to manage the
business and assets of the MSAF Group.
Pursuant to the terms of the Servicing Agreement, the Servicer is required
to comply with the ILFC Services Standard and the ILFC Conflicts Standard in the
performance of the Services. All transactions to be entered into by the Servicer
on behalf of MSAF Group (other than with other persons within MSAF Group) are
required to be at arm's length and on fair market value terms unless otherwise
agreed or directed by MSAF Group. Certain transactions or matters with respect
to Initial Aircraft require the specific approval of MSAF Group, including:
- sales of (or commitments or agreements to sell) Initial Aircraft (other
than as required by a Lease);
- the entering into of any new Leases (including renewals or extensions,
unless any such Lease had originally been approved) if the Lease does not
comply with any applicable operating covenants set forth under
"Description of the Notes -- Operating Covenants";
- terminating any Lease or Leases to any single Lessee with respect to
Initial Aircraft then having a value in excess of $100 million;
- unless provided for in the applicable budget, entering into any contract
for the modification or maintenance of Initial Aircraft where the costs
to be incurred (A) exceed the greater of (i) the
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estimated aggregate cost of a heavy maintenance or structural check for
similar aircraft and (ii) available maintenance reserves or other
collateral under the related Lease or (B) are outside the ordinary course
of MSAF Group's business;
- entering into any capital commitment or confirming any order or
commitment to acquire or acquiring aircraft or engines on behalf of MSAF
Group, except, with respect to a replacement engine or a spare part for
an Initial Aircraft, (A) if provided for in the applicable budget or (B)
at such times and on such terms and conditions as the Servicer deems
reasonably necessary or appropriate in connection with its performance of
the Services and in no greater quantity than that which is required to
enable the Initial Aircraft to be leased;
- issuing any guarantee on behalf of, or otherwise pledging the credit of,
any person within MSAF Group;
- unless otherwise permitted, entering into any agreement for services to
be provided in respect of Initial Aircraft by third parties at MSAF
Group's cost outside the ordinary course of ILFC's business, except to
the extent provided for in the applicable budget;
- incurring or causing to be incurred on behalf of any person within MSAF
Group any liability (actual or contingent), unless contemplated in the
applicable budget, pursuant to a transaction of a type for which MSAF
Group's specific approval is otherwise required, or incurred in the
ordinary course of MSAF Group's business; and
- any transaction with ILFC or any of its affiliates not contemplated in
the Servicing Agreement.
BUDGETS
MSAF Group will adopt an annual and a three-year budget each year with
respect to all Initial Aircraft. Under the Servicing Agreement, the Servicer has
undertaken to use best efforts to achieve the annual budget for each year.
MANAGEMENT FEES AND SERVICER EXPENSES
MSAF is obligated to pay certain fees to the Servicer, pursuant to the
Servicing Agreement. A base fee is payable in instalments: an initial fee of
$2,000,000 was paid on December 1, 1997 and the balance is payable monthly, in
the amounts of approximately $81,000 per month until November 30, 1998, $243,000
per month thereafter until November 30, 1999 and approximately $162,000 per
month thereafter, in each case subject to pro-rata reduction for any month in
which MSAF Group does not own all the Initial Aircraft. A rent-related fee is
also payable monthly, equal to 1% of the aggregate rent due for any month (or
portion of a month) in which MSAF Group owns the related Aircraft, plus 1% of
the aggregate rent actually paid for such month. In addition, the Servicer will
receive two incentive fees: (i) a results-based incentive fee, equal to 10% of
any excess of actual net results for any year over a target amount contained in
the applicable annual budget and (ii) a sales-based incentive fee with respect
to each sale of an Aircraft, equal to 1.5% of the lesser of the net proceeds of
such sale and the target amount for such Aircraft agreed in advance by MSAF and
the Servicer, plus 5% of any excess of such net proceeds over such target
amount.
The Servicer also will be reimbursed for certain expenses incurred in
connection with the Servicer's performance of the Services. These expenses
include, among other expenses, Initial Aircraft maintenance costs and insurance,
outside professional advisory fees (including legal fees) and other out of
pocket expenses, all of which in the aggregate may constitute a significant
additional component of MSAF Group's total overhead costs.
TERM AND TERMINATION
The Servicing Agreement shall expire on the twenty-fifth anniversary of the
date on which the last Initial Aircraft is delivered to MSAF Group.
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Each party will also have the right to terminate the Servicing Agreement
under certain circumstances. The Servicer has the right to terminate the
Servicing Agreement if, among other things:
- MSAF fails to pay when due any amount payable by MSAF to the Servicer if
not paid within 5 days of notice of such failure;
- MSAF or any of its subsidiaries shall materially breach any of their
obligations under the Servicing Agreement other than payment obligations;
- all of the public debt of the MSAF Group is repaid or defeased in full
in accordance with the terms of any Indenture;
- all of the Initial Aircraft of MSAF Group are sold; or
- an involuntary proceeding is commenced or an involuntary petition is
filed in respect of MSAF or any subsidiary of MSAF under applicable
bankruptcy, insolvency, receivership or similar law, and such proceeding
or petition shall continue undismissed for 120 days or any such person
shall go into liquidation, suffer a receiver or mortgagee to take
possession of all or substantially all of its assets or have an examiner
appointed over it, or a petition or proceeding is presented for any of
the foregoing and not discharged within 120 days; or a voluntary
proceeding is commenced in respect of MSAF or any subsidiary of MSAF
under bankruptcy, insolvency, receivership or similar law, or such person
consents to the institution of, or fails within 120 days to contest the
filing of, any petition described above, or files an answer admitting the
material allegations of any such petition, or makes a general assignment
for the benefit of its creditors.
MSAF has the right to terminate the Servicing Agreement with respect to one
or more Aircraft if:
- the Servicer materially breaches any of its obligations under the
Servicing Agreement;
- the Servicer fails, within a reasonable period of time, to re-lease an
Initial Aircraft upon the termination of any Lease or to sell an Initial
Aircraft upon commercially reasonable written direction from MSAF;
- all of the public debt of the MSAF Group is repaid or defeased in full
in accordance with the terms of any Indenture;
- all of the Initial Aircraft of MSAF Group are sold;
- a Rating Decline occurs as a result of a Change of Control. A "RATING
DECLINE" means that the rating of the outstanding senior unsecured
long-term debt securities of the Servicer is decreased below A1 by
Moody's, below A+ by Standard & Poor's or below AA- by DCR, at any time
between (a) the date of public notice of a Change of Control, or of the
intention of the Servicer or any person to effect a Change of Control and
(b) 90 days after the occurrence of the Change of Control (which period
shall be extended so long as the rating of the outstanding senior
unsecured long-term debt securities of the Servicer is under publicly
announced consideration for possible downgrade by a Rating Agency). A
"CHANGE OF CONTROL" means that either (A) any person or any persons
acting together that would constitute a "group" (a "GROUP") for purposes
of Section 13(d) of the Securities Exchange Act of 1934, together with
any affiliates or persons directly or indirectly owning 5% of the
outstanding common stock or equity interest, or of the combined voting
power of the voting stock, of such person ("RELATED PERSONS"), shall
beneficially own (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934 ("RULE 13D-3")) at least 50% of the aggregate voting
power of all classes of voting stock of the Servicer, or (B) any person
or Group, together with any affiliates or Related Persons, shall succeed
in having a sufficient number of its nominees elected to the Board of
Directors of the Servicer such that such nominees, when added to any
existing director remaining on the Board of Directors of the Servicer
after such election who was a nominee of or is an affiliate or Related
Person of such person or Group, will constitute a majority of the Board
of Directors of the Servicer; provided that with respect to both clauses
(A) and (B) above, a Change of Control shall not be deemed to have
occurred if American International Group, Inc. continues to beneficially
own (within
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the meaning of Rule 13d-3) at least 51% of the aggregate voting power of
all classes of voting stock of the Servicer; or
- an involuntary proceeding is commenced in respect of the Servicer under
bankruptcy, insolvency, receivership or similar law, if such proceeding
continues undismissed for 120 days or the Servicer shall go into
liquidation, suffer a receiver or mortgagee to take possession of all or
substantially all of its assets or have an examiner appointed over it or
if a petition or proceeding is presented for any of the foregoing and not
discharged within 120 days or a voluntary proceeding is commenced in
respect of the Servicer under bankruptcy, insolvency, receivership or
similar law or the Servicer shall make a general assignment for the
benefit of its creditors.
Other than in the case of a termination of the Servicing Agreement by the
Servicer because of MSAF's failure to make a payment to the Servicer, the
Servicing Agreement may not be terminated, unless a replacement servicer has
been appointed and accepted such appointment. In the event that a replacement
servicer has not been appointed within 90 days after any termination of the
Servicing Agreement or resignation by the Servicer, the Servicer may petition
any court of competent jurisdiction for the appointment of a replacement
servicer.
ASSIGNMENT OF SERVICING AGREEMENT
The Servicing Agreement and the rights and obligations of the Servicer, on
the one hand, and MSAF, on the other hand, are not assignable by either party
other than with the prior consent of the other party.
PRIORITY OF PAYMENT OF SERVICING FEES AND REIMBURSABLE EXPENDITURES
The fees and expenses of the Servicer rank senior in priority of payment to
all payments of interest, principal and premium, if any, on the Notes.
CORPORATE MANAGEMENT
With regard to the corporate affairs of MSAF Group, management services are
provided by three entities: the Administrative Agent, the Cash Manager and the
Financial Advisor.
ADMINISTRATIVE AGENT
Cabot acts as the Administrative Agent of MSAF Group.
The Administrative Agent is responsible for providing administrative,
accounting, bank account management and calculation and other services to MSAF.
The Administrative Agent's duties include:
- monitoring the performance of the Servicer (including the Servicer's
compliance with the Servicing Agreement) and reporting on such
performance to MSAF;
- assisting MSAF in establishing a program for evaluating the Servicer's
performance under the Servicing Agreement;
- acting as liaison with various rating agencies to assess the impact of
management decisions on the ratings of the Notes and coordinating
responses to rating agency questions;
- the maintenance on behalf of MSAF Group of accounting ledgers and the
provision on a quarterly and annual basis of draft accounts on a combined
basis for MSAF Group as well as, on a quarterly and annual basis, on an
individual company basis for certain companies. However, MSAF Group
retains responsibility for the ledgers and accounts including all
discretionary decisions and judgments relating to the preparation and
maintenance thereof, and MSAF Group retains responsibility for, and
prepares, its financial statements;
- preparing annual budgets and presenting them to MSAF Group for approval;
- authorizing payment of certain bills and expenses;
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- to the extent required by MSAF Group or the parties thereto,
coordinating any amendments to the transaction agreements, subject to the
approval of MSAF Group;
- supervising outside counsel and other professional advisers and
coordinating legal and other professional advice received by MSAF Group
other than with respect to any service or matter which is the
responsibility of the Servicer under the Servicing Agreement;
- preparing and coordinating reports to investors and to the Commission,
including preparing press releases and managing investor relations with
the assistance of outside counsel and auditors, if appropriate;
- preparing for the approval of MSAF Group and filing all required tax
returns with the assistance of outside counsel and auditors, if
appropriate;
- maintaining, or monitoring the maintenance of, the books, records,
registers and associated filings of MSAF Group;
- preparing an agenda and any required papers for meetings of the
governing bodies of the entities within MSAF Group;
- assisting in making aircraft lease, sale and capital investment
decisions;
- overseeing the general operation of the ILFC Facility;
- overseeing the general operation of the Morgan Stanley Facility;
- establishing and maintaining the Accounts and any other accounts;
- advising MSAF Group as to the appropriate levels of the Liquidity
Reserve Amount;
- informing the Servicer of the aggregate deposits in the Accounts as
required;
- directing withdrawals and transfers from the Accounts in accordance with
the Indenture;
- receiving data provided by the Servicer with respect to the Aircraft and
Leases;
- calculating certain monthly payments, and all other calculations
otherwise required pursuant to the Indenture;
- providing the Trustee with information required by the Trustee to
provide its reports to the Noteholders; and
- providing additional services upon the request of MSAF Group upon terms
to be agreed at the time of any such request.
The Administrative Agent may delegate to a third party one or more of the
above administrative services it is responsible for providing to MSAF Group.
The Administrative Agent receives a monthly fee equal to 1.5% of the rental
payments made by the Lessees under the Leases for such month from MSAF Group in
respect of its services to MSAF Group subject to an annual minimum of $200,000.
The Administrative Agent is entitled to indemnification by MSAF Group for, and
will be held harmless against, any loss or liability incurred by the
Administrative Agent arising out of or in connection with its provision of
administrative services to MSAF Group (other than through its own deceit, fraud,
gross negligence or wilful misconduct or that of its officers, directors, agents
and employees).
MSAF Group may remove the Administrative Agent at any time on 120 days'
written notice.
The Administrative Agent may resign on 120 days' written notice in certain
circumstances.
CASH MANAGER
Bankers Trust Company acts as the Cash Manager. Subject to certain
limitations and at the direction of MSAF Group, the Cash Manager is authorized
to invest the funds held by MSAF Group in the Accounts in certain prescribed
investments (the "PERMITTED ACCOUNT INVESTMENTS") on permitted terms.
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The Cash Manager devotes the same amount of time and attention to and is
required to exercise the same level of skill, care and diligence in the
performance of its services as a prudent businessperson would in administering
such services on its own behalf. The Cash Manager's annual fees are not expected
to exceed $50,000 per annum. The Cash Manager is entitled to indemnification by
MSAF Group for, and will be held harmless against, any loss or liability
incurred by the Cash Manager (other than through its own gross negligence (or
simple negligence in the handling of funds), deceit, fraud or wilful misconduct
or that of its officers, directors, agents and employees).
MSAF may remove the Cash Manager at any time on 90 days' written notice as
long as MSAF Group has engaged another person or entity to perform the services
that were being provided by the Cash Manager. The Cash Manager may resign on 90
days' written notice as long as MSAF Group has engaged another person or entity
to perform the services that were being provided by the Cash Manager.
FINANCIAL ADVISOR
Morgan Stanley & Co. Incorporated acts as the Financial Advisor.
The Financial Advisor is responsible for assisting MSAF Group in developing
and implementing its interest rate risk management policies and developing
models for the purposes of analyzing the financial impact of aircraft lease,
sale and capital investment decisions. The Financial Advisor receives a fee of
$50,000 per annum, payable monthly in arrears in equal instalments, from MSAF
Group in respect of its services to MSAF Group. The Financial Advisory Agreement
may be terminated by either MSAF or the Financial Advisor on 30 days' written
notice.
DELAWARE TRUSTEE
Wilmington Trust Company will maintain the books and records, including
minute books and records and trust certificate records, of MSAF. It will make
available telephone, telecopy, telex and post office box facilities and will
maintain MSAF's principal place of business in Delaware.
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SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data in the following table have been
derived from, and should be read in conjunction with, MSAF Group's consolidated
financial statements as of and for the one month period ended November 30, 1997
and as of and for the eleven month period ended October 31, 1998, including the
notes thereto (the "Financial Statements") appearing elsewhere in this
Prospectus. MSAF Group's Financial Statements as of and for the one month period
ended November 30, 1997 have been audited by Deloitte & Touche LLP, independent
auditors. MSAF Group's Financial Statements as of and for the eleven months
ended October 31, 1998 contain all adjustments that are of a normal and
recurring nature necessary to present fairly the financial position and results
of operations for such period. The results of operations for the eleven months
ended October 31, 1998 are not necessarily indicative of the results expected
for the full fiscal year 1998.
PERIOD FROM
OCTOBER 30, 1997
(DATE OF FORMATION) ELEVEN MONTHS ENDED
TO NOVEMBER 30, 1997 OCTOBER 31, 1998
-------------------- -------------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Revenues:
Lease income, net....................................... $ 4,747 $109,142
Investment income on collection account................. -- 1,993
-------- --------
Total revenues.......................................... 4,747 111,135
-------- --------
Expenses:
Interest expense........................................ -- 44,948
Depreciation expense.................................... 43 34,756
Operating expenses:
Fees payable......................................... -- 8,483
Maintenance and other aircraft related costs......... -- 3,309
-------- --------
Total expenses.......................................... 43 91,496
-------- --------
Net income................................................ $ 4,704 $ 19,639
======== ========
STATEMENT OF CASH FLOWS DATA:
Net cash provided by operating activities................. -- 82,165
Net cash used for investing activities.................... (66,370) (887,315)
Net cash provided by financing activities................. 66,370 843,272
AS OF AS OF
NOVEMBER 30, 1997 OCTOBER 31, 1998
-------------------- -------------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ -- $ 38,122
Total Assets.............................................. 71,074 1,015,922
Total Liabilities......................................... 66,369 1,063,281
Total Beneficial Interestholder's Equity/(Deficit)........ 4,705 (47,359)
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
INTRODUCTION
The MSAF Group entities were organized in late 1997 and since that time
their principal business activity has been the acquisition of the Initial
Aircraft and the placement of certain initial aircraft on operating lease. MSAF
Group's future business is expected to consist principally of aircraft operating
lease activities, acquisitions of Additional Aircraft and sales of Aircraft.
Cash flows generated from such activities will be used to service interest and
principal on the Notes, any Refinancing Notes and any Additional Notes but only
after various expenses of MSAF Group have been paid for, including any taxes,
obligations to Lessees including maintenance obligations, fees and expenses of
the Servicer, Administrative Agent, Cash Manager, Financial Advisor, Trustee and
other service providers, and payments to Swap Providers. Upon the issuance of
the Notes, MSAF will have no indebtedness other than the Notes.
MSAF Group's ability to generate sufficient cash from its Initial Aircraft
assets to service the Notes will depend primarily on (i) the rental rates it can
achieve on Leases and the Lessees' ability to perform according to the terms of
those Leases and (ii) the prices it can achieve on any Initial Aircraft sales.
MSAF Group's ability to service the Notes will also depend on the level of its
operating expenses, including maintenance obligations which will increase as the
Initial Aircraft age, and on any unforeseen contingent liabilities arising.
There can be no assurance that cash flows generated from the Initial Aircraft
assets will be sufficient to service interest and principal on the Notes. See
"Risk Factors -- Risks Relating to the Aircraft", "-- Risks Relating to the
Leases" and "-- Risks Relating to the Lessees".
MSAF Group will not use operational cash flow to pay the purchase price for
Additional Aircraft but, instead, will issue Additional Notes to fund such
purchase price. Any such Additional Notes will be issued in compliance with the
limitations set forth under "Description of the Notes -- Indenture Covenants --
Limitation on Indebtedness".
RECENT DEVELOPMENTS
INITIAL AIRCRAFT
As of May 31, 1998, all but one of the Contract Aircraft were acquired by
MSAF. The undelivered aircraft is a B737-400 on lease to the Turkish national
carrier, THY, with an appraised value of $28.82 million. Pursuant to the
Indenture, the Trustees decided not to substitute this aircraft but instead
distributed to Noteholders that portion of the proceeds from the Offering of the
Old Notes relating to this aircraft on June 15, 1998 pursuant to the priority of
payments set forth in the Indenture. As a result, the overall size of the
Initial Aircraft is 32 aircraft plus a spare engine with revised total Initial
Appraised Value reduced to $1,086.69 million. No aircraft have been sold or
suffered a total loss since March 3, 1998. As of October 31, 1998, the Initial
Aircraft were subject to leases with 29 lessees in 19 countries.
In the period from March 3, 1998 to October 31, 1998, four of the Initial
Aircraft were aircraft on ground ("AOG") for a period of 36, 42, 59 days and 10
days, respectively. Part of the AOG period was dedicated to performing
maintenance work on the aircraft prior to releasing. As of October 31, 1998
three of the Initial Aircraft that were previously AOG were subject to signed
lease agreements with new lessees. A letter of intent was entered into with
Flying Colours to re-lease the remaining AOG which was returned early by
Transaero on October 22, 1998.
APPRAISED VALUES AT SEPTEMBER 30, 1998
The most recent annual appraisals of the Base Value of each aircraft
occurred on September 30, 1998 with total appraised value of the Initial
Aircraft at September 30, 1998 equal to $1,029.44 million. See Appendix 11. The
appraisals at September 30, 1998 did not indicate a Base Value decline
sufficiently in excess of the value decline assumed under the terms of the Notes
to require excess cash flows to be redirected to the Class A Notes via the Class
A Scheduled Principal Payment Amount.
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LESSEE DIFFICULTIES
Since March 3, 1998, in addition to the Lessee difficulties that resulted
in the repossession of three aircraft and the early return of a fourth aircraft
as discussed below under "Results of Operations -- Eleven Months Ended October
31, 1998 -- Operating Lease Income", there have been difficulties with respect
to one Lessee in the Europe/Middle East region, representing approximately 4.3%
of the adjusted appraised value of the portfolio as of August 31, 1998. With
respect to this Lessee, lease rentals and maintenance reserves were restructured
in March 1998 and at August 31, 1998 the lessee was in arrears with respect to
the restructured payment amounts. Such arrears amounted to $38,171 at August 31,
1998 and other amounts in arrears totalled approximately $896,115 at August 31,
1998. Another lessee has been publicly reported to be having liquidity
difficulties stemming from both withdrawal of state aid and strikes, although it
was not in arrears as of August 31, 1998.
B737 INSPECTIONS
On May 14, 1998, the Federal Aviation Administration (FAA) issued a
directive requiring B737s with between 30,000 and 40,000 hours of flying time to
be inspected within 45 days for chafed wiring in conduits that run through the
plane's fuel tank that could cause a fire or explosion. MSAF owns 10 B737-
300/400/500s. All these aircraft have below 30,000 flight hours and will not be
inspected under the current directive. MSAF does not believe the cost to comply
with this directive in the future will be significant.
B747 INSPECTIONS
On May 25, 1998, Boeing issued a Service Bulletin recommending inspection
of all B747 center fuel tanks to check wiring and grounding straps, pumps, fuel
lines and fittings and other equipment and installation of a "flame arrestor"
for a scavenge pump. MSAF owns one B747-300 on lease to VARIG and does not
believe the cost to comply with this Service Bulletin will be significant.
ECONOMIC CRISES IN EMERGING MARKETS
Emerging market economies have recently been affected by severe economic
and financial difficulties. The economic crisis in Asia has spread to Russia and
to Latin America as well. As of August 31, 1998 MSAF leased 43.31% of its fleet
in emerging markets, including 12.75% of its fleet in "emerging" European
markets, 12.89% in "emerging" Asian markets and 17.67% in Latin America (using
MSCI designations).
As of August 31, 1998, MSAF leased 12.89% of its fleet in Asia (5.3% in
South Korea, 5.0% in Taiwan and 2.6% in China) and 6.6% in Pacific and Other
regions (6.6% in Fiji) by assumed appraised value as of June 30, 1998. As of
August 31, 1998, none of these lessees were in arrears although severe financial
difficulties have been reported for certain other air carriers in the region.
The recent economic crisis in Russia continues to threaten that region.
Transaero, MSAF's only lessee in Russia, recently returned its aircraft to MSAF
on October 22, 1998.
As of August 31, 1998 MSAF leased 17.67% of its fleet in Latin America
(11.36% in Brazil and 6.31% in Mexico). None of the MSAF Group Lessees in Latin
America were in arrears as of August 31, 1998.
RESULTS OF OPERATIONS -- ELEVEN MONTHS ENDED OCTOBER 31, 1998
LEASE INCOME
Lease income for the eleven month period from December 1, 1997 to October
31, 1998 amounted to $109.1 million. Many of the Initial Aircraft were not owned
by MSAF for all of the period. During the period, there was a loss in lease
rental revenues caused by three AOG ($2.0 million) and the early return of one
aircraft on lease to Transaero. Three aircraft had been repossessed from Western
Pacific Airlines and Pan Am Airlines (formerly Carnival) but were all subject to
signed lease agreements as of October 31, 1998. The three aircraft were placed
on lease with Olympic Airways, the Greek national carrier, VASP, and TAESA. The
other aircraft which remains AOG is subject to a letter of intent with Flying
Colours. Part of the AOG period
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was spent performing maintenance work on all three aircraft prior to re-leasing.
MSAF Group records the cash prepayments made by lessees for maintenance as a
component of the provision for maintenance liability account which appears on
the consolidated balance sheet. When the lessee incurs a maintenance
expenditure, MSAF Group must return a corresponding amount of the prepayment to
the lessee. At this time, MSAF Group will forward cash to the lessee, with a
corresponding decrease to the provision for maintenance liability account. MSAF
Group will only reimburse the lessee for the cost of maintenance expenditures to
the extent that sufficient prepayments have been made by the lessee.
INVESTMENT INCOME
In the eleven months ended October 31, 1998, MSAF earned interest income of
$2.0 million. Investment income is expected to decline going forward principally
because cash in the Aircraft Purchase Account has now been used to acquire the
Initial Aircraft except for a balance of $26.1 million which has been refunded
to investors in respect of the undelivered THY aircraft.
INTEREST EXPENSE
Interest expense, including swap costs of $1.9 million, amounted to $44.9
million in the eleven months ended October 31, 1998. Interest expense relates to
the cost of the Old Notes which were issued on March 3, 1998 and, therefore,
only outstanding for approximately eight months in the period. The weighted
average interest rate on the Subclass A-1 to D-1 Notes during the period from
March 3, 1998 to October 31, 1998 was 5.41% and the average debt in respect of
the Subclass A-1 to D-1 Notes outstanding during the period since March 3, 1998
was $1,034.0 million.
MSAF is a party to eight interest rate swaps with Morgan Stanley Capital
Services Inc. ("MSCS"), a wholly-owned subsidiary of Morgan Stanley. In six of
these swaps, MSAF pays a fixed monthly coupon and receives one month LIBOR on a
notional balance of $1,000 million and in two of these swaps, MSAF pays one
month LIBOR and receives a fixed monthly coupon on a notional balance of $200
million.
All eight swaps were originally entered into by MSCS, with an internal
swaps desk as the counter party, on November 12, 1997 and February 19, 1998,
respectively. On March 3, 1998, all eight swaps were assigned to MSAF by MSCS
and on such date such swaps had an aggregate fair value of approximately $(15.3)
million. No consideration was paid to or received by MSAF in connection with the
assumption of these swap positions. MSAF has recorded the assumption of these
interest rate swaps at their fair value by recognizing a liability within Other
liabilities in its Condensed Consolidated Balance Sheet, with a corresponding
charge to Deemed Distribution, a component of Beneficial Interestholder's
Deficit.
Four of the swaps assumed from MSCS having an aggregate notional principal
amount of $800 million are accounted for as hedges of its obligations under the
Notes. Under these swap arrangements MSAF will pay fixed and receive floating
amounts on a monthly basis. The fair value of the liability assumed relating to
those swaps which are being accounted for as hedges is being deferred and
recognized when the offsetting gain or loss is recognized on the hedged
transaction. This amount and the differential payable or receivable on such
interest rate swap contracts, to the extent such swaps are deemed to be
effective hedges, is recognized as an adjustment to interest expense. The
portion of these swaps not deemed to be an effective hedge is accounted for on a
mark-to-market basis with changes in fair value reflected in interest expense.
The remaining four swaps assumed by MSAF have an aggregate gross notional
principal amount of $400 million. Under these swap arrangements, MSAF will
pay/receive fixed and receive/pay floating amounts on a monthly basis. MSAF
determined that these swaps do not qualify for hedge accounting. The fair value
of the liability assumed related to these swaps is accounted for on a
mark-to-market basis with changes in fair value reflected in interest expense.
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Notwithstanding the differential accounting treatment for the various
swaps, all eight swaps were required to hedge MSAF's interest rate exposure on
an economic basis. In November 1997, MSAF had contracted to purchase the Initial
Aircraft and their associated fixed rate leases but, prior to the time of
pricing the Old Notes, was exposed to movements in interest rates with respect
to its liabilities. Accordingly, in November 1997, six swaps with a notional
balance of $1,000 million were entered into by MSCS under which MSAF would pay
fixed amounts and receive floating amounts. Once the Old Notes were priced in
February 1998, MSAF could determine that to hedge the interest rate exposure
associated with its variable rate debt it required swaps with a notional balance
of only $800 million, approximately. Accordingly, in February 1998, MSCS entered
into re-balancing swaps with a notional amount of $200 million under which MSAF
would pay floating amounts and receive fixed amounts.
The net economic effect of assigning all eight swaps with a gross notional
amount of $1.2 billion to MSAF on March 3, 1998 was to fix MSAF's interest rate
liability at November 12, 1997, shortly after the date MSAF incurred its
exposure to movements in interest rates when it agreed to purchase the Initial
Aircraft with associated fixed rate leases. See "Interest Rate Management" below
for more information regarding MSAF's swaps positions and hedging policy.
DEPRECIATION
The charge for depreciation in the eleven months ended October 31, 1998
amounted to $34.8 million. The charge is expected to be proportionately higher
in future periods given that MSAF did not own all of the Initial Aircraft
throughout the period from December 1, 1997 to October 31, 1998.
OPERATING EXPENSES
Service Provider Fees. Service provider fees and expenses for the period
ended October 31, 1998 were $8.5 million. The most significant element was the
aircraft servicing fee paid to ILFC, which amounted to $5.2 million for the
period. A significant portion of the fees payable to ILFC are calculated as a
percent of rental revenue actually received. Accordingly, the fees paid to ILFC
reflected the lower rental revenue caused by AOGs and undelivered aircraft
during the period. MSAF's service provider expenses also included $1.1 million
in respect of administrative agency and cash management fees.
Maintenance and Other Aircraft Related Costs. Maintenance and other
aircraft related costs in the eleven months ended October 31, 1998 amounted to
$3.3 million. These costs reflected additional maintenance work that was
performed on the three aircraft which were repossessed. This work included a
"C-check" for certain of the aircraft and the installation of new landing gear.
In the next six months it is likely that maintenance disbursements will increase
proportionately due to anticipated engine overhauls and the larger number of
aircraft owned by MSAF.
Insurance, re-leasing and other costs incurred in the eleven months ended
October 31, 1998 were approximately $0.7 million. It is expected that re-leasing
costs will increase proportionately over the next several months due to certain
aircraft modification payments expected to be reimbursed to lessees and costs
relating to reconfiguring aircraft for new lessees upon redelivery, including
the AOG that is subject to a letter of intent with Flying Colours. It is also
expected that additional insurance premiums relating to AOG will become payable
in the remainder of 1998.
NET INCOME
Net income for the eleven month period ended October 31, 1998 was $19.6
million.
MSAF is a Delaware business trust treated as a branch of MS Financing Inc.
for U.S. Federal, state and local income tax purposes. As such, MSAF is not
subject to U.S. Federal, state and local income taxes.
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FINANCIAL RESOURCES AND LIQUIDITY
LIQUIDITY
The cash balances at October 31, 1998 were $38.1 million. Of this amount,
$25 million represents the cash portion of the Liquidity Reserve Amount (which
is used as a source of liquidity for, among other things, maintenance
obligations, security deposit return obligations, cash operating expenses and
contingent liabilities) and $13.1 million represents rental and maintenance
receipts.
In addition to the $25 million cash portion at October 31, 1998, the
Liquidity Reserve Amount also contained $41.0 million of undrawn credit and
liquidity facilities from Morgan Stanley and ILFC. As of October 31, 1998,
ILFC's short term unsecured debt was rated A-1+ by Standard & Poor's, and,
accordingly, the letter of credit previously issued by the Bank of Montreal to
support ILFC's obligations under the ILFC Facility was canceled.
CASH FLOWS FROM OPERATING ACTIVITIES
Operating cash flows depend on many factors including the performance of
lessees and MSAF Group's ability to re-lease Aircraft, the average cost of the
Notes, the efficacy of MSAF Group's interest rate hedging policies, the ability
of MSAF Group's swap providers to perform under the terms of their swap and
similar obligations and whether MSAF Group will be able to refinance certain
subclasses of Notes that have not been repaid with lease cash flows.
Net cash provided by operating activities in the eleven months ended
October 31, 1998 amounted to $82.2 million, principally reflecting non-cash
depreciation expense of approximately $34.8 million, net income of approximately
$19.6 million, provisions for maintenance of approximately $13.7 million and
deferral of recognition of advance rental payments of $8.7 million.
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES
In the eleven months ended October 31, 1998, the use of cash flows from
investing activities was to acquire the Initial Aircraft. Cash flows from
financing activities in the eleven months ended October 31, 1998 primarily
reflect the proceeds from the Offering of the Old Notes and the payment to
Morgan Stanley Financing Inc., of a distribution with respect to the Beneficial
Interest.
INDEBTEDNESS
General
MSAF Group's indebtedness primarily consisted of the Subclass A-1 to D-1
Notes in the amount of $983.9 million at October 31, 1998.
Aircraft Values
At September 30, 1997, the total appraised value of the 33 aircraft and the
spare engine that MSAF originally agreed to acquire from ILFC was $1,115.5
million. At September 30, 1998, the total appraised value of MSAF Group's 32
aircraft and spare engine (giving effect to the non-delivery of the THY
aircraft) was $1,029.4 million. See Appendix 11 for the appraised value of each
Initial Aircraft at September 30, 1998.
Under the terms of the Notes, MSAF is obliged to obtain annual appraisals
of the Base Value of each aircraft from three independent appraisers by October
31 of each year. Generally, where the appraisals indicate a Base Value decline
significantly in excess of the value decline assumed under the terms of the
Notes, excess cash flow is redirected to the extent required to the Class A
Notes via the Class A Scheduled Principal Payment Amount. The most recent
appraisals occurred on September 30, 1998 and the next are due to occur no later
than October 31, 1999.
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LIQUIDITY RESERVE AMOUNT
The Liquidity Reserve Amount is intended to serve as a source of liquidity
for MSAF Group's maintenance obligations, security deposit return obligations,
operating expenses, contingent liabilities and Note obligations. The Liquidity
Reserve Amount may be funded with cash in the Collection Account and with
letters of credit, guarantees or other credit support instruments ("ELIGIBLE
CREDIT FACILITIES") provided by, or supported with further Eligible Credit
Facilities provided by, a person (an "ELIGIBLE PROVIDER") whose short-term
unsecured debt is rated P-1 by Moody's, A-1+ by Standard & Poor's, or D-1+ by
DCR or is otherwise designated as an Eligible Provider by the Controlling
Trustees. Both the ILFC Facility discussed below under "-- ILFC Facility" and
the Morgan Stanley Facility discussed below under "-- Morgan Stanley Facility"
will be Eligible Credit Facilities and will comprise part of the Liquidity
Reserve Amount on and following the Closing Date. There are currently no other
Eligible Credit Facilities in place.
The Liquidity Reserve Amount was approximately $66.0 million on October 31,
1998. The Minimum Liquidity Reserve Amount was approximately $15 million on
October 31, 1998. The Liquidity Reserve Amount and the Minimum Liquidity Reserve
Amount may be increased or decreased from time to time for any reason (including
upon acquisitions of Additional Aircraft) by an action of the Controlling
Trustees in light of changes in, inter alia, the condition of the Aircraft, the
terms and conditions of the Leases, the financial condition of the Lessees,
sales of Aircraft and prevailing industry conditions; provided that MSAF Group
will obtain confirmation in advance in writing from the Rating Agencies that any
proposed reduction in the Liquidity Reserve Amount or the Minimum Liquidity
Reserve Amount will not result in a lowering or withdrawal by any such Rating
Agencies of their respective ratings of any MSAF Notes.
If the balance of cash on deposit in the Collection Account, together with
the amount available for drawing under any Eligible Credit Facilities, should
fall below the Liquidity Reserve Amount at any time (including as a result of
MSAF Group's determination that the Liquidity Reserve Amount should be
increased, as required by the Rating Agencies or otherwise), MSAF Group may
continue to make all payments, and any credit or liquidity enhancement
facilities may be drawn to fund such payments, including required payments on
the Notes, which rank prior to, or pari passu with, payments of the Minimum
Principal Payment Amount on the Class D Notes under "Description of the Notes --
Priority of Payments" and any Permitted Accruals other than in respect of
Modification Payments, provided that the balance of funds in the Collection
Account, together with the amount available for drawing under any Eligible
Credit Facilities, does not fall below the Minimum Liquidity Reserve Amount at
its then current level. However, the balance of funds in the Collection Account,
together with the amount available for drawing under any Eligible Credit
Facilities, may fall below the Minimum Liquidity Reserve Amount at its then
current level and MSAF Group may continue to make payments of, and any credit or
liquidity enhancement facilities may be drawn to fund such payments, all accrued
and unpaid interest on any subclass of the most senior class of Notes then
Outstanding to avoid an Event of Default, and, on the Final Maturity Date of any
subclass thereof, principal of, any subclass of the most senior class of Notes
then Outstanding to avoid an Event of Default.
Amounts drawn under any Eligible Credit Facility will either be repayable
at the third level in the priority of payments, as set forth in "Description of
the Notes -- Priority of Payments", before the First Collection Account Top-Up
(any such facility, a "PRIMARY ELIGIBLE CREDIT FACILITY") or at the eleventh
level in the priority of payments, as set forth in "Description of the Notes --
Priority of Payments", before the Second Collection Account Top-Up (any such
facility, a "SECONDARY ELIGIBLE CREDIT FACILITY").
The Liquidity Reserve Amount and the Minimum Liquidity Reserve Amount have
been determined largely based on an analysis of historical experience,
assumptions regarding MSAF Group's future experience and the frequency and cost
of certain contingencies in respect of the Initial Aircraft, and are intended to
provide liquidity for meeting the cost of maintenance obligations and
non-maintenance, aircraft-related contingencies such as removing regulatory
liens, complying with ADs, repossessing and releasing aircraft. In analyzing the
future impact of these costs, assumptions have been made regarding their
frequency and amount based upon historical experience. There can be no
assurance, however, that historical experience will prove to be relevant in the
future or that actual cash received by MSAF Group in the future will not be
significantly
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less than that assumed. Any significant variation may materially adversely
affect the ability of MSAF Group to make payments of interest and principal on
the Notes.
ILFC FACILITY
Under the ILFC Facility, ILFC will hold certain security deposits with
respect to the Initial Aircraft as custodian for the benefit of the MSAF Group.
ILFC will hold all cash security deposits paid with respect to the Initial
Aircraft other than (i) amounts determined in good faith by ILFC to be no longer
held on behalf of a Lessee, whether upon expiry of or default under the
applicable Lease or otherwise, and (ii) any cash security deposits in an amount
exceeding three months' rent with respect to a single Initial Aircraft and paid
by a single Lessee. Any interest accruing on amounts of Initial Aircraft
security deposits that are being held by ILFC will generally accrue for the
benefit of ILFC.
In addition, under the ILFC Facility, ILFC will make loans to MSAF which
MSAF may use for the same purposes as those for which the Liquidity Reserve
Amount may be applied as discussed above under "-- Liquidity Reserve Amount",
including to pay interest and Minimum Principal Payment Amounts on the Notes.
ILFC's obligation to make such amounts available shall be limited to the "ILFC
FACILITY COMMITMENT" which was approximately $31.0 million on October 31, 1998.
The ILFC Facility Commitment shall be equal to (i) at any time before a Facility
Reduction Event, the sum of (A) $10 million plus (B) total Initial Aircraft
security deposits held by ILFC for the benefit of MSAF at such time minus (C)
all drawings previously made by MSAF under the ILFC Facility ("ILFC FACILITY
DRAWN AMOUNTS") and required to be repaid to ILFC but not repaid at such time
and (ii) at any time from and after a Facility Reduction Event, $10 million
minus all ILFC Facility Drawn Amounts required to be repaid to ILFC but not
repaid at such time. A "FACILITY REDUCTION EVENT" means a termination of the
Servicing Agreement prior to the twenty-fifth anniversary of the date on which
the last Initial Aircraft is delivered to MSAF Group for a reason other than a
sale of all the Initial Aircraft or the repayment or defeasance of MSAF's debt.
The ILFC Facility is a Secondary Eligible Credit Facility and, accordingly,
on the Payment Date following any drawing on the ILFC Facility, MSAF will be
obligated, to the extent there are Available Collections remaining after payment
of the Minimum Principal Payment Amount on the Class D Notes, to repay ILFC
Facility Drawn Amounts to ILFC, together with interest accrued thereon at 3% per
annum, calculated on the basis of a 360-day year consisting of twelve 30-day
months and compounded daily.
ILFC's agreement to provide the ILFC Facility will expire on the earliest
of (i) the twenty-fifth anniversary of the date on which the last Initial
Aircraft is delivered to MSAF Group, (ii) a sale of all the Initial Aircraft,
and (iii) the repayment or defeasance of all MSAF's debt.
For so long as ILFC is not an Eligible Provider, ILFC's obligations under
the ILFC Facility will be supported by an Eligible Credit Facility satisfactory
to MSAF provided by an Eligible Provider at ILFC's expense (a "BACK-UP
FACILITY").
MSAF may borrow under the ILFC Facility (i) in order to pay interest and
Minimum Principal Payment Amounts on the Notes, (ii) upon a downgrade in the
short-term unsecured debt rating of the provider of the Back-Up Facility such
that it is no longer an Eligible Provider and (iii) upon failure by the provider
of the Back-Up Facility to renew the Back-Up Facility (the events described in
clause (ii) and (iii), each, a "SUSPENSION EVENT"). If for any reason ILFC fails
to make any loan requested when due, MSAF may draw on the Back-Up Facility.
In the event of a loan by ILFC, or a drawing on the Back-Up Facility, in a
Suspension Event (a "SUSPENSION DRAWING"), MSAF will hold the drawing proceeds
in the Collection Account and such proceeds will comprise part of the cash
portion of the Liquidity Reserve Amount. In the event of any drawing, the
obligation to reimburse the provider of the Back-Up Facility shall be solely
ILFC's obligation and the provider of the Back-Up Facility shall have no
recourse to MSAF for any such amounts that are not reimbursed by ILFC.
Immediately following and after giving effect to any Suspension Drawing, ILFC
shall set off and apply the security deposits held by it on the date of such
Suspension Drawing on MSAF Group's
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behalf against the principal amount of any ILFC Facility Drawn Amounts then
outstanding, which shall be deemed repaid in the amount of such set-off and
application. After giving effect to such set-off and application, MSAF shall be
obliged to repay only up to $10 million of any outstanding ILFC Facility Drawn
Amounts unless and until ILFC has procured, at its expense, a replacement
Back-Up Facility acceptable to MSAF. MSAF shall be obliged to pay interest on
the proceeds of a Suspension Drawing at 3% per annum, calculated on the basis of
a 360-day year consisting of twelve 30-day months and compounded daily.
MORGAN STANLEY FACILITY
Under the Morgan Stanley Facility, Morgan Stanley will make loans to MSAF
which MSAF may use for the same purposes as those for which the Liquidity
Reserve Amount may be applied as discussed above under "-- Liquidity Reserve
Amount", including to pay interest and Minimum Principal Payment Amounts on the
Notes. Morgan Stanley's obligation to make such amounts available shall be
limited to the "MORGAN STANLEY FACILITY COMMITMENT". The Morgan Stanley Facility
Commitment, at any time, shall be equal to the sum of (A) $10 million minus (B)
all drawings previously made by MSAF under the Morgan Stanley Facility ("MORGAN
STANLEY FACILITY DRAWN AMOUNTS") and not repaid at such time.
The Morgan Stanley Facility is a Secondary Eligible Credit Facility and,
accordingly, on the Payment Date following any drawing on the Morgan Stanley
Facility, MSAF will be obligated, to the extent that there are Available
Collections remaining after payment of the Minimum Principal Payment Amount on
the Class D Notes, to repay Morgan Stanley Facility Drawn Amounts to Morgan
Stanley, together with interest accrued thereon at 3% per annum, calculated on
the basis of a 360-day year consisting of twelve 30-day months and compounded
daily.
Morgan Stanley's agreement to provide the Morgan Stanley Facility will
expire on the earlier of (i) a sale of all the Aircraft and (ii) the repayment
or defeasance of all MSAF's debt. Morgan Stanley has been designated by the
Controlling Trustees as an Eligible Provider. As of the date of this Prospectus,
Morgan Stanley's long-term unsecured debt was rated A1 by Moody's, A+ by
Standard & Poor's and AA- by DCR.
OTHER FACILITIES
There are currently no Primary Eligible Credit Facilities in place. MSAF
may put in place other Eligible Credit Facilities from time to time, each of
which shall be designated by the Controlling Trustees as a Primary Eligible
Credit Facility or a Secondary Eligible Credit Facility. In addition, MSAF may
from time to time put in place other credit or liquidity enhancement facilities
which are not Eligible Credit Facilities. Amounts drawn under any such other
facilities are repayable at the eleventh level in the order of priorities as set
forth in "Description of the Notes -- Priority of Payments", before the Second
Collection Account Top-Up.
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INTEREST RATE MANAGEMENT
The leasing revenues of MSAF Group will be generated primarily from Rental
Payments. Rental Payments are currently entirely fixed but may be either fixed
or floating with respect to Future Leases. In general, an interest rate exposure
arises to the extent that MSAF Group's fixed and floating interest obligations
in respect of the Notes do not correlate to the mix of fixed and floating rental
payments for different rental periods. This interest rate exposure can be
managed through the use of interest rate swaps and other derivative instruments.
The Subclass A-1, A-2 and B-1 Notes bear floating rates of interest and the
Subclass C-1 and D-1 Notes bear fixed rates of interest. MSAF is a party to
eight interest rate swaps (the "INITIAL SWAPS") with MSCS, a wholly-owned
subsidiary of Morgan Stanley. In six of these swaps MSAF pays a fixed monthly
coupon and receives one month LIBOR and in two of these swaps MSAF pays one
month LIBOR and receives a fixed monthly coupon on the notional balances as set
out below:
FAIR VALUE AT
NOTIONAL FIXED MONTHLY FIXED MONTHLY OCTOBER 31,
BALANCE EFFECTIVE DATE MATURITY DATE PAY RATE RECEIVE RATE 1998
- -------- ----------------- ----------------- ------------- ------------- -------------
($000'S) (%) (%) ($000S)
100,000 November 12, 1997 November 15, 1999 6.0550 -- (1,366)
300,000 November 12, 1997 November 15, 2000 6.1325 -- (8,686)
200,000 November 12, 1997 November 15, 2002 6.2150 -- (9,838)
200,000 November 12, 1997 November 15, 2004 6.2650 -- (12,530)
150,000 November 12, 1997 November 15, 2007 6.3600 -- (11,659)
50,000 November 12, 1997 November 15, 2009 6.4250 -- (4,223)
150,000 February 19, 1998 November 15, 2007 -- 5.860 6,197
50,000 February 19, 1998 November 15, 2009 -- 5.905 2,028
All eight swaps were originally entered into by MSCS with an internal swaps
desk as the counterparty on November 12, 1997 and February 19, 1998,
respectively. On March 3, 1998, all eight of the above swaps were assigned to
MSAF by MSCS. Although MSAF Group's floating rate liability at March 3, 1998 was
approximately $800 million (after the repayment of principal due to the
undelivered aircraft), the net economic effect of assigning all eight swaps to
MSAF with an aggregate notional amount of $1.2 billion was to fix the interest
rate liability at the November 12, 1997 interest rate. MSAF Group required this
certainty both in furtherance of its interest rate management policy not to be
adversely exposed to material movements in interest rates from November 12, 1997
(shortly after MSAF entered into the Asset Purchase Agreement) and, by fixing
the principal liabilities relating to the transaction, to facilitate the
structuring of the transaction.
At least every three months, MSAF Group expects to seek to enter into
additional swaps or sell at market value or unwind part or all of the initial
and any future swaps in order to rebalance the fixed and floating mix of
interest obligations (including those arising as a result of previous interest
rate swaps entered into) and the fixed and floating mix of rental payments.
Through the use of interest rate swaps, and other interest rate hedging
products, it is MSAF Group's policy not to be adversely exposed to material
movements in interest rates. MSAF Group's interest rate management strategy will
need to be rebalanced with any acquisition of Additional Aircraft to reflect the
adjusted mix of fixed and floating rate rental payments arising from any such
acquisition. There can be no assurance, however, that MSAF Group's interest rate
risk management strategies will be effective in this regard. Any change to MSAF
Group's policy with regard to its dealing in interest rate hedging products will
be subject to periodic review by the Rating Agencies.
The Controlling Trustees are responsible for reviewing and approving the
overall interest rate management policies and transaction authority limits.
Counterparty risk will be monitored on an ongoing basis. Counterparties will be
subject to the prior approval of the Controlling Trustees. MSAF Group's
counterparties are currently all affiliates of Morgan Stanley. Future
counterparties will consist primarily of the affiliates of major United States
and European financial institutions (including special-purpose derivative
vehicles) which have credit ratings, or which provide collateralization
arrangements, consistent with maintaining the ratings of the Notes.
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DESCRIPTION OF THE NOTES
The following summary is qualified in its entirety by reference to the
Indenture, the Cash Management Agreement, the Reference Agency Agreement, the
Administrative Agency Agreement, the Notes, the Security Trust Agreement, the
Servicing Agreement, the Asset Purchase Agreement, the Financial Advisory
Agreement, the Swap Agreements, the ILFC Facility and the Morgan Stanley
Facility (collectively, the "RELATED DOCUMENTS"). References to "Related
Documents" shall also include where the context requires, any Refinancing Notes
and any Additional Notes and guarantees, asset or stock purchase agreements,
swap or other interest rate agreements or other agreement entered into by any
member of MSAF Group in connection with any acquisition of Additional Aircraft
and issuance of Additional Notes.
GENERAL
The Old Notes were issued pursuant to the Indenture, a copy of which has
been filed as an exhibit to the Registration Statement, of which this Prospectus
is a part. The New Notes will also be issued pursuant to the Indenture, which
will be qualified under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act") upon effectiveness of the Registration Statement of which this
Prospectus is a part. The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act.
The terms of the New Notes will be identical in all material respects to
the Old Notes, except that the offer of the New Notes will have been registered
under the Securities Act and, therefore, the New Notes will not be subject to
certain transfer restrictions, registration rights and certain provisions
providing for an increase in the interest rate on the Notes under certain
circumstances relating to the Registration Agreement.
The Notes, composed of Subclass A-1, Subclass A-2, Subclass B-1, Subclass
C-1 and Subclass D-1 Notes, will be issued in fully registered form only. The
Notes will be issued in minimum denominations of $100,000 and integral multiples
of $1,000 in excess thereof.
The Notes are solely an obligation of MSAF and are not secured by the
Aircraft and do not represent obligations of any Lessee, Morgan Stanley, the
Trustee, ILFC, or any affiliate of any of the foregoing other than MSAF.
The Indenture provides that MSAF will pay the fees and expenses of the
Trustee and further provides that the Trustee will be entitled to
indemnification by MSAF for, and will be held harmless against, any loss,
liability or expenses incurred by the Trustee (other than through its own wilful
misconduct, bad faith or negligence or by reason of a breach of any of its
representations or warranties set forth in the Indenture).
The Trustee may resign with respect to any subclass of MSAF Notes at any
time without cause upon at least 90 days' prior written notice to MSAF, the
Administrative Agent and the holders of such subclass, in which event MSAF will
be obligated to appoint a successor trustee for such subclass of MSAF Notes.
Holders of each subclass may have divergent or conflicting interests from the
MSAF Noteholders of other subclasses. As a result, the occurrence of certain
circumstances, including the occurrence of an Event of Default, may give rise to
a potential conflict of interest on the part of the Trustee in its capacity as
trustee in respect of more than one subclass of MSAF Notes, upon which event the
Trustee may be compelled to resign as trustee in respect of more than one
subclass of MSAF Notes. If the Trustee ceases to be eligible to continue as
trustee with respect to any subclass of MSAF Notes, becomes incapable of acting
as Trustee or becomes insolvent, MSAF may remove the Trustee, or any MSAF
Noteholder of the applicable subclass who has been a bona fide MSAF Noteholder
for at least six months may, on behalf of itself and all other MSAF Noteholders
of the same subclass, petition any court of competent jurisdiction for the
removal of the Trustee as trustee of such subclass and the appointment of a
successor trustee. In addition, holders of not less than a majority in aggregate
Outstanding Principal Balance of any subclass of MSAF Notes may at any time
remove the Trustee with respect to such subclass without cause by delivering
written notice of such removal in writing to MSAF, the Administrative Agent and
the Trustee. Any resignation or removal of the Trustee and appointment of a
successor trustee will not become effective until acceptance of the appointment
by the successor trustee. Pursuant to such resignation, removal and successor
trustee provisions, it is possible that a different trustee
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could be appointed to act as the successor trustee with respect to each subclass
of the MSAF Notes. All references in this Prospectus to the "Trustee" should be
read to include the Trustee and any successor trustee appointed in the event of
such a resignation or removal.
RATINGS
Each subclass of the Notes is rated as of the date of this Prospectus as
follows:
RATING AGENCIES
-----------------------------------
SUBCLASS OF NOTES MOODY'S STANDARD & POOR'S DCR
- ----------------- ------- ----------------- ---
Subclass A-1............................................. Aa2 AA AA
Subclass A-2............................................. Aa2 AA AA
Subclass B-1............................................. A2 A A
Subclass C-1............................................. Baa2 BBB BBB
Subclass D-1............................................. Ba2 BB BB
The ratings of the Notes address the likelihood of the timely payment of
interest and the ultimate payment of principal and premium, if any, on the
Notes. Payments of principal and interest on all subclasses of the Notes will be
payable only after any Expenses and certain other amounts have been paid or
provided for in full and only to the extent that Available Collections are
sufficient therefor in accordance with the priority of payments established for
the Notes. In addition, MSAF's ability to pay Step-Up Interest in full on the
Subclass A-1 Notes has not been rated by any of the Rating Agencies. The ratings
assigned to the Notes do not address the imposition of any withholding tax on
any payments under the Leases, the Notes or otherwise. See "Risk Factors --
Risks Relating to Tax".
A rating is not a recommendation to buy, sell or hold Notes inasmuch as
such ratings do not comment as to market price or suitability for a particular
investor and may be subject to revision or withdrawal at any time by the
assigning Rating Agency. In the event that the rating initially assigned to any
subclass of the Notes is subsequently lowered, suspended or withdrawn for any
reason, no person or entity is obliged to provide any additional support or
credit enhancement with respect to the Notes.
REGISTRATION REQUIREMENTS
Holders of New Notes are not generally entitled to any registration rights
with respect to such New Notes. Pursuant to the Registration Agreement, MSAF has
filed with the Commission the Registration Statement of which this Prospectus is
a part with respect to the Exchange Offer to exchange the Old Notes for New
Notes.
In the event that applicable interpretations of the staff of the Commission
do not permit MSAF to effect the Exchange Offer, or under certain other
circumstances, MSAF shall, at MSAF's cost, use its best efforts to cause to
become effective a shelf registration statement (the "SHELF REGISTRATION
STATEMENT") with respect to resales of the Notes and to keep such registration
statement effective until March 3, 2000 or until all Notes have been sold
thereunder. MSAF shall, in the event of such a shelf registration, provide to
each Noteholder copies of the prospectus, notifying each Noteholder when the
Shelf Registration Statement for the Notes has become effective and take certain
other actions as are required to permit resales of the Notes. A Noteholder that
sells its Notes pursuant to the Shelf Registration Statement generally will be
required to be named as a selling security holder in the related prospectus and
to deliver a prospectus to purchasers. In addition, such Noteholder will be
subject to certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the
Registration Rights Agreement that are applicable to such Noteholder (including
certain indemnification obligations).
In the event that the Exchange Offer is not consummated, or a Shelf
Registration Statement is not declared effective on or prior to November 30,
1998, then, from and after such date, the applicable annual interest rate borne
by each subclass of the Notes shall be increased by 0.50% per annum over the
rate then applicable to such subclass of Notes in accordance with the rate shown
on the cover page of this Prospectus
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until the Exchange Offer is consummated or the Shelf Registration Statement is
declared effective. So long as the Notes are listed on the Luxembourg Stock
Exchange, any such increase in the interest rates applicable to any subclass of
Notes shall be published in accordance with the notification requirements
specified in the Indenture. See "-- Notices to Noteholders".
PAYMENTS
On each Payment Date, commencing April 15, 1998, payments of interest,
principal and, in certain limited circumstances described herein, premium on
each subclass of Notes will be determined and made in accordance with the
provisions described below under "-- Priority of Payments".
On each Payment Date, the Trustee will pay (or will instruct a paying agent
appointed in Luxembourg to pay) to the Noteholders all interest, principal and
premium, if any, on the Notes of each subclass (other than payments received
following an Event of Default in respect of any subclass of Notes), the receipt
of which is confirmed by the Trustee or paying agent by 1:00 p.m. (New York
time) on such Payment Date or, if such receipt is confirmed after 1:00 p.m. (New
York time) on such Payment Date or on any Business Day thereafter, then on the
Business Day following the Business Day on which payment is received. Each
payment on any Payment Date other than the Final Payment Date with respect to
any subclass of Notes will be made by the Trustee or paying agent to the
Noteholders as of the Record Date immediately preceding such Payment Date. The
final payment with respect to any Note, however, will be made only upon
presentation and surrender of such Note by the Noteholder or its agent
(including any holder in street name) at the office or agency of the applicable
Trustee or paying agent specified in the notice given by the Trustee or paying
agent with respect to such final payment. So long as the Notes are listed on the
Luxembourg Stock Exchange, MSAF shall appoint and maintain a paying agent in
Luxembourg.
At such time, if any, as the Notes of any subclass are issued in the form
of Definitive Notes, payments from the applicable Account on a Payment Date will
be made by check mailed to each Noteholder of a Definitive Note on the
applicable Record Date at its address appearing on the register maintained with
respect to such subclass. Alternatively, upon application in writing to the
Trustee, not later than the applicable Record Date, by a Noteholder of one or
more Definitive Notes of such subclass having an aggregate principal amount of
not less than $1,000,000, any such payments will be made by wire transfer to an
account designated by such Noteholder at a financial institution in New York,
New York; provided that the final payment for each subclass of Notes will be
made only upon presentation and surrender of the Definitive Notes of such
subclass by the Noteholder or its agent (including any holder in street name) at
the office or agency of the Trustee specified in the notice of such final
payment given by the Trustee. The Trustee will mail such notice of the final
payment of such subclass to each of the Noteholders of such subclass, specifying
the date and amount of such final payment.
If any Payment Date or other date specified herein for any payments to
Noteholders is not a Business Day, the payment scheduled to be made on such
Payment Date or other date shall be made on the next succeeding Business Day.
The following table sets forth the Expected Weighted Average Life, the
Expected Final Payment Date and the Final Maturity Date of each subclass of
Notes. The Expected Final Payment Date for each subclass of Notes represents the
date on which the final payment of principal of and interest on such subclass of
Notes is expected to be made based on the Assumptions. The Final Maturity Date
for each subclass of Notes represents the date on which all principal not
previously paid, if any, on the corresponding subclass of Notes is due and
payable. The actual final payment date for each subclass of Notes is likely to
occur earlier or later than the Expected Final Payment Date as a result of
numerous factors, including that the Assumptions are unlikely to correspond to
actual experience. For a description of certain Redemption events and other
factors which could cause the Notes to be paid prior to the Expected Final
Payment Date applicable to each corresponding subclass of Notes, see "-- Payment
of Principal and Interest -- Redemption". Holders of the Subclass A-1 Notes will
receive payments of Step-Up Interest in respect of any amounts Outstanding on
and after the Expected Final Payment Date for such subclass.
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EXPECTED WEIGHTED AVERAGE LIFE, EXPECTED FINAL PAYMENT DATES
AND FINAL MATURITY DATES OF THE NOTES
EXPECTED
WEIGHTED
AVERAGE LIFE EXPECTED FINAL FINAL MATURITY
SUBCLASS OF NOTES IN YEARS PAYMENT DATE DATE
- ----------------- ------------ ------------------ --------------
Subclass A-1............................. 2.0 March 15, 2000 March 15, 2023
Subclass A-2............................. 3.8 September 15, 2005 March 15, 2023
Subclass B-1............................. 8.6 March 15, 2013 March 15, 2023
Subclass C-1............................. 10.6 March 15, 2013 March 15, 2023
Subclass D-1............................. 12.1 March 15, 2014 March 15, 2023
ASSUMPTIONS
The Assumptions and tables set forth below represent possible revenue
scenarios designed to illustrate certain payment characteristics of the Notes
and are not intended to be projections, estimates, forecasts or forward-looking
statements. The tables have been developed by fixing certain of the Assumptions
and by varying other Assumptions and certain other factors which affect MSAF
Group's revenues and costs and expenses. The Assumptions do not represent a
complete list of factors which may affect the revenues and costs and expenses of
MSAF Group, but rather indicate those factors which are likely to significantly
affect the performance of MSAF Group in future years. In addition, the range of
possible outcomes with respect to each Assumption and the combinations of
Assumptions set forth above do not indicate a comprehensive set of possible
results for MSAF Group. In particular, more severe stresses may lead to payments
of principal on the Notes being delayed or decreased, or in certain cases, an
Event of Default.
Accordingly, investors should understand that the following tables are
intended merely to illustrate certain, but not all, payment sensitivities of the
Notes to certain, but not all, market and economic stresses. MSAF Group does not
intend to update or revise the information presented to reflect changes
occurring after March 31, 1998. As of the date of this Prospectus, however, MSAF
Group is not aware of events or circumstances since March 31, 1998 that would
cause the Assumptions to be unreliable. It is highly likely that actual
experience will vary from the Assumptions and the possible revenue scenarios
represented by the tables. The principal factors that could cause MSAF Group's
actual revenues to differ materially from such scenarios are the Stresses and
certain "Risk Factors" as set out herein. See "Risk Factors".
REVENUE ASSUMPTIONS:
(i) One month LIBOR remains constant at 5.75% per annum and the U.S.
Treasury rate used for Make-Whole Premium calculations is 5.5%.
(ii) Funds on deposit in the Collection Account and any other cash
balances held by MSAF earn interest at a rate of one month LIBOR.
(iii) Aircraft coming off-lease in the future are assumed to be re-leased
at a monthly rate that is a function of the current contracted
monthly lease rate as of February 1, 1998 for such Aircraft, and the
age of such Aircraft. Lease rates are assumed to remain constant at
the monthly lease rate for the first 60% of an Aircraft's expected
useful life, thereafter declining on a straight-line basis to 40% of
such lease rate over the remainder of its expected useful life (the
"FUTURE LEASE RATE"). All types of Initial Aircraft in the Portfolio
are assumed to have an expected useful life of 25 years (the
"EXPECTED USEFUL LIFE").
(iv) Initial Aircraft are assumed to have no scrap value at the end of
their Expected Useful Life.
(v) All contracted and assumed future payments in respect of the Leases
are timely received by MSAF Group on the due date therefor.
(vi) Future Lease terms are assumed to be five years.
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(vii) No new Purchase Options with respect to the Initial Aircraft are
granted to Lessees by MSAF Group and the only existing Purchase
Option exercised is the option associated with the Conditional Sale
Agreement.
(viii) No new Lease termination or extension options are granted to Lessees
by MSAF Group and no existing termination or extension options are
exercised.
(ix) The Remaining Aircraft are delivered to MSAF Group and with the
exception of the Initial Aircraft sale assumed pursuant to the
Conditional Sale Agreement as detailed in paragraph (vii) above, MSAF
Group sells no Initial Aircraft.
(x) MSAF Group acquires no Additional Aircraft.
(xi) MSAF makes and receives Swap Payments in accordance with the
contracted terms of the Initial Swaps.
(xii) Security deposits, Modification Payments and Subordinated Swap
Payments are assumed to be zero.
The above Assumptions (i) to (xii) are used to determine the assumed gross
monthly revenue to MSAF Group before interest payments, principal payments,
selling, general and administrative expenses and before lost rental payments and
expenditures required due to Aircraft downtime, Lessee defaults, aircraft
repossession costs, bad debts and operating costs incurred in the ordinary
course of the operating lease business ("GROSS REVENUE"). See Appendix 3 to this
Prospectus for further data regarding Gross Revenue.
INTEREST, EXPENSE AND OPERATING COST ASSUMPTIONS:
(xiii) The Notes are issued in amounts and with coupons as set forth in the
following table and payments are made in accordance with the order
of priorities set forth under "-- Priority of Payments".
SUBCLASS OF NOTES AMOUNT MONTHLY COUPON
----------------- ------------ --------------------
($ MILLIONS)
Subclass A-1................................ 400 1 Month LIBOR+ 0.21%
Subclass A-2................................ 340 1 Month LIBOR+ 0.35%
Subclass B-1................................ 100 1 Month LIBOR+ 0.65%
Subclass C-1................................ 100 6.90%
Subclass D-1................................ 110 8.70%
------
$1,050
======
(xiv) Refinancing Notes are assumed to be issued and sold on the Expected
Final Payment Date of the Subclass A-1 Notes (and on each subsequent
expected final payment dates of any such Refinancing Notes) on the
same terms with respect to priority, coupon and redemption as the
Notes being refinanced and with maturities and amortization schedules
paid with the application of the Minimum, Scheduled and Supplemental
Principal Payment Amounts. Issuance expenses are assumed to be
one-twelfth of 0.05% of the Outstanding Principal Balance.
(xv) The Servicer's fees are as described under "Management of MSAF Group
-- Servicer" and the results-based incentive fee is assumed to be
equal to 1% of Gross Revenue. The Administrative Agent's fee is as
described in "Management of MSAF Group -- Corporate Management".
MSAF's other selling, general and administrative expenses in the
amount of $1 million per annum are deducted from Gross Revenue and
include fees to the Cash Manager and Financial Advisor.
(xvi) Gross Revenues are reduced each year by 3.5% to account for certain
operating costs incurred in the ordinary course of the operating
lease business including insurance expenses, Aircraft related costs
and leasing transaction expenses.
(xvii) The maximum Beneficial Interest Distribution Amount that can be paid
on any Payment Date in accordance with the above Assumptions is
paid.
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ASSUMED CASE STRESS SCENARIO:
(xviii) Gross Revenues are assumed to be reduced by 4.5% per annum in
respect of lost rental payments and expenditures required due to
AOG, Lessee defaults, aircraft repossession costs and bad debts
("STRESSES"). The following set of Stresses are presented for
illustrative purposes and only represent an example of a
combination of Stresses which result in approximately a 4.5%
reduction in Gross Revenues. Other Stress combinations could result
in Gross Revenue reductions which exceed 4.5%.
A: Weighted Average Portfolio Turnover:......... 20% per annum (Assumption (vi))
B: Average Re-marketing Time:................... 4 weeks (.08 years)
C: Weighted Average Default Rate:............... 4% per annum
D: Average Repossession Time:................... 14 weeks (.27 years)
E: Average Repossession Cost:................... $500,000 per Aircraft
F: Weighted Average Bad Debt Expense:........... 1% per annum
AOG = (A X B) + (C X (B + D))
Annual Repossession Expense ("ARE") = (C X(E/Average
Gross Revenue per Aircraft)) (See Appendix 3)
AOG = (20% X .08 yrs) + (4% X (.08 yrs + .27 yrs)).......... 3.0%
ARE = (4% X 13%)............................................ 0.5
Bad Debt Expense............................................ +1.0
-----
Stress Related Gross Revenue Reduction...................... 4.5%
Operating costs (see Assumption (xvi))...................... +3.5
-----
Gross Revenue Reduction in the assumed case................. 8.0%
=====
Increasing the above Stresses would result in a greater reduction in annual
Gross Revenues. The following table shows the effect upon Gross Revenues of
doubling the severity of each Stress (other than Average Repossession Cost)
outlined in the above example (in each case holding other Stresses unchanged).
GROSS
REVENUE
STRESS SEVERITY REDUCTION
- ------ ------------- ---------
Portfolio Turnover........................... 40% per annum 9.6%
Re-marketing Time............................ 8 weeks 9.9%
Default Rate................................. 8% per annum 9.9%
Repossession Time............................ 28 weeks 9.1%
Bad Debt Expense............................. 2% per annum 9.0%
It is highly likely that actual experience will differ from the Assumptions
and the Stresses and, therefore, principal payments on certain Notes will likely
occur earlier or later, and may occur significantly earlier or later, than
assumed.
PRINCIPAL REPAYMENTS UNDER THE ASSUMED CASE
The table below shows, for each Payment Date presented, the percentage of
the initial Outstanding Principal Balance of the aggregate Class A Notes,
including Refinancing Notes, and the Subclass A-1, Subclass A-2, Subclass B-1,
Subclass C-1 and Subclass D-1 Notes expected to be Outstanding on such Payment
Date based on the Assumptions. It is highly unlikely that the Assumptions will
correspond to actual experience. Therefore, principal payments on the Notes may
occur earlier or later than as set forth in the table. The failure of MSAF to
pay principal of any subclass of the Notes prior to the Final Maturity Date of
such subclass because funds are not available therefor in accordance with the
order of priorities described under "-- Priority of Payments" will not
constitute an Event of Default.
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93
PERCENT OF INITIAL PRINCIPAL BALANCE OF THE
NOTES BASED ON THE ASSUMED CASE(1)
AGGREGATE CLASS A
NOTES, INCLUDING
PAYMENT DATE OCCURRING IN MARCH A-1 A-2 REFINANCING NOTES B-1 C-1 D-1
------------------------------- ---- ---- ----------------- ---- ---- ----
1998 (March 3, 1998).................. 100% 100% 100% 100% 100% 100%
1999.................................. 100% 87% 94% 96% 100% 100%
2000.................................. 0% 74% 88% 92% 100% 100%
2001.................................. 0% 61% 82% 88% 99% 100%
2002.................................. 0% 48% 76% 83% 97% 99%
2003.................................. 0% 34% 69% 78% 94% 98%
2004.................................. 0% 19% 63% 71% 89% 96%
2005.................................. 0% 6% 57% 64% 84% 93%
2006.................................. 0% 0% 51% 57% 77% 88%
2007.................................. 0% 0% 45% 50% 70% 83%
2008.................................. 0% 0% 39% 42% 61% 76%
2009.................................. 0% 0% 33% 33% 51% 67%
2010.................................. 0% 0% 28% 24% 40% 57%
2011.................................. 0% 0% 22% 15% 28% 45%
2012.................................. 0% 0% 18% 7% 14% 32%
2013.................................. 0% 0% 12% 0% 0% 17%
2014.................................. 0% 0% 6% 0% 0% 0%
Weighted Average Life (Years)(2)...... 2.0 3.8 8.4 8.6 10.6 12.1
- ---------------
(1) See Appendices 3 and 9, respectively, for further data regarding Gross
Revenues and Pool Factors.
(2) The weighted average life of a Note equals (i) the sum of the products on
each Payment Date of (A) the principal payments assumed to be made on such
Payment Date and (B) the number of years from the date of issuance of such
Note to such Payment Date (ii) divided by the Initial Principal Balance of
such Note ("WEIGHTED AVERAGE LIFE").
DECLINING BALANCES OF THE NOTES AND ASSUMED PORTFOLIO VALUE
BASED ON THE ASSUMED CASE
In each of the following tables, "EXPECTED MATURITY" means the period
(expressed in years) from March 3, 1998 through the expected final payment of
principal of the relevant Notes.
88
94
EFFECT OF INABILITY TO REFINANCE SUBCLASS A-1 NOTES
The table below is based on the Assumptions, except that no Refinancing
Notes are assumed to be issued and sold and the Subclass A-1 Notes are assumed
to amortize according to the Priority of Payments. If such Refinancings do not
occur, the Expected Maturities ("EXP") and Weighted Average Lives ("AVG") of the
respective subclasses of Notes would be as set forth below.
EXPECTED MATURITIES AND WEIGHTED AVERAGE LIVES OF NOTES
EXPECTED MATURITY/
WEIGHTED AVERAGE LIFE
--------------------------------
ASSUMED CASE NO REFINANCINGS
------------- ---------------
EXP AVG EXP AVG
---- ---- ----- -----
Subclass A-1................................................ 2.0 2.0 17.3 12.6
Subclass A-2................................................ 7.5 3.8 8.9 4.0
Subclass B-1................................................ 15.0 8.6 15.0 8.6
Subclass C-1................................................ 15.0 10.6 15.0 10.6
Subclass D-1................................................ 16.0 12.1 16.3 12.6
MINIMUM REVENUE PERCENTAGE REQUIRED TO RETIRE NOTES
The table below indicates the minimum percentage of Gross Revenue that will
be necessary to repay all interest and principal on each class of Notes by their
respective Final Maturity Dates. If the actual revenue received by MSAF Group
were to fall below the percentages of Gross Revenue indicated below and all of
the other Assumptions were to occur as assumed, MSAF would be unable to meet its
required payment obligations which would constitute an Event of Default with
respect to the Notes.
PERCENTAGE OF GROSS REVENUE NECESSARY TO REPAY THE
NOTES BY THE APPLICABLE FINAL MATURITY DATE ASSUMING ACTUAL
EXPERIENCE CORRESPONDS TO THE ASSUMED CASE UNTIL THE BEGINNING OF THE YEAR
STATED
MARCH 3, 1998 YEAR 3 YEAR 6 YEAR 10
------------- ------ ------ -------
Aggregate Class A Notes............................... 59.4% 58.2% 54.7% 47.5%
Subclass B-1 Notes.................................... 67.1% 65.7% 61.6% 53.0%
Subclass C-1 Notes.................................... 75.8% 74.2% 70.6% 61.4%
Subclass D-1 Notes.................................... 84.8% 83.3% 80.0% 72.1%
89
95
EFFECT OF A PERMANENT CHANGE IN GROSS REVENUE
The tables below have been prepared based on the Assumptions, except that
the revenue received by MSAF Group varies from Gross Revenues by the indicated
percentages, beginning in years 3 and 6. If the actual revenues received by MSAF
Group were to vary as indicated below and all of the other Assumptions were to
occur as assumed, then the Expected Maturities and Weighted Average Lives of the
respective subclasses of Notes would be as set forth below.
EXPECTED MATURITIES AND WEIGHTED AVERAGE LIVES OF NOTES
ASSUMING A PERMANENT CHANGE IN GROSS REVENUE, BEGINNING IN YEAR 3
PERMANENT CHANGE IN GROSS REVENUE
--------------------------------------------------------------------
+10% 0% -8%* -15% -20%
----------- ----------- ----------- ----------- ------------
EXP AVG EXP AVG EXP AVG EXP AVG EXP AVG
---- ---- ---- ---- ---- ---- ---- ---- ----- ----
Subclass A-1........................ 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0
Subclass A-2........................ 5.9 3.2 6.4 3.4 7.5 3.8 8.9 4.4 9.2 4.6
Subclass B-1........................ 11.2 6.8 12.0 8.0 15.0 8.6 18.5 9.2 18.5 9.2
Subclass C-1........................ 11.0 9.2 14.0 10.5 15.0 10.6 20.0 14.2 20.0 14.7
Subclass D-1........................ 9.7 7.6 13.5 11.3 16.0 12.1 21.3 16.9 (1)
- ---------------
*Assumed case
(1) Not all principal repaid prior to the Final Maturity Date. (Yield = 6.17%)
EXPECTED MATURITIES AND WEIGHTED AVERAGE LIVES OF NOTES
ASSUMING A PERMANENT CHANGE IN GROSS REVENUE, BEGINNING IN YEAR 6
PERMANENT CHANGE IN GROSS REVENUE
-------------------------------------------------------------------
+10% 0% -8%* -15% -20%
----------- ----------- ----------- ----------- -----------
EXP AVG EXP AVG EXP AVG EXP AVG EXP AVG
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Subclass A-1......................... 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0
Subclass A-2......................... 6.6 3.7 7.0 3.8 7.5 3.8 8.9 4.0 8.9 4.1
Subclass B-1......................... 12.0 7.6 13.8 8.5 15.0 8.6 15.0 8.6 18.5 9.2
Subclass C-1......................... 12.8 10.2 14.7 10.6 15.0 10.6 17.4 12.2 20.0 14.0
Subclass D-1......................... 12.2 10.4 14.6 11.8 16.0 12.1 19.5 15.5 24.9 18.9
- ---------------
*Assumed case
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96
EFFECT OF PERMANENT DECLINE IN PORTFOLIO VALUE
To the extent that the Adjusted Portfolio Value is significantly less than
the Assumed Portfolio Value, the Scheduled Principal Payment Amount payable to
holders of the Class A Notes may be increased. See "-- Principal Amortization".
Payment of such increased amount may shorten the Weighted Average Lives of the
Class A Notes and lengthen the Weighted Average Lives of the subclasses of Notes
that rank behind the Class A Notes in priority of payment. The following tables
show the Expected Maturity and Weighted Average Life of each subclass of Notes
if the Adjusted Portfolio Value was to permanently decline to a given percentage
of the Assumed Portfolio Value, beginning in years 1 and 5, respectively.
EXPECTED MATURITIES AND WEIGHTED AVERAGE LIVES OF NOTES
ASSUMING A PERMANENT CHANGE IN PORTFOLIO VALUE, BEGINNING IN YEAR 1
ADJUSTED PORTFOLIO VALUE AS PERCENTAGE OF
ASSUMED PORTFOLIO VALUE BEGINNING IN YEAR 1
-----------------------------------------------------
100%* 90% 80% 70%
----------- ----------- ----------- -----------
EXP AVG EXP AVG EXP AVG EXP AVG
---- ---- ---- ---- ---- ---- ---- ----
Subclass A-1.................................... 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0
Subclass A-2.................................... 7.5 3.8 7.5 3.8 7.0 3.7 7.0 3.7
Subclass B-1.................................... 15.0 8.6 15.0 8.6 15.0 8.6 15.0 8.6
Subclass C-1.................................... 15.0 10.6 15.0 10.6 15.0 10.9 15.0 11.4
Subclass D-1.................................... 16.0 12.1 16.0 12.1 16.0 12.3 16.0 13.5
- ---------------
*Assumed case
EXPECTED MATURITIES AND WEIGHTED AVERAGE LIVES OF NOTES
ASSUMING A PERMANENT CHANGE IN PORTFOLIO VALUE, BEGINNING IN YEAR 5
ADJUSTED PORTFOLIO VALUE AS PERCENTAGE OF
ASSUMED PORTFOLIO VALUE BEGINNING IN YEAR 5
-----------------------------------------------------
100%* 90% 80% 70%
----------- ----------- ----------- -----------
EXP AVG EXP AVG EXP AVG EXP AVG
---- ---- ---- ---- ---- ---- ---- ----
Subclass A-1.................................... 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0
Subclass A-2.................................... 7.5 3.8 7.5 3.8 7.0 3.7 7.0 3.7
Subclass B-1.................................... 15.0 8.6 15.0 8.6 15.0 8.6 15.0 8.6
Subclass C-1.................................... 15.0 10.6 15.0 10.6 15.0 10.8 15.0 11.3
Subclass D-1.................................... 16.0 12.1 16.0 12.1 16.0 12.3 16.0 13.5
- ---------------
*Assumed case
EFFECT OF CYCLICAL VARIATIONS IN GROSS REVENUE AND PORTFOLIO VALUE --
"RECESSION SCENARIOS"
Historically, the aviation industry has experienced cyclical swings in the
supply and demand for aircraft. MSAF Group would be negatively affected by a
decline in the demand for aircraft. Such a decline or "RECESSION" (as used in
this discussion) is assumed to result in a decline in Aircraft values and an
increase in defaults and downtime, as well as a decline in operating lease
rental rates. These effects would result in a decline in Gross Revenues.
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97
The following tables have been prepared on the basis of a number of
assumptions to show the effect on Expected Maturities and Weighted Average Lives
of Subclass B-1, Subclass C-1 and Subclass D-1 Notes if recessions having given
durations were to occur at certain given times in the future. Actual experience
will likely differ from that which is assumed and, therefore, Expected
Maturities and Weighted Average Lives of the Notes actually experienced will
likely differ from those shown in the tables below. In preparing the following
tables it has been assumed that a recession would have the following effect on
MSAF Group: First, Aircraft values would fall on the first day of the recession
to a given percentage of the Assumed Portfolio Value which, in turn, may trigger
payment of increased Scheduled Principal Payment Amounts on the Class A Notes if
amounts are available to do so. Second, after a period of two years following
the first day of the recession, Gross Revenues fall by a given percentage as
Aircraft are re-leased or Lessees default which would result in less cash flow
being available to make payments of interest and principal on the Notes. Third,
the recession lasts a given period of time followed by the Adjusted Portfolio
Value returning to the then Assumed Portfolio Value on the first day after the
recession and, two years following the end of the recession, Gross Revenues
returning to the Assumed Case. However, MSAF Group can give no assurance that
periods of weak traffic growth and lower demand for aircraft will be followed by
periods of strong growth and high demand for aircraft nor can it be assured that
following a recession Aircraft values and Gross Revenues will return to assumed
case levels.
EXPECTED MATURITIES AND WEIGHTED AVERAGE LIVES OF SUBCLASS B-1
NOTES ASSUMING A RECESSION LASTING THREE YEARS
DECLINE IN GROSS REVENUES..................... 0% 8%* 10% 20%
ADJUSTED PORTFOLIO VALUE AS A PERCENTAGE OF
ASSUMED PORTFOLIO VALUE..................... 100% 100%* 90% 80%
EXP AVG EXP AVG EXP AVG EXP AVG
---- ---- ---- ---- ---- ---- ---- ----
Recession begins at start of
Year......................... 1 (Closing Date) 15.0 8.6 15.0 8.6 15.0 8.6 15.0 8.6
3 15.0 8.6 15.0 8.6 15.0 8.6 15.0 8.6
5 15.0 8.6 15.0 8.6 15.0 8.6 15.0 8.6
10 15.0 8.6 15.0 8.6 15.0 8.6 15.0 8.6
- ---------------
*Assumed case
EXPECTED MATURITIES AND WEIGHTED AVERAGE LIVES OF SUBCLASS B-1
NOTES ASSUMING A RECESSION LASTING FIVE YEARS
DECLINE IN GROSS REVENUES..................... 0% 8%* 10% 20%
ADJUSTED PORTFOLIO VALUE AS A PERCENTAGE OF
ASSUMED PORTFOLIO VALUE..................... 100% 100%* 90% 80%
EXP AVG EXP AVG EXP AVG EXP AVG
---- ---- ---- ---- ---- ---- ---- ----
Recession begins at start of
Year......................... 1 (Closing Date) 14.8 8.6 15.0 8.6 15.0 8.6 16.3 9.1
3 15.0 8.6 15.0 8.6 15.0 8.6 15.0 8.6
5 15.0 8.6 15.0 8.6 15.0 8.6 15.0 8.7
10 15.0 8.6 15.0 8.6 15.0 8.6 15.0 8.6
- ---------------
*Assumed case
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98
EXPECTED MATURITIES AND WEIGHTED AVERAGE LIVES OF SUBCLASS C-1
NOTES ASSUMING A RECESSION LASTING THREE YEARS
DECLINE IN GROSS REVENUES..................... 0% 8%* 10% 20%
ADJUSTED PORTFOLIO VALUE AS A PERCENTAGE OF
ASSUMED PORTFOLIO VALUE..................... 100% 100%* 90% 80%
EXP AVG EXP AVG EXP AVG EXP AVG
---- ---- ---- ---- ---- ---- ---- ----
Recession begins at start of
Year......................... 1 (Closing Date) 15.0 10.6 15.0 10.6 15.0 10.6 15.6 11.1
3 15.0 10.6 15.0 10.6 15.0 10.6 15.1 10.9
5 15.0 10.6 15.0 10.6 15.0 10.6 15.0 10.9
10 15.0 10.6 15.0 10.6 15.0 10.6 15.0 10.7
- ---------------
*Assumed case
EXPECTED MATURITIES AND WEIGHTED AVERAGE LIVES OF SUBCLASS C-1
NOTES ASSUMING A RECESSION LASTING FIVE YEARS
DECLINE IN GROSS REVENUES..................... 0% 8%* 10% 20%
ADJUSTED PORTFOLIO VALUE AS A PERCENTAGE OF
ASSUMED PORTFOLIO VALUE..................... 100% 100%* 90% 80%
EXP AVG EXP AVG EXP AVG EXP AVG
---- ---- ---- ---- ---- ---- ---- ----
Recession begins at start of
Year........................... 1 (Closing Date) 15.0 10.6 15.0 10.6 15.0 10.6 18.2 14.1
3 15.0 10.6 15.0 10.6 15.0 10.6 17.2 13.2
5 15.0 10.6 15.0 10.6 15.0 10.6 16.3 12.2
10 15.0 10.6 15.0 10.6 15.0 10.6 15.0 10.8
- ---------------
*Assumed case
EXPECTED MATURITIES AND WEIGHTED AVERAGE LIVES OF SUBCLASS D-1
NOTES ASSUMING A RECESSION LASTING THREE YEARS
DECLINE IN GROSS REVENUES..................... 0% 8%* 10% 20%
ADJUSTED PORTFOLIO VALUE AS A PERCENTAGE OF
ASSUMED PORTFOLIO VALUE..................... 100% 100%* 90% 80%
EXP AVG EXP AVG EXP AVG EXP AVG
---- ---- ---- ---- ---- ---- ---- ----
Recession begins at start of
Year........................... 1 (Closing Date) 15.9 12.1 16.0 12.1 16.0 12.3 17.9 15.2
3 16.0 12.1 16.0 12.1 16.0 12.2 17.5 14.7
5 16.0 12.1 16.0 12.1 16.0 12.1 17.1 14.0
10 16.0 12.1 16.0 12.1 16.0 12.1 16.5 12.9
- ---------------
*Assumed case
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99
EXPECTED MATURITIES AND WEIGHTED AVERAGE LIVES OF SUBCLASS D-1
NOTES ASSUMING A RECESSION LASTING FIVE YEARS
DECLINE IN GROSS REVENUES..................... 0% 8%* 10% 20%
ADJUSTED PORTFOLIO VALUE AS A PERCENTAGE OF
ASSUMED PORTFOLIO VALUE..................... 100% 100%* 90% 80%
EXP AVG EXP AVG EXP AVG EXP AVG
---- ---- ---- ---- ---- ---- ---- ----
Recession begins at start of
Year........................... 1 (Closing Date) 15.3 12.0 16.0 12.1 16.0 12.4 19.9 16.6
3 15.5 12.1 16.0 12.1 16.0 12.3 19.0 16.1
5 15.6 12.1 16.0 12.1 16.0 12.2 18.3 15.7
10 16.0 12.1 16.0 12.1 16.0 12.1 17.2 13.8
- ---------------
*Assumed case
EFFECT OF CHANGES IN GROSS REVENUES ON YIELDS OF FIXED RATE NOTES
The tables below have been prepared based on the Assumptions, except that
the revenue received by MSAF Group varies from Gross Revenues by the indicated
percentages, beginning in certain years, for a period of three years in one case
and permanently in the other. If the actual revenues received by MSAF Group were
to vary as indicated below and all of the other Assumptions were to occur as
assumed, then the yield to maturity for the Subclass C-1 and Subclass D-1 Notes
would be as set forth below. If significant declines in Gross Revenues were to
occur, there may not be sufficient revenues available to meet interest payments
(as well as principal payments) on the Notes. In such cases, interest on the
Notes would be deferred.
YIELD, DATE OF FIRST DEFERRAL AND NUMBER OF MONTHS IN WHICH INTEREST IS DEFERRED
ON THE SUBCLASS C-1 NOTES GIVEN THE ASSUMPTIONS BUT WITH A THREE YEAR CHANGE IN
GROSS REVENUE OF THE MAGNITUDE SHOWN
CHANGE IN GROSS REVENUES BEGINNING IN YEAR:
------------------------------------------------------------------------------------------
3 6 9
---------------------------- ---------------------------- ----------------------------
DATE OF MONTHS OF DATE OF MONTHS OF DATE OF MONTHS OF
YIELD DEFERRAL DEFERRALS YIELD DEFERRAL DEFERRALS YIELD DEFERRAL DEFERRALS
----- -------- --------- ----- -------- --------- ----- -------- ---------
Increase of 10%.................. 7.01% none 0 7.01% none 0 7.01% none 0
Decrease of 8%*.................. 7.01% none 0 7.01% none 0 7.01% none 0
Decrease of 20%.................. 7.01% none 0 7.01% none 0 7.01% none 0
Decrease of 30%.................. 7.01% none 0 7.01% none 0 7.01% none 0
YIELD, DATE OF FIRST DEFERRAL AND NUMBER OF MONTHS IN WHICH INTEREST IS DEFERRED
ON THE SUBCLASS C-1 NOTES GIVEN THE ASSUMPTIONS BUT WITH A PERMANENT CHANGE IN
GROSS REVENUE OF THE MAGNITUDE SHOWN
CHANGE IN GROSS REVENUES BEGINNING IN YEAR:
------------------------------------------------------------------------------------------
3 6 9
---------------------------- ---------------------------- ----------------------------
DATE OF MONTHS OF DATE OF MONTHS OF DATE OF MONTHS OF
YIELD DEFERRAL DEFERRALS YIELD DEFERRAL DEFERRALS YIELD DEFERRAL DEFERRALS
----- -------- --------- ----- -------- --------- ----- -------- ---------
Increase of 10%.................. 7.12% none 0 7.04% none 0 7.01% none 0
Decrease of 8%*.................. 7.01% none 0 7.01% none 0 7.01% none 0
Decrease of 20%.................. 7.01% none 0 7.01% none 0 7.01% none 0
Decrease of 30%.................. 3.38% Jul-03 237 6.72% Apr-07 122 7.01% May-11 17
94
100
YIELD, DATE OF FIRST DEFERRAL AND NUMBER OF MONTHS IN WHICH INTEREST IS DEFERRED
ON THE SUBCLASS D-1 NOTES, GIVEN THE ASSUMPTIONS BUT WITH A THREE YEAR CHANGE IN
GROSS REVENUE OF THE MAGNITUDE SHOWN
CHANGE IN GROSS REVENUES BEGINNING IN YEAR:
------------------------------------------------------------------------------------------
3 6 9
---------------------------- ---------------------------- ----------------------------
DATE OF MONTHS OF DATE OF MONTHS OF DATE OF MONTHS OF
YIELD DEFERRAL DEFERRALS YIELD DEFERRAL DEFERRALS YIELD DEFERRAL DEFERRALS
----- -------- --------- ----- -------- --------- ----- -------- ---------
Increase of 10%.................. 8.86% none 0 8.86% none 0 8.86% none 0
Decrease of 8%*.................. 8.86% none 0 8.86% none 0 8.86% none 0
Decrease of 20%.................. 8.86% none 0 8.86% none 0 8.86% none 0
Decrease of 30%.................. 8.86% none 0 8.86% none 0 8.86% none 0
- ---------------
*Assumed case
YIELD, DATE OF FIRST DEFERRAL AND NUMBER OF MONTHS IN WHICH INTEREST IS DEFERRED
ON THE SUBCLASS D-1 NOTES, GIVEN THE ASSUMPTIONS BUT WITH A PERMANENT CHANGE IN
GROSS REVENUE OF THE MAGNITUDE SHOWN
CHANGE IN GROSS REVENUES BEGINNING IN YEAR:
---------------------------------------------------------------------------------------------
3 6 9
------------------------------ ----------------------------- ----------------------------
DATE OF MONTHS OF DATE OF MONTHS OF DATE OF MONTHS OF
YIELD DEFERRAL DEFERRALS YIELD DEFERRAL DEFERRALS YIELD DEFERRAL DEFERRALS
------- -------- --------- ------ -------- --------- ----- -------- ---------
Increase of 10%.............. 9.21% none 0 8.90% none 0 8.86% none 0
Decrease of 8%*.............. 8.86% none 0 8.86% none 0 8.86% none 0
Decrease of 20%.............. 6.17% Jul-07 189 8.86% May-13 15 8.86% none 0
Decrease of 30%.............. -25.02% Jun-03 238 -3.88% Apr-07 192 7.00% May-11 143
- ---------------
*Assumed case
EFFECT OF PRINCIPAL ALLOCATION ACCORDING TO THE EXTENDED POOL FACTOR ONLY FOR
THE SUBCLASS A-2, SUBCLASS B-1, SUBCLASS C-1 AND SUBCLASS D-1 NOTES.
The following table has been prepared on the basis of a number of
assumptions to show the effect on Expected Maturities and Weighted Average Lives
of Subclass A-2, Subclass B-1, Subclass C-1 and Subclass D-1 Notes if subclasses
of Additional Notes are issued to fund the acquisition of Additional Aircraft
but Gross Revenues from the Aircraft are only sufficient to amortize such
subclasses with the application of Available Collections in accordance with the
applicable Extended Pool Factors in accordance with clause "First" under "--
Allocation of Principal Among Subclasses of Notes".
SUBCLASSES OF NOTES EXP. AVG.
------------------- ---- ----
Subclass A-2 Notes.......................................... 8.9 4.9
Subclass B-1 Notes.......................................... 16.0 9.6
Subclass C-1 Notes.......................................... 17.0 12.6
Subclass D-1 Notes.......................................... 18.0 14.1
PAYMENT OF PRINCIPAL AND INTEREST
GENERAL
Pursuant to the terms of the Leases, the Lessees are obliged to make rental
payments and certain other payments (collectively, the "RENTAL PAYMENTS") to
certain subsidiaries of MSAF. Pursuant to the terms of the Leases, all Rental
Payments and certain other amounts will be made directly to the Rental Account
held in the name of the Security Trustee on behalf of the Secured Parties.
Unsegregated amounts received by MSAF Group in respect of the assets of MSAF
Group will be transferred directly to the Collection Account pursuant to the
Indenture and the Administrative Agency Agreement. Any amounts received by MSAF
Group which are required to be segregated will be transferred to the Lessee
Funded Account. On the
95
101
basis of the Assumptions, such Rental Payments, together with such other
amounts, are expected to be sufficient to pay the principal, interest and
premium, if any, on the Notes and all other amounts payable by MSAF Group to the
creditors referred to in the Administrative Agency Agreement, including the
Servicer, the Trustee, the Cash Manager, the Administrative Agent, the Financial
Advisor and each Swap Provider in each case when and as due.
The Notes constitute direct obligations of MSAF and are subordinated to the
Expenses and certain obligations and pari passu or senior to certain other
obligations specified in the Indenture. The only source of payment for the Notes
and the obligations of MSAF to creditors is (i) the payments made by the Lessees
under the Leases, (ii) payments or drawdowns under any credit or liquidity
enhancement facility, (iii) proceeds from dispositions, if any, of the assets of
MSAF Group, (iii) net payments, if any, under the Swap Agreements and (iv) net
cash proceeds received from the sale of Refinancing Notes. See "-- Payment of
Principal and Interest" and "-- Priority of Payments".
Each class and subclass of the Notes has the priority set forth in the
Indenture and the Notes. Pursuant to the subordination provisions of the
Indenture and the various classes of Notes, no payment of principal, interest
and premium, if any, on any class of Notes may be made on any Payment Date
unless certain required payments have been made in respect of the Notes of each
class ranking prior to such class of Notes on such Payment Date. The
subordination provisions contained in the Indenture may not be amended or
modified without the consent of each Swap Provider, each holder of the class of
Notes affected thereby and each holder of any class of Notes ranking senior to
such Notes. In no event shall the provisions relating to the priority of the
Expenses or any payments under Swap Agreements in the Indenture be amended or
modified.
In addition, the Administrative Agent, on behalf of MSAF, may replace the
bank with which the Accounts are held (1) if such bank fails to maintain a
short-term unsecured debt rating of A-1+ by Standard & Poor's, P-1 by Moody's or
D-1+ by DCR or better by each Rating Agency (or A-1 by Standard & Poor's, P-1 by
Moody's or D-1 by DCR or better if the amount on deposit at any time in any
Accounts held with such bank does not exceed 20% of the Outstanding Principal
Balance of the Notes for any period in excess of 30 days), (2) if such bank is
adjudged a bankrupt or an insolvent, (3) if a receiver or public officer takes
charge of such bank or its property, (4) if such bank becomes incapable of
acting or (5) upon 120 days' notice, for any reason, with Rating Agency
approval.
Holders of each class of Notes (other than Class A Notes) will not be
permitted to give a Default Notice with respect to any Event of Default or to
exercise any remedy in respect of such Event of Default until all amounts with
respect to Notes of each class ranking senior to such class of Notes have been
paid in full. See "-- Events of Default and Remedies".
INTEREST
Each Note will bear interest on the Outstanding Principal Balance thereof
from March 3, 1998, payable monthly in arrears on each Payment Date. The initial
Interest Accrual Period is the period commencing on and including March 3, 1998,
and ending on but excluding the first Payment Date. Each subsequent Interest
Accrual Period will include each period from and including the last preceding
Payment Date to but excluding the next succeeding Payment Date. The final
Interest Accrual Period with respect to each subclass of Notes will end on but
exclude the Final Maturity Date, or, if earlier, the date upon which all
principal, interest and premium, if any, on such subclass of Notes is paid in
full. Each subclass of Notes will bear interest for each Interest Accrual Period
at the rate per annum set forth on the cover page of this Prospectus.
Interest on the Subclass A-1, A-2 and B-1 Notes will be calculated on the
basis of a 360-day year and the actual number of days elapsed in an Interest
Accrual Period. Interest on Subclass C-1 and D-1 Notes will be calculated on the
basis of one-twelfth of an annual interest payment on the Outstanding Principal
Balance and in the case of an incomplete Interest Accrual Period on the basis of
a 360-day year consisting of twelve 30-day months.
The interest rate borne by the Subclass A-1 Notes will increase after the
Expected Final Payment Date of such subclass, to the extent such Notes are then
Outstanding, by the amount of Step-Up Interest. Payments
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of Step-Up Interest on the Subclass A-1 Notes and any Step-Up Interest on
Additional Notes and Refinancing Notes will be subordinated to certain other
obligations of MSAF Group, including the payment of the Minimum Principal
Payment Amounts and Scheduled Principal Payment Amounts with respect to, and
accrued and unpaid interest on, the MSAF Notes, and will not be rated by the
Rating Agencies. See "-- Priority of Payments".
REFERENCE AGENCY AGREEMENT
For the purpose of calculating the rate of interest payable on the Subclass
A-1, A-2 and B-1 Notes, MSAF has entered into the Reference Agency Agreement
with the Trustee, Bankers Trust Company, as reference agent (the "REFERENCE
AGENT") and the Administrative Agent. The Reference Agent will determine LIBOR
for each Interest Accrual Period following the Initial Interest Accrual Period,
on a Reference Date (a date that is two Business Days before the Payment Date on
which such Interest Accrual Period commences). The Reference Agent will
determine LIBOR in accordance with the following provisions of the Reference
Agency Agreement:
On each Reference Date, the Reference Agent will determine LIBOR as the per
annum offered rate for deposits in U.S. dollars for a period of one month that
appears on the display designated as page "3750" on the Telerate Monitor (or
such other page or service as may replace it for the purpose of displaying LIBOR
of major banks for U.S. dollar deposits) at approximately 11:00 a.m. (London
time).
If the offered rate so appearing is replaced by the corresponding rates of
more than one bank then the determination described in the foregoing paragraph
shall be made, with any necessary consequential changes, on the basis of the
arithmetic mean of the rates (being at least two) which so appear, as determined
by the Reference Agent. If for any other reason such offered rate does not so
appear, or if the relevant page is unavailable, the Reference Agent will request
that each of the banks whose offered rates would have been used for the purposes
of the relevant page if the event leading to the application of this sentence
had not happened or any duly appointed substitute reference bank acting in each
case through its principal London office (the "REFERENCE BANKS"), to provide the
Reference Agent with its offered quotation to prime banks for dollar deposits in
London for the next Interest Accrual Period concerned as at 11:00 a.m. (London
time) on the applicable Reference Date. The floating rates of interest for such
Interest Accrual Period for each subclass of Subclass A-1, A-2 and B-1 Notes
shall be the aggregate of the arithmetic mean of such quotations (or of such of
them, being at least two, as are so provided), as determined by the Reference
Agent, plus the applicable interest rate spread over LIBOR set forth opposite
such subclass on the cover page of this Prospectus, plus Step-Up Interest, if
applicable.
If, on any Reference Date, one only or none of the Reference Banks provides
such quotation, the interest rate for the next Interest Accrual Period shall be
the rate per annum which the Reference Agent determines to be the aggregate of
the arithmetic mean of the U.S. dollar lending rates which New York City banks
selected by the Reference Agent are quoting on the relevant Reference Date to
leading European banks for the next Interest Accrual Period, plus the applicable
interest rate spread over LIBOR set forth opposite such subclass on the cover
page of this Prospectus, plus, if applicable, any Step-up Interest, except that,
if the banks so selected by the Reference Agent are not quoting as mentioned
above, the applicable rate of interest shall be the interest rate in effect for
the last preceding Interest Accrual Period.
Once having obtained LIBOR or its substitute, the Reference Agent will
calculate the interest rate for each subclass of Subclass A-1, A-2 and B-1 Notes
and the amount of interest payable on the relevant Payment Date in respect of
each subclass of Subclass A-1, A-2 and B-1 Notes. The interest amount for each
subclass of Subclass A-1, A-2 and B-1 Notes will be calculated by the Reference
Agent by multiplying the rate of interest for such subclass for the relevant
Interest Accrual Period by the estimated Outstanding Principal Balance of such
subclass of Subclass A-1, A-2 and B-1 Notes on the first day of such Interest
Accrual Period and by multiplying the product by the actual number of days in
such Interest Accrual Period divided by 360 and rounding the resulting amount to
the nearest cent (with half a cent being rounded upwards). The Reference Agent's
determination of LIBOR, the interest rate and the interest amount for each
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subclass of Subclass A-1, A-2 and B-1 Notes (in the absence of negligence,
wilful default, bad faith or manifest error) will be conclusive and binding upon
all parties.
As promptly as is practicable after the determination thereof, the
Reference Agent will give notice of applicable LIBOR, the Payment Date, the
interest rate for each subclass of Subclass A-1, A-2 and B-1 Notes for the
relevant Interest Accrual Period and the amount of interest on each subclass of
Subclass A-1, A-2 and B-1 Notes to MSAF, the Listing Agent, the Luxembourg Stock
Exchange and the Administrative Agent. Noteholders may obtain such information
at the offices of the Listing Agent or paying agent in Luxembourg or otherwise
in the Cash Reports provided to Noteholders by the Trustee on the second
Business Day before each Payment Date and any other date for distribution of any
payments with respect to the Notes.
If the Reference Agent does not determine the interest rate for each
subclass of Subclass A-1, A-2 and B-1 Notes or calculate the amount of interest
on each subclass of Subclass A-1, A-2 and B-1 Notes for the relevant Interest
Accrual Period in accordance with the provisions described above, the
Administrative Agent will determine such rate of interest or calculate such
interest amount in accordance with the provisions described above, and each such
determination or calculation will be deemed to have been made by the Reference
Agent.
MSAF reserves the right to terminate the appointment of the Reference Agent
at any time on 30 days' notice and to appoint a replacement reference agent in
its place. Notice of any such termination will be given to the holders of the
Subclass A-1, A-2 and B-1 Notes. The Reference Agent may not be removed or
resign its duties without a successor having been appointed.
PRINCIPAL AMORTIZATION
With respect to each class of the Notes, there may be distributed on any
Payment Date, to the extent there are sufficient funds in the Collection
Account, the sum of the Minimum Principal Payment Amount, if any, the Scheduled
Principal Payment Amount, if any, and, with respect to the Class A and B Notes
only, the Supplemental Principal Payment Amount, if any, and, principal
redemptions pursuant to priorities (xxi) through (xxiv) set forth under "--
Priority of Payments". If MSAF issues any Additional Notes or Refinancing Notes,
each such issuance constitutes a new and subsequent subclass of the respective
class of Notes. See "-- Allocation of Principal among Subclasses of Notes".
Minimum Principal Payment Amount. With respect to each class of the Notes,
the "MINIMUM PRINCIPAL PAYMENT AMOUNT" on any Payment Date will equal the
difference, if positive, between the Outstanding Principal Balance of such class
and the Minimum Target Principal Balance for such class on such Payment Date.
On each Payment Date, the "MINIMUM TARGET PRINCIPAL BALANCE" for the Class
A and B Notes will equal the product of (i) the applicable "MINIMUM CLASS
PERCENTAGE" on such Payment Date (as set forth in Appendices 5 and 6 to this
Prospectus) and (ii) the Assumed Portfolio Value (as set forth in Appendix 4 to
this Prospectus with respect to the Initial Aircraft) in respect of such Payment
Date; provided that with respect to only the Class A Notes, if on any Payment
Date the Outstanding Principal Balance of the Class A Notes (including
Refinancing Notes and Additional Notes) is greater than the Adjusted Portfolio
Value in respect of such Payment Date, then the Minimum Target Principal Balance
of the Class A Notes shall be equal to the Scheduled Target Principal Balance of
the Class A Notes.
For each Payment Date, the Minimum Target Principal Balance for the Class C
and D Notes is set out in Appendices 7 and 8 to this Prospectus.
In respect of each Payment Date, the "ASSUMED PORTFOLIO VALUE" with respect
to the Initial Aircraft will equal the aggregate sum of the products of (A) the
Initial Appraised Value of each Aircraft in the Portfolio on the Calculation
Date preceding such Payment Date and (B) the quotient obtained by dividing the
applicable Depreciation Factor (each, a "DEPRECIATION FACTOR") for such Aircraft
(as set forth below) on such Calculation Date by the Depreciation Factor for
such Aircraft on March 3, 1998. The Depreciation Factors produce a "depreciation
curve" that assumes an accelerating decline in the value of Initial Aircraft of
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increasing age. The accelerating annual decline in aircraft values that is
assumed by the depreciation curve has been expressed as an equation below:
Depreciation Factor = (1 - (kn)) X (1 + g)(n) but not less than zero
Where, with respect to the Initial Aircraft:
n = age of the Aircraft expressed in years
1
k =
-----------------------------------------
Expected Useful Life
g = 0.02
The Depreciation Factors are used solely for the purposes of determining
repayments of principal to Noteholders and do not correlate to or predict actual
declines in aircraft values over any period. Furthermore, the Depreciation
Factor variables and therefore the depreciation curve will change as the
composition of the Portfolio changes through acquisitions and sales of
Additional Aircraft and Initial Aircraft. Finally, MSAF Group may in the future
apply different depreciation factors or alternative methodologies more generally
to express the assumed decline in values of Additional Aircraft. In addition,
the Minimum Class Percentages, the Scheduled Class Percentages and the
Supplemental Class Percentages for the Class A and B Notes and Minimum Target
Principal Balances and Scheduled Target Principal Balances for the Class C and D
Notes will change as Additional Aircraft are acquired; however, the Pool Factors
and the Extended Pool Factors for each subclass will not change as the
composition of the Portfolio changes.
Scheduled Principal Payment Amount. With respect to each class of Notes,
the "SCHEDULED PRINCIPAL PAYMENT AMOUNT" on any Payment Date will equal the
difference, if positive, between the Outstanding Principal Balance of such class
(after giving effect to any payment of the Minimum Principal Payment Amount for
such class) and the Scheduled Target Principal Balance for such class on such
Payment Date.
On each Payment Date, the "SCHEDULED TARGET PRINCIPAL BALANCE" for the
Class A Notes will equal the product of (i) the applicable "SCHEDULED CLASS
PERCENTAGE" on such Payment Date (as set forth in Appendix 5 to this Prospectus)
and (ii) the lesser of (A) the Assumed Portfolio Value in respect of such
Payment Date and (B) the product of the Adjusted Portfolio Value in respect of
such Payment Date and 105%. On each Payment Date, the Scheduled Target Principal
Balance for the Class B Notes will equal the product of (i) the applicable
Scheduled Class Percentage on such Payment Date (as set forth in Appendix 6 to
this Prospectus) and (ii) the Assumed Portfolio Value in respect of such Payment
Date.
For each Payment Date, the Scheduled Target Principal Balance for the Class
C and D Notes is set out in Appendices 7 and 8 to this Prospectus.
In respect of each Payment Date, the "ADJUSTED PORTFOLIO VALUE" will equal
the sum of the products, for each Aircraft in the Portfolio on the Calculation
Date preceding such Payment Date, of (A) the Adjusted Base Value of such
Aircraft and (B) the quotient obtained by dividing the applicable Depreciation
Factor for such Aircraft on such Calculation Date by the Depreciation Factor for
such Aircraft as of the Relevant Appraisal.
The "ADJUSTED BASE VALUE" of each Aircraft will be the Base Value of such
Aircraft as determined in the most recent Appraisal (the "RELEVANT APPRAISAL")
preceding such Calculation Date.
Supplemental Principal Payment Amount. With respect to the Class A and B
Notes the "SUPPLEMENTAL PRINCIPAL PAYMENT AMOUNT" on any Payment Date will equal
the difference, if positive, between the Outstanding Principal Balance of such
class (after giving effect to the payment of any Minimum Principal Payment
Amount and Scheduled Principal Payment Amount) and the Supplemental Target
Principal Balance for such class on such Payment Date.
On each Payment Date, the "SUPPLEMENTAL TARGET PRINCIPAL BALANCE" for the
Class A and B Notes will equal the product of (i) the applicable "SUPPLEMENTAL
CLASS PERCENTAGE" on such Payment Date (as set forth
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in Appendices 5 and 6 to this Prospectus) and (ii) the Assumed Portfolio Value
in respect of such Payment Date.
ALLOCATION OF PRINCIPAL AMONG SUBCLASSES OF NOTES
Subclass A-1 Notes. On the Expected Final Payment Date of the Subclass A-1
Notes, MSAF Group intends to refinance 100% of the Outstanding Principal Balance
of the Subclass A-1 Notes by issuing Refinancing Notes and selling such
Refinancing Notes in the capital markets. Failure to repay any Subclass A-1 Note
in full at its Expected Final Payment Date will not result in an Event of
Default. If the Subclass A-1 Notes are not repaid in full on their Expected
Final Payment Date, such subclass of Notes will convert automatically into a
subclass of Notes having a principal repayment schedule intended to ensure that
the remaining Outstanding Principal Balance of the Subclass A-1 Notes will be
repaid in full on or before its Final Maturity Date in accordance with the
Subclass A-1 Pool Factors set forth in Appendix 9.
MSAF may also refinance any other subclass of Notes, at any time, at the
Redemption Price that would be payable if MSAF were to have redeemed such Notes
instead. See "-- Refinancing" and "-- Indenture Covenants -- Limitation on
Indebtedness".
Subclass A-2, B-1, C-1 and D-1 Notes. The terms of the Subclass A-2, B-1,
C-1 and D-1 Notes will require amortization of the Outstanding Principal Balance
thereof on each or certain Payment Dates prior to each of their respective
Expected Final Payment Dates, to the extent there are funds available therefor
in accordance with the order of priorities set forth under "-- Priority of
Payments".
To the extent that any principal amount is required to be paid in
accordance with the priorities as described in "-- Priority of Payments" with
respect to any class of Notes on any Payment Date, Available Collections, to the
extent there are sufficient Available Collections therefor, will be applied to
the various subclasses of the relevant class in the following order after giving
effect to all prior subclass principal payments of such class:
(i) First, to each subclass, in order of the earliest issued subclass, the
difference, if positive, between the Outstanding Principal Balance of
each such subclass and the product of the applicable Extended Pool
Factor (as set forth in Appendix 10 to this Prospectus) on such
Payment Date and the Initial Principal Balance of each such subclass
(the "EXTENSION AMOUNT"); provided that in the case of two or more
subclasses issued on the same date, Available Collections will be
applied to each such subclass pro rata according to the amount of, but
not to exceed, the Extension Amount of such subclass.
(ii) Second, to each subclass, in no order of priority inter se, but pro
rata according to the amount of, but not to exceed, the difference,
if positive, between the Outstanding Principal Balance of each such
subclass (after giving effect to any payment under clause (i) above)
and the product of the applicable Pool Factor (as set forth in
Appendix 9 to this Prospectus) on such Payment Date and the Initial
Principal Balance of each such subclass.
(iii) Third, to each subclass with an Expected Final Payment Date on or
before such Payment Date, in order of the earliest issued subclass;
provided that in the case of two or more subclasses issued on the
same date, Available Collections will be applied to such subclasses
in order of the subclass with the earliest Expected Final Payment
Date and, with respect to any two or more subclasses having the same
Expected Final Payment Date, Available Collections will be applied to
such subclasses pro rata according to the Outstanding Principal
Balance of each such subclass (after giving effect to any payments
under clauses (i) and (ii) above) on such Payment Date.
(iv) Fourth, to each subclass with an Excess Amortization Date on or before
such Payment Date, in no order inter se, but pro rata according to the
Outstanding Principal Balance of each such subclass (after giving
effect to any payments under clauses (i), (ii) and (iii) above) on
such Payment Date.
(v) Fifth, to each subclass in order of the earliest Expected Final
Payment Date, provided, in the case of two or more subclasses having
the same Expected Final Payment Date, in no order of priority
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inter se, but pro rata according to the Outstanding Principal Balance of
each such subclass (after giving effect to any payments under clauses
(i), (ii), (iii) and (iv) above) on such Payment Date.
"INITIAL PRINCIPAL BALANCE" means the initial Outstanding Principal Balance
on the relevant closing date of the Notes of such subclass.
The "EXCESS AMORTIZATION DATE" for each subclass of the Notes is as set out
below:
SUBCLASS OF NOTES EXCESS AMORTIZATION DATE
- ----------------- ------------------------
Subclass A-1................................................ March 15, 2000
Subclass A-2................................................ April 15, 1998
Subclass B-1................................................ April 15, 1998
Subclass C-1................................................ March 15, 2013
Subclass D-1................................................ March 15, 2010
REFINANCING
MSAF may repay any subclass of the Notes, in whole but not in part, on any
date (a "REFINANCING DATE") with the proceeds of the issuance of any Refinancing
Notes issued in accordance with the "Limitation on Indebtedness" covenant under
the Indenture (any such repayment, a "REFINANCING"). See "-- Indenture Covenants
- -- Limitation on Indebtedness". The amount to be repaid by MSAF in connection
with the Refinancing of any subclass of Notes shall be equal to the Redemption
Price for such subclass on the Refinancing Date plus accrued and unpaid
interest.
In respect of any Refinancing of any subclass of Notes, at least five days
but not more than 30 days before the proposed Refinancing Date, the Trustee will
give notice of such Refinancing (a "NOTICE OF REFINANCING") to each holder of
such subclass of Notes in accordance with the notice provisions contained in the
Indenture. See "-- Notices to Noteholders". In connection with any Refinancing,
MSAF will deposit, or will cause to be deposited, in the Refinancing Account an
amount equal to the Redemption Price, together with an amount sufficient to pay
or provide for all accrued and unpaid interest as of the Refinancing Date. Each
Notice of Refinancing will state (i) the applicable Refinancing Date, (ii) the
Redemption Price of the Notes to be repaid and the amount of accrued but unpaid
interest payable thereon, (iii) that Notes of the subclass to be repaid must be
surrendered (which action may be taken by any holder of the Notes or its
authorized agent) and (iv) that, unless MSAF defaults in the payment of the
Redemption Price and any accrued and unpaid interest, interest on the subclass
of Notes to be refinanced will cease to accrue on and after the Refinancing
Date. Once a Notice of Refinancing in respect of any Refinancing is published,
each subclass of Notes to which such Notice of Refinancing applies will become
due and payable on the Refinancing Date stated in such Notice of Refinancing at
their Redemption Price, together with accrued and unpaid interest.
REDEMPTION
MSAF may redeem any subclass of the Notes (a "REDEMPTION") out of amounts
available for such purpose, if any, on any Payment Date (any such date, a
"REDEMPTION DATE"), in whole or in part, at the Redemption Price plus accrued
but unpaid interest. In addition, MSAF will be required on each Payment Date to
redeem Notes to the extent of any Available Collections, in the manner described
in "-- Principal Amortization" above and "-- Priority of Payments" below. Within
each subclass of Notes being redeemed in part, the amount of the Outstanding
Principal Balance being prepaid will be applied in each case pro rata among all
Notes of such subclass.
The Redemption Price on the Subclass A-1, A-2 and B-1 Notes redeemed (i)
with the application of funds other than from Available Collections (including
proceeds from Refinancing Notes and proceeds from third parties) will equal the
product of the applicable Redemption Premium set out below and Outstanding
Principal Balance of the amount of such subclass being redeemed and (ii) with
respect to redemptions from Available Collections, will equal the Outstanding
Principal Balance of the amount of such subclass being redeemed, without
premium.
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The Redemption Price of the Subclass C-1 Notes will equal the higher of (i)
the discounted present value of Scheduled Principal Payment Amounts and interest
on such subclass from the Redemption Date to and including the applicable
Expected Final Payment Date computed by discounting such payments at a discount
rate equal to the applicable Treasury Yield plus 0.50% and (ii) the Outstanding
Principal Balance of such subclass being redeemed.
The Redemption Price of the Subclass D-1 Notes will equal (i) if such
redemption occurs prior to March 15, 2003, the higher of (A) the discounted
present value of Scheduled Principal Payment Amounts and interest from the
Redemption Date through, but not including, March 15, 2003, plus the product of
the applicable Redemption Premium set out below and the assumed Outstanding
Principal Balance for March 15, 2003 discounted at a rate equal to the
applicable Treasury Yield plus 1.00% and (B) the Outstanding Principal Balance
of such subclass being redeemed or (ii) if such redemption occurs on or after
March 15, 2003, the product of the applicable Redemption Premium set out below
and the Outstanding Principal Balance of such subclass being redeemed.
REDEMPTION DATE REDEMPTION PREMIUM
--------------- ------------------------------------------------
SUBCLASS SUBCLASS SUBCLASS SUBCLASS
A-1 NOTES A-2 NOTES B-1 NOTES D-1 NOTES
--------- --------- --------- ---------
After March 3, 1998.......................... 101.00% 102.00% 103.00% --
On or after March 15, 1999................... 100.50% 101.50% 102.50% --
On or after March 15, 2000................... 100.00% 101.00% 102.00% --
On or after March 15, 2001................... -- 100.50% 101.50% --
On or after March 15, 2002................... -- 100.00% 101.00% --
On or after March 15, 2003................... -- 100.00% 100.50% 105.25%
On or after March 15, 2004................... -- 100.00% 100.00% 104.50%
On or after March 15, 2005................... -- 100.00% 100.00% 103.75%
On or after March 15, 2006................... -- -- 100.00% 103.00%
On or after March 15, 2007................... -- -- 100.00% 102.25%
On or after March 15, 2008................... -- -- 100.00% 101.50%
On or after March 15, 2009................... -- -- 100.00% 100.75%
On or after March 15, 2010................... -- -- 100.00% 100.00%
On or after March 15, 2011................... -- -- 100.00% 100.00%
On or after March 15, 2012................... -- -- 100.00% 100.00%
On or after March 15, 2013................... -- -- 100.00% 100.00%
On or after March 15, 2014................... -- -- -- 100.00%
"TREASURY YIELD" means a per annum rate (expressed as a monthly equivalent
yield) determined to be the per annum rate equal to the semiannual yield to
maturity of the 6 1/4% United States Treasury Note maturing on February 15,
2003, and with respect to redemptions of the Subclass C-1 Notes, means, on any
Payment Date the interest rate (expressed as a semiannual decimal and, in the
case of United States Treasury bills, converted to a bond equivalent yield)
determined to be the per annum rate equal to the semiannual yield to maturity
for United States Treasury securities maturing on the Average Life Date of such
subclass and trading in the public securities markets either (x) as determined
by interpolation between the most recent weekly average yield to maturity for
two series of United States Treasury securities trading in the public securities
markets, (A) one maturing as close as possible to, but earlier than, the Average
Life Date of such subclass and (B) the other maturing as close as possible to,
but later than, the Average Life Date of such subclass in each case as published
in the most recent H.15 (519) or (y) if a weekly average yield to maturity for
United States Treasury securities maturing on the Average Life Date of such
subclass is reported in the most recent H.15 (519), such weekly average yield to
maturity as published in such H.15 (519).
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"H.15 (519)" means the weekly statistical release designated as such, or any
successor publication, published by the Board of Governors of the Federal
Reserve System. The date of determination of the Treasury Yield with respect to
the Subclass C-1 Notes shall be the fourth business day prior to the applicable
Payment Date and the "MOST RECENT H.15 (519)" means the H.15 (519) published
prior to the close of business on the fourth business day prior to the
applicable Payment Date.
"AVERAGE LIFE DATE" shall be the date which follows the applicable Payment
Date by a period equal to the Remaining Weighted Average Life of such subclass.
"REMAINING WEIGHTED AVERAGE LIFE", with respect to the Subclass C-1 Notes on any
Payment Date shall be (a) the sum of the products of (i) each Scheduled
Principal Payment Amount for such subclass on each subsequent Payment Date
(each, a "SUBSEQUENT DATE") and (ii) the number of days remaining until such
Subsequent Date divided by (b) the then Outstanding Principal Balance of such
subclass on such Payment Date.
Redemption for Taxation Purposes. All payments of principal, interest and
premium, if any, made by MSAF in respect of any Notes will be made without
withholding or deduction for or on account of any present or future taxes or
duties of whatever nature unless required by law. Should such withholding or
deduction be required by law, MSAF will not be obliged to pay any additional
amounts in respect of such withholding or deduction. If at any time:
(a) MSAF is, or on the next Payment Date will be, required to make any
withholding or deduction under the laws or regulations of any applicable
tax authority with respect to any payment in respect of any subclass of
Notes; or
(b) MSAF is or will be subject to any circumstance (whether by reason of
any law, regulation, regulatory requirement or double-taxation
convention, or the interpretation or application thereof, or otherwise)
leading to the imposition of a tax (whether by direct assessment or by
withholding at source) or other similar imposition by any jurisdiction
which would (i) materially increase the cost to MSAF of making payments
in respect of any subclass of Notes or of complying with its obligations
under or in connection with any Notes; (ii) materially increase the
operating or administrative expenses of MSAF; or (iii) otherwise
obligate MSAF or any of its subsidiaries to make any material payment
on, or calculated by reference to, the amount of any sum received or
receivable by MSAF, or by the Administrative Agent on behalf of MSAF as
contemplated by the Administrative Agency Agreement;
then MSAF will inform the Trustee at such time of any such requirement or
imposition and shall use its or their best efforts to avoid the effect of the
same; provided that no actions shall be taken by MSAF to avoid such effects
unless each Rating Agency has confirmed that such action will not result in the
lowering or withdrawal by it of its current rating of any subclass of MSAF Notes
then outstanding. If, after using its best efforts to avoid the adverse effect
described above, MSAF or any of its subsidiaries has not avoided such effects,
MSAF may, at its election, redeem the Notes of any or all subclasses to which
such withholding or deduction applies in whole with accrued and unpaid interest
but without premium on any Payment Date. However, any such redemptions may not
occur more than 30 days prior to such time as the requirement or imposition
described in (a) or (b) above is to become effective.
Method of Redemption. In respect of any Redemption of any subclass of
Notes to be made out of amounts available for such purposes, if any, other than
Available Collections on any Payment Date, at least 20 days but not more than 60
days before such Redemption Date, the Trustee will give notice of such
Redemption (a "NOTICE OF REDEMPTION") to each holder of such subclass of Notes
in accordance with the notice provisions contained in the Indenture; provided
that the Trustee shall have determined in advance of giving any such notice that
funds are or will, on the Redemption Date, be available therefor. See "--
Notices to Noteholders". If a Redemption is of less than all of the Notes of any
subclass, Notes of such subclass to be redeemed will be repaid principal pro
rata, to the extent moneys are available therefor. In the case of any Redemption
in whole (other than a Redemption resulting from taxation reasons), MSAF will
deposit, or will cause to be deposited, in the Defeasance/Redemption Account an
amount equal to the Redemption Price, together with an amount sufficient to pay
or provide for all of the accrued and unpaid interest as of the Redemption Date.
In the case of any required Redemption by MSAF from Collections on any Payment
Date
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pursuant to the Priority of Payments, such Redemptions will be made only in
conformance with the order of payments set forth under "Priority of Payments",
and no Notice of Redemption will be sent. Each Notice of Redemption will state
(i) the applicable Redemption Date, (ii) the Trustee's arrangements for making
payments due, (iii) the Redemption Price of the Notes to be redeemed, (iv) in
the case of Redemptions in whole, that Notes of the subclass to be redeemed must
be surrendered (which action may be taken by any holder of the Notes or its
authorized agent) to the Trustee to collect the Redemption Price and accrued and
unpaid interest on such Notes and (v) in the case of Redemptions in whole, that,
unless MSAF defaults in the payment of the Redemption Price and any accrued and
unpaid interest thereon, interest on the subclass of Notes called for Redemption
will cease to accrue on and after the Redemption Date. Once a Notice of
Redemption in respect of a Redemption in whole is published, each subclass of
Notes to which such Notice of Redemption applies will become due and payable on
the Redemption Date stated in such Notice of Redemption at its Redemption Price,
together with accrued and unpaid interest thereon.
DEFEASANCE
MSAF at any time may terminate all of its obligations under the Notes and
the Indenture ("LEGAL DEFEASANCE"), except for certain obligations, including
those respecting the defeasance trust and obligations to register the transfer
or exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes
and to maintain a register in respect of the Notes. MSAF at any time may
terminate its obligations under the covenants described under "Indenture
Covenants" and "Operating Covenants" and the Events of Default described under
"Events of Default and Remedies" other than clauses (a), (b), (c), (e) (solely
with respect to MSAF) and (f) (solely with respect to MSAF) set forth under "--
Events of Default and Remedies" ("COVENANT DEFEASANCE").
MSAF may exercise its legal defeasance options notwithstanding its prior
exercise of the covenant defeasance option. If MSAF exercises its legal
defeasance options, payment of the Notes may not be accelerated because of an
Event of Default with respect thereto. If MSAF exercises its covenant defeasance
options, payment of the Notes may not be accelerated because of the Events of
Default described under "Events of Default and Remedies" other than clauses (a),
(b), (c), (e) (solely with respect to MSAF) and (f) (solely with respect to
MSAF) set forth under "-- Events of Default and Remedies".
In order to exercise either defeasance option, MSAF must irrevocably
deposit in trust (the "DEFEASANCE TRUST") with the Trustee cash or obligations
of the U.S. Government or any combination thereof in such amounts as will be
sufficient for the payment of principal, premium (if any), and interest on the
Notes to redemption or maturity, as the case may be, and must comply with
certain other conditions, including delivering to the Trustee an opinion of
counsel to the effect that holders of the Notes will not recognize income, gain
or loss for Federal income tax purposes as a result of such deposit and
defeasance and will be subject to Federal income tax on the same amount and in
the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such opinion of counsel must be based on a ruling of the IRS or other
change in applicable Federal income tax law).
PRIORITY OF PAYMENTS
Pursuant to the terms of the Indenture and the Administrative Agency
Agreement, on each Payment Date, the Administrative Agent will withdraw all
amounts on deposit in the Collection Account and distribute such amounts in the
order of priority set forth below but, in each case, only to the extent that all
amounts ranking prior thereto have been paid in full.
(i) First, to the Expense Account, or in certain cases directly to the
relevant Expense payees, an amount equal to the Required Expense
Amount and then to the relevant Expense payees;
(ii) Second, in no order of priority inter se, but pro rata, (A) to
the holders of each subclass of Class A Notes, all accrued and
unpaid interest excluding Step-Up Interest, if applicable, on
such subclass of Class A Notes in no order of priority inter se,
but pro rata according to the amount of accrued and unpaid
interest on such subclass of Class A Notes; and (B) pro rata, to
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any Swap Provider, an amount equal to any payment (other than
Subordinated Swap Payments) due from MSAF pursuant to any Swap
Agreement;
(iii) Third, first, to any persons providing Primary Eligible Credit
Facilities, any amounts payable to such persons under the terms
of their respective Primary Eligible Credit Facilities and then,
retain in the Collection Account an amount (the "FIRST COLLECTION
ACCOUNT TOP-UP"), if positive, equal to (A) the Minimum Liquidity
Reserve Amount less (B) amounts available for drawing under any
Primary Eligible Credit Facilities;
(iv) Fourth, to the holders of Class A Notes, in the order of priority
by subclass set forth under "-- Allocation of Principal among
Subclasses of Notes", an amount equal to the Minimum Principal
Payment Amount with respect to the Class A Notes;
(v) Fifth, to the holders of each subclass of Class B Notes, all
accrued and unpaid interest, excluding Step-Up Interest, if
applicable, on such subclass of Class B Notes in no order of
priority inter se, but pro rata according to the amount of accrued
and unpaid interest on such subclass of Class B Notes;
(vi) Sixth, to the holders of Class B Notes, in the order of priority
by subclass set forth under "-- Allocation of Principal among
Subclasses of Notes", an amount equal to the Minimum Principal
Payment Amount with respect to the Class B Notes;
(vii) Seventh, to the holders of each subclass of Class C Notes, all
accrued and unpaid interest, excluding Step-Up Interest, if
applicable, on such subclass of Class C Notes in no order of
priority inter se, but pro rata according to the amount of such
accrued and unpaid interest on such subclass of Class C Notes;
(viii) Eighth, to the holders of Class C Notes, in the order of priority
by subclass set forth under "-- Allocation of Principal among
Subclasses of Notes", an amount equal to the Minimum Principal
Payment Amount with respect to the Class C Notes;
(ix) Ninth, to the holders of each subclass of Class D Notes, all
accrued and unpaid interest, excluding Step-Up Interest, if
applicable, on such subclass of Class D Notes in no order of
priority inter se, but pro rata according to the amount of such
accrued and unpaid interest on such subclass of Class D Notes;
(x) Tenth, to the holders of Class D Notes, in the order of priority
by subclass set forth under "-- Allocation of Principal among
Subclasses of Notes", an amount equal to the Minimum Principal
Payment Amount with respect to the Class D Notes;
(xi) Eleventh, first, to any persons providing credit or liquidity
enhancement facilities that are not Primary Eligible Credit
Facilities, any amounts payable to such persons under the terms of
their respective facilities and then, retain in the Collection
Account an amount (the "SECOND COLLECTION ACCOUNT TOP-UP"), if
positive, equal to (A) the Liquidity Reserve Amount less (B) an
amount equal to cash amounts reserved under (iii) above plus
amounts available for drawing under any Eligible Credit
Facilities;
(xii) Twelfth, to the holders of Class A Notes, in the order of priority
by subclass set forth under "-- Allocation of Principal among
Subclasses of Notes", an amount equal to the Scheduled Principal
Payment Amount with respect to the Class A Notes;
(xiii) Thirteenth, to the holders of Class B Notes, in the order of
priority by subclass set forth under "-- Allocation of Principal
among Subclasses of Notes", an amount equal to the Scheduled
Principal Payment Amount with respect to the Class B Notes;
(xiv) Fourteenth, to the holders of Class C Notes, in the order of
priority by subclass set forth under "-- Allocation of Principal
among Subclasses of Notes", an amount equal to the Scheduled
Principal Payment Amount with respect to the Class C Notes;
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(xv) Fifteenth, to the holders of Class D Notes, in the order of
priority by subclass set forth under "-- Allocation of Principal
among Subclasses of Notes", an amount equal to the Scheduled
Principal Payment Amount with respect to the Class D Notes;
(xvi) Sixteenth, to the Permitted Accruals balance in the Expense
Account, an amount equal to Permitted Accruals in respect of any
Modification Payments (or any part thereof);
(xvii) Seventeenth, to the holders of each subclass of Notes entitled
thereto, an amount equal to all accrued and unpaid Step-Up
Interest on such subclass, if any, in no order of priority inter
se, but pro rata according to the amount of such accrued and
unpaid Step-Up Interest;
(xviii) Eighteenth, to the holders of the Beneficial Interest, the
Beneficial Interest Distribution Amount;
(xix) Nineteenth, to the holders of Class A Notes, in the order of
priority by subclass set forth under "-- Allocation of Principal
among Subclasses of Notes", an amount equal to the Supplemental
Principal Payment Amount with respect to the Class A Notes;
(xx) Twentieth, to the holders of Class B Notes, in the order of
priority by subclass set forth under "-- Allocation of Principal
among Subclasses of Notes", an amount equal to the Supplemental
Principal Payment Amount with respect to Class B Notes;
(xxi) Twenty-first, to the holders of Class D Notes, in the order of
priority by subclass set forth under "Allocation of Principal
among Subclasses of Notes" an amount equal to the Redemption Price
of the Outstanding Principal Balance, if any, of any subclass of
Class D Notes;
(xxii) Twenty-second, to the holders of Class C Notes, in the order of
priority by subclass set forth under "Allocation of Principal
among Subclasses of Notes" an amount equal to the Redemption Price
of the Outstanding Principal Balance, if any, of any subclass of
Class C Notes;
(xxiii) Twenty-third, to the holders of Class B Notes, in the order of
priority by subclass set forth under "Allocation of Principal
among Subclasses of Notes" an amount equal to the Redemption
Price of the Outstanding Principal Balance, if any, of any
subclass of Class B Notes;
(xxiv) Twenty-fourth, to the holders of Class A Notes, in the order of
priority by subclass set forth under "Allocation of Principal
among Subclasses of Notes" an amount equal to the Redemption Price
of the Outstanding Principal Balance, if any, of any subclass of
Class A Notes;
(xxv) Twenty-fifth, payments to Swap Providers which are subordinated in
accordance with the relevant Swap Agreement ("SUBORDINATED SWAP
PAYMENTS"); and
(xxvi) Twenty-sixth, to the holders of the Beneficial Interest, all
remaining amounts.
PRIORITY OF PAYMENTS FOLLOWING A DEFAULT NOTICE
Following delivery to MSAF or the Administrative Agent of a Default Notice
or if any Event of Default described in clause (e) or (f) under "-- Events of
Default and Remedies" shall have occurred and be continuing, the allocation of
payments described above will not apply and all amounts on deposit in the
Collection Account and the Expense Account will be applied in the following
order of priority:
(i) First, to the Expense Account, or in certain cases directly to the
relevant Expense payees, an amount equal to the Required Expense
Amount and then to the relevant Expense payees;
(ii) Second, in no order of priority inter se, but pro rata, to the
providers of any Primary Eligible Credit Facilities, such amounts
as are required to make any payments due to such providers
pursuant to their respective Primary Eligible Credit Facilities;
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(iii) Third, in no order of priority inter se, but (A) pro rata to the
holders of each subclass of Class A Notes, all accrued and unpaid
interest (including Step-Up Interest, if any) on, and all
Outstanding principal of, such subclass and (B) pro rata to any
Swap Provider, such amounts as are required to make any payments
(other than Subordinated Swap Payments) due to such Swap Provider
pursuant to any Swap Agreement;
(iv) Fourth, in no order of priority inter se, but pro rata, to the
holders of each subclass of Class B Notes, all accrued and unpaid
interest (including Step-Up Interest, if any) on and all
Outstanding principal of such subclass of Class B Notes;
(v) Fifth, in no order of priority inter se, but pro rata, to the
holders of each subclass of Class C Notes, all accrued and unpaid
interest (including Step-Up Interest, if any) on and all
Outstanding principal of such subclass of Class C Notes;
(vi) Sixth, in no order of priority inter se, but pro rata, to the
holders of each subclass of Class D Notes, all accrued and unpaid
interest (including Step-Up Interest, if any) on and all
Outstanding principal of such subclass of Class D Notes;
(vii) Seventh, in no order of priority inter se, but pro rata, to the
providers of any credit or liquidity enhancement facilities in
favor of MSAF other than Primary Eligible Credit Facilities, such
amounts as are required to make any payments due to such
providers pursuant to their respective facilities;
(viii) Eighth, in no order of priority inter se, but pro rata, to any
Swap Provider, such amounts as are required to make any
Subordinated Swap Payments due to such Swap Provider pursuant to
any Swap Agreement; and
(ix) Ninth, to the holders of the Beneficial Interest, all remaining
amounts.
INDENTURE COVENANTS
No Release of Obligations. MSAF will not take, or knowingly permit any
subsidiary to take, any action which would amend, terminate (other than any
termination in connection with the replacement of such agreement with an
agreement on terms substantially no less favorable to MSAF and its subsidiaries
than the agreement being terminated) or discharge or prejudice the validity or
effectiveness of the Indenture (other than as permitted therein), the Security
Trust Agreement, the Cash Management Agreement, the Administrative Agency
Agreement, the Financial Advisory Agreement or any Servicing Agreement or permit
any party to any such document to be released from such obligations, except, in
each case, as permitted or contemplated by the terms of such document, and
provided that such actions may be taken or permitted, and such releases may be
permitted, if MSAF shall have first obtained an authorizing resolution of the
Controlling Trustees determining that such action, permitted action or release
does not materially adversely affect the interests of the Noteholders, and
provided further, that in any case (i) MSAF will not take any action which would
result in any amendment or modification to any conflicts standard or duty of
care in such agreements and (ii) there must be at all times an administrative
agent, a cash manager, a financial advisor and, unless a Servicer resigns prior
to the appointment of a replacement servicer as a result of any failure to pay
amounts due and owing to it, one or more Servicers with respect to all Aircraft
in the Portfolio.
Limitation on Encumbrances. Under the terms of the Indenture, MSAF will
not, and will not permit any subsidiary to, create, incur, assume or suffer to
exist any mortgage, pledge, lien, encumbrance, charge or security interest (in
each case, an "ENCUMBRANCE"), including, without limitation, any conditional
sale, any sale with recourse against the seller or any affiliate of the seller,
or any agreement to give any security interest over or with respect to any of
MSAF's or any subsidiary's assets (excluding Lessee funds required to be
segregated from MSAF Group's other funds under the terms of any Lease)
including, without limitation, all beneficial interests in trusts, ordinary
shares and preferred shares, any options, warrants and other rights to acquire
such shares of capital stock ("STOCK") and any Indebtedness of any subsidiary
held by MSAF or a subsidiary thereof.
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Notwithstanding the foregoing, MSAF may create, incur, assume or suffer to
exist (i) any Permitted Encumbrance, (ii) any security interest created or
required to be created under the Security Trust Agreement, (iii) Encumbrances
over rights in or derived from leases, upon confirmation from the Rating
Agencies in advance that such action or event will not result in the lowering or
withdrawal of any rating assigned by any Rating Agency to any of the Notes,
provided that any transaction or series of transactions resulting in such
Encumbrance, taken as a whole, does not materially adversely affect the amount
of Collections that would have been received by MSAF from such Lease had such
Encumbrance not been created or (iv) any other Encumbrance the validity or
applicability of which is being contested in good faith in appropriate
proceedings by MSAF or any of its subsidiaries.
As used in this Prospectus, "AFFILIATE" means, with respect to any person,
any other person that, directly or indirectly, controls, is controlled by or is
under common control with, such person or is a director or officer of such
person; "CONTROL" of a person means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of such
person, whether through the ownership of voting Stock, by contract or otherwise;
and "PERMITTED ENCUMBRANCE" means (i) any lien for taxes, assessments and
governmental charges or levies not yet due and payable or which are being
contested in good faith by appropriate proceedings; (ii) in respect of any
Aircraft, any liens of a repairer, carrier or hanger keeper arising in the
ordinary course of business by operation of law or any engine or parts-pooling
arrangements or other similar lien; (iii) any permitted lien or encumbrance on
any Aircraft, Engines or Parts as defined under any Lease thereof (other than
liens or encumbrances created by the relevant lessor); (iv) any liens created by
or through or arising from debt or liabilities or any act or omission of any
Lessee in each case either in contravention of the relevant Lease (whether or
not such Lease has been terminated) or without the consent of the relevant
Lessor (provided that if such Lessor becomes aware of any such lien, such Lessor
shall use commercially reasonable efforts to have any such liens lifted); (v)
any head lease, lease, conditional sale agreement or Purchase Option existing on
March 3, 1998, with respect to the Initial Aircraft, or, with respect to any
Additional Aircraft, on the date such Aircraft is acquired by MSAF or any of its
subsidiaries or affiliates, or any Aircraft Agreement meeting the requirements
of (iii) or (v) of the second paragraph under the "Limitation on Aircraft Sales"
covenant: (vi) any lien for air navigation authority, airport tending, gate or
handling (or similar) charges or levies; (vii) any lien created in favor of MSAF
or any of its subsidiaries or the Security Trustee; (viii) any lien not referred
to in (i) through (vii) above which would not adversely affect the owner's
rights and does not exceed the greater of 1% of the aggregate Initial Appraised
Value of the Portfolio from time to time and $250,000 per Aircraft; and (ix) any
Encumbrance arising under the ILFC Facility or any other agreements the terms of
which contemplate that custody of security deposits held for Lessees with
respect to Additional Aircraft is held by a third party.
Limitation on Restricted Payments. Under the terms of the Indenture, MSAF
will not, and will not permit any of its subsidiaries to, (i) declare or pay any
dividend or make any distribution on its Stock held by persons other than MSAF
or any of its subsidiaries; provided that, so long as no Event of Default shall
have occurred and be continuing, MSAF may make payments on its Beneficial
Interest to the extent permitted by the Indenture; (ii) purchase, redeem, retire
or otherwise acquire for value any beneficial interest in MSAF or any stock of
its subsidiaries held by and on behalf of persons other than MSAF, any of its
subsidiaries or other Persons permitted under the requirements of (ii)(B) under
the "Limitation on the Issuance, Delivery and Sale of Capital Stock" covenant;
(iii) make any interest, principal or premium payment on the Notes or make any
voluntary or optional repurchase, defeasance or other acquisition or retirement
for value of Indebtedness of MSAF or any of its subsidiaries that is not owed to
MSAF or any of its subsidiaries other than in accordance with the Notes and the
Indenture; provided that MSAF or any of its affiliates may repurchase, defease
or otherwise acquire or retire any of the Notes other than from Available
Collections so long as any new notes of MSAF issued in connection with such
transaction rank pari passu with the Notes being repurchased, defeased, acquired
or retired; provided further that the Controlling Trustees shall determine that
such action does not materially adversely affect the Noteholders and shall have
obtained confirmation in advance that such action will not result in the
lowering or withdrawal of any rating assigned by any Rating Agency to any of the
MSAF Notes or (iv) make any investments (other than Permitted Account
Investments, investments permitted under the "Limitation on Engaging in Business
Activities" covenant, Allowed Restructurings and investments in any subsidiaries
that own Additional Aircraft).
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The term "INVESTMENT" for purposes of the above restriction shall mean any
loan or advance to a person or entity, any purchase or other acquisition of any
beneficial interest, capital stock, warrants, rights, options, obligations or
other securities of such person or entity, any capital contribution to such
person or entity or any other investment in such person or entity. For the
avoidance of doubt, "investment" shall not include any obligation of a purchaser
of an Aircraft to make deferred or installment payments pursuant to any Aircraft
Agreement specified in clauses (iii) or (v) of the second paragraph under
"Limitations on Aircraft Sales" below so long as MSAF Group retains a security
interest in the relevant Aircraft until all such obligations are discharged.
Limitation on Dividends and Other Payment Restrictions. Under the terms of
the Indenture, MSAF will not, and will not permit any of its subsidiaries to,
create or otherwise suffer to exist any consensual encumbrance or restriction of
any kind on the ability of any subsidiary to (i) declare or pay dividends or
make any other distributions permitted by applicable law, or purchase, redeem or
otherwise acquire for value, any beneficial interest in MSAF or the stock of any
such subsidiary, as the case may be, (ii) pay any Indebtedness owed to MSAF or
such subsidiary, (iii) make loans or advances to MSAF or such subsidiary or (iv)
transfer any of its property or assets to MSAF or any other subsidiary thereof.
The foregoing provisions shall not restrict any consensual encumbrances or
other restrictions: (i) existing on March 3, 1998, with respect to the Initial
Aircraft, or, with respect to any Additional Aircraft, on the date such Aircraft
is acquired, under any Related Document, and any amendments, extensions,
refinancings, renewals or replacements of such documents; provided that such
consensual encumbrances and restrictions in any such amendments, extensions,
refinancings, renewals or replacements are no less favorable in any material
respect to the holders of the MSAF Notes than those previously in effect and
being amended, extended, refinanced, renewed or replaced; or (ii) in the case of
clause (iv) in the preceding paragraph, (A) that restrict in a customary manner
the subletting, assignment or transfer of any property or asset that is a lease,
license, conveyance or contract or similar property or asset or (B) existing by
virtue of any transfer of, agreement to transfer, option or right with respect
to, or consensual encumbrance on, any property or assets of MSAF or any
subsidiary not otherwise prohibited by the Indenture. Nothing contained in this
covenant shall prevent MSAF or any subsidiary from creating, incurring, assuming
or suffering to exist any Encumbrances not otherwise prohibited under the
Indenture.
Limitation on Engaging in Business Activities. Under the terms of the
Indenture, MSAF will not, and will not permit any subsidiary to, engage in any
business or activity other than:
(i) (A) purchasing or otherwise acquiring aircraft assets (subject to the
limitations set forth in the "Limitation on Aircraft Acquisitions"
covenant) and (B) owning, holding, converting, maintaining,
modifying, managing, operating, leasing, re-leasing and, subject to
the limitations set forth in the "Limitations on Aircraft Sales"
covenant, selling or otherwise disposing of aircraft assets and
entering into all contracts and engaging in all related activities
incidental thereto, including from time to time accepting,
exchanging, holding or permitting any of its subsidiaries to accept,
exchange or hold (an "ALLOWED RESTRUCTURING") promissory notes,
contingent payment obligations or equity interests, of Lessees or
their affiliates issued in connection with the bankruptcy,
reorganization or other similar process, or in settlement of
delinquent obligations or obligations anticipated to be delinquent,
of such Lessees or their respective affiliates in the ordinary course
of business;
(ii) providing loans to, and guaranteeing or otherwise supporting the
obligations and liabilities of, MSAF's subsidiaries or any Future
MSAF Group Entity, in each case on such terms and in such manner as
the Controlling Trustees see fit and (whether or not such member of
MSAF Group derives a benefit therefrom) so long as such loans,
guarantees or other supports are provided in connection with the
purposes set forth in clause (i) of this covenant;
(iii) financing or refinancing the business activities described in clause
(i) of this covenant through the offer, sale and issuance of any
securities of MSAF, upon such terms and conditions as the Controlling
Trustees see fit, for cash or in payment or in partial payment for
any property purchased or otherwise acquired by MSAF Group or any
Future MSAF Group Entity;
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(iv) engaging in currency and interest rate exchange transactions for the
purposes of avoiding, reducing, minimizing, hedging against or
otherwise managing the risk of any loss, cost, expense or liability
arising, or which may arise, directly or indirectly, from any change
or changes in any interest rate or currency exchange rate or in the
price or value of any of the property or assets of MSAF or any of its
subsidiaries within limits determined by the Controlling Trustees from
time to time and submitted to the Rating Agencies, including but not
limited to dealings, whether involving purchases, sales or otherwise,
in foreign currency, spot and forward interest rate exchange
contracts, forward interest rate agreements, caps, floors and collars,
futures, options, swaps, and any other currency, interest rate and
other similar hedging arrangements and such other instruments as are
similar to, or derivatives of, any of the foregoing;
(v) (A) establishing, promoting and aiding in promoting, constituting,
forming or organizing companies, trusts, syndicates, partnerships or
other entities of all kinds in any part of the world for the purposes
set forth in clause (i) above, (B) acquiring, holding and disposing of
shares, securities and other interests in any such entity or
partnership and (C) disposing of shares, securities and other
interests in, or causing the dissolution of, any existing subsidiary;
provided that any such disposition which results in the disposition of
an Aircraft meets the requirements set forth under the "Limitation on
Aircraft Sales" covenant; and
(vi) taking out, acquiring, surrendering and assigning policies of
insurance and assurances with any insurance company or companies which
MSAF or any of its subsidiaries may think fit and to pay the premiums
thereon.
Limitation on Indebtedness. Under the terms of the Indenture, MSAF will
not, and will not permit any of its subsidiaries to, incur, create, issue,
assume, guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, whether present or
future (in any such case, to "INCUR"), Indebtedness.
For the purposes of the Indenture, "INDEBTEDNESS" means, with respect to
any person at any date of determination (without duplication), (i) all
indebtedness of such person for borrowed money, (ii) all obligations of such
person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all obligations of such person in respect of letters of credit or other similar
instruments (including reimbursement obligations with respect thereto), (iv) all
obligations of such person to pay the deferred and unpaid purchase price of
property or services, which purchase price is due more than six months after the
date of purchasing such property or service or taking delivery and title thereto
or the completion of such services, and payment deferrals arranged primarily as
a method of raising finance or financing the acquisition of such property or
service, (v) all obligations of such person under a lease of (or other agreement
conveying the right to use) any property, whether real, personal or mixed, that
is required to be classified and accounted for as a capital lease obligation
under generally accepted accounting principles in the United States ("U.S.
GAAP"), (vi) all Indebtedness (as defined in clauses (i) through (v) of this
paragraph) of other persons secured by a lien on any asset of such person,
whether or not such Indebtedness is assumed by such person, and (vii) all
Indebtedness (as defined in clauses (i) through (v) of this paragraph) of other
persons guaranteed by such person.
Notwithstanding the foregoing, MSAF and any subsidiary may incur each and
all of the following: (i) Indebtedness in respect of any Note issued on March 3,
1998, (ii) Indebtedness in respect of any Refinancing Notes or other
Indebtedness issued in connection with the repurchase, acquisition, defeasance
or retirement for value of Notes; provided that (A) such Refinancing Notes or
other Indebtedness receive ratings from the Rating Agencies at the close of such
Refinancing or issuance equal to or higher than those of the subclass being
refinanced or repurchased, acquired, defeased or retired (determined at the date
of incurrence), (B) taking into account such Refinancing or repurchase,
acquisition, defeasance or retirement for value, MSAF receives confirmation
prior to such Refinancing from the Rating Agencies that such transaction will
not result in the lowering or withdrawal of any rating assigned by any Rating
Agency to any of the MSAF Notes Outstanding at such time, and (C) the net
proceeds of any such Refinancing or issuance shall be used only to repay the
Outstanding Principal Balance of the subclass of the Notes being so refinanced
or
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repurchased, acquired, defeased or retired (plus any Redemption Premium and
transaction expenses relating thereto); (iii) Indebtedness in respect of
guarantees by MSAF or any subsidiary of any other member of MSAF Group (other
than guarantees described in clause (v)), provided that no such Indebtedness in
respect of any member of MSAF Group other than MSAF or any subsidiary of MSAF
shall be incurred if it would materially adversely affect the Noteholders; (iv)
Indebtedness in respect of any Additional Notes incurred in connection with a
Permitted Additional Aircraft Acquisition; provided that (A) taking into account
the incurrence of such Indebtedness, MSAF receives confirmation prior thereto
that the incurrence of such Indebtedness will not result in the lowering or
withdrawal of any rating assigned by any Rating Agency to any of the MSAF Notes
Outstanding at such time and (B) the net proceeds of such Indebtedness shall be
used only to finance such Permitted Additional Aircraft Acquisition; (v)
Indebtedness in respect of guarantees by MSAF or any subsidiary of Indebtedness
incurred by any Future MSAF Group Entity (other than a subsidiary of MSAF) in
connection with a Permitted Additional Aircraft Acquisition; provided that (A)
such Future MSAF Group Entity shall have guaranteed the Notes, (B) the
Indebtedness being guaranteed would be permitted pursuant to clause (ii) or (iv)
above if such Indebtedness were incurred directly by MSAF or any subsidiary in
connection with such Permitted Additional Aircraft Acquisition and (C) the
Indebtedness being guaranteed was issued by such Future MSAF Group Entity under
an indenture, the terms of which (including the covenants and other obligations
of such Future MSAF Group Entity thereunder) are substantially similar to those
of the Indenture; (vi) Indebtedness to aircraft sellers pursuant to aircraft
acquisition or similar agreements; (vii) Indebtedness under intercompany loans
or any agreement between MSAF or any of its subsidiaries and any other members
of MSAF Group (each an "INTERCOMPANY LOAN"); provided that any Indebtedness owed
by any member of MSAF Group to MSAF shall be evidenced by promissory notes; and
(viii) Indebtedness of MSAF Group under any credit or liquidity enhancement
facility provided in favor of MSAF Group.
As used in this Prospectus, "GUARANTEE" means any obligation, contingent or
otherwise, of any person directly or indirectly guaranteeing any Indebtedness or
other obligation of any other person and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or otherwise, of such
person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation of such other person or (ii)
entered into for purposes of assuring in any other manner the obligee of such
Indebtedness or other obligation of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part); provided that the
term "guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "guarantee" when used as a verb has a
corresponding meaning.
Limitation on Aircraft Sales. Under the terms of the Indenture, MSAF will
not, and will not permit any of its subsidiaries to, sell, transfer or otherwise
dispose of any Aircraft or any interest therein.
Notwithstanding the foregoing, MSAF and any of its subsidiaries will be
permitted to sell, transfer or otherwise dispose of, directly or indirectly, (a)
any engines owned on March 3, 1998, with respect to the Initial Aircraft, or,
with respect to any Additional Aircraft, on the date such Aircraft is acquired,
or any replacements thereof ("ENGINES") or parts installed in or attached to any
Aircraft other than Engines ("PARTS"), or (b) one or more Aircraft or an
interest therein (i) pursuant to a Purchase Option or other agreements of a
similar character existing on March 3, 1998, with respect to the Initial
Aircraft, or, with respect to any Additional Aircraft, on the closing date of
the related issue of Additional Notes, (ii) within or among MSAF and its
subsidiaries without limitation, and among MSAF or any of its subsidiaries and
any other member of MSAF Group if such sale, transfer or disposition, as the
case may be, would not materially adversely affect the Noteholders, (iii)
pursuant to any Aircraft Agreement as long as such sale does not result in a
Concentration Default, and the net present value of the cash Net Sale Proceeds
is not less than the Note Target Price, (iv) pursuant to receipt of insurance
proceeds in connection with an event of loss, or (v) pursuant to an Aircraft
Agreement and, in any one calendar year, not exceeding 10% of the Adjusted
Portfolio Value as determined by the most recent Appraisal obtained for such
calendar year; provided that (x) the Controlling Trustees unanimously confirm
that each such sale does not materially adversely affect MSAF and the
Noteholders and (y) such sale does not result in a Concentration Default.
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For the purpose of this covenant, the net present value of the cash Net
Sale Proceeds of any sale, transfer or other disposition of any Aircraft shall
mean the present value of all payments received or to be received by MSAF Group
from the date of execution or option granting date, as the case may be, of the
relevant Aircraft Agreement through and including the date of transfer of title
to such Aircraft, discounted back to the date of execution or option granting
date, as the case may be, of such Aircraft Agreement at the weighted average
cost of funds of MSAF Group (based on the cost of funds represented by the Notes
on the Payment Date immediately preceding such date and taking into account any
Swap Agreements).
The "NOTE TARGET PRICE" means, in respect of any Aircraft, an amount equal
to 103% of the aggregate Outstanding Principal Balance of the MSAF Notes,
together with any accrued but unpaid interest thereon, allocable to such
Aircraft on the date of the sale agreement or purchase option date, as the case
may be. On any date, the Outstanding Principal Balance of MSAF Notes allocable
to an Aircraft will equal the product of (i) (A) the Adjusted Base Value of such
Aircraft divided by (B) the Adjusted Portfolio Value and (ii) the aggregate
Outstanding Principal Balance of the MSAF Notes, in each case on the most recent
Payment Date.
"AIRCRAFT AGREEMENT" means any lease, sub-lease, conditional sale
agreement, finance lease, hire purchase agreement or other agreement (other than
an agreement relating to maintenance, modification or repairs) or any purchase
option granted to a person other than MSAF or its subsidiaries or any other
member of MSAF Group to purchase an Aircraft pursuant to a purchase option
agreement, in each case pursuant to which any person acquires or is entitled to
acquire legal title, or the economic benefits of ownership of, such aircraft.
"NET SALE PROCEEDS" means, with respect to any sale or other disposition of
any assets, the aggregate amount of cash received or to be received from time to
time (whether as initial or deferred consideration) by or on behalf of the
seller in connection with such transaction after deducting therefrom (without
duplication) (a) reasonable and customary brokers' commissions and other similar
fees and commissions (including fees received by the Servicer under the
Servicing Agreement) and (b) the amount of taxes payable in connection with or
as a result of such transaction, in each case to the extent, but only to the
extent, that the amounts so deducted are, at the time of receipt of such cash,
actually paid to a person that is not an affiliate of the seller and are
properly attributable to such transaction or to the asset that is the subject
thereof.
"CONCENTRATION DEFAULT" means an Event of Default under "Operating
Covenants -- Concentration Limits", as such covenant may be adjusted from time
to time upon approval by the Rating Agencies, which would arise if effect were
given to any sale, transfer or other disposition or any purchase or other
acquisition as of the date of the binding sale or purchase agreement regardless
of whether such sale, transfer or other disposition or purchase or other
acquisition is scheduled or expected to occur after the date of such binding
agreement.
Limitation on Aircraft Acquisitions. Under the terms of the Indenture,
MSAF will not, and will not permit any of its subsidiaries, to purchase or
otherwise acquire any Aircraft other than the Initial Aircraft, any Substitute
Aircraft or any interest therein.
Notwithstanding the foregoing, MSAF and any of its subsidiaries will be
permitted to: (A) purchase or otherwise acquire, directly or indirectly,
Additional Aircraft; provided that (i) no Event of Default shall have occurred
and be continuing, (ii) all Scheduled Principal Payment Amounts on the Notes
have been paid, (iii) the acquisition does not result in a Concentration
Default, and (iv) after giving effect to such acquisition, no more than 90% by
appraised Base Value of the Portfolio consists of Stage 3 narrowbody aircraft
and regional jets, no more than 50% consists of Stage 3 widebody aircraft and no
more than 15% consists of Stage 2 aircraft and turboprop aircraft without the
Controlling Trustees having obtained confirmation in advance that such action
will not result in the lowering or withdrawal of any rating assigned by any
Rating Agency to any of the MSAF Notes Outstanding at such time; (B) act as
sponsor of a Future MSAF Group Entity other than a subsidiary of MSAF that would
fund an acquisition of aircraft assets with indebtedness guaranteed by MSAF
pursuant to the "Limitation on Indebtedness" covenant as described above;
provided that, if such acquisition of aircraft assets had been consummated
indirectly by MSAF, such acquisition would have been permitted pursuant to the
preceding clause (A) (each of the transactions described in clauses (A)
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and (B), a "PERMITTED ADDITIONAL AIRCRAFT ACQUISITION"); and (C) purchase or
otherwise acquire, directly or indirectly, (x) the Remaining Aircraft or (y)
Substitute Aircraft.
Limitation on Modification Payments and Capital Expenditures. Under the
terms of the Indenture, MSAF will not, and will not permit any of its
subsidiaries to, make any capital expenditures for the purpose of effecting any
optional improvement or modification of any Aircraft, or for the optional
conversion of any Aircraft from a passenger aircraft to a freighter or mixed-use
aircraft, for the purpose of purchasing or otherwise acquiring any Engines or
Parts outside of the ordinary course of business (each such expenditure, a
"MODIFICATION PAYMENT"). Notwithstanding the foregoing, MSAF may, and may permit
any of its subsidiaries to, make Modification Payments; provided that (i) each
Modification Payment, together with all other Modification Payments made after
March 3, 1998 with respect to any single Aircraft, do not exceed the aggregate
amount of funds that would be necessary to perform heavy maintenance (as
described in the applicable servicing agreement) on such Aircraft, including the
airframe and the related Engines thereof; (ii) such Modification Payment is
included in the annual operating budget of the MSAF Group and approved by the
Controlling Trustees; (iii) the amount of funds necessary to make such
Modification Payment shall have been accrued in advance as a Permitted Accrual
in the Expense Account through transfers into the Expense Account pursuant to
the Indenture or otherwise allowed to be paid under Permitted Indebtedness; and
(iv) the aggregate amount of all Modification Payments made by members of MSAF
Group, taken as a whole, pursuant to this covenant after March 3, 1998,
including such Modification Payment, shall not exceed 5% of the aggregate
Initial Appraised Value of all Aircraft acquired by MSAF Group.
Limitation on Consolidation, Merger and Transfer of Assets. Under the
terms of the Indenture, MSAF will not, and will not permit any subsidiary to,
consolidate with, merge with or into, or sell, convey, transfer, lease or
otherwise dispose of its property and assets (as an entirety or substantially as
an entirety in one transaction or in a series of related transactions) to, any
other person, or permit any other person to merge with or into MSAF or any
subsidiary, unless (i) the resulting entity is a special purpose entity, the
constituent document of which is substantially similar to the Amended and
Restated Trust Agreement or the equivalent charter document of such subsidiary,
as the case may be, and, after such consolidation, merger, sale, conveyance,
transfer, lease or other disposition, payments from such resulting entity to the
holders of the Notes do not give rise to any withholding tax payments less
favorable to the holders of the Notes than the amount of any withholding tax
payments which would have been required had such event not occurred, (ii) in the
case of consolidation, merger or transfer by MSAF, the surviving successor or
transferee entity shall expressly assume all of the obligations of MSAF in the
Indenture, the Notes and each other Related Document to which MSAF is then a
party, (iii) the Controlling Trustees shall have obtained confirmation in
advance that such action or event will not result in the lowering or withdrawal
of any rating assigned by any Rating Agency to any of the Notes, (iv)
immediately after giving effect to such transaction, no Event of Default shall
have occurred and be continuing, and (v) MSAF delivers to the Trustee an
officers' certificate and an opinion of counsel, in each case stating that such
consolidation, merger or transfer and such supplemental indenture comply with
the above criteria and, if applicable, the "Limitation on Aircraft Sales"
covenant and that all conditions precedent provided for in the Indenture
relating to such transaction have been complied with; provided that this
covenant shall not apply to any such consolidation, merger, sale, conveyance,
transfer, lease or disposition (a) within and among MSAF and any of its
subsidiaries and among MSAF Group if such consolidation, merger, sale,
conveyance, transfer, lease or disposition, as the case may be, would not
materially adversely affect the holders of the Notes, (b) complying with the
terms of the "Limitation on Aircraft Sales" covenant or (c) effected as part of
a single transaction providing for the redemption or defeasance of the MSAF
Notes in accordance with the terms thereof as described under "-- Redemption" or
"-- Defeasance", respectively.
Limitation on Transactions with Affiliates. Under the terms of the
Indenture, MSAF will not, and will not permit any subsidiary to, directly or
indirectly, enter into, renew or extend any transaction (including, without
limitation, the purchase, sale, lease or exchange of property or assets, or the
rendering of any service) with any affiliate of MSAF or any subsidiary, except
upon fair and reasonable terms no less favorable to MSAF or such subsidiary than
could be obtained, at the time of such transaction or at the time of the
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execution of the agreement providing therefor, in a comparable arm's-length
transaction with a person that is not such an affiliate.
The foregoing limitation does not limit, and shall not apply to: (i) any
transaction in connection with the establishment of MSAF Group, its acquisition
of the Initial Aircraft, any Substitute Aircraft or pursuant to the terms of the
Related Documents; (ii) any transaction within and among MSAF or any of its
subsidiaries and any other member of MSAF Group, provided that no such
transaction, other than between MSAF and any of its subsidiaries, shall be
consummated if it would materially adversely affect the holders of the MSAF
Notes; (iii) the payment of reasonable and customary fees to, and the provision
of reasonable and customary liability insurance in respect of, the Controlling
Trustees; (iv) any payments on the Beneficial Interest in accordance with the
Indenture and the "Order of Priorities"; (v) any Permitted Additional Aircraft
Acquisition or any transaction complying with the "Limitation on Aircraft Sales"
covenant; (vi) any payments of the types referred to in clauses (i) or (ii) of
the "Limitation on Restricted Payments" covenant and not prohibited thereunder;
(vii) entering into any transaction effected as part of a single transaction
providing for the redemption or defeasance of the MSAF Notes, in accordance with
the terms thereof as described under "-- Redemption" or "-- Defeasance",
respectively; (viii) entering into an interest rate swap or option on an
interest rate swap or other instrument used for the management of interest rate
risk with Morgan Stanley or any of its affiliates; or (ix) the tax
indemnification agreement between MSAF and Morgan Stanley.
Limitation on the Issuance, Delivery and Sale of Stock. Under the terms of
the Indenture, MSAF will not (i) issue, deliver or sell any shares,
participations or other equivalents (however designated, whether voting or
non-voting, other than beneficial interests, shares, participations or other
equivalents existing on March 3, 1998) in equity, or (ii) sell, or permit any
subsidiary, directly or indirectly, to issue, deliver or sell, any beneficial
interests, shares, participations or other equivalents (however designated,
whether voting or non-voting, other than such shares, interests, participations
or other equivalents existing on March 3, 1998) in equity except (A) issuances
or sales of further Beneficial Interests in MSAF having economic terms that are
no less favorable to the Noteholders than those of the Beneficial Interest
existing on March 3, 1998, (B) issuances or sales of shares of Stock of foreign
subsidiaries of MSAF to nationals in the jurisdiction of incorporation or
organization of such subsidiary, as the case may be, to the extent required by
applicable law or necessary in the determination of the Controlling Trustees to
avoid an adverse tax consequence in any such jurisdiction, (C) the pledge of the
beneficial interests and shares in MSAF's subsidiaries pursuant to the Security
Trust Agreement, (D) the sale, delivery or transfer of any Stock of any member
of the MSAF Group as part of a single transaction providing for the redemption
or defeasance of the MSAF Notes, in accordance with the terms set forth under
"-- Redemption" or "-- Defeasance", respectively, (E) the sale of any Stock in
connection with any sale of Aircraft in compliance with the terms of the
"Limitation on Aircraft Sales" covenant and (F) the sale, delivery, transfer or
pledge of beneficial interests or shares of any MSAF Group member to or for the
benefit of any other MSAF Group member.
Bankruptcy and Insolvency. Under the terms of the Indenture, (i) MSAF will
promptly provide the Trustee and the Rating Agencies with notice of the
institution of any proceeding by or against MSAF or any of its subsidiaries, as
the case may be, seeking to adjudicate any of them a bankrupt or insolvent, or
seeking liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief or composition of their debts under any law relating to
bankruptcy, insolvency or reorganization or relief of debtors, or seeking an
entry of an order for relief or the appointment of a receiver, trustee or other
similar official for either or for any substantial part of their property, (ii)
MSAF will not amend any provision of the Amended and Restated Trust Agreement
that would adversely affect the rights, privileges or preferences of any holder
of the Notes, as determined by the Controlling Trustees, and (iii) MSAF will
not, without an affirmative unanimous written resolution of the Controlling
Trustees and the Independent Trustees take any action to waive, repeal, amend,
vary, supplement or otherwise modify the provision of the Amended and Restated
Trust Agreement which requires a unanimous resolution of the Controlling
Trustees and the Independent Trustees, or limits the actions of beneficial
interest holders, with respect to voluntary insolvency proceedings or consents
to involuntary insolvency proceedings.
In addition, under the terms of the Amended and Restated Trust Agreement
the Controlling Trustees and Independent Trustees will agree that while the
Notes are outstanding they will not take any action (i) to
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cause MSAF to institute any proceeding seeking liquidation or insolvency (or
similar proceeding), (ii) in the case of any such proceeding instituted against
MSAF, to authorize or consent to such proceedings or (iii) to terminate MSAF's
existence.
OPERATING COVENANTS
Concentration Limits. Unless the Controlling Trustees obtain prior written
confirmation from each of the Rating Agencies that no lowering or withdrawal of
the then current rating of any subclass of Notes will result, MSAF will not
permit any of its subsidiaries to lease or re-lease any Aircraft if entering
into such proposed lease would cause the Portfolio (excluding any Aircraft then
subject to an Aircraft Agreement and expected to be disposed of within one year
from the date of effectiveness of such lease pursuant to clauses (iii) and (v)
under "-- Indenture Covenants -- Limitation on Aircraft Sales" above but
including any Aircraft with respect to which MSAF Group has entered into a
binding agreement to acquire and which the Controlling Trustees reasonably
expect to acquire within 180 days from the date of effectiveness of such
agreement) to exceed any of the concentration limits set forth below (the
"CONCENTRATION LIMITS"); provided that the Indenture will permit breaches of
such Concentration Limits upon any renewal, extension or restructuring of any
Lease.
LESSEE CONCENTRATION LIMITS PERCENTAGE OF
MOST RECENT APPRAISED
VALUE OF PORTFOLIO(1)
---------------------
Single Lessee rated BBB/Baa2 (or the equivalent) or
better.................................................... 15%
Other single Lessees........................................ 10%
Five largest Lessees........................................ 35%
COUNTRY CONCENTRATION LIMITS PERCENTAGE OF
MOST RECENT APPRAISED
VALUE OF PORTFOLIO(1)
---------------------
United States............................................... 25%
Countries rated BBB/Baa2 (or the equivalent) or better(2)... 20%
Other....................................................... 15%
REGION CONCENTRATION LIMITS PERCENTAGE OF
MOST RECENT APPRAISED
VALUE OF PORTFOLIO(1)
---------------------
Developed Market Region(3).................................. 50%
Emerging Market Region(3)................................... 25%
Other(3).................................................... 20%
- ---------------
(1) Percentage to be obtained by dividing the aggregate most recent Appraised
Values of all Aircraft leased or to be leased to Lessees habitually based in
the applicable country by the aggregate most recent Appraised Values of all
Aircraft then owned by MSAF Group and any future MSAF Group member.
(2) Based on the sovereign foreign currency debt rating assigned by the Rating
Agencies to the country in which a Lessee is habitually based at the time
the relevant Lease is executed.
(3) The designations of Emerging Markets and Developed Markets are as determined
and published by Capital International Perspective S.A. ("MSCI") from time
to time based on, among other things, gross domestic product levels,
regulation of foreign ownership of assets, the regulatory environment,
exchange controls and perceived investment risk. The current designations
are as set out below:
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REGION COUNTRY
------ -------
Developed Markets
Europe....................... EU (except Greece and Luxembourg), Norway and Switzerland
North America................ Canada and United States
Pacific...................... Australia, Hong Kong, Japan, New Zealand and Singapore
Emerging Markets
Asia......................... China, India, Indonesia, Korea, Malaysia, Pakistan,
Philippines, Sri Lanka, Taiwan and Thailand
Europe and Middle East....... Czech Republic, Greece, Hungary, Israel, Jordan, Poland,
Russia and Turkey
Latin America................ Argentina, Brazil, Chile, Colombia, Mexico, Peru and
Venezuela
Other
All other countries (generally those that have small or underdeveloped capital markets,
including Iceland, Fiji and Guyana)
In addition, the Indenture will not permit MSAF or any subsidiary to lease
Aircraft operated or to be operated by Lessees domiciled in (i) certain
countries and (ii) certain other countries without procuring political risk
insurance. The list of prohibited countries and countries with respect to which
political risk insurance must be procured may be modified from time to time upon
the approval of the Rating Agencies.
The Indenture contains no limitations with respect to the country or region
where any sublessees of Aircraft operated or to be operated are domiciled if (i)
such sublease is permitted under the relevant Lease (including by reason of
consent or waiver, if applicable) or renewed Lease (including by reason of
consent or waiver, if applicable) and (ii) the relevant Lessee is either a
signatory to a Lease or a renewed Lease.
Compliance with Law, Maintenance of Permits. Under the terms of the
Indenture, MSAF will (i) comply, and cause each of its subsidiaries to comply,
in all material respects with all applicable laws, (ii) obtain, and cause each
of its subsidiaries to obtain, all material governmental (including regulatory)
registrations, certificates, licenses, permits and authorizations required for
such person's use and operation of the Aircraft, including, without limitation,
a current certificate of airworthiness for each Aircraft (issued by the
applicable aviation authority and in the appropriate category for the nature of
operations of such Aircraft), except that (A) no certificate of airworthiness
shall be required for any Aircraft (x) during any period when such Aircraft is
undergoing maintenance, modification or repair, (y) following the withdrawal or
suspension by such applicable aviation authority of certificates of
airworthiness in respect of all aircraft of the same model or period of
manufacture as such Aircraft (in which case MSAF shall comply, and cause each of
its subsidiaries to comply, with all directions of such applicable aviation
authority in connection with such withdrawal or suspension), (B) no
registration, certificates, licenses, permits or authorizations required for the
use or operation of any Aircraft need be obtained with respect to any period
when such Aircraft is not being operated and (C) no such registrations,
certificates, licenses, permits or authorizations shall be required to be
maintained for any Aircraft that is not the subject of a Lease, except to the
extent required under applicable laws, (iii) not cause or knowingly permit,
directly or indirectly, through any of its subsidiaries, any Lessee to operate
any Aircraft under any Lease in any material respect contrary to any applicable
law and (iv) not knowingly permit, directly or indirectly, through any of its
subsidiaries, any Lessee not to obtain all material governmental (including
regulatory) registrations, certificates, licenses, permits and authorizations
required for such Lessee's use and operation of any Aircraft under any operating
Lease except as provided, mutatis mutandis, in clauses (ii)(A) and (ii)(B)
above.
The foregoing covenant shall not be deemed to have been breached by virtue
of any act or omission of a Lessee or sub-lessee, or of any person which has
possession of the Aircraft or any Engine for the purpose of repairs,
maintenance, notification or storage, or by virtue of any requisition, seizure,
or confiscation of the Aircraft (other than seizure or confiscation arising from
a breach by MSAF or a subsidiary of such covenant) (each, a "THIRD PARTY
EVENT"); provided that (i) no member of MSAF Group consents or has consented to
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such Third Party Event; and (ii) the member of MSAF Group which is the lessor or
owner of such Aircraft promptly and diligently takes such commercially
reasonable actions as a leading international aircraft operating lessor or owner
would reasonably take in respect of such Third Party Event, including, as deemed
appropriate (taking into account, inter alia, the laws of the jurisdictions in
which the Aircraft are located), seeking to compel such Lessee or other relevant
person to remedy such Third Party Event or seeking to repossess the relevant
Aircraft or Engine.
Appraisal of Portfolio. Under the terms of the Indenture, MSAF will, at
least once each year and in any case no later than October 31 of each year,
deliver to the Trustee appraisals of the Base Value of each of the Aircraft,
from at least three independent appraisers that are members of the International
Society of Transport Aircraft Trading or any similar organization, each such
appraisal to be dated within 30 days prior to its delivery to the Trustee.
Maintenance of Assets. Under the terms of the Indenture, MSAF will (i)
with respect to each Aircraft and Engine that is subject to a Lease, cause
directly or indirectly, through any of its subsidiaries, such Aircraft and
Engine to be maintained in a state of repair and condition consistent with the
reasonable commercial practice of leading international aircraft operating
lessors with respect to similar aircraft under lease, taking into consideration,
among other things, the identity of the relevant Lessee (including the credit
standing and operating experience thereof), the age and condition of the
Aircraft and the jurisdiction in which such Aircraft will be operated or
registered under such Lease, and (ii) with respect to each Aircraft that is not
subject to a Lease, maintain, and cause each of its subsidiaries to maintain,
such Aircraft in a state of repair and condition consistent with the reasonable
commercial practice of leading international aircraft operating lessors with
respect to aircraft not under lease. No breach of this covenant, however, shall
be deemed to have occurred by virtue of any Third Party Event; provided that (i)
no member of MSAF Group consents or has consented to such Third Party Event; and
(ii) the member of MSAF Group which is the lessor or owner of such Aircraft
promptly and diligently takes such commercially reasonable actions as a leading
international aircraft operating lessor would reasonably take in respect of such
Third Party Event, including as deemed appropriate, seeking to compel such
Lessee or other relevant person to remedy such Third Party Event or seeking to
repossess the relevant Aircraft or Engine.
Notification of Trustee and Administrative Agent. Under the terms of the
Indenture, MSAF will notify the Trustee and Administrative Agent as soon as MSAF
or any of its subsidiaries becomes aware of any loss, theft, damage or
destruction to any Aircraft or Engine if the potential cost of repair or
replacement of such asset (without regard to any insurance claim related
thereto) may exceed $2,000,000.
Leases. Under the terms of the Indenture, MSAF shall adopt and has agreed
to cause the Servicer to use, and will adopt and will agree to cause any
additional Servicer replacing the Servicer pursuant to the terms of the
Servicing Agreement (an "ADDITIONAL SERVICER") to use, the pro forma lease
agreement or agreements then used by the Servicer or such Additional Servicer,
as the case may be, in connection with its aircraft operating leasing services
business generally, as such pro forma lease agreement or agreements may be
revised for purposes of MSAF Group specifically or generally from time to time
by the Servicer or Additional Servicer (the "PRO FORMA LEASE"), on behalf of
each member of MSAF Group as a starting point in the negotiation of Future
Leases; provided, that with respect to any Future Lease entered into in
connection with (x) the renewal or extension of a Lease, (y) the leasing of an
Aircraft to a person that is or was a Lessee under a pre-existing Lease or (z)
the leasing of an Aircraft to a person that is or was a lessee under an
operating lease of an aircraft that is being managed or serviced by the Servicer
or such Additional Servicer, as the case may be (such Future Lease, a "RENEWAL
LEASE"), a form of lease substantially similar to such pre-existing Lease or
operating lease (a "PRECEDENT LEASE"), as the case may be, may, in lieu of the
Pro Forma Lease, be used by the Servicer or such Additional Servicer, as the
case may be, on behalf of any member of the MSAF Group as a starting point in
the negotiation of such future lease with persons who are not members of the
MSAF Group or any Future MSAF Group Entity.
Opinions. Under the terms of the Indenture, MSAF will not enter into, and
will not permit any of its subsidiaries to enter into, any Future Lease with any
person that is not a member of MSAF Group or change the jurisdiction of
registration of any Aircraft that is subject to a Lease, unless, upon entering
into such Future
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Lease or changing the jurisdiction or registration of such Aircraft (or within a
commercially reasonable period thereafter), the Servicer or Additional Servicer,
as the case may be, obtains such legal opinions, if any, with regard to
compliance with the registration requirements of the relevant jurisdiction,
enforceability of the Future Lease and such other matters customary for such
transactions to the extent that receiving such legal opinions is consistent with
the reasonable commercial practice of leading international aircraft operating
lessors.
Insurance. Under the terms of the Indenture, MSAF will maintain or cause,
directly or indirectly through its subsidiaries, to be maintained with reputable
and responsible insurers or with insurers that maintain relevant reinsurance
with reputable and responsible reinsurers (i) airline hull insurance for each
Aircraft in an amount at least equal to the Note Target Price for such Aircraft
(or the equivalent thereof from time to time if such insurance is denominated in
a currency other than United States dollars), (ii) airline liability insurance
for each Aircraft and occurrence in an amount at least equal to the relevant
amounts set forth in the Indenture for each model of aircraft and (iii) airline
political risk insurance ("PRI") for each Aircraft subject to a Lease and
habitually based in a jurisdiction determined in accordance with the PRI
guidelines, as set forth in the Indenture and as amended from time to time with
the consent of the Rating Agencies, in an amount at least equal to the Note
Target Price (or the equivalent thereof from time to time if such insurance is
denominated in a currency other than United States Dollars) for such Aircraft;
provided, however, that with respect to any such insurance for any Aircraft
subject to a Lease, such insurance may be subject to commercially reasonable
deductible and self-insurance arrangements (taking into account, inter alia, the
creditworthiness and experience of the Lessee, if any, the type of aircraft and
market practices in the aircraft insurance industry generally). The coverage and
terms (including endorsements, deductibles and self-insurance arrangements) of
any insurance maintained with respect to any Aircraft not subject to a Lease
shall be substantially consistent with the commercial practices of leading
international aircraft operating lessors regarding similar aircraft.
In determining the amount of insurance required to be maintained, MSAF may
take into account any indemnification from, or insurance provided by, any
governmental, supranational or inter-governmental authority or agency (other
than, with respect to PRI, any governmental authority or agency of any
jurisdiction for which PRI must be obtained), the sovereign foreign currency
debt rating of which is rated AA, or the equivalent, by at least one of the
Rating Agencies, against any risk with respect to an Aircraft at least in an
amount which, when added to the amount of insurance against such risk maintained
by MSAF (or which MSAF has caused to be maintained), shall be at least equal to
the amount of insurance against such risk otherwise required by the covenant
(taking into account self-insurance permitted by the covenant). Any such
indemnification or insurance provided by such government shall provide
substantially similar protection as the insurance required by the covenant. MSAF
will not be required to maintain (or to cause to be maintained) any insurance
otherwise required hereunder to the extent that such insurance is not generally
available in the relevant insurance market at commercially reasonable rates from
time to time.
Indemnity. Under the terms of the Indenture, MSAF will, and will cause
each of its subsidiaries to, include in each Lease between a member of MSAF
Group and a person who is not a member of MSAF Group an indemnity in respect of
the Lease in respect of any losses or liabilities arising from the use or
operation of the Aircraft during the term of such Lease, subject to such
exceptions, limitations and qualifications as are consistent with the reasonable
commercial practices of leading international aircraft operating lessors.
EVENTS OF DEFAULT AND REMEDIES
Each of the following events will constitute an "EVENT OF DEFAULT" with
respect to any class of Notes under the Indenture (unless otherwise specified
below):
(a) failure to pay interest on the Notes of such class or any subclass
thereof (other than Step-Up Interest), in each case when such amount
becomes due, and such default continues for a period of five or more
Business Days;
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(b) failure to pay principal or premium, if any, on the Notes of such
class or any subclass thereof either on or prior to the applicable
Final Maturity Date;
(c) failure to pay any amount (other than interest) when due and payable
in connection with any Note of such class or any subclass thereof, to
the extent that there are at such time Available Collections therefor,
and such default continues for a period of five or more Business Days;
(d) failure by MSAF to comply with any of the covenants, obligations,
conditions or provisions binding on it under the Indenture or the
Notes (other than a payment default for which provision is made in
clause (a), (b) or (c) above), if such failure materially adversely
affects the holders of such class of Notes and continues for a period
of 30 days or more after written notice thereof has been given to MSAF
by the Cash Manager, the Administrative Agent, the Servicer or
Additional Servicer, as the case may be, or by holders of at least 25%
of the aggregate Outstanding Principal Balance of the Notes of the
Senior Class;
(e) a court having jurisdiction in the premises enters a decree or order
for (i) relief in respect of MSAF, or any subsidiary thereof (other
than a subsidiary which owns or leases Aircraft having an aggregate
Base Value of less than 10% of the Adjusted Portfolio Value at that
time) (each, a "SIGNIFICANT SUBSIDIARY"), under any applicable law
relating to bankruptcy, insolvency, receivership, winding-up,
liquidation, reorganization, examination, relief of debtors or other
similar law now or hereafter in effect, (ii) appointment of a
receiver, liquidator, examiner, assignee, custodian, trustee,
sequestrator or similar official of MSAF or any Significant
Subsidiary; or (iii) the winding up or liquidation of the affairs of
MSAF or any Significant Subsidiary and, in each case, such decree or
order shall remain unstayed or such writ or other process shall not
have been stayed or dismissed within 90 days from entry thereof;
(f) MSAF or any Significant Subsidiary (i) commences a voluntary case
under any applicable law relating to bankruptcy, insolvency,
receivership, winding-up, liquidation, reorganization, examination,
relief of debtors or other similar law now or hereafter in effect, or
consents to the entry of an order for relief in any voluntary case
under any such law, (ii) consents to the appointment of or taking
possession by a receiver, liquidator, examiner, assignee, custodian,
trustee, sequestrator or similar official of MSAF or any Significant
Subsidiary or for all or substantially all of the property and assets
of MSAF or any Significant Subsidiary or (iii) effects any general
assignment for the benefit of creditors;
(g) any judgment or order for the payment of money in excess of 5% of the
aggregate Adjusted Portfolio Value shall be rendered against MSAF or
any subsidiary or any other member of MSAF Group and either (i)
enforcement proceedings shall have been commenced by any creditor upon
such judgment or order or (ii) there shall be any period of 10
consecutive days during which a stay of enforcement of such judgment
or order, by reason of a pending appeal or otherwise, shall not be in
effect; provided, however, that any such judgment or order shall not
be an Event of Default under the Indenture if and for so long as (i)
the amount of such judgment or order is covered by a valid and binding
policy of insurance between the defendant and the insurer covering
payment thereof and (ii) such insurer, which shall be rated at least A
by A.M. Best Company or any similar successor entity, has been
notified of, and has not disputed the claim made for payment of, the
amount of such judgment or order; or
(h) the constitutional documents of MSAF cease to be in full force and
effect without replacement documents having the same terms being in
full force and effect.
The Indenture provides that, within 30 days of the occurrence of an Event
of Default in respect of any class of Notes, the Trustee will give to the
Noteholders of such class notice, transmitted by mail, of all uncured or
unwaived defaults under the Indenture known to it on such date. If an Event of
Default (other than an Event of Default under (e) or (f) above) with respect to
the Senior Class of Notes shall have occurred and be continuing, the Senior
Trustee may, and, when instructed by the holders of 25% of the aggregate
Outstanding Principal Balance of the Senior Class of Notes, shall, give a
Default Notice to MSAF,
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the Administrative Agent, the Trustee and the Cash Manager declaring the
Outstanding Principal Balance of the Notes and all accrued and unpaid interest
thereon to be due and payable. At any time after the Senior Trustee has declared
the Outstanding Principal Balance of the Notes to be due and payable and prior
to the exercise of any other remedies pursuant to the Indenture, holders of a
majority of the Outstanding Principal Balance of the Senior Class of Notes, by
written notice to MSAF, the Senior Trustee and the Administrative Agent, may,
except in the case of (i) a default in the deposit or distribution of any
payment required to be made on the Notes of such class, (ii) a payment default
on such class of Notes or (iii) a default in respect of any covenant or
provision of the Indenture that cannot by the terms thereof be modified or
amended without the consent of each Noteholder affected thereby, rescind and
annul such declaration and thereby annul its consequences if: (i) there has been
paid to or deposited with the Senior Trustee an amount sufficient to pay all
overdue installments of interest on the Notes, and the principal of and premium,
if any, on the Notes that would have become due otherwise than by such
declaration of acceleration, (ii) the rescission would not conflict with any
judgment or decree and (iii) all other defaults and Events of Default, other
than nonpayment of interest and principal on the Notes that have become due
solely because of such acceleration, have been cured or waived. If an Event of
Default under clause (e) or (f) occurs, the Outstanding Principal Balance of the
Notes and all accrued and unpaid interest thereon shall automatically become due
and payable without any further action by any party. After the occurrence and
during the continuation of an Event of Default, (i) the Class B Noteholders will
not be permitted to give or direct the giving of a Default Notice or to exercise
any remedy in respect of such Event of Default until all interest and principal
on the Class A Notes have been paid in full, (ii) the Class C Noteholders will
not be permitted to give a Default Notice or to exercise any remedy in respect
of such Event of Default until all interest and principal on the Class A Notes
and the Class B Notes have been paid in full and (iii) the Class D Noteholders
will not be permitted to give a Default Notice or to exercise any remedy in
respect of such Event of Default until all interest and principal on the Class A
Notes, the Class B Notes and the Class C Notes have been paid in full. The
Trustee shall provide each Rating Agency with a copy of any Default Notice it
receives pursuant to the Indenture.
The Indenture contains a provision entitling the Trustee, subject to the
duty of the Trustee during a default to act with the required standard of care,
to be indemnified by the holders of any class of the Notes before proceeding to
exercise any right or power under the Indenture or the Administrative Agency
Agreement at the request or direction of such holders. Except in limited
circumstances, no holder of the Notes will have the right, other than through
the Senior Trustee acting in accordance with the Indenture, to sue for recovery
or take any other actions to enforce the obligations of MSAF to pay any and all
amounts due and payable under the Notes, and no holder of the Notes will have
the right to take any steps to cause the filing for bankruptcy of MSAF. However,
such limitation does not apply to a suit instituted by any holder of a Note for
the enforcement of payment of principal or interest on such Note on or after the
respective due dates therefor unless such holder shall have consented thereto.
The Senior Trustee is entitled to exercise any and all remedies available under
the Indenture.
For the purposes of the Indenture, the term "DEFAULT" shall mean the
occurrence of any event which is, or after notice or lapse of time, or both,
would constitute an Event of Default.
INTERCREDITOR RIGHTS
Subject to the terms of the Indenture, the Senior Trustee will have sole
discretion as to whether to direct the Administrative Agent to exercise and
enforce any and all remedies with respect to the Notes. The Senior Trustee may
take various actions in respect of the Notes, without regard to the interests of
any other creditors.
MODIFICATION AND WAIVER
In the event that the Trustee receives a request for its consent to an
amendment, modification or waiver under the Indenture, the Notes or any Related
Document relating to the Notes, the Trustee shall mail a notice of such proposed
amendment, modification or waiver to each Noteholder as to whether or not to
consent to such amendment, modification or waiver.
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The Indenture will provide that, with the consent of the holders of a
majority of the Outstanding Principal Balance of the Notes (acting as a single
class), modifications may be made to the Notes or the Indenture; provided that
any modification of the provisions setting forth the frequency or the currency
of payment of, the maturity of, or the method of calculation of the amount of
any interest, principal and premium, if any, payable in respect of any subclass
of Notes, or reducing the percentage of the aggregate Outstanding Principal
Balance of any subclass of Notes required to approve any such amendment or
waiver, or altering the manner or priority of payment of any subclass of Notes
(each, a "BASIC TERMS MODIFICATION") is not permitted without the consent of any
Swap Provider and the holder of each Outstanding Note affected thereby; provided
further however, that the Senior Trustee may waive any Event of Default. Any
such modification approved by the required holders of any subclass of Notes will
be binding on the holders of the relevant subclass of Notes and each party to
the Indenture. The foregoing, however, shall not prevent MSAF or any subsidiary
from amending any Lease; provided that such amendment is otherwise permitted by
the Indenture.
The subordination provisions contained in the Indenture may not be amended
or modified without the consent of each Swap Provider, each holder of the class
of Notes affected thereby and each holder of any class of Notes ranking senior
to such Notes.
Without the consent of each Noteholder, no amendment or modification of the
Indenture or the Administrative Agency Agreement may, inter alia, (a) modify the
provisions of the Indenture or the Administrative Agency Agreement with respect
to Account payment instructions and the payment thereunder by the Administrative
Agent or (b) result in the sale of MSAF's assets other than pursuant to the
provisions of "Indenture Covenants". In no event shall the provisions relating
to the priority of the Expenses or Swap Payments in the Indenture be amended or
modified.
NOTICES TO NOTEHOLDERS
Save as provided below, any notice to the Noteholders shall be validly
given (i) by publication in the Luxemburger Wort or, if such newspaper shall
cease to be published or timely publication therein shall not be practicable, in
such English language newspaper or newspapers as the Trustee shall approve
having a general circulation in Europe, (ii) by either of (a) the information
contained in such notice appearing on the relevant page of the Reuters Screen or
such other medium for the electronic display of data as may be approved by the
Trustee and notified to Noteholders or (b) publication in the Financial Times
and The Wall Street Journal (National Edition) or, if either newspaper shall
cease to be published or timely publication therein shall not be practicable, in
such English language newspaper or newspapers as the Trustee shall approve
having a general circulation in Europe and the United States and (iii) until
such time as any Definitive Notes are issued and, so long as the Notes are
registered in the name of a nominee for DTC, Euroclear and/or Cedel Bank,
delivery of the relevant notice to DTC, Euroclear and/or Cedel Bank for
communication by them to Noteholders.
The Trustee shall be at liberty to sanction some other method of giving
notice to the Noteholders if, in its opinion, such other method is reasonable,
having regard to the number and identity of the Noteholders and/or to market
practice then prevailing, is in the best interests of the Noteholders and will
comply with the rules of the Luxembourg Stock Exchange or such other stock
exchange (if any) on which the Notes are then listed, and any such notice shall
be deemed to have been given on such date as the Trustee may approve; provided
that notice of such method is given to the Noteholders in such manner as the
Trustee shall require.
Notwithstanding the above, any notice specifying the rate, amount or
Payment Date in respect of any Floating Rate Notes, or in respect of any
repayment of principal on any Notes shall, for so long as the Notes are listed
on the Luxembourg Stock Exchange and so long as the rules of the Luxembourg
Stock Exchange so require, be given to the Luxembourg Stock Exchange; provided
that such requirement shall be satisfied until such time as any Definitive Notes
are issued to all Noteholders and so long as the Notes are held on behalf of
DTC, Cedel Bank and Euroclear by (i) delivery of the relevant notice to DTC,
Cedel Bank and Euroclear for communication by them to the Noteholders without
the need for publication in the Luxemburger Wort and (ii) delivery of the notice
to the Luxembourg Stock Exchange and the paying agent in Luxembourg; provided
further, however, that any notice specifying (a) an increase in the interest
rate of any subclass of Notes due to Step-Up Interest or failure by MSAF to
comply with the registration requirements for the Notes or
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(b) redemption of principal of any Notes must be published in the Luxemburger
Wort or another daily newspaper of general circulation in Luxembourg. Any such
notice shall be deemed to have been given on the first day on which any of such
conditions shall have been met.
GOVERNING LAW AND JURISDICTION
The Indenture, the Notes, the Administrative Agency Agreement and the Cash
Management Agreement are to be governed by and construed in accordance with the
laws of the State of New York. In the Indenture, the Administrative Agency
Agreement and the Cash Management Agreement, MSAF has submitted to the
jurisdiction of the United States Federal and New York State courts located in
The City of New York for all purposes of or in connection with the Notes, the
Administrative Agency Agreement and Cash Management Agreement, as the case may
be, and has designated a person in The City of New York to accept service of any
process on its behalf.
BENEFICIAL INTEREST
The nominal value of the Beneficial Interest is $1.00. Morgan Stanley
indirectly holds 100% of the Beneficial Interest, but Morgan Stanley may
transfer all or a portion of the Beneficial Interest to a related or unrelated
person in the future. The Beneficial Interest will rank junior in priority of
payment to certain payments on the Notes and certain other obligations of MSAF
and, to the extent held by more than one person, pari passu among such persons.
Pursuant to the subordination provisions of the Indenture, payments on the
Beneficial Interest, other than the Beneficial Interest Distribution Amount, as
set forth in "-- Priority of Payments", are subordinated to all payments of
interest and principal on the Notes and no payments may be made on the
Beneficial Interest other than the Beneficial Interest Distribution Amount while
the Notes remain Outstanding.
When, as and if declared by the Controlling Trustees, a "BENEFICIAL
INTEREST DISTRIBUTION AMOUNT" shall only be payable on any Payment Date
occurring after March 15, 2003 and will not exceed the lesser of (i) 3% of the
difference, if positive, between the Adjusted Portfolio Value on such Payment
Date and the Outstanding Principal Balance of the MSAF Notes (determined prior
to application of Available Collections on such Payment Date) and (ii) 15% of
Available Collections on such Payment Date after application of payments and
retentions (i) through (xvii) as set forth above under "-- Priority of
Payments".
CASH MANAGEMENT AGREEMENT
The Cash Management Agreement among MSAF Group, the Cash Manager and the
Security Trustee, appoints the Cash Manager to invest the funds held by MSAF
Group in the Accounts in the Permitted Account Investments.
ACCOUNTS
The Administrative Agent, acting on behalf of the Security Trustee, has
established the following accounts: (i) the Collection Account, (ii) the Expense
Account, (iii) the initial Rental Account and (iv) an aircraft purchase account
(the "AIRCRAFT PURCHASE ACCOUNT") in which amounts were deposited to purchase
certain of the Initial Aircraft which had not been delivered as of March 3,
1998, the closing date of the Offering of the Old Notes (collectively with the
Lessee Funded Account, the Refinancing Account and the Defeasance/Redemption
Account, and including any ledger or subledger accounts maintained therein, the
"ACCOUNTS"). Each of the Collection Account, the Expense Account, the Rental
Accounts, the Lessee Funded Account and the Aircraft Purchase Account has been
established at a bank having (i) a long-term unsecured debt rating of not less
than AA, or the equivalent, by the Rating Agencies or (ii) a certificate of
deposit rating of A-1+ by Standard & Poor's and P-1 by Moody's and that is
acceptable to the other Rating Agencies. Where required by the terms of the
relevant Leases, certain Rental Accounts may be established at banks having
ratings of less than AA, or the equivalent, by the Rating Agencies, or a
certificate of deposit rating of less than A-1+ by Standard and Poor's and P-1
by Moody's. Except where local legal or regulatory reasons do not permit, all of
such Accounts will be held in the names of the Security Trustee, who will have
sole dominion and control over the Accounts, including, inter alia, the sole
power to direct withdrawals from
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or transfers among such Accounts. Subject to certain conditions set forth in the
Administrative Agency Agreement, the Security Trustee will delegate such
authority over the Accounts to the Administrative Agent; provided that the
Security Trustee will not be responsible for the acts or omissions of the
Administrative Agent.
For as long as any Notes remain Outstanding, funds on deposit in the
Accounts will be invested and reinvested by the Cash Manager at MSAF Group's
written direction (or, following delivery to MSAF or the Administrative Agent of
a Default Notice or if any Event of Default described in clause (e) or (f) under
"-- Events of Default and Remedies" shall have occurred and be continuing, at
the Security Trustee's written direction) in one or more Permitted Account
Investments maturing, in the case of the Collection Account and Expense Account,
such that sufficient funds shall be available to make required payments on the
first succeeding scheduled Payment Date after such Permitted Account Investments
are made; provided that investment and reinvestment of funds in the Lessee
Funded Account must be made in a manner and with maturities that conform to the
requirements of the related Leases or Aircraft Agreements, as the case may be.
Investment earnings on funds deposited in any Account, net of losses and
investment expenses, will, to the extent permitted by the terms of such related
Leases in the case of such funds in the Lessee Funded Account, be deposited in
the Collection Account and treated as collections.
RENTAL ACCOUNTS
The Lessees will make all payments under the Leases directly into the
applicable Rental Accounts. Pursuant to the Administrative Agency Agreement, the
Administrative Agent will transfer, or cause to be transferred, all funds
deposited into the Rental Accounts into the Collection Account as collections
within one Business Day of receipt thereof (other than certain limited amounts,
if any, required to be left on deposit for local legal or regulatory reasons).
COLLECTION ACCOUNT
Collections will include all amounts received by MSAF Group, including (i)
Rental Payments, (ii) amounts drawn under any credit or liquidity enhancement
facility, (iii) payments under any letter of credit, letter of comfort, letter
of guarantee or other assurance in respect of a Lessee's obligations under a
Lease, (iv) the cash portion of the Liquidity Reserve Amount, (v) amounts
received in respect of claims for damages or in respect of any breach of
contract for nonpayment of any of the foregoing (including any amounts received
from any MSAF Group subsidiary, whether by way of distribution, dividend,
repayment of a loan or otherwise and any proceeds received in connection with
any Allowed Restructuring), (vi) net proceeds of any Aircraft sale or amounts
received under any Aircraft Agreement, (vii) proceeds of any insurance payments
in respect of any Aircraft or any indemnification proceeds, (viii) certain
amounts transferred from the Lessee Funded Account to the Collection Account,
(ix) certain security deposits transferred from ILFC, (x) net payments to MSAF
Group under any Swap Agreement, (xi) investment income, if any, on all amounts
on deposit in the Accounts (in each case to the extent consistent with the terms
of applicable related Leases) and (xii) any other amounts received by any member
of the MSAF Group other than segregated funds, certain funds to be applied in
connection with a redemption, certain funds received in connection with a
Refinancing and other amounts required to be paid over to any third party
pursuant to any Related Document (collectively, the "COLLECTIONS").
Collections on deposit in the Collection Account will be calculated by the
Administrative Agent on the Calculation Date. The portion of the Required
Expense Amount that has not been paid directly by the Administrative Agent to
Expense payees will be transferred into the Expense Account on each Payment Date
and the Administrative Agent may, from time to time, transfer other amounts into
the Expense Account in respect of unanticipated Expenses falling due and payable
within such Interest Accrual Period. To the extent funds are available therefor
on any Payment Date, the Administrative Agent will also transfer amounts in
respect of expenses and costs that are not regular, monthly recurring expenses,
including Modification Payments and refinancing expenses, if any, anticipated to
become due and payable in any future Interest Accrual Period ("PERMITTED
ACCRUALS"). Amounts received in respect of certain segregated security deposits
and maintenance reserves (as described below) will be transferred directly into
the Lessee Funded Account.
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LIQUIDITY RESERVE AMOUNT
All Collections received by MSAF Group will either be transferred to
another Account as described above and below, paid to the appropriate third
party on behalf of MSAF Group or held in the Collection Account as a part of the
cash portion of the Liquidity Reserve Amount, a balance required to be held by
MSAF Group in the Collection Account pursuant to the Indenture. The Liquidity
Reserve Amount is intended to provide liquidity for MSAF Group to meet its
aircraft maintenance obligations and its lessee security deposit repayment
obligations and to provide for certain other contingencies that may arise in the
course of MSAF Group's activities. The Liquidity Reserve Amount may be funded
with cash in the Collection Account or with amounts available under Eligible
Credit Facilities.
The initial Liquidity Reserve Amount was approximately $65.2 million on
March 3, 1998. The Liquidity Reserve Amount may be increased or decreased from
time to time for any reason (including upon acquisitions of Additional Aircraft)
by an action of the Controlling Trustees in light of significant changes in,
inter alia, the condition of the Aircraft, the terms and conditions of the
Leases, the financial condition of the Lessees or prevailing industry
conditions; provided that MSAF Group will obtain confirmation in advance in
writing from the Rating Agencies that any such proposed reduction in the
Liquidity Reserve Amount will not result in a lowering or withdrawal by any such
Rating Agencies of their respective ratings of any class of Notes.
If the balance of cash on deposit in the Collection Account, together with
the amount available for drawing under any Eligible Credit Facilities, should
fall below the Liquidity Reserve Amount at any time (including as a result of
MSAF Group's determination that the Liquidity Reserve Amount should be
increased, as required by the Rating Agencies or otherwise), MSAF Group may
continue to make all payments, and any credit or liquidity enhancement
facilities may be drawn to fund such payments, including required payments on
the Notes, which rank prior to, or pari passu with, payments of Minimum
Principal Payment Amount on the Class D Notes under "Description of the Notes --
Priority of Payments" and any Permitted Accruals other than in respect of
Modification Payments, provided that the balance of funds in the Collection
Account, together with the amount available for drawing under any Eligible
Credit Facilities, does not fall below the Minimum Liquidity Reserve Amount at
its then current level. However, the balance of funds in the Collection Account,
together with the amount available for drawing under any Eligible Credit
Facilities, may fall below the Minimum Liquidity Reserve Amount at its then
current level and MSAF Group may continue to make payments of, and any credit or
liquidity enhancement facilities may be drawn to fund such payments, all accrued
and unpaid interest on any subclass of the most senior class of Notes then
Outstanding to avoid an Event of Default, and, on the Final Maturity Date of any
subclass thereof, principal of, any subclass of the most senior class of Notes
then Outstanding to avoid an Event of Default.
At such time as the aggregate Outstanding Principal Balance of the Notes is
less than or equal to the Liquidity Reserve Amount, the balance of funds, if
any, in the Collection Account will be distributed in accordance with the
priority of payments established for the Notes.
LESSEE FUNDED ACCOUNT
Certain Lessee security deposits and supplemental rent payments to provide
for maintenance reserves may be required to be segregated from other MSAF Group
funds in the future. Amounts received from Lessees in respect of such security
deposits and maintenance obligations will be held in the Lessee Funded Account.
Funds on deposit in the Lessee Funded Account will be used to make certain
maintenance and security deposit repayment related payments (or such other
payments as may be required or permitted under the terms of the relevant Leases)
or may be applied against maintenance-related payments otherwise required to be
made by the Lessee during the term of the related Lease and will not be used to
make payments in respect of the Notes or the Notes at any time, including after
the delivery of a Default Notice. In certain circumstances where Lessees
relinquish their rights to receive certain maintenance and security deposit
payments upon the expiration of a lease, surplus funds may be credited from the
Lessee Funded Account to the Collection Account.
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EXPENSE ACCOUNT
On each Payment Date, the Administrative Agent will withdraw from the funds
deposited in the Collection Account, in the priority of payments established for
the Notes, an amount equal to the Required Expense Amount, which amount will
then be used to pay the Expenses. To the extent that the Required Expense Amount
has not been paid directly by the Administrative Agent to Expense payees, the
Required Expense Amount will be deposited into the Expense Account. In addition,
in the period between Payment Dates, the Administrative Agent may make further
withdrawals of cash from the Collection Account in order to satisfy Expenses due
and payable prior to the next Payment Date that were not previously anticipated
to become so due and payable on the previous Payment Date. If funds on deposit
in the Collection Account are less than the Required Expense Amount on any
Payment Date, MSAF Group will be unable to pay the Required Expense Amount in
full on such date, which may lead to a default under one or more of the Related
Documents or MSAF Group's various service agreements. All Available Collections
remaining in the Collection Account will be used by the Administrative Agent to
make payments on the Notes in accordance with the priority of payments
established therefor under "-- Priority of Payments".
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REPORTS TO NOTEHOLDERS
On the second Business Day before each Payment Date and any other date for
distribution of any payments with respect to each subclass of Notes then
Outstanding, the Trustee will distribute to each Noteholder a Monthly Report
with respect to any payment to be made on such Payment Date or other date, as
the case may be, setting forth the following information:
With respect to each Payment Date, (A) the balances on deposit on the
(i) Calculation Date immediately preceding the prior Payment Date, (B) the
aggregate amounts of deposits and withdrawals between such Calculation
Date and the Calculation Date immediately preceding the Payment Date
and (C) the balances on deposit in the Expense Account, Collection
Account and Lessee Funded Account on the Calculation Date immediately
preceding such Payment Date.
(ii) Analysis of Expense Account Activity
Balance on Preceding Calculation Date; .....................
Net Transfer to the Expense Account during the period
between the prior Calculation Date and the relevant
Calculation Date ...........................................
Payments during period between prior Calculation Date and
the relevant Calculation Date;
(1) Payments on prior Payment Date..........................
(2) Other payments..........................................
Balance on relevant Calculation Date........................
(iii) Analysis of Collection Account Activity
Balance on Preceding Calculation Date.......................
-- Required Expense Amount (including on preceding Payment
Date).....................................................
-- Net Transfer to Lessee Funded Accounts during period.....
-- Collections during period................................
-- Transfer from the Aircraft Purchase Account..............
-- Drawings under credit or liquidity enhancement
facilities................................................
-- Aggregate Note Payments..................................
-- Swap Payments............................................
-- Repayments of drawings under credit or liquidity
enhancement facilities....................................
Balance on relevant Calculation Date (separately stating the
Liquidity Reserve Amount)...................................
Analysis of current Payment Date distributions..............
(iv) Payments on the Notes
(a) Floating Rate Notes (by class and, if applicable,
subclass)...............................................
-- Applicable LIBOR for the current Interest Accrual
Period....................................................
-- Applicable Margin for the current Interest Accrual
Period....................................................
-- Applicable Interest Rate for the current Interest Accrual
Period....................................................
-- Interest Amount Payable..................................
-- Step-Up Interest.........................................
-- Opening Outstanding Principal Balance....................
-- Minimum Principal Payment Amount.........................
-- Scheduled Principal Payment Amount.......................
-- Supplemental Principal Payment Amount....................
-- Redemption Amount........................................
-- amount allocable to principal............................
-- amount allocable to premium..............................
-- Closing Outstanding Principal Balance....................
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(b) Fixed Rate Notes (by class and, if applicable, subclass)
Applicable Interest Rate....................................
Interest Amount Payable.....................................
Opening Outstanding Principal Balance.......................
Minimum Principal Payment Amount............................
Scheduled Principal Payment Amount..........................
Redemption Amount
-- amount allocable to principal............................
-- amount allocable to premium..............................
Closing Outstanding Principal Balance.......................
(v) Floating Rate Note information for next Interest Accrual
Period (by subclass)
Applicable LIBOR............................................
Applicable Margin...........................................
Applicable Interest Rate....................................
(vi) Payments per $100,000 Initial Outstanding Principal Balance
of Notes (by subclass)
Opening Outstanding Principal Balance.......................
Total Principal Payments....................................
Closing Outstanding Principal Balance.......................
Total Interest..............................................
Total Premium...............................................
Following effectiveness of the Registration Statement of which this
Prospectus constitutes a part, such Monthly Reports are expected to be filed by
MSAF with the Commission in a Report on Form 8-K and the Quarterly Reports
accompanying the Monthly Reports for each April 15, July 15 and October 15 are
expected to be filed with the Commission in a Report on Form 10-Q. Following
effectiveness of the Registration Statement of which this Prospectus constitutes
a part, the Annual Report accompanying the Monthly Report for each February 15
is expected to be filed with the Commission in a Report on Form 10-K. The
financial data relating to annual Collection Account activity contained in
Annual Reports will be audited by Deloitte & Touche LLP.
After the end of each calendar year, the Trustee will furnish to each
person who at any time during such calendar year was a holder of any subclass of
Notes a statement containing the sum of the amounts determined pursuant to
clause (iv) above with respect to such subclass for such calendar year or, in
the event such person was a holder of record of any subclass of Notes during a
portion of such calendar year, for the applicable portion of such calendar year,
and such other items as are readily available to such Trustee and which a
Noteholder shall reasonably request as necessary for the purpose of such
Noteholder's preparation of its United States federal income tax returns. So
long as the Notes of any subclass are registered in the name of DTC or its
nominee, such report and such other items will be prepared on the basis of such
information supplied to the Indenture Trustee by DTC and the DTC Participants,
and will be delivered by the Trustee to such DTC Participants to be available
for forwarding by such DTC Participants to the applicable Noteholders in the
manner described above
The Trustee will publish or will cause to be published following each
Payment Date and other date specified above in a daily newspaper in Luxembourg
(expected to be the Luxemburger Wort) a notice to the effect that the
information set forth above will be available for review at the main office of
the Listing Agent for the Notes in Luxembourg City, Luxembourg. Notices to
Noteholders in respect of the Notes will be given by publication in a daily
newspaper in Luxembourg, which is expected to be the Luxemburger Wort. The
Luxembourg Stock Exchange will receive notice promptly following each
distribution date. In addition, the Trustee intends to provide such information
to Bloomberg Financial Markets promptly following each Payment Date for
publication on the BLOOMBERG.
At such time, if any, as the Notes of any subclass are issued in the form
of Definitive Notes, the Trustee will prepare and deliver the information
described above to each holder of record of a Definitive Note of such subclass
as the name and period of beneficial ownership of such holder of record of a
Definitive Note of such subclass appears on the records of the Trustee. The
Trustee maintains the records concerning the holders of such Notes.
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BOOK-ENTRY REGISTRATION, GLOBAL CLEARANCE AND SETTLEMENT
BOOK-ENTRY REGISTRATION
Investors will hold their Notes through The Depository Trust Company
("DTC") (in the United States) or Cedel Bank, societe anonyme ("CEDEL BANK") or
Morgan Guaranty Trust Company of New York, Brussels Office, as operator of the
Euroclear System ("EUROCLEAR") (in Europe) if they are participants in such
systems, or indirectly through organizations which are participants in such
systems. Except as set forth below, the Notes will be registered in the name of
Cede as the nominee for DTC. Investors will be entitled to receive a physical
certificate representing such person's interest therein only in the limited
circumstances described herein. Unless and until Definitive Notes are issued,
all references herein to actions by Noteholders will refer to actions taken by
DTC upon instructions from participants whose securities are held by DTC (the
"DTC PARTICIPANTS"), and all references herein to distributions, notices,
reports and statements to Noteholders will refer to distributions, notices,
reports and statements, respectively, to DTC or Cede, as the registered holder
of the Notes, or to DTC Participants for distribution to Noteholders in
accordance with DTC procedures.
Cedel Bank and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in the names of Cedel Bank
and Morgan Guaranty Trust Company of New York, Brussels office, on the books of
their respective Depositaries which, in turn, will hold such positions in
customers' securities accounts in the Depositaries' names on the books of DTC.
Citibank, N.A. will act as depositary for Cedel Bank and Morgan Guaranty Trust
Company of New York will act as depositary for Euroclear (in such capacities,
the "DEPOSITARIES").
Transfers between DTC Participants will occur in the ordinary way in
accordance with DTC rules. Transfers between participating organizations whose
securities are held by Cedel Bank (the "CEDEL PARTICIPANTS") and participants in
Euroclear (the "EUROCLEAR PARTICIPANTS") will occur in the ordinary way in
accordance with the applicable rules and operating procedures of Cedel Bank and
Euroclear.
Cross-market transfers between persons holding directly or indirectly
through DTC Participants, on the one hand, and directly or indirectly through
Cedel Participants or Euroclear Participants, on the other, will be effected by
DTC in accordance with DTC rules on behalf of Cedel Bank or Euroclear, as the
case may be, by its respective Depositary. However, such cross-market
transactions will require delivery of instructions to Cedel Bank or Euroclear,
as the case may be, by the counterparty in such system in accordance with its
rules and procedures and within its established deadlines. If the transaction
meets its settlement requirements, Cedel Bank or Euroclear, as the case may be,
will deliver instructions to its respective Depositary to take action to effect
final settlement on its behalf by delivering or receiving securities in DTC, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to DTC. Cedel Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of beneficial interests in the
Notes received in Cedel Bank or Euroclear as a result of a transaction with a
DTC Participant will be made during the securities settlement processing day
dated the Business Day following the DTC settlement date. Such credits or any
transactions in such Notes settled during such processing will be reported to
the relevant Cedel Participant or Euroclear Participant on such Business Day.
Cash received in Cedel Bank or Euroclear as a result of sales of beneficial
interests in the Global Notes by or through a Cedel Participant or Euroclear
Participant to a DTC Participant will be received with value on the DTC
settlement date but will be available in the relevant Cedel Bank or Euroclear
cash account only as of the Business Day following settlement in DTC.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities for DTC Participants and to
facilitate the clearance and settlement of securities transactions between DTC
Participants through electronic book-entry changes in accounts of DTC
Participants, thereby eliminating the need for physical movement of
certificates. DTC Participants include securities brokers and dealers (including
the Initial Purchasers), banks, trust companies and clearing corporations and
may in the future include certain other organizations. Indirect access to the
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DTC system also is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a DTC
Participant either directly or indirectly ("INDIRECT PARTICIPANTS").
Investors who are not DTC Participants but desire to purchase, sell or
otherwise transfer ownership of, or other interests in, beneficial interests in
the Notes may do so only through DTC Participants. Indirect Participants are
required to effect transfers through a DTC Participant. Payments of interest,
principal, and premium, if any, in respect of the Notes will be made to DTC and
are the responsibility of MSAF. Noteholders will receive all distributions of
interest, principal and premium, if any, in respect of the Notes from the
Trustee or a paying agent through DTC Participants and Indirect Participants.
Disbursement of such payments to DTC Participants will be the responsibility of
DTC and disbursement of such payments to the Noteholders will be the
responsibility of DTC Participants and Indirect Participants. DTC's practice is
to credit DTC Participants' accounts on the payment date in accordance with
their respective holdings shown on DTC's records unless DTC has reason to
believe that it will not receive payment on such payment date. Payments by DTC
Participants to Noteholders will be governed by standing instructions and
customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name," and will be the
responsibility of such DTC Participant. So long as the Notes are registered in
the name of Cede & Co., the only "Noteholder" will be Cede & Co., as nominee for
DTC and such nominee will be considered the sole owner or holder of the Notes
for all purposes under the Indenture and the Notes. While so registered,
Noteholders will be permitted to exercise the rights of Noteholders only
indirectly through DTC and DTC Participants.
Under the rules, regulations and procedures governing DTC and its
operations (the "RULES"), DTC is required to make book-entry transfers of the
Notes among the DTC Participants on whose behalf it acts with respect to the
Notes and to receive and transmit distributions of interest, principal and
premium, if any, in respect of the Notes. DTC Participants and Indirect
Participants similarly are required to make book-entry transfers and receive and
transmit such payments on behalf of their respective Notes. The Rules provide a
mechanism by which Noteholders will receive payments and will be able to
transfer their interests.
DTC has advised MSAF that it will take any action permitted to be taken by
a Noteholder in respect of each subclass of Notes under the Indenture only at
the direction of one or more DTC Participants to whose accounts that subclass of
Notes is credited. Additionally, DTC has advised MSAF that it will take such
actions with respect to any percentage of the outstanding principal amount of
any subclass of Notes only at the direction of and on behalf of the DTC
Participants whose customers own such outstanding principal amount. DTC may take
conflicting actions with respect to different subclasses of Notes to the extent
that such actions are taken on behalf of DTC Participants whose holdings include
such different subclasses of Notes.
Distributions with respect to Notes held beneficially through Cedel Bank
will be credited to cash accounts of Cedel Participants in accordance with Cedel
Bank's rules and procedures, to the extent received by its Depositary. Cedel
Bank will take any other action permitted to be taken by a Noteholder under the
Indenture on behalf of a Cedel Participant only in accordance with its rules and
procedures and subject to its Depositary's ability to effect such actions on its
behalf through DTC.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "TERMS AND CONDITIONS"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear and receipts of payments with respect to securities in
Euroclear. All securities of a particular subclass in Euroclear are held on a
fungible basis without attribution of specific certificates to specific
securities clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of Euroclear Participants, and has no record of or
relationship with persons holding through Euroclear Participants.
Distributions with respect to Notes beneficially held through Euroclear
will be credited to the cash accounts of Euroclear Participants in accordance
with the Terms and Conditions, to the extent received by its Depositary. The
Euroclear Operator will take any other action permitted to be taken by a
Noteholder under
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the Indenture on behalf of a Euroclear Participant only in accordance with the
Terms and Conditions and subject to its Depositary's ability to effect such
actions on its behalf through DTC.
Although DTC, Cedel Bank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Notes among participants of DTC,
Cedel Bank and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
DEFINITIVE NOTES
The Notes of any subclass may be issued in fully registered, certificated
form ("DEFINITIVE NOTES") to individual Noteholders of that subclass or their
nominees only if (i) MSAF advises the Trustee in writing that DTC is no longer
willing or able to properly discharge its responsibilities as depositary with
respect to the Notes and the Trustee or MSAF is unable to appoint a qualified
successor within 90 days of such notice, (ii) MSAF, at its option, elects to
terminate the book-entry system through DTC or (iii) after the occurrence of an
Event of Default with respect to any class of Notes, Noteholders of a subclass
within such class representing an aggregate of not less than 51% of the
aggregate outstanding principal amount of Notes of such subclass advise MSAF,
the Trustee and DTC through DTC Participants in writing that the continuation of
a book-entry system through DTC (or a successor thereto) is no longer in such
Noteholders' best interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Trustee will be required to notify all Noteholders of each
affected subclass through DTC of the availability of Definitive Notes of such
subclass. Upon surrender by DTC of the Global Notes of that subclass and receipt
of instructions for registration, the Trustee will reissue the Notes of that
subclass as Definitive Notes to Noteholders of that subclass.
Distributions of principal of, and interest and premiums, if any, on any
Definitive Notes will thereafter be made by the Trustee or a paying agent in
accordance with the procedures set forth in the Indenture directly to holders of
Definitive Notes in whose names the Definitive Notes were registered at the
close of business on the Record Date. Such distributions will be made by check
mailed to the address of such holder as it appears on the register maintained by
the registrar. The final payment on any such Definitive Notes, however, will be
made only upon presentation and surrender of such Definitive Notes at the office
or agency specified in the notice of final distribution to Noteholders.
Definitive Notes will be freely transferable and exchangeable for
Definitive Notes of the same subclass at the office of the Trustee or the
offices of the co-registrar in Luxembourg upon compliance with the requirements
set forth in the Indenture. No service charge will be imposed for any
registration of transfer or exchange, but payment of a sum sufficient to cover
any tax or other governmental charge may be required.
A Note that is mutilated, destroyed, lost or stolen may be exchanged or
replaced, as the case may be, at the offices of the Trustee or of the
co-registrar in Luxembourg upon presentation of the Note or satisfactory
evidence of destruction, loss or theft thereof to the Trustee or such
co-registrar. An indemnity satisfactory to the Trustee or such co-registrar may
be required at the expense of the Noteholder before a replacement Note will be
issued. The Noteholder will be required to pay any tax or other governmental
charge imposed in connection with such exchange or replacement and any other
expenses (including the fees and expenses of the Trustee and co-registrar)
connected therewith.
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CUSIP, ISIN AND COMMON CODE NUMBERS
The Notes have been accepted for clearance through Euroclear and Cedel
Bank. The CUSIP numbers, International Securities Identification Numbers
("ISIN") and the Common Code Numbers ("CCN") are set forth in the table below.
SUBCLASS CUSIP ISIN CCN
- -------- ------------ ------------ ---------
Subclass A-1................................. 61745WAL5 US61745WAL54 009188126
Subclass A-2................................. 61745WAM3 US61745WAM38 009188363
Subclass B-1................................. 61745WAN1 US61745WAN11 009188380
Subclass C-1................................. 61745WAP6 US61745WAP68 009188436
Subclass D-1................................. 61745WAQ4 US61745WAQ42 009188452
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TAXATION
U.S. FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Davis Polk & Wardwell, the following discussion sets
forth the material United States federal tax consequences resulting from the
purchase, ownership and disposition of Notes to the U.S. Holders and Non-U.S.
Holders described herein. It does not purport to consider all the possible tax
consequences of the purchase, ownership or disposition of the Notes, and it is
not intended to reflect the individual tax position of any holder. It deals only
with Notes held as capital assets. Except as expressly indicated, it is
addressed only to initial holders that purchased Notes at their issue price (as
defined below) in the offering (the "OFFERING") and does not deal with holders
with a special tax status or special tax situation, such as financial
institutions or dealers in securities or currencies, Notes held as a hedge
against currency risks or as part of a straddle with other investments or as
part of a "synthetic security" or other integrated investment (including a
"conversion transaction") consisting of a Note and one or more other
investments, or situations in which the functional currency of the Noteholder is
not the U.S. dollar. Except to the extent discussed below, this discussion is
not applicable to Non-U.S. Holders (as defined below). This discussion is based
upon the United States federal tax laws and regulations as now in effect and as
currently interpreted, and does not take into account possible changes in such
tax laws or such interpretations, all of which may be applied retroactively.
This discussion does not include any description of the tax laws of any state or
local governments within the United States, or of any foreign government, that
may be applicable to the Notes or holders thereof. Holders of Notes should
consult their own tax advisors concerning the application of the United States
federal tax laws to their particular situations as well as any consequences
arising under the laws of any other taxing jurisdiction.
For purposes of the discussion below, (i) "U.S. HOLDER" means a beneficial
owner of a Note that is for United States federal income tax purposes a citizen
or resident of the United States, a corporation, partnership or certain other
entities created or organized in or under the laws of the United States, or any
political subdivision thereof, or an estate or trust the income of which is
subject to United States federal income taxation regardless of its source and
(ii) "NON-U.S. HOLDER" means a person other than a U.S. Holder. The "issue
price" of a Note is the first price to the public (not including bond houses,
brokers or similar persons or organizations acting in the capacity of
underwriters, placement agents or wholesalers) at which a substantial amount of
Notes was sold for money.
TAXATION OF U.S. HOLDERS
Payments of interest on a Note generally will be includible in income by a
U.S. Holder as ordinary income at the time such payments are accrued or received
in accordance with the U.S. Holder's regular method of accounting for U.S.
federal income tax purposes.
Except as noted below, upon the sale, exchange or retirement of a Note, a
U.S. Holder generally will recognize gain or loss equal to the difference
between the amount realized from such sale or exchange (exclusive of any portion
thereof reflecting accrued but unpaid interest accrued between interest payment
dates on the Notes, which will be includible in income in accordance with the
United States person's method of accounting as described above) and its tax
basis in the Note. A U.S. Holder's adjusted basis in a Note generally will equal
such U.S. Holder's purchase price for such Note, decreased by any principal
repayments. Any capital gain will generally be U.S. source gain. U.S. Holders
should consult their tax advisors regarding the United States federal income tax
treatment of capital gains (which may be taxed at lower rates than ordinary
income for certain taxpayers who are individuals) and losses (the deductibility
of which is subject to limitations).
An exchange of New Notes for Old Notes will not be treated as a taxable
exchange for U.S. federal income tax purposes. Accordingly, holders (including
holders that are not initial holders) who exchange their Old Notes for New Notes
will not recognize income, gain or loss for U.S. federal income tax purposes. A
U.S. Holder's tax basis in the New Notes will be equal to its adjusted basis in
the Old Notes and its holding period will include the period during which it
held the Old Notes.
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TAXATION OF NON-U.S. HOLDERS
Payments of interest (including original issue discount, if any), principal
and premium, if any, on the Notes to any Non-U.S. Holder will not be subject to
United States federal withholding tax, providing that, in the case of interest,
such person (i) does not own, actually or constructively, 10% or more of the
total combined voting power of all classes of stock entitled to vote in the
Morgan Stanley subsidiary that owns the Beneficial Interest, (ii) is not a
controlled foreign corporation related, directly or indirectly, to the issuer
through stock ownership and (iii) is not a bank receiving interest described in
Section 881(c)(3)(A) of the Code, and provided that the statement requirement
described in the next sentence has been fulfilled with respect to the beneficial
owner. Sections 871(h) and 881(c) of the Code require that, in order to obtain
the exemption from withholding tax described in the previous sentence, either
the beneficial owner of the Note, or a securities clearing organization, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business (a "FINANCIAL INSTITUTION") and that is holding
the Note on behalf of such beneficial owner, file a statement with the
withholding agent to the effect that the beneficial owner of the Note is not a
United States person. Under temporary United States Treasury Regulations which
apply to both stated interest and sale or exchange proceeds if either is paid
with respect to a Note on or before December 31, 1999, such requirement will be
fulfilled if (i) the beneficial owner of a Note certifies on Internal Revenue
Service ("IRS") Form W-8, under penalties of perjury, that it is not a United
States person and provides its name and address and (ii) any Financial
Institution holding the Note on behalf of the beneficial owner files a statement
with the withholding agent to the effect that it has received such a statement
from the Noteholder (and furnishes the withholding agent with a copy thereof).
Recently issued final Treasury Regulations (the "FINAL REGULATIONS"), which
apply to interest (including original issue discount) and sale or exchange
proceeds paid with respect to a Note after December 31, 1999, also provide that
the requirement of Section 871(h) and 881(c) generally will be fulfilled if
beneficial owners (including partners of certain foreign partnerships), as well
as certain foreign partnerships, meet the two conditions set forth in the
preceding sentence. However, a beneficial owner that is a foreign estate or
trust (or fiduciary thereof), a foreign partnership that has entered into a
withholding agreement with the IRS, or a Non-U.S. Holder holding a Note through
its United States branch will be required to provide its "taxpayer
identification number" in addition to its name and address on Form W-8. Foreign
partnerships and their partners should consult their tax advisors regarding
possible additional reporting requirements.
Notwithstanding the foregoing, if interest or other income received with
respect to the Note is effectively connected with a United States trade or
business conducted by a Non-U.S. Holder, such Noteholder, although exempt from
the withholding tax described in the preceding paragraph, may be subject to
United States federal income tax on such interest in the same manner as if it
were a United States person. In addition, if such Noteholder is a corporation,
it may be subject to a branch profits tax equal to 30% (or a lower treaty rate)
of its effectively connected earnings and profits for the taxable year, subject
to certain adjustments.
A Non-U.S. Holder will not be subject to United States federal income tax
on gain realized on the sale, exchange or other disposition of a Note, unless
(i) such Noteholder is an individual who is present in the United States for 183
days or more in the taxable year of disposition, and either (a) such individual
has a "tax home" (as defined in code Section 911(d)(3)) in the United States
(unless such gain is attributable to a fixed place of business in a foreign
country maintained by such individual and has been subject to foreign tax of at
least 10%) or (b) the gain is attributable to an office or other fixed place of
business maintained by such individual in the United States or (ii) such gain is
effectively connected with the conduct by such Noteholder of a trade or business
in the United States.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Trustee will be required to report annually to the IRS, and to each
Noteholder of record, certain information, including the Noteholder's name,
address and taxpayer identification number (either the Noteholder's Social
Security number or its employer identification number, as the case may be), the
aggregate amount of principal and interest paid and the amount of tax withheld,
if any. This obligation, however, does not apply with respect to certain U.S.
Holders, including corporations, tax-exempt organizations, qualified pension and
profit-sharing trusts and individual retirement accounts.
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In the event a U.S. Holder subject to the reporting requirements described
above fails to supply its correct taxpayer identification number in the manner
required by applicable law or underreports its tax liability, MSAF, its agents
or paying agents may be required to "backup" withhold a tax equal to 31% of each
payment of interest and principal on the Notes. This backup withholding is not
an additional tax and may be credited against the Noteholder's United States
federal income tax liability, provided that the required information is
furnished to the IRS.
Under current Treasury regulations, information reporting and backup
withholding will not apply to payments made by MSAF or any agent thereof to a
Noteholder that is a Non-U.S. Holder if the certifications required by Section
871(h) and 881(c) of the Code (described above) are received, provided that MSAF
or such agent does not have actual knowledge that the payee is a United States
person.
The Final Regulations modify the backup withholding and information
reporting procedures in certain respects for payments made after December 31,
1999. Holders are urged to consult their tax advisors regarding the application
of the backup withholding and information reporting rules.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. MSAF has agreed that, starting on the Expiration Date and
ending on the close of business on the 180th day following the Expiration Date,
it will make this Prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale.
MSAF will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is "underwriter"
within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, MSAF will promptly send
additional copies of this Prospectus and any amendment or supplement to this
Prospectus to any broker-dealer that requests such documents in the letter of
Transmittal. MSAF has agreed to pay all expenses incident to the Exchange Offer
(including the expenses of one counsel for the holders of the Old Notes) other
than commissions or concessions of any brokers or dealers and will indemnify the
holders of the Old Notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act.
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ERISA CONSIDERATIONS
ERISA and the Code impose certain requirements on employee benefit plans
and certain other retirement plans and arrangements, including individual
retirement accounts and annuities, that are subject to ERISA and/or the Code or
any entity which may be deemed to hold the assets of any such plan (all of which
are hereinafter referred to as "PLANS") and or persons who are fiduciaries with
respect to such Plans. A person who exercises discretionary authority or control
with respect to the management or assets of a Plan will be considered a
fiduciary of the Plan under ERISA. In accordance with ERISA's general fiduciary
standards, before investing in a Note, a Plan fiduciary should determine whether
such an investment is permitted under the governing Plan instruments and is
appropriate for the Plan in view of its overall investment policy and the
composition and diversification of its portfolio, taking into account the
limited liquidity of the Notes. Other provisions of ERISA and the Code prohibit
certain transactions ("PROHIBITED TRANSACTIONS") involving the assets of a Plan
and persons who have certain specified relationships to the Plan ("PARTIES IN
INTEREST" within the meaning of ERISA or "DISQUALIFIED PERSONS" within the
meaning of the Code). By virtue of its relationship with Morgan Stanley, MSAF
may be a party in interest or a disqualified person with respect to a Plan
purchasing the Notes. Any Plan that proposes to purchase Notes must determine
that its purchase of Notes will not give rise to a direct or indirect Prohibited
Transaction.
Certain statutory or administrative exemptions from the Prohibited
Transaction rules under ERISA and the Code may be available to a Plan which is
purchasing the Notes. Included among these exemptions are: Prohibited
Transaction Class Exemption ("PTCE") 84-14 (regarding transactions directed by
an independent qualified professional asset manager), PTCE 91-38 (regarding
investments by bank collective investment funds), PTCE 90-1 (regarding
investments by insurance company pooled separate accounts), PTCE 95-60
(regarding investments by insurance company general accounts) or PTCE 96-23
(regarding transactions directed by a qualified in-house asset manager).
Governmental plans and certain church plans (as defined under ERISA) are
not subject to the Prohibited Transaction rules. Such plans may, however, be
subject to federal, state or local laws or regulations which may affect their
investment in the Notes. Any fiduciary of such a governmental or church plan
considering a purchase of the Notes must determine the need for, and the
availability, if necessary, of any exemptive relief under any such laws or
regulations.
The foregoing discussion is general in nature and is not intended to be all
inclusive. Any fiduciary of a Plan, governmental plan or church plan considering
the purchase and holding of the Notes should consult with its legal advisors
regarding the consequences of such purchase and holding. By its purchase and
acceptance of a Note, each such purchaser will be deemed to have represented and
warranted that either (i) no Plan assets have been used to purchase such Notes
or (ii) one or more Prohibited Transaction statutory or administrative
exemptions applies such that the use of such Plan assets to purchase and hold
such Notes will not constitute a non-exempt Prohibited Transaction.
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LEGAL MATTERS
Certain legal matters relating to the New Notes offered hereby will be
passed upon for MSAF by Davis Polk & Wardwell, New York, New York, counsel for
MSAF Group and by Richards, Layton & Finger, Wilmington, Delaware, special
Delaware counsel for MSAF Group.
In accordance with the rules of the Luxembourg Stock Exchange, MSAF states
that there has been no material adverse change in the financial condition of
MSAF since the date of its formation on October 30, 1997.
EXPERTS
The financial statements as of November 30, 1997 and for the period ended
November 30, 1997 included in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein,
and have been so included in reliance upon the report of such firm given their
authority as experts in accounting and auditing.
Valuations of the Aircraft have been made by three expert aircraft
appraisers: Aircraft Information Services, Inc., BK Associates, Inc. and
Airclaims Limited. These valuations are discussed in detail elsewhere in this
Prospectus and are included herein in reliance upon the authority of such firms
as experts in giving such appraisals.
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MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report................................ F-2
Consolidated Balance Sheet.................................. F-3
Consolidated Statement of Income............................ F-4
Consolidated Statement of Cash Flows........................ F-5
Consolidated Statement of Changes in Beneficial Interest.... F-6
Notes to the Consolidated Financial Statements.............. F-7
Interim Condensed Consolidated Financial Statements
(Unaudited)............................................... F-12
Notes to the Interim Condensed Consolidated Financial
Statements (Unaudited).................................... F-16
F-1
143
INDEPENDENT AUDITORS' REPORT
To the Trustees of
Morgan Stanley Aircraft Finance and Subsidiaries
We have audited the accompanying consolidated balance sheet of Morgan Stanley
Aircraft Finance and Subsidiaries (the "Group") as of November 30, 1997, and the
related consolidated statements of income, changes in beneficial interest, and
cash flows for the period from October 30, 1997 (date of formation) to November
30, 1997. These consolidated financial statements are the responsibility of the
Group's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Group at November 30, 1997, and
the results of its operations and its cash flows for the period from October 30,
1997 to November 30, 1997 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
New York, New York
September 25, 1998
F-2
144
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
NOVEMBER 30,
1997
------------
ASSETS
Receivables:
Lease income.............................................. $ 137
Aircraft under operating leases, net........................ 45,937
Investment in capital lease, net............................ 25,000
--------
Total Assets................................................ $ 71,074
========
LIABILITIES AND BENEFICIAL INTERESTHOLDER'S EQUITY
Payables:
To Morgan Stanley Financing Inc........................... $ 66,369
--------
Commitments and contingencies
Beneficial Interestholder's equity:
Beneficial Interest....................................... 1
Retained Earnings......................................... 4,704
--------
Total Beneficial Interestholder's equity.................. 4,705
--------
Total Liabilities and Beneficial Interestholder's equity.... $ 71,074
========
See Notes to Consolidated Financial Statements
F-3
145
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
PERIOD FROM
OCTOBER 30, 1997
(DATE OF FORMATION)
TO NOVEMBER 30, 1997
--------------------
Revenues:
Lease income.............................................. $ 4,747
--------
Total revenues............................................ 4,747
--------
Expenses:
Depreciation expense...................................... 43
--------
Total expenses............................................ 43
--------
Net income.................................................. $ 4,704
========
See Notes to Consolidated Financial Statements
F-4
146
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
PERIOD FROM
OCTOBER 30, 1997
(DATE OF FORMATION)
TO NOVEMBER 30, 1997
--------------------
Cash flows from operating activities
Net income................................................ $ 4,704
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation expense -- equipment under operating
leases................................................. 43
Gain on capital lease..................................... (4,610)
Changes in assets and liabilities:
Receivables:
Lease income......................................... (137)
--------
Net cash provided by operating activities................... --
--------
Cash flows from investing activities
Purchase of aircraft...................................... (66,370)
--------
Net cash used for investing activities...................... (66,370)
--------
Cash flows from financing activities
Issuance of beneficial interest to Morgan Stanley
Financing Inc.......................................... 1
Borrowings from Morgan Stanley Financing Inc.............. 66,369
--------
Net cash provided by financing activities................... 66,370
--------
Net increase in cash and cash equivalents................... --
Cash and cash equivalents at beginning of period............ --
--------
Cash and cash equivalents at end of period.................. $ --
========
See Notes to Consolidated Financial Statements
F-5
147
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN BENEFICIAL INTEREST
(DOLLARS IN THOUSANDS)
PERIOD FROM OCTOBER 30, 1997 (DATE OF FORMATION) THROUGH NOVEMBER 30, 1997
TOTAL
BENEFICIAL RETAINED BENEFICIAL
INTEREST EARNINGS INTEREST
---------- -------- ----------
Issuance of beneficial interest............................. $ 1 $ -- $ 1
Net income.................................................. -- 4,704 4,704
------ ------ ------
Balance at November 30, 1997................................ $ 1 $4,704 $4,705
====== ====== ======
See Notes to Consolidated Financial Statements
F-6
148
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
Morgan Stanley Aircraft Finance ("MSAF") is a special purpose business
trust that was formed on October 30, 1997 under the laws of Delaware. MSAF and
its subsidiaries ("MSAF Group") were formed to conduct certain limited
activities, including acquiring, financing, leasing, selling and maintaining
commercial aircraft. All of the beneficial interest of MSAF Group is owned by
Morgan Stanley Financing, Inc. ("MSF"), a wholly-owned subsidiary of Morgan
Stanley Dean Witter & Co. ("MSDW"). MSAF's obligations, including its financial
debt obligations, are not obligations of, or guaranteed by, MSDW, MSF or any
person other than MSAF.
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles, which require management to make
estimates and assumptions that affect the financial statements and related
disclosures. Management believes that the estimates utilized in the preparation
of the consolidated financial statements are prudent and reasonable. Actual
results could differ materially from these estimates.
All material intercompany transactions have been eliminated.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments
with a maturity of three months or less.
Revenue Recognition
Revenue from aircraft on operating leases is recognised on a straight-line
basis.
Certain lease contracts may require the lessee to make separate payments
for flight hours flown and revenue sector passenger miles flown. In such
instances, MSAF Group recognizes rental revenues as they are earned in
accordance with the terms of the lease contract.
Aircraft
Aircraft, including engines, are stated at cost less accumulated
depreciation. Cost is comprised of the cash purchase price paid plus any
maintenance liabilities that MSAF Group assumed from the seller at the date of
purchase. Depreciation is calculated on a straight line basis. The estimates of
useful lives and residual values are reviewed periodically. The current
estimates for residual values are generally 10% of cost and useful lives are
generally 25 years from the date of manufacture.
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" ("SFAS 121"), the recognition of an impairment loss for an asset
held for use is required when the estimate of undiscounted future cash flows
expected to be generated by the asset is less than its carrying amount.
Measurement of impairment loss is to be recognised based on the fair value of
the asset. Fair value reflects the underlying economic value of the aircraft,
including engines, in normal market conditions (where supply and demand are in
reasonable equilibrium) and assumes adequate time for a sale and a willing buyer
and seller. Short term fluctuations in the market place are disregarded and it
is assumed that there is no necessity either to dispose of a significant number
of aircraft simultaneously or to dispose of aircraft quickly. The fair value of
the assets is based on independent valuations of the aircraft in the fleet and
estimates of discounted future cash flows. SFAS 121 also requires that
long-lived assets to be disposed of be reported at the lower of the carrying
amount or fair value less estimated disposal costs. At November 30, 1997, no
impairment losses had been recognized.
F-7
149
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Provision for Maintenance
In most lease contracts the lessee has the obligation for maintenance costs
on airframes and engines. In many lease contracts the lessee makes a full or
partial prepayment to the lessor, calculated at an hourly rate, which is used to
reimburse the lessee for significant maintenance charges, including major
airframe and engine overhauls. Such prepayments are generally non-refundable.
MSAF Group records the cash prepayments made by lessees for maintenance as a
component of the provision for maintenance liability account which appears on
the consolidated balance sheet. When the lessee incurs a maintenance
expenditure, MSAF Group must return a corresponding amount of the prepayment to
the lessee. At this time, MSAF Group will forward cash to the lessee, with a
corresponding decrease to the provision for maintenance liability account. MSAF
Group will only reimburse the lessee for the cost of maintenance expenditures to
the extent that sufficient prepayments have been made by the lessee. At the time
an aircraft is re-leased to a new lessee, an assessment is made of the expected
maintenance reserve requirements; any excess reserve is then released to lease
income.
MSAF Group also estimates the amount of maintenance expenditures for which
it will have primary responsibility. Such expenditures typically are required
when an aircraft must be prepared prior to the commencement of a new lease. MSAF
Group also makes estimates of the amounts that, in certain circumstances
(including lessees defaulting on payment obligations), could result in MSAF
Group incurring maintenance costs which are the lessee's primary responsibility.
When MSAF Group determines that it will be primarily responsible for certain
maintenance expenditures, the amount of such expenditure is charged directly to
earnings and is included as a component of the provision for maintenance
liability account appearing on the consolidated balance sheet.
Allowance for Doubtful Debts
Allowances are made for doubtful debts where it is considered that there is
a significant risk of non-recovery. The assessment of risk of non-recovery is
primarily based on the extent to which amounts outstanding exceed the expected
value of security deposits held (if any), together with an assessment of the
financial strength and condition of a lessee and the economic conditions
existing in the lessee's operating environment. At November 30, 1997, no
allowances for doubtful debts were recorded.
Income Taxes
MSAF is a Delaware business trust treated as a branch of MSF for U.S.
Federal, State and local income tax purposes. As such, MSAF is not subject to
U.S. Federal, State and local income taxes.
Concentrations of Credit Risk
Credit risk with respect to operating lease receivables is generally
diversified due to the number of lessees comprising MSAF Group's customer base
and the different geographic areas in which they operate. At November 30, 1997
MSAF Group had leased aircraft to three lessees in two countries. The geographic
concentrations of the Company's leasing revenues is set forth in Note 6.
Many of MSAF Group's lessees are in a relatively weak financial position
because of the difficult economic conditions in the civil aviation industry as a
whole and because, in general, weakly capitalised airlines are more likely to
seek operating leases. The exposure of MSAF Group's aircraft to particular
countries and customers is managed partly through concentration limits and
through obtaining security from lessees by way of deposits. MSAF Group will
continue to manage its exposure to particular countries, regions and lessees
through concentration limits.
F-8
150
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- RELATED PARTY TRANSACTIONS
At November 30, 1997, MSAF Group had borrowings of approximately $66
million outstanding from MSF. MSAF Group used the proceeds from these borrowings
primarily to finance the acquisition of its aircraft portfolio. Subsequent to
November 30, 1997, MSAF Group borrowed additional funds from MSF in order to
finance the purchase of additional aircraft (see Note 7). The loan from MSF was
non-interest bearing. At the time of the issuance of the Notes (see Note 7) this
loan was automatically converted into a beneficial interest and a final payment
was made in the form of a distribution on such beneficial interest.
Under service agreements with MSAF Group, Cabot Aircraft Services Limited
and Morgan Stanley & Co. Incorporated, both wholly-owned subsidiaries of MSDW,
act as Administrative Agent and Financial Advisor, respectively. No fees were
paid to either Cabot Aircraft Services Limited or Morgan Stanley & Co.
Incorporated during the period from October 30, 1997 (date of formation) through
November 30, 1997.
MSAF Group's management is comprised of six trustees, as MSAF Group has no
employees or executive officers. Three of MSAF Group's six trustees and one
alternate trustee are employees of MSDW. MSAF Group's remaining three trustees
are unaffiliated with MSDW.
NOTE 4 -- AIRCRAFT
NOVEMBER 30, 1997
(DOLLARS IN THOUSANDS)
----------------------
Stage 3 Aircraft:
Cost........................................................ $ 45,980
Less Accumulated depreciation............................... (43)
--------
$ 45,937
========
Fleet Analysis:
On lease for a further period of:
Less than five years........................................ 1
More than five years........................................ 2
--------
Total aircraft in portfolio............................... 3
========
At November 30, 1997, there were no non-revenue earning aircraft in MSAF
Group's portfolio.
NOTE 5 -- INVESTMENT IN CAPITAL LEASE
One of MSAF Group's aircraft has been leased to a customer under a
sales-type capital lease. The components of MSAF Group's investment in this
lease are as follows:
NOVEMBER 30, 1997
(DOLLARS IN THOUSANDS)
----------------------
Minimum lease payments receivable........................... $31,542
Less: Unearned income....................................... (6,542)
-------
Net investment in capital lease............................. $25,000
=======
At November 30, 1997, minimum lease payments for each of the five
succeeding years are $4 million.
The Company recorded a gain of $4.6 million at the inception of this lease,
which represented the excess of the present value of the minimum lease payments
over the cost of the aircraft.
Unearned income is recognized over the term of the lease using the interest
method.
F-9
151
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- REVENUES
The distribution of revenues by geographic area is as follows (dollars in
thousands):
North America............................................... $ 137
Latin America............................................... 4,610
------
Total....................................................... $4,747
======
At November 30, 1997, MSAF Group had contracted to receive the following
minimum rentals under operating leases (dollars in thousands):
YEAR ENDING NOVEMBER 30,
- ------------------------
1998........................................................ $ 83
1999........................................................ 110
2000........................................................ 101
2001........................................................ 75
2002........................................................ 67
Thereafter.................................................. 70
NOTE 7 -- SUBSEQUENT EVENTS: ADDITIONAL AIRCRAFT PURCHASES AND SECURITIZATION
TRANSACTION
Subsequent to November 30, 1997, MSAF Group acquired 29 additional aircraft
and one spare engine having an aggregate cost of $926 million. These purchases
were financed primarily through additional borrowings from MSF and from the net
proceeds from MSAF Group's private placement of securitized notes as discussed
below.
On March 3, 1998, MSAF Group completed an offering of $1,050 million of
securitized notes (the "Notes") on a basis exempt from registration under the
Securities Act of 1933, as amended. Simultaneous with the private placement, the
interest free loan provided by MSF was automatically converted into a beneficial
interest held by MSF. MSAF Group primarily utilized the proceeds from the Notes
to pay a beneficial interest distribution to MSF and to acquire an additional
aircraft. The Notes are not obligations of, or guaranteed by, MSDW or any of its
other subsidiaries, including MSF. The beneficial interest distribution paid to
MSF represented a final repayment of the interest free loan and rentals accrued
up to the date of the offering of $20.9 million.
The repayment terms of each subclass of Notes are such that certain
principal amounts are expected to be repaid based on certain assumptions (the
"Expected Final Payment Date") or refinanced through the issuance of new Notes,
but in any event are ultimately due for repayment on specified final maturity
dates (the "Final Maturity Date"). The Expected Final Payment Dates, Final
Maturity Dates and interest rates applicable to each subclass of the Notes are
listed below:
INITIAL PRINCIPAL
AMOUNT EXPECTED FINAL
SUBCLASS OF NOTE (IN THOUSANDS) INTEREST RATE PAYMENT DATE FINAL MATURITY DATE
- ---------------- ----------------- ------------- -------------- -------------------
Subclass A-1.............. $400,000 LIBOR+0.21% March 15, 2000 March 15, 2023
Subclass A-2.............. 340,000 LIBOR+0.35% Sept. 15, 2005 March 15, 2023
Subclass B-1.............. 100,000 LIBOR+0.65% March 15, 2013 March 15, 2023
Subclass C-1.............. 100,000 6.90% March 15, 2013 March 15, 2023
Subclass D-1.............. 110,000 8.70% March 14, 2014 March 15, 2023
F-10
152
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If the Subclass A-1 Notes are not repaid on or before the Expected Final
Payment Date for such subclass, such subclass of Notes will accrue interest
thereafter at a rate equal to the stated interest rate therefor, plus 0.50% per
annum ("Step-Up Interest").
MSAF Group is obligated to use its best efforts to consummate an exchange
offer (the "Exchange Offer") pursuant to which the Notes would be exchanged for
substantially similar securities issued pursuant to an effective registration
statement under the Securities Act of 1933. If the Exchange Offer is not
consummated or a shelf registration statement is not declared effective on or
prior to November 30, 1998, thereafter an additional incremental interest amount
will accrue on each subclass of Notes, at an annual rate of 0.50%. Such
additional incremental interest on the Notes will be payable until the date that
the Exchange Offer is consummated or until such time as MSAF Group causes a
shelf registration statement with respect to resales of the Notes to become
effective.
The dates on which principal repayments on the Notes will actually occur
will depend on the cash flows generated by the rental income from MSAF Group's
portfolio of aircraft. Amounts received by MSAF Group and available for
distribution are paid in accordance with the priorities specified in the Note
Indenture.
NOTE 8 -- COMMITMENTS
In accordance with the terms of a servicing agreement (the "Servicing
Agreement"), International Lease Finance Corporation ("ILFC") is performing
certain aircraft related activities with respect to MSAF Group's aircraft
portfolio. Such activities include marketing MSAF Group's aircraft for lease or
sale and monitoring lessee compliance with lease terms including terms relating
to payment, maintenance and insurance. In accordance with the Servicing
Agreement, fees payable to ILFC by MSAF Group are calculated as a percentage of
the lease rentals received, in addition to certain incentive-based fees.
The Servicing Agreement expires in 2023, although each party has the right
to terminate the Servicing Agreement under certain circumstances.
F-11
153
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
OCTOBER 31,
1998
-----------
(UNAUDITED)
ASSETS
Cash and cash equivalents................................... $ 38,122
Receivables:
Lease income, net......................................... 2,491
Investment income and other............................... 156
Aircraft under operating leases, net........................ 937,231
Investment in capital lease, net............................ 20,777
Underwriting and other issuance related costs, net of
amortisation.............................................. 17,145
----------
Total Assets................................................ $1,015,922
==========
LIABILITIES AND BENEFICIAL INTERESTHOLDER'S DEFICIT
Payables:
To Morgan Stanley Financing Inc........................... $ 1
Interest payable to Noteholders........................... 2,599
Deferred rental income...................................... 8,658
Provision for maintenance................................... 52,423
Other liabilities........................................... 15,671
Notes payable:
Class A-1................................................. 400,000
Class A-2................................................. 278,802
Class B-1................................................. 95,127
Class C-1................................................. 100,000
Class D-1................................................. 110,000
----------
1,063,281
----------
Commitments and contingencies
Beneficial Interestholder's Deficit:
Beneficial Interest....................................... 1
Deemed Distribution....................................... (15,305)
Accumulated Deficit....................................... (32,055)
----------
Total Beneficial Interestholder's Deficit................. (47,359)
----------
Total Liabilities and Beneficial Interestholder's Deficit... $1,015,922
==========
See Notes to Interim Condensed Consolidated Financial Statements (Unaudited)
F-12
154
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
ELEVEN MONTHS ENDED
OCTOBER 31, 1998
-------------------
(UNAUDITED)
Revenues:
Lease income, net......................................... $109,142
Investment income on collection account................... 1,993
--------
Total revenues............................................ 111,135
--------
Expenses:
Interest expense.......................................... 44,948
Depreciation expense...................................... 34,756
Operating expenses:
Fees payable........................................... 8,483
Maintenance and other aircraft related costs........... 3,309
--------
Total expenses............................................ 91,496
--------
Net income.................................................. $ 19,639
========
See Notes to Interim Condensed Consolidated Financial Statements (Unaudited)
F-13
155
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
ELEVEN MONTHS ENDED
OCTOBER 31, 1998
-------------------
(UNAUDITED)
Cash flows from operating activities
Net income................................................ $ 19,639
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation expense--equipment under operating leases.... 34,756
Amortisation of underwriting and other issuance related
costs.................................................. 745
Changes in assets and liabilities:
Receivables:
Investment income and other.......................... (156)
Lease income......................................... (2,354)
Investment in capital lease............................ 4,224
Provision for maintenance.............................. 13,688
Interest payable to Noteholders........................ 2,599
Deferred rental income................................. 8,658
Other liabilities...................................... 366
-----------
Net cash provided by operating activities................... 82,165
-----------
Cash flows from investing activities
Purchase of aircraft...................................... (887,315)
-----------
Net cash used for investing activities...................... (887,315)
-----------
Cash flows from financing activities
Proceeds from Notes, net of underwriting costs............ 1,041,610
Proceeds from borrowings from Morgan Stanley Financing
Inc.................................................... 853,490
Beneficial Interest Distribution.......................... (976,257)
Repayments of Notes....................................... (66,071)
Other issuance related costs.............................. (9,500)
-----------
Net cash provided by financing activities................... 843,272
-----------
Net increase in cash and cash equivalents................... 38,122
Cash and cash equivalents at beginning of period............ --
-----------
Cash and cash equivalents at end of period.................. $ 38,122
===========
See Notes to Interim Condensed Consolidated Financial Statements (Unaudited)
F-14
156
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN BENEFICIAL
INTEREST/(DEFICIT)
(DOLLARS IN THOUSANDS)
RETAINED
EARNINGS TOTAL
BENEFICIAL DEEMED (ACCUMULATED BENEFICIAL INTEREST
INTEREST DISTRIBUTION DEFICIT) (DEFICIT)
---------- ------------ ------------ -------------------
(UNAUDITED)
Issuance of Beneficial Interest....... $ 1 $ -- $ -- $ 1
Net income............................ -- -- 4,704 4,704
-------- -------- -------- ---------
Balance at November 30, 1997.......... 1 -- 4,704 4,705
Net income............................ -- -- 19,639 19,639
Deemed Distribution................... -- (15,305) -- (15,305)
Borrowings from Morgan Stanley
Financing Inc. converted into
Beneficial Interest................. 919,859 -- -- 919,859
Payment of Beneficial Interest
Distribution to Morgan Stanley
Financing Inc....................... (919,859) -- (56,398) (976,257)
-------- -------- -------- ---------
Balance at October 31, 1998........... $ 1 (15,305) $(32,055) $ (47,359)
======== ======== ======== =========
See Notes to Interim Condensed Consolidated Financial Statements (Unaudited)
F-15
157
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
Morgan Stanley Aircraft Finance ("MSAF") is a special purpose business
trust that was formed on October 30, 1997 under the laws of Delaware. MSAF and
its subsidiaries ("MSAF Group") were formed to conduct certain limited
activities, including acquiring, financing, leasing, selling and maintaining
commercial aircraft. All of the beneficial interest of MSAF Group is owned by
Morgan Stanley Financing, Inc. ("MSF"), a wholly-owned subsidiary of Morgan
Stanley Dean Witter & Co. ("MSDW"). MSAF's obligations, including its financial
debt obligations, are not obligations of, or guaranteed by, MSDW, MSF or any
person other than MSAF.
The condensed consolidated financial statements are prepared in accordance
with generally accepted accounting principles, which require management to make
estimates and assumptions that affect the financial statements and related
disclosures. Management believes that the estimates utilized in the preparation
of the condensed consolidated financial statements are prudent and reasonable.
Actual results could differ materially from these estimates.
All material intercompany transactions have been eliminated.
The condensed consolidated financial statements should be read in
conjunction with MSAF Group's consolidated financial statements and notes
thereto as of and for the period ended November 30, 1997. The condensed
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of management, necessary
for the fair statement of the results for the interim period. The results of
operations for interim periods are not necessarily indicative of results for the
entire year.
NOTE 2 -- CONCENTRATIONS OF CREDIT RISK
Credit risk with respect to operating lease receivables is generally
diversified due to the number of lessees comprising MSAF Group's customer base
and the different geographic areas in which they operate. At October 31, 1998
MSAF Group had leased aircraft to 29 lessees in 19 countries.
Many of MSAF Group's lessees are in a relatively weak financial position
because of the difficult economic conditions in the civil aviation industry as a
whole and because, in general, weakly capitalised airlines are more likely to
seek operating leases. In addition, at October 31, 1998, 15 of MSAF Group's
aircraft are being leased to lessees domiciled in certain emerging market
nations, including those located in Eastern Europe, the Middle East, Latin
America and Asia. Emerging market economies have recently been affected by
severe economic and financial difficulties. The exposure of MSAF Group's
aircraft to particular countries and customers is managed partly through
concentration limits and through obtaining security from lessees by way of
deposits. MSAF Group will continue to manage its exposure to particular
countries, regions and lessees through concentration limits. At October 31,
1998, MSAF Group had recorded allowances for doubtful debts against lease income
receivables for four lessees.
F-16
158
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --
(CONTINUED)
NOTE 3 -- AIRCRAFT
OCTOBER 31, 1998
(DOLLARS IN THOUSANDS)
----------------------
Stage 3 Aircraft and one spare engine:
Cost........................................................ $972,030
Less Accumulated depreciation............................... (34,799)
--------
$937,231
========
Aircraft cost includes $38.7 million of maintenance
liabilities that MSAF Group assumed at the date of purchase.
Fleet Analysis:
On lease for a further period of:
More than five years........................................ 8
From one to five years...................................... 20
Less than one year.......................................... 5
--------
Total aircraft portfolio (including one spare engine)....... 33
========
At October 31, 1998, there were no non-revenue earning aircraft in MSAF
Group's portfolio.
NOTE 4 -- INVESTMENT IN CAPITAL LEASE
One of MSAF Group's aircraft has been leased to a customer under a
sales-type capital lease. The components of MSAF Group's investment in this
lease are as follows:
OCTOBER 31, 1998
(DOLLARS IN THOUSANDS)
----------------------
Minimum lease payments receivable........................... $25,642
Less: Unearned income....................................... (4,865)
-------
Net investment in capital lease............................. $20,777
=======
At October 31, 1998, minimum lease payments for each of the five succeeding
years are $4 million.
Unearned income is recognized over the term of the lease using the interest
method.
NOTE 5 -- NOTES PAYABLE
During the eleven month period ended October 31, 1998, MSAF Group acquired
29 aircraft and one spare engine having an aggregate cost of $926 million. MSAF
Group financed these purchases primarily through additional borrowings from MSF
and from the net proceeds from MSAF Group's private placement of securitized
notes as discussed below.
On March 3, 1998, MSAF Group completed an offering of $1,050 million of
securitized notes (the "Notes") on a basis exempt from registration under the
Securities Act of 1933, as amended. Simultaneous with the private placement, the
loan provided by MSF was automatically converted into a beneficial interest held
by MSF. MSAF Group primarily utilized the proceeds from the Notes to pay a
beneficial interest distribution to MSF and to acquire an additional aircraft.
With the exception of MSAF Group, the Notes are not obligations of, or
guaranteed by, MSDW or any of its subsidiaries, including MSF.
Underwriting and other issuance related costs of $17.9 million which were
incurred in connection with the offering are being amortised over the expected
life of the Notes, which is currently estimated to be 16 years.
F-17
159
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --
(CONTINUED)
The repayment terms of each subclass of Notes are such that certain
principal amounts are expected to be repaid based on certain assumptions (the
"Expected Final Payment Date") or refinanced through the issuance of new Notes,
but in any event are ultimately due for repayment on specified final maturity
dates (the "Final Maturity Date"). The Expected Final Payment Dates, Final
Maturity Dates and interest rates applicable to each subclass of the Notes are
listed below:
INITIAL
PRINCIPAL
AMOUNT EXPECTED FINAL FINAL MATURITY
SUBCLASS OF NOTE (IN THOUSANDS) INTEREST RATE PAYMENT DATE DATE
---------------- -------------- ------------- -------------- --------------
Subclass A-1............. 400,000 LIBOR+0.21% March 15, 2000 March 15, 2023
Subclass A-2............. 340,000 LIBOR+0.35% Sept. 15, 2005 March 15, 2023
Subclass B-1............. 100,000 LIBOR+0.65% March 15, 2013 March 15, 2023
Subclass C-1............. 100,000 6.90% March 15, 2013 March 15, 2023
Subclass D-1............. 110,000 8.70% March 14, 2014 March 15, 2023
If the Subclass A-1 Notes are not repaid on or before the Expected Final
Payment Date for such subclass, such subclass of Notes will accrue interest
thereafter at a rate equal to the stated interest rate therefor, plus 0.50% per
annum ("Step-Up Interest").
MSAF Group is obligated to use its best efforts to consummate an exchange
offer (the "Exchange Offer") pursuant to which the Notes would be exchanged for
substantially similar securities issued pursuant to an effective registration
statement under the Securities Act of 1933. If the Exchange Offer was not
consummated or a shelf registration statement was not declared effective on or
prior to November 30, 1998, thereafter an additional incremental interest amount
accrues on each subclass of Notes, at an annual rate of 0.50%. Such additional
incremental interest on the Notes has accrued since December 1, 1998 and will be
payable until the date that the Exchange Offer is consummated or until such time
as MSAF Group causes a shelf registration statement with respect to resales of
the Notes to become effective.
The dates on which principal repayments on the Notes will actually occur
will depend on the cash flows generated by the rental income from MSAF Group's
portfolio of aircraft. Amounts received by MSAF Group and available for
distribution are paid in accordance with the priorities specified in the Note
Indenture.
NOTE 6 -- LINES OF CREDIT
MSAF Group requires liquidity in order to finance many of its primary
business activities, including maintenance obligations, security deposit return
obligations, operating expenses and obligations under the Notes. MSAF Group's
primary sources of liquidity are cash bank deposits and lines of credit.
The Company's cash account (the "Collection Account") is primarily funded
through the receipt of rental payments from lessees.
In connection with the issuance of the Notes, the Company entered into two
credit agreements. Under a Custody and Loan Agreement (the "ILFC Facility")
between International Lease Finance Corporation ("ILFC") and MSAF Group, ILFC
will hold substantially all of the cash security deposits paid by lessees with
respect to MSAF Group's aircraft portfolio and will retain the interest earnings
on such security deposits. In addition, ILFC has agreed to extend loans to MSAF
Group in a maximum amount of $10 million plus the aggregate amount of cash
security deposits held by ILFC. Under a Loan Agreement (the "MSF Facility")
between MSF and MSAF Group, MSF has agreed to extend loans in a maximum amount
of $10 million.
As of October 31, 1998, the aggregate amount available under the ILFC
Facility and the MSF Facility was approximately $41.0 million.
F-18
160
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --
(CONTINUED)
NOTE 7 -- DERIVATIVE FINANCIAL INSTRUMENTS
The leasing revenues of MSAF Group will be generated primarily from Rental
Payments. Rental Payments are currently entirely fixed but may be either fixed
or floating with respect to Future Leases. In general, an interest rate exposure
arises to the extent that MSAF Group's fixed and floating interest obligations
in respect of the Notes do not correlate to the mix of fixed and floating rental
payments for different rental periods. This interest rate exposure can be
managed through the use of interest rate swaps and other derivative instruments.
The Subclass A-1, A-2 and B-1 Notes bear floating rates of interest and the
Subclass C-1 and D-1 Notes bear fixed rates of interest. MSAF Group is a party
to eight interest rate swaps with Morgan Stanley Capital Services Inc. ("MSCS"),
a wholly-owned subsidiary of MSDW. In six of these swaps, MSAF Group pays a
fixed monthly coupon and receives one month LIBOR on a notional balance of
$1,000 million and in two of these swaps, MSAF Group pays one month LIBOR and
receives a fixed monthly coupon on a notional balance of $200 million.
All eight swaps were originally entered into by MSCS, with an internal
swaps desk as the counter party, on November 12, 1997 and February 19, 1998,
respectively. On March 3, 1998, all eight swaps were assigned to MSAF Group by
MSCS. Although MSAF Group's floating rate liability at March 3, 1998 was $800
million (after the payment of principal due to the undelivered aircraft), the
net economic effect of assigning all eight swaps to MSAF Group with an aggregate
notional amount of $1.2 billion was to fix the interest rate liability at the
November 12, 1997 interest rate. MSAF Group required this certainty both in
furtherance of its interest rate management policy not to be adversely exposed
to material movements in interest rates from November 12, 1997 (shortly after
MSAF entered into the Asset Purchase Agreement) and by fixing the principal
liabilities relating to the transaction, to facilitate the structuring of the
transaction.
On the date that the eight interest rate swaps were assigned from MSCS to
MSAF Group, such swaps had an aggregate fair value of approximately $(15.3)
million. No consideration was paid to or received by MSAF Group in connection
with the assumption of these swap positions. MSAF Group has recorded the
assumption of these interest rate swaps at their fair value by recognizing a
liablity within other liabilities in its Condensed Consolidated Balance Sheet,
with a corresponding charge to Deemed Distribution, a component of Beneficial
Interestholder's Deficit.
Four of the swaps assumed from MSCS having an aggregate notional principal
amount of $800 million are accounted for as hedges of its obligations under the
Notes. Under these swap arrangements MSAF Group will pay fixed and received
floating amounts on a monthly basis. The fair value of the liability assumed
relating to those swaps which are being accounted for as hedges is being
deferred and recognized when the offsetting gain or loss is recognized on the
hedged transaction. This amount and the differential payable or receivable on
such interest rate swap contracts, to the extent such swaps are deemed to be
effective hedges, is recognized as an adjustment to interest expense. The
portion of swaps not deemed to be an effective hedge is accounted for on a
mark-to-market basis with changes in fair value reflected in interest expense.
Gains and losses resulting from the termination of such interest rate swap
contracts prior to their stated maturity are deferred and recognized when the
offsetting gain or loss is recognized on the hedged transaction. The fair value
of these interest rate swaps at October 31, 1998 was $(32.4) million.
The remaining four swaps assumed by MSAF Group have an aggregate gross
notional principal amount of $400 million. Under these swap arrangements, MSAF
Group will pay/receive fixed and receive/pay floating amounts on a monthly
basis. MSAF Group determined that these swaps do not qualify for hedge
accounting. The fair value of the liability assumed related to these swaps is
accounted for on a mark-to-market basis with changes in fair value reflected in
interest expense. At October 31, 1998, the fair value of these swaps was $(7.6)
million.
The gross notional amounts of these swaps are indicative of MSAF Groups's
degree of use of such swaps but do not represent MSAF Group's exposure to credit
or market risk. Credit risk arises from the failure of the
F-19
161
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --
(CONTINUED)
counterparty to perform according to the terms of the swap contract. MSAF
Group's exposure to credit risk at any point in time is represented by the fair
value of the swap contracts reported as assets. MSAF Group does not currently
require collateral to support swap contracts with credit risk. The credit risk
of these swap contracts is monitored by MSAF Group's Trustees.
MSAF Group does not utilize derivative financial instruments for trading
purposes.
NOTE 8 -- RELATED PARTY TRANSACTIONS
Under service agreements with MSAF Group, Cabot Aircraft Services Limited
and Morgan Stanley & Co. Incorporated, both subsidiaries of MSDW, act as
Administrative Agent and Financial Advisor, respectively. During the eleven
month period ended October 31, 1998, Cabot Aircraft Services Limited received a
fee of $1.0 million for providing these services, which is calculated as a
percentage of the operating lease rentals received. Morgan Stanley & Co.
Incorporated received advisory fees of $.03 million in this period.
Prior to the issuance of the Notes, MSAF Group received approximately $920
million of non-interest bearing financing from MSF which was utilized to
purchase 31 of the 32 aircraft in its aircraft portfolio. At the time of the
issuance of the Notes, this loan was automatically converted into a beneficial
interest and a payment of approximately $976 million was made in the form of a
distribution on such beneficial interest and comprised the following amounts (in
millions):
Non-interest bearing loans (subsequently converted into
beneficial interest)...................................... $920
Distribution (comprising $21 million in lease rentals
accrued to the date of issuance of the Notes with the
balance representing finance and other charges paid to
MSF)...................................................... 56
----
Total Beneficial Interest Distribution...................... $976
====
In connection with the issuance of the Notes, MSAF paid approximately $7.1
million in subscription discounts and commissions to subsidiaries of MSDW.
MSAF Group's counterparty to its interest rate swap agreements is MSCS, a
wholly-owned subsidiary of MSDW.
MSAF Group's management is comprised of six trustees, as MSAF Group has no
employees or executive officers. Three of MSAF Group's six trustees and one
alternate trustee are employees of MSDW. MSAF Group's remaining three trustees
are unaffiliated with MSDW.
NOTE 9 -- COMMITMENTS
MSAF Group did not have any material contractual commitments for capital
expenditures at June 30, 1998.
In accordance with the terms of a servicing agreement (the "Servicing
Agreement"), ILFC is performing certain aircraft related activities with respect
to MSAF Group's aircraft portfolio. Such activities include marketing MSAF
Group's aircraft for lease or sale and monitoring lessee compliance with lease
terms including terms relating to payment, maintenance and insurance. In
accordance with the Servicing Agreement, fees payable to ILFC by MSAF Group are
calculated as a percentage of the lease rentals received, in addition to certain
incentive-based fees.
The Servicing Agreement expires in 2023, although each party has the right
to terminate the Servicing Agreement under certain circumstances.
F-20
162
APPENDIX 1
INDEX OF DEFINED TERMS
PAGE
----
Accounts.............................. 121
Additional Aircraft................... 1
Additional Leases..................... 1
Additional Notes...................... 1
Additional Servicer................... 116
Adjusted Base Value................... 98
Adjusted Portfolio Value.............. 98
Administrative Agency Agreement....... 17
Administrative Agent.................. 17
ADs................................... 27
Aero Mexico........................... 46
Aeropostale........................... 46
affiliate............................. 107
Agent's Message....................... 35
Airbus................................ 22
Air Liberte........................... 46
Air Pacific........................... 46
Aircraft.............................. 1
Aircraft Agreement.................... 110
Aircraft-Owning Subsidiaries.......... 21
Aircraft Purchase Account............. 121
Alaska Airlines....................... 46
Allowed Restructuring................. 108
Amended and Restated Trust
Agreement........................... 10
Annual Report......................... Cover
Ansett................................ 46
AOG................................... 60
Appraisals............................ 14
Appraisers............................ 14
ARE................................... 86
Asiana................................ 46
ASMs.................................. 59
Assumed Debt Service Coverage Ratio... 5
Assumed First Year's Net Revenue...... 4
Assumed Interest Coverage Ratio....... 4
Assumed Portfolio Value............... 97
Assumptions........................... 12
ATOP.................................. 37
Available Collections................. 11
Average Life Date..................... 102
Avg................................... 88
Back-Up Facility...................... 78
Base Value............................ 14
Basic Terms Modification.............. 120
Beneficial Interest................... 2
Beneficial Interest Distribution
Amount.............................. 121
Boeing................................ 22
Book-Entry Confirmation............... 35
Book-Entry Transfer Facility.......... 36
Britannia............................. 46
PAGE
----
Business Day.......................... 10
Cabot................................. 1
Caledonian............................ 46
Calculation Date...................... 10
Cash Management Agreement............. 17
Cash Manager.......................... 17
Cash Reports.......................... Cover
CCN................................... 130
Cedel Bank............................ 127
Cedel Participants.................... 127
Change of Control..................... 68
Chicago Convention.................... 44
China Airlines........................ 46
China Hainan.......................... 46
Code.................................. 19
Collection Account.................... 16
Collections........................... 122
Commission............................ Cover
Concentration Default................. 111
Concentration Limits.................. 114
Conditional Sale Agreement............ 52
control............................... 107
Contract Aircraft..................... 50
Contract Leases....................... 50
Controlling Trustees.................. 2
covenant defeasance................... 103
DCR................................... 11
default............................... 119
defeasance trust...................... 103
Definitive Notes...................... 129
Delaware Trustee...................... 2
Depositaries.......................... 127
Depreciation Factor................... 97
disqualified persons.................. 134
DTC................................... 127
DTC Participants...................... 127
Eligible Institutions................. 36
Eligible Provider..................... 76
Eligible Credit Facilities............ 76
Encumbrance........................... 107
Engine Lease.......................... 51
Engines............................... 110
ERISA................................. 19
EU.................................... 27
Euroclear............................. 127
Euroclear Participants................ 127
Event of Default...................... 117
Excess Amortization Date.............. 100
Exchange Act.......................... Cover
Exchange Agent........................ 3
A-1
163
PAGE
----
Exchange Offer........................ Cover
Exp................................... 88
Expected Final Payment Date........... 5
Expected Maturity..................... 87
Expected Useful Life.................. 84
Expense Account....................... 17
Expenses.............................. 13
Expiration Date....................... 35
Extension Amount...................... 99
Facility Reduction Event.............. 78
Falcon................................ 46
Final Maturity Date................... 5
Final Regulations..................... 132
Financial Advisor..................... 17
Financial Advisory Agreement.......... 18
Financial Institution................. 132
First Collection Account Top-Up....... 104
First Year's Interest................. 4
First Year's Interest and Minimum and
Scheduled Principal................. 5
Flightlease........................... 46
Future Lease Rate..................... 84
Future Leases......................... 1
Future MSAF Group Entities............ 41
GPA................................... 62
Gross Revenue......................... 85
Group................................. 68
guarantee............................. 110
Guyana Airways........................ 46
H.15 (519)............................ 101
Holders............................... Cover
Icelandair............................ 46
ILFC.................................. 1
ILFC Conflicts Standard............... 22
ILFC Facility......................... 15
ILFC Facility Commitment.............. 78
ILFC Facility Drawn Amounts........... 78
ILFC Services Standard................ 22
ILFC Managed Portfolio................ 41
incur................................. 109
Indebtedness.......................... 109
Indenture............................. 11
Independent Trustees.................. 2
Indirect Participants................. 128
Initial Aircraft...................... 1
Initial Appraised Value............... 15
Initial Leases........................ 1
Initial Lessees....................... 16
Initial Loan.......................... 4
Initial Loan to Value................. 4
Initial Principal Balance............. 100
Initial Swaps......................... 79
Intercompany Loan..................... 110
Interest Accrual Period............... 10
PAGE
----
investment............................ 108
IRS................................... 132
ISIN.................................. 130
KLM................................... 46
Leases................................ 1
legal defeasance...................... 103
Lessees............................... 16
Lessor................................ 50
Letter of Transmittal................. Cover
LIBOR................................. Cover
Liens................................. 27
Liquidity Reserve Amount.............. 16
Listing Agent......................... Cover
Losses................................ 23
Malev................................. 46
Minimum Class Percentage.............. 97
Minimum Liquidity Reserve Amount...... 17
Minimum Principal Payment Amount...... 97
Minimum Target Principal Balance...... 97
Modification Payment.................. 112
Monarch............................... 46
Monthly Report........................ Cover
Moody's............................... 11
Morgan Stanley........................ 1
Morgan Stanley Facility............... 16
Morgan Stanley Facility Commitment.... 78
Morgan Stanley Facility Drawn
Amounts............................. 79
most recent H.15(519)................. 102
MSA I................................. 12
MSAF.................................. Cover
MSAF Group............................ Cover
MSAF Noteholders...................... 11
MSAF Notes............................ 1
MSCI.................................. 114
Navasota.............................. 52
Net Sale Proceeds..................... 111
New Notes............................. Cover
Non-U.S. Holder....................... 131
Noteholders........................... 11
Notes................................. Cover
Notice of Redemption.................. 102
Notice of Refinancing................. 100
Note Target Price..................... 111
NYSE.................................. 37
Offering.............................. 131
Old Notes............................. Cover
Olympic............................... 46
Onur Air.............................. 46
Outstanding........................... 33
Outstanding Principal Balance......... 13
parties in interest................... 134
Parts................................. 110
Passaredo............................. 46
Passaredo Lease....................... 52
A-2
164
PAGE
----
Payment Date.......................... 10
Permitted Account Investments......... 70
Permitted Accruals.................... 122
Permitted Additional Aircraft
Acquisition......................... 112
Permitted Encumbrance................. 107
Plans................................. 134
Portfolio............................. 1
Precedent Lease....................... 116
PRI................................... 117
Primary Eligible Credit Facility...... 77
Pro Forma Lease....................... 116
Prohibited Transactions............... 134
PTCE.................................. 134
Purchase Options...................... 26
Quarterly Report...................... Cover
Rating Agencies....................... 11
Rating Decline........................ 68
recession............................. 90
Record Date........................... 10
Redemption............................ 100
Redemption Date....................... 100
Redemption Price...................... 13
Reference Agent....................... 96
Reference Banks....................... 96
Reference Date........................ 10
Refinancing........................... 100
Refinancing Date...................... 100
Refinancing Notes..................... 12
Registration Agreement................ Cover
Registration Statement................ Cover
Related Documents..................... 81
Related Persons....................... 68
Re-Leasing Guidelines................. 18
Relevant Appraisal.................... 98
Remaining Weighted Average Life....... 102
Renewal Lease......................... 116
Rental Payments....................... 94
Required Expense Amount............... 11
RPMs.................................. 59
Rule 13d-3............................ 68
Rules................................. 128
Scheduled Class Percentage............ 98
Scheduled Principal Payment Amount.... 98
Scheduled Target Principal Balance.... 98
Second Collection Account Top-Up...... 104
PAGE
----
Secondary Eligible Credit Facility.... 77
Securities Act........................ Cover
Security Trust Agreement.............. 33
Security Trustee...................... 33
Servicer.............................. 1
Services.............................. 66
Servicing Agreement................... 1
Shelf Registration Statement.......... 82
Significant Subsidiary................ 118
SPC-5................................. 12
Stage 3 aircraft...................... 44
Standard & Poor's..................... 11
Step-Up Interest...................... 13
Stock................................. 106
Stresses.............................. 86
Subordinated Swap Payments............ 105
Subsequent Date....................... 102
Supplemental Class Percentage......... 98
Supplemental Principal Payment
Amount.............................. 98
Supplemental Target Principal
Balance............................. 98
Suspension Drawing.................... 78
Suspension Event...................... 78
Swap Providers........................ 13
Swiss Air............................. 46
TAESA................................. 46
TAP................................... 46
Terms and Conditions.................. 128
Third Party Event..................... 115
TransAer.............................. 46
Transaero............................. 46
Transavia............................. 46
Transwede............................. 46
Treasury Yield........................ 101
Trustee............................... 11
TWA................................... 46
U.S. Bankruptcy Code.................. 34
U.S. GAAP............................. 109
U.S. Holder........................... 131
Unijet................................ 46
Varig................................. 46
VASP.................................. 46
Weighted Average Life................. 87
World Traffic Growth.................. 59
$..................................... Cover
A-3
165
APPENDIX 2
AIRCRAFT TYPES DATA(1)
NO. & STAGE 3
NARROW/ MFR. OF NOISE
TYPE & VARIANT WIDEBODY TYPICAL SEATS ENGINES COMPLIANCE PROD. YEARS NO. DELIVERED(2)
-------------- -------- ------------- ------------ ---------- ------------------ ------------------
Airbus A300-600R............... Wide 220 (3 class) 2 X GE/PW Yes 1987- 156
Airbus A310-300................ Wide 180 (3 class) 2 X GE/PW Yes 1985- 169
Airbus A320-200................ Narrow 150 (2 class) 2 X CFM/IAE Yes 1988- 591
Airbus A321-100................ Narrow 185 (2 class) 2 X CFM/IAE Yes 1993- 65
Boeing 737-300................. Narrow 130 (2 class) 2 X CFM Yes 1984- 1032(4)
Boeing 737-300F................ Narrow 0 2 X CFM Yes (all conversions) (all conversions)
Boeing 737-300QC............... Narrow 130/freight 2 X CFM Yes (all conversions) (all conversions)
Boeing 737-400................. Narrow 150 (2 class) 2 X CFM Yes 1988- 442
Boeing 737-500................. Narrow 110 (2 class) 2 X CFM Yes 1989- 354
Boeing 747-300................. Wide 400 (3 class) 4 X GE/PW/RR Yes 1982-90 81
Boeing 757-200................. Narrow 200 (2 class) 2 X PW/RR Yes 1982- 783
Boeing 767-200ER............... Wide 180 (3 class) 2 X GE/PW Yes 1984- 133
Boeing 767-300ER............... Wide 220 (3 class) 2 X GE/PW/RR Yes 1986- 362
Fokker 70...................... Narrow 70 (2 class) 2 X RR Yes 1994-97 48
MDC MD-82(6)................... Narrow 140 (2 class) 2 X PW Yes 1981- 577
MDC MD-83(6)................... Narrow 140 (2 class) 2 X PW Yes 1984- 224
CURRENT ON NO. OF
TYPE & VARIANT FLEET ORDER OPERATORS(3)
-------------- ------- ----- -------------
Airbus A300-600R............... 154 8 18
Airbus A310-300................ 166 7 43
Airbus A320-200................ 588 297 80
Airbus A321-100................ 65 59 13
Boeing 737-300................. 992 88 95
Boeing 737-300F................ 3 0 2
Boeing 737-300QC............... 29 0 6
Boeing 737-400................. 439 37 54
Boeing 737-500................. 353 29 41
Boeing 747-300................. 79 0 22
Boeing 757-200................. 779 128 63
Boeing 767-200ER............... 130 0 26
Boeing 767-300ER............... 361 77 38
Fokker 70...................... 48 0 11
MDC MD-82(6)................... 570 0 24
MDC MD-83(6)................... 246(5) 10 31
- ---------------
Source: Airclaims Limited.
(1) Data is as at January 1, 1998.
(2) Includes demonstrators/test aircraft.
(3) Excludes lessors.
(4) 737-300 deliveries include aircraft later converted to - 300F or 300QC.
(5) MD-83 current fleet includes aircraft converted from MD-81 and -82.
(6) Boeing has announced that production of these aircraft types is expected to
end in 1999.
A-4
166
APPENDIX 3
MONTHLY GROSS REVENUES BASED ON THE ASSUMPTIONS
GROSS
MONTH REVENUES
- ------------------------- ----------
($)
April 1998............... 20,127,090
May 1998................. 11,041,661
June 1998................ 11,898,636
July 1998................ 9,998,636
August 1998.............. 11,070,411
September 1998........... 11,898,636
October 1998............. 9,998,636
November 1998............ 11,070,411
December 1998............ 11,875,636
January 1999............. 9,978,787
February 1999............ 10,440,562
March 1999............... 11,890,312
April 1999............... 10,617,053
May 1999................. 9,858,828
June 1999................ 12,545,803
July 1999................ 10,645,803
August 1999.............. 9,887,578
September 1999........... 12,545,803
October 1999............. 10,645,803
November 1999............ 9,887,578
December 1999............ 12,522,803
January 2000............. 10,624,379
February 2000............ 9,866,154
March 2000............... 12,534,330
April 2000............... 10,646,906
May 2000................. 9,897,643
June 2000................ 12,563,720
July 2000................ 10,663,720
August 2000.............. 9,906,095
September 2000........... 12,563,720
October 2000............. 10,663,720
November 2000............ 9,906,095
December 2000............ 11,317,631
January 2001............. 11,292,706
February 2001............ 10,535,081
March 2001............... 11,329,154
April 2001............... 10,736,600
May 2001................. 10,806,275
June 2001................ 11,590,400
July 2001................ 10,736,600
August 2001.............. 10,806,875
September 2001........... 11,590,400
October 2001............. 10,736,600
November 2001............ 10,806,875
December 2001............ 11,590,400
January 2002............. 10,738,176
February 2002............ 10,808,451
March 2002............... 11,601,927
April 2002............... 10,749,703
May 2002................. 10,819,978
June 2002................ 11,603,503
July 2002................ 10,749,703
August 2002.............. 10,772,967
September 2002........... 11,626,767
October 2002............. 10,737,967
GROSS
MONTH REVENUES
- ------------------------- ----------
($)
November 2002............ 10,737,967
December 2002............ 11,591,767
January 2003............. 10,739,543
February 2003............ 10,739,543
March 2003............... 11,310,319
April 2003............... 10,742,695
May 2003................. 11,026,611
June 2003................ 11,026,611
July 2003................ 11,026,611
August 2003.............. 11,026,611
September 2003........... 11,026,611
October 2003............. 11,055,921
November 2003............ 11,055,921
December 2003............ 11,055,921
January 2004............. 15,613,844
February 2004............ 10,707,385
March 2004............... 10,711,291
April 2004............... 10,586,731
May 2004................. 10,586,731
June 2004................ 10,586,731
July 2004................ 10,586,731
August 2004.............. 10,586,731
September 2004........... 10,586,731
October 2004............. 10,552,625
November 2004............ 10,552,625
December 2004............ 10,552,625
January 2005............. 10,552,625
February 2005............ 10,552,625
March 2005............... 10,532,565
April 2005............... 10,532,565
May 2005................. 10,532,565
June 2005................ 10,532,565
July 2005................ 10,532,565
August 2005.............. 10,532,565
September 2005........... 10,532,565
October 2005............. 10,532,565
November 2005............ 10,532,565
December 2005............ 10,456,449
January 2006............. 10,456,449
February 2006............ 10,432,224
March 2006............... 10,432,224
April 2006............... 10,343,761
May 2006................. 10,309,593
June 2006................ 10,309,593
July 2006................ 10,270,089
August 2006.............. 10,270,089
September 2006........... 10,270,089
October 2006............. 10,270,089
November 2006............ 10,270,089
December 2006............ 10,270,089
January 2007............. 10,228,759
February 2007............ 10,228,759
March 2007............... 10,227,930
April 2007............... 10,227,930
May 2007................. 10,227,541
GROSS
MONTH REVENUES
- ------------------------- ----------
($)
June 2007................ 10,227,541
July 2007................ 10,227,541
August 2007.............. 10,227,541
September 2007........... 10,227,541
October 2007............. 10,227,541
November 2007............ 10,227,541
December 2007............ 10,227,541
January 2008............. 10,227,541
February 2008............ 10,227,541
March 2008............... 10,226,619
April 2008............... 10,226,619
May 2008................. 9,843,805
June 2008................ 9,842,377
July 2008................ 9,842,377
August 2008.............. 9,842,377
September 2008........... 9,842,377
October 2008............. 9,734,411
November 2008............ 9,734,411
December 2008............ 9,653,636
January 2009............. 9,653,636
February 2009............ 9,653,636
March 2009............... 9,653,636
April 2009............... 9,431,656
May 2009................. 9,431,656
June 2009................ 9,431,656
July 2009................ 9,431,656
August 2009.............. 9,431,656
September 2009........... 9,431,656
October 2009............. 9,359,938
November 2009............ 9,359,938
December 2009............ 9,359,938
January 2010............. 9,359,938
February 2010............ 9,359,938
March 2010............... 9,335,730
April 2010............... 9,335,730
May 2010................. 9,335,730
June 2010................ 9,335,730
July 2010................ 9,335,730
August 2010.............. 9,335,730
September 2010........... 9,335,730
October 2010............. 9,335,730
November 2010............ 9,335,730
December 2010............ 9,191,116
January 2011............. 9,191,116
February 2011............ 9,056,116
March 2011............... 9,056,116
April 2011............... 8,737,419
May 2011................. 8,666,319
June 2011................ 8,666,319
July 2011................ 8,593,314
August 2011.............. 8,593,314
September 2011........... 8,593,314
October 2011............. 8,593,314
November 2011............ 8,593,314
December 2011............ 8,593,314
A-5
167
MONTHLY GROSS REVENUES BASED ON THE ASSUMPTIONS (CONTINUED)
GROSS
MONTH REVENUES
- ------------------------- ----------
($)
January 2012............. 8,519,289
February 2012............ 8,519,289
March 2012............... 8,444,739
April 2012............... 8,444,739
May 2012................. 8,344,530
June 2012................ 8,344,530
July 2012................ 8,344,530
August 2012.............. 8,341,451
September 2012........... 8,341,451
October 2012............. 8,341,451
November 2012............ 8,341,451
December 2012............ 8,341,451
January 2013............. 8,341,451
February 2013............ 8,341,451
March 2013............... 8,254,151
April 2013............... 8,254,151
May 2013................. 7,330,081
June 2013................ 7,234,864
July 2013................ 7,234,864
August 2013.............. 7,234,864
September 2013........... 7,050,432
October 2013............. 6,872,139
November 2013............ 6,872,139
December 2013............ 6,791,139
January 2014............. 6,758,168
February 2014............ 6,725,939
March 2014............... 6,693,561
April 2014............... 6,300,808
May 2014................. 6,300,808
June 2014................ 6,300,808
July 2014................ 6,300,808
August 2014.............. 6,300,808
September 2014........... 6,300,808
October 2014............. 6,167,572
November 2014............ 6,167,572
December 2014............ 6,167,572
January 2015............. 6,167,572
February 2015............ 6,167,572
March 2015............... 6,051,063
April 2015............... 6,051,063
May 2015................. 6,051,063
June 2015................ 5,966,095
July 2015................ 5,966,095
August 2015.............. 5,966,095
September 2015........... 5,966,095
GROSS
MONTH REVENUES
- ------------------------- ----------
($)
October 2015............. 5,966,095
November 2015............ 5,966,095
December 2015............ 5,700,476
January 2016............. 5,700,476
February 2016............ 5,409,701
March 2016............... 5,409,701
April 2016............... 4,804,828
May 2016................. 4,673,096
June 2016................ 4,673,096
July 2016................ 4,542,254
August 2016.............. 4,542,254
September 2016........... 4,542,254
October 2016............. 4,542,254
November 2016............ 4,542,254
December 2016............ 4,542,254
January 2017............. 4,410,860
February 2017............ 4,410,860
March 2017............... 4,237,738
April 2017............... 4,237,738
May 2017................. 4,004,307
June 2017................ 4,004,307
July 2017................ 4,004,307
August 2017.............. 3,997,328
September 2017........... 3,997,328
October 2017............. 3,997,328
November 2017............ 3,997,328
December 2017............ 3,997,328
January 2018............. 3,997,328
February 2018............ 3,997,328
March 2018............... 3,794,549
April 2018............... 3,794,549
May 2018................. 3,192,249
June 2018................ 2,971,504
July 2018................ 2,971,504
August 2018.............. 2,971,504
September 2018........... 2,740,804
October 2018............. 2,432,753
November 2018............ 2,432,753
December 2018............ 2,324,528
January 2019............. 2,270,820
February 2019............ 2,217,156
March 2019............... 2,163,540
April 2019............... 1,995,242
May 2019................. 1,995,242
June 2019................ 1,995,242
GROSS
MONTH REVENUES
- ------------------------- ----------
($)
July 2019................ 1,995,242
August 2019.............. 1,995,242
September 2019........... 1,995,242
October 2019............. 1,995,242
November 2019............ 1,995,242
December 2019............ 1,995,242
January 2020............. 1,995,242
February 2020............ 1,995,242
March 2020............... 1,747,595
April 2020............... 1,747,595
May 2020................. 1,747,595
June 2020................ 1,643,127
July 2020................ 1,643,127
August 2020.............. 1,643,127
September 2020........... 1,643,127
October 2020............. 1,643,127
November 2020............ 1,643,127
December 2020............ 1,502,065
January 2021............. 1,502,065
February 2021............ 1,502,065
March 2021............... 1,502,065
April 2021............... 918,578
May 2021................. 918,578
June 2021................ 918,578
July 2021................ 918,578
August 2021.............. 918,578
September 2021........... 918,578
October 2021............. 918,578
November 2021............ 918,578
December 2021............ 918,578
January 2022............. 918,578
February 2022............ 918,578
March 2022............... 918,578
April 2022............... 918,578
May 2022................. 918,578
June 2022................ 918,578
July 2022................ 918,578
August 2022.............. 905,372
September 2022........... 905,372
October 2022............. 905,372
November 2022............ 905,372
December 2022............ 905,372
January 2023............. 905,372
February 2023............ 905,372
March 2023............... 905,372
A-6
168
APPENDIX 4
ASSUMED PORTFOLIO VALUES FOR THE INITIAL PORTFOLIO
EXPECTED
MONTH PORTFOLIO VALUE
- ---------------------- ---------------
($ MILLIONS)
Closing............... 1,115.51
April 1998............ 1,110.73
May 1998.............. 1,107.30
June 1998............. 1,103.85
July 1998............. 1,100.39
August 1998........... 1,096.92
September 1998........ 1,093.43
October 1998.......... 1,089.93
November 1998......... 1,086.41
December 1998......... 1,082.88
January 1999.......... 1,079.33
February 1999......... 1,075.77
March 1999............ 1,072.19
April 1999............ 1,068.60
May 1999.............. 1,064.99
June 1999............. 1,061.37
July 1999............. 1,057.74
August 1999........... 1,054.08
September 1999........ 1,050.42
October 1999.......... 1,046.74
November 1999......... 1,043.04
December 1999......... 1,039.33
January 2000.......... 1,035.61
February 2000......... 1,031.86
March 2000............ 1,028.11
April 2000............ 1,024.34
May 2000.............. 1,020.55
June 2000............. 1,016.75
July 2000............. 1,012.93
August 2000........... 1,009.10
September 2000........ 1,005.25
October 2000.......... 1,001.39
November 2000......... 997.51
December 2000......... 993.61
January 2001.......... 989.70
February 2001......... 985.78
March 2001............ 981.83
April 2001............ 977.88
May 2001.............. 973.90
June 2001............. 969.92
July 2001............. 965.91
August 2001........... 961.89
September 2001........ 957.85
October 2001.......... 953.80
November 2001......... 949.73
December 2001......... 945.65
January 2002.......... 941.55
February 2002......... 937.43
March 2002............ 933.30
April 2002............ 929.15
May 2002.............. 924.98
June 2002............. 920.80
July 2002............. 916.60
August 2002........... 912.39
September 2002........ 908.16
EXPECTED
MONTH PORTFOLIO VALUE
- ---------------------- ---------------
($ MILLIONS)
October 2002.......... 903.91
November 2002......... 899.65
December 2002......... 895.37
January 2003.......... 891.07
February 2003......... 886.76
March 2003............ 882.43
April 2003............ 878.08
May 2003.............. 873.72
June 2003............. 869.34
July 2003............. 864.94
August 2003........... 860.53
September 2003........ 856.09
October 2003.......... 851.65
November 2003......... 847.18
December 2003......... 842.70
January 2004.......... 817.34
February 2004......... 813.02
March 2004............ 808.67
April 2004............ 804.31
May 2004.............. 799.94
June 2004............. 795.54
July 2004............. 791.13
August 2004........... 786.70
September 2004........ 782.26
October 2004.......... 777.80
November 2004......... 773.32
December 2004......... 768.83
January 2005.......... 764.31
February 2005......... 759.79
March 2005............ 755.24
April 2005............ 750.68
May 2005.............. 746.10
June 2005............. 741.50
July 2005............. 736.89
August 2005........... 732.25
September 2005........ 727.60
October 2005.......... 722.94
November 2005......... 718.25
December 2005......... 713.55
January 2006.......... 708.83
February 2006......... 704.10
March 2006............ 699.35
April 2006............ 694.57
May 2006.............. 689.78
June 2006............. 684.98
July 2006............. 680.15
August 2006........... 675.31
September 2006........ 670.45
October 2006.......... 665.57
November 2006......... 660.68
December 2006......... 655.76
January 2007.......... 650.83
February 2007......... 645.88
March 2007............ 640.91
April 2007............ 635.93
EXPECTED
MONTH PORTFOLIO VALUE
- ---------------------- ---------------
($ MILLIONS)
May 2007.............. 630.92
June 2007............. 625.90
July 2007............. 620.86
August 2007........... 615.80
September 2007........ 610.72
October 2007.......... 605.62
November 2007......... 600.51
December 2007......... 595.38
January 2008.......... 590.22
February 2008......... 585.05
March 2008............ 579.86
April 2008............ 574.66
May 2008.............. 569.43
June 2008............. 564.18
July 2008............. 558.92
August 2008........... 553.63
September 2008........ 548.33
October 2008.......... 543.01
November 2008......... 537.67
December 2008......... 532.31
January 2009.......... 526.93
February 2009......... 521.53
March 2009............ 516.12
April 2009............ 510.68
May 2009.............. 505.22
June 2009............. 499.75
July 2009............. 494.25
August 2009........... 488.74
September 2009........ 483.20
October 2009.......... 477.65
November 2009......... 472.08
December 2009......... 466.48
January 2010.......... 460.87
February 2010......... 455.24
March 2010............ 449.59
April 2010............ 443.91
May 2010.............. 438.22
June 2010............. 432.51
July 2010............. 426.78
August 2010........... 421.02
September 2010........ 415.25
October 2010.......... 409.46
November 2010......... 403.65
December 2010......... 398.11
January 2011.......... 392.70
February 2011......... 387.27
March 2011............ 381.82
April 2011............ 376.36
May 2011.............. 370.87
June 2011............. 365.37
July 2011............. 359.84
August 2011........... 354.30
September 2011........ 348.74
October 2011.......... 343.16
November 2011......... 337.56
A-7
169
ASSUMED PORTFOLIO VALUES FOR THE INITIAL PORTFOLIO (CONTINUED)
EXPECTED
MONTH PORTFOLIO VALUE
- ---------------------- ---------------
($ MILLIONS)
December 2011......... 331.94
January 2012.......... 326.30
February 2012......... 320.64
March 2012............ 314.96
April 2012............ 309.26
May 2012.............. 303.54
June 2012............. 297.89
July 2012............. 292.31
August 2012........... 286.70
September 2012........ 281.28
October 2012.......... 276.01
November 2012......... 270.82
December 2012......... 265.62
January 2013.......... 260.39
February 2013......... 255.15
March 2013............ 249.89
April 2013............ 244.61
May 2013.............. 239.57
June 2013............. 234.76
July 2013............. 229.93
August 2013........... 225.09
September 2013........ 220.23
October 2013.......... 215.36
November 2013......... 210.71
December 2013......... 206.14
January 2014.......... 201.90
February 2014......... 197.83
March 2014............ 193.89
April 2014............ 190.08
May 2014.............. 186.40
June 2014............. 182.71
July 2014............. 179.00
August 2014........... 175.29
September 2014........ 171.56
October 2014.......... 167.81
November 2014......... 164.06
December 2014......... 160.29
January 2015.......... 156.51
February 2015......... 152.72
March 2015............ 148.91
April 2015............ 145.38
May 2015.............. 141.92
June 2015............. 138.45
July 2015............. 134.97
August 2015........... 131.47
September 2015........ 127.97
EXPECTED
MONTH PORTFOLIO VALUE
- ---------------------- ---------------
($ MILLIONS)
October 2015.......... 124.58
November 2015......... 121.44
December 2015......... 118.28
January 2016.......... 115.12
February 2016......... 111.95
March 2016............ 108.76
April 2016............ 105.57
May 2016.............. 102.36
June 2016............. 99.14
July 2016............. 95.91
August 2016........... 92.67
September 2016........ 89.42
October 2016.......... 86.16
November 2016......... 82.89
December 2016......... 79.61
January 2017.......... 76.32
February 2017......... 73.20
March 2017............ 70.36
April 2017............ 67.59
May 2017.............. 64.86
June 2017............. 62.26
July 2017............. 59.64
August 2017........... 57.02
September 2017........ 54.39
October 2017.......... 51.75
November 2017......... 49.10
December 2017......... 46.45
January 2018.......... 43.78
February 2018......... 41.11
March 2018............ 38.55
April 2018............ 36.26
May 2018.............. 34.29
June 2018............. 32.68
July 2018............. 31.12
August 2018........... 29.55
September 2018........ 27.98
October 2018.......... 26.41
November 2018......... 24.82
December 2018......... 23.27
January 2019.......... 21.85
February 2019......... 20.42
March 2019............ 19.12
April 2019............ 17.95
May 2019.............. 16.79
June 2019............. 15.61
EXPECTED
MONTH PORTFOLIO VALUE
- ---------------------- ---------------
($ MILLIONS)
July 2019............. 14.44
August 2019........... 13.26
September 2019........ 12.07
October 2019.......... 11.30
November 2019......... 10.53
December 2019......... 9.76
January 2020.......... 8.99
February 2020......... 8.22
March 2020............ 7.45
April 2020............ 6.67
May 2020.............. 5.89
June 2020............. 5.30
July 2020............. 4.73
August 2020........... 4.17
September 2020........ 3.60
October 2020.......... 3.04
November 2020......... 2.47
December 2020......... 1.89
January 2021.......... 1.40
February 2021......... 0.93
March 2021............ 0.59
April 2021............ 0.32
May 2021.............. 0.05
June 2021............. 0.00
July 2021............. 0.00
August 2021........... 0.00
September 2021........ 0.00
October 2021.......... 0.00
November 2021......... 0.00
December 2021......... 0.00
January 2022.......... 0.00
February 2022......... 0.00
March 2022............ 0.00
April 2022............ 0.00
May 2022.............. 0.00
June 2022............. 0.00
July 2022............. 0.00
August 2022........... 0.00
September 2022........ 0.00
October 2022.......... 0.00
November 2022......... 0.00
December 2022......... 0.00
January 2023.......... 0.00
February 2023......... 0.00
March 2023............ 0.00
A-8
170
APPENDIX 5
CLASS A CLASS PERCENTAGES
CLASS A CLASS A CLASS A
MINIMUM SCHEDULED SUPPLEMENTAL
PAYMENT DATE CLASS CLASS CLASS
OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE
- ------------ ---------- ---------- ------------
Closing.............. 66.34% 66.34% 59.70%
April 1998........... 66.34% 66.34% 59.69%
May 1998............. 66.34% 66.34% 59.66%
June 1998............ 66.34% 66.34% 59.63%
July 1998............ 66.34% 66.34% 59.58%
August 1998.......... 66.34% 66.34% 59.53%
September 1998....... 66.34% 66.34% 59.47%
October 1998......... 66.33% 66.33% 59.40%
November 1998........ 66.33% 66.33% 59.33%
December 1998........ 66.33% 66.33% 59.26%
January 1999......... 66.33% 66.33% 59.18%
February 1999........ 66.33% 66.33% 59.09%
March 1999........... 66.32% 66.32% 59.00%
April 1999........... 66.32% 66.32% 58.91%
May 1999............. 66.32% 66.32% 58.81%
June 1999............ 66.31% 66.31% 58.71%
July 1999............ 66.31% 66.31% 58.60%
August 1999.......... 66.30% 66.30% 58.49%
September 1999....... 66.30% 66.30% 58.38%
October 1999......... 66.29% 66.29% 58.26%
November 1999........ 66.29% 66.28% 58.13%
December 1999........ 66.28% 66.27% 58.01%
January 2000......... 66.27% 66.26% 57.88%
February 2000........ 66.26% 66.25% 57.75%
March 2000........... 66.25% 66.24% 57.61%
April 2000........... 66.24% 66.23% 57.47%
May 2000............. 66.23% 66.22% 57.33%
June 2000............ 66.22% 66.21% 57.18%
July 2000............ 66.21% 66.19% 57.03%
August 2000.......... 66.19% 66.18% 56.88%
September 2000....... 66.18% 66.16% 56.73%
October 2000......... 66.16% 66.14% 56.57%
November 2000........ 66.15% 66.12% 56.41%
December 2000........ 66.13% 66.10% 56.24%
January 2001......... 66.11% 66.08% 56.07%
February 2001........ 66.09% 66.06% 55.90%
March 2001........... 66.07% 66.04% 55.73%
April 2001........... 66.05% 66.01% 55.55%
May 2001............. 66.03% 65.99% 55.38%
June 2001............ 66.01% 65.96% 55.20%
July 2001............ 65.98% 65.93% 55.01%
August 2001.......... 65.96% 65.90% 54.82%
September 2001....... 65.93% 65.87% 54.63%
October 2001......... 65.90% 65.84% 54.44%
November 2001........ 65.87% 65.81% 54.25%
December 2001........ 65.84% 65.77% 54.05%
January 2002......... 65.81% 65.74% 53.85%
February 2002........ 65.78% 65.70% 53.65%
March 2002........... 65.75% 65.66% 53.44%
April 2002........... 65.71% 65.62% 53.24%
May 2002............. 65.68% 65.58% 53.03%
June 2002............ 65.64% 65.53% 52.81%
July 2002............ 65.60% 65.49% 52.60%
August 2002.......... 65.56% 65.44% 52.38%
CLASS A CLASS A CLASS A
MINIMUM SCHEDULED SUPPLEMENTAL
PAYMENT DATE CLASS CLASS CLASS
OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE
- ------------ ---------- ---------- ------------
September 2002....... 65.52% 65.39% 52.16%
October 2002......... 65.48% 65.34% 51.94%
November 2002........ 65.43% 65.29% 51.72%
December 2002........ 65.39% 65.23% 51.49%
January 2003......... 65.34% 65.18% 51.26%
February 2003........ 65.29% 65.12% 51.03%
March 2003........... 65.24% 65.06% 50.80%
April 2003........... 65.19% 65.00% 50.56%
May 2003............. 65.14% 64.93% 50.32%
June 2003............ 65.09% 64.87% 50.08%
July 2003............ 65.03% 64.80% 49.84%
August 2003.......... 64.97% 64.73% 49.60%
September 2003....... 64.91% 64.66% 49.35%
October 2003......... 64.85% 64.58% 49.10%
November 2003........ 64.79% 64.51% 48.85%
December 2003........ 64.73% 64.43% 48.60%
January 2004......... 64.66% 64.35% 48.34%
February 2004........ 64.59% 64.27% 48.08%
March 2004........... 64.53% 64.19% 47.82%
April 2004........... 64.46% 64.10% 47.56%
May 2004............. 64.38% 64.01% 47.30%
June 2004............ 64.31% 63.92% 47.03%
July 2004............ 64.23% 63.83% 46.76%
August 2004.......... 64.16% 63.73% 46.49%
September 2004....... 64.08% 63.64% 46.22%
October 2004......... 63.99% 63.54% 45.95%
November 2004........ 63.91% 63.43% 45.67%
December 2004........ 63.83% 63.33% 45.39%
January 2005......... 63.74% 63.22% 45.11%
February 2005........ 63.65% 63.11% 44.83%
March 2005........... 63.56% 63.00% 44.55%
April 2005........... 63.47% 62.89% 44.26%
May 2005............. 63.37% 62.77% 43.97%
June 2005............ 63.28% 62.65% 43.68%
July 2005............ 63.18% 62.53% 43.39%
August 2005.......... 63.08% 62.40% 43.10%
September 2005....... 62.98% 62.28% 42.80%
October 2005......... 62.87% 62.15% 42.50%
November 2005........ 62.76% 62.01% 42.20%
December 2005........ 62.66% 61.88% 41.90%
January 2006......... 62.54% 61.74% 41.60%
February 2006........ 62.43% 61.60% 41.29%
March 2006........... 62.32% 61.46% 40.99%
April 2006........... 62.20% 61.31% 40.68%
May 2006............. 62.08% 61.16% 40.37%
June 2006............ 61.96% 61.01% 40.05%
July 2006............ 61.84% 60.85% 39.74%
August 2006.......... 61.71% 60.70% 39.42%
September 2006....... 61.58% 60.54% 39.10%
October 2006......... 61.45% 60.37% 38.78%
November 2006........ 61.32% 60.21% 38.46%
December 2006........ 61.18% 60.04% 38.14%
January 2007......... 61.05% 59.86% 37.81%
February 2007........ 60.91% 59.69% 37.49%
A-9
171
CLASS A CLASS PERCENTAGES (CONTINUED)
CLASS A CLASS A CLASS A
MINIMUM SCHEDULED SUPPLEMENTAL
PAYMENT DATE CLASS CLASS CLASS
OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE
- ------------ ---------- ---------- ------------
March 2007........... 60.77% 59.51% 37.16%
April 2007........... 60.62% 59.33% 36.83%
May 2007............. 60.47% 59.14% 36.49%
June 2007............ 60.33% 58.96% 36.16%
July 2007............ 60.17% 58.77% 35.82%
August 2007.......... 60.02% 58.57% 35.48%
September 2007....... 59.86% 58.37% 35.14%
October 2007......... 59.71% 58.17% 34.80%
November 2007........ 59.55% 57.97% 34.46%
December 2007........ 59.38% 57.76% 34.12%
January 2008......... 59.22% 57.55% 33.77%
February 2008........ 59.05% 57.34% 33.42%
March 2008........... 58.88% 57.12% 33.07%
April 2008........... 58.70% 56.90% 32.72%
May 2008............. 58.53% 56.68% 32.37%
June 2008............ 58.35% 56.45% 32.01%
July 2008............ 58.17% 56.22% 31.65%
August 2008.......... 57.98% 55.99% 31.30%
September 2008....... 57.80% 55.75% 30.94%
October 2008......... 57.61% 55.51% 30.57%
November 2008........ 57.41% 55.26% 30.21%
December 2008........ 57.22% 55.01% 29.85%
January 2009......... 57.02% 54.76% 29.48%
February 2009........ 56.82% 54.51% 29.11%
March 2009........... 56.62% 54.25% 28.74%
April 2009........... 56.42% 53.99% 28.37%
May 2009............. 56.21% 53.72% 28.00%
June 2009............ 56.00% 53.45% 27.62%
July 2009............ 55.78% 53.18% 27.25%
August 2009.......... 55.57% 52.90% 26.87%
September 2009....... 55.35% 52.62% 26.49%
October 2009......... 55.12% 52.33% 26.11%
November 2009........ 54.90% 52.04% 25.72%
December 2009........ 54.67% 51.75% 25.34%
January 2010......... 54.44% 51.45% 24.95%
February 2010........ 54.21% 51.15% 24.57%
March 2010........... 53.97% 50.85% 24.18%
April 2010........... 53.73% 50.54% 23.79%
May 2010............. 53.49% 50.23% 23.40%
June 2010............ 53.24% 49.91% 23.00%
July 2010............ 53.00% 49.59% 22.61%
August 2010.......... 52.74% 49.27% 22.21%
September 2010....... 52.49% 48.94% 21.81%
October 2010......... 52.23% 48.61% 21.41%
November 2010........ 51.97% 48.27% 21.01%
December 2010........ 51.71% 47.93% 20.61%
January 2011......... 51.44% 47.59% 20.20%
February 2011........ 51.17% 47.24% 19.80%
March 2011........... 50.90% 46.88% 19.39%
April 2011........... 50.62% 46.53% 18.98%
May 2011............. 50.34% 46.17% 18.57%
June 2011............ 50.06% 45.80% 18.16%
July 2011............ 49.78% 45.43% 17.74%
August 2011.......... 49.49% 45.06% 17.33%
September 2011....... 49.20% 44.68% 16.91%
October 2011......... 48.90% 44.29% 16.49%
November 2011........ 48.60% 43.91% 16.07%
CLASS A CLASS A CLASS A
MINIMUM SCHEDULED SUPPLEMENTAL
PAYMENT DATE CLASS CLASS CLASS
OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE
- ------------ ---------- ---------- ------------
December 2011........ 48.30% 43.52% 15.65%
January 2012......... 48.00% 43.12% 15.23%
February 2012........ 47.69% 42.72% 14.80%
March 2012........... 47.38% 42.31% 14.38%
April 2012........... 47.07% 41.90% 13.95%
May 2012............. 46.75% 41.49% 13.52%
June 2012............ 46.43% 41.07% 13.09%
July 2012............ 46.10% 40.65% 12.66%
August 2012.......... 45.77% 40.22% 12.23%
September 2012....... 45.44% 39.79% 11.79%
October 2012......... 45.11% 39.35% 11.36%
November 2012........ 44.77% 38.91% 10.92%
December 2012........ 44.43% 38.46% 10.48%
January 2013......... 44.09% 38.01% 10.04%
February 2013........ 43.74% 37.56% 9.60%
March 2013........... 43.39% 37.10% 9.16%
April 2013........... 43.03% 36.63% 8.71%
May 2013............. 42.67% 36.16% 8.27%
June 2013............ 42.31% 35.69% 7.82%
July 2013............ 41.94% 35.21% 7.37%
August 2013.......... 41.58% 34.73% 6.92%
September 2013....... 41.20% 34.24% 6.47%
October 2013......... 40.83% 33.74% 6.02%
November 2013........ 40.45% 33.24% 5.56%
December 2013........ 40.06% 32.74% 5.11%
January 2014......... 39.68% 32.23% 4.65%
February 2014........ 39.29% 31.72% 4.19%
March 2014........... 38.89% 31.20% 3.73%
April 2014........... 38.49% 30.68% 3.27%
May 2014............. 38.09% 30.15% 2.81%
June 2014............ 37.69% 29.61% 2.34%
July 2014............ 37.28% 29.07% 1.88%
August 2014.......... 36.86% 28.53% 1.41%
September 2014....... 36.45% 27.98% 0.94%
October 2014......... 36.03% 27.43% 0.47%
November 2014........ 35.60% 26.87% 0.00%
December 2014........ 35.18% 26.30% 0.00%
January 2015......... 34.74% 25.73% 0.00%
February 2015........ 34.31% 25.16% 0.00%
March 2015........... 33.87% 24.58% 0.00%
April 2015........... 33.43% 23.99% 0.00%
May 2015............. 32.98% 23.40% 0.00%
June 2015............ 32.53% 22.80% 0.00%
July 2015............ 32.07% 22.20% 0.00%
August 2015.......... 31.62% 21.60% 0.00%
September 2015....... 31.15% 20.98% 0.00%
October 2015......... 30.69% 20.37% 0.00%
November 2015........ 30.22% 19.74% 0.00%
December 2015........ 29.74% 19.11% 0.00%
January 2016......... 29.27% 18.48% 0.00%
February 2016........ 28.78% 17.84% 0.00%
March 2016........... 28.30% 17.20% 0.00%
April 2016........... 27.81% 16.54% 0.00%
May 2016............. 27.31% 15.89% 0.00%
June 2016............ 26.81% 15.23% 0.00%
July 2016............ 26.31% 14.56% 0.00%
August 2016.......... 25.81% 13.89% 0.00%
A-10
172
CLASS A CLASS PERCENTAGES (CONTINUED)
CLASS A CLASS A CLASS A
MINIMUM SCHEDULED SUPPLEMENTAL
PAYMENT DATE CLASS CLASS CLASS
OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE
- ------------ ---------- ---------- ------------
September 2016....... 25.30% 13.21% 0.00%
October 2016......... 24.78% 12.52% 0.00%
November 2016........ 24.26% 11.83% 0.00%
December 2016........ 23.74% 11.14% 0.00%
January 2017......... 23.21% 10.44% 0.00%
February 2017........ 22.68% 9.73% 0.00%
March 2017........... 22.15% 9.02% 0.00%
April 2017........... 21.61% 8.30% 0.00%
May 2017............. 21.07% 7.57% 0.00%
June 2017............ 20.52% 6.84% 0.00%
July 2017............ 19.97% 6.10% 0.00%
August 2017.......... 19.41% 5.36% 0.00%
September 2017....... 18.85% 4.61% 0.00%
October 2017......... 18.29% 3.86% 0.00%
November 2017........ 17.72% 3.10% 0.00%
December 2017........ 17.14% 2.33% 0.00%
January 2018......... 16.57% 1.56% 0.00%
February 2018........ 15.98% 0.78% 0.00%
March 2018........... 15.40% 0.00% 0.00%
April 2018........... 14.81% 0.00% 0.00%
May 2018............. 14.21% 0.00% 0.00%
June 2018............ 13.61% 0.00% 0.00%
CLASS A CLASS A CLASS A
MINIMUM SCHEDULED SUPPLEMENTAL
PAYMENT DATE CLASS CLASS CLASS
OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE
- ------------ ---------- ---------- ------------
July 2018............ 13.01% 0.00% 0.00%
August 2018.......... 12.40% 0.00% 0.00%
September 2018....... 11.79% 0.00% 0.00%
October 2018......... 11.17% 0.00% 0.00%
November 2018........ 10.55% 0.00% 0.00%
December 2018........ 9.93% 0.00% 0.00%
January 2019......... 9.30% 0.00% 0.00%
February 2019........ 8.66% 0.00% 0.00%
March 2019........... 8.02% 0.00% 0.00%
April 2019........... 7.38% 0.00% 0.00%
May 2019............. 6.73% 0.00% 0.00%
June 2019............ 6.08% 0.00% 0.00%
July 2019............ 5.42% 0.00% 0.00%
August 2019.......... 4.76% 0.00% 0.00%
September 2019....... 4.09% 0.00% 0.00%
October 2019......... 3.42% 0.00% 0.00%
November 2019........ 2.75% 0.00% 0.00%
December 2019........ 2.07% 0.00% 0.00%
January 2020......... 1.38% 0.00% 0.00%
February 2020........ 0.69% 0.00% 0.00%
March 2020........... 0.00% 0.00% 0.00%
A-11
173
APPENDIX 6
CLASS B CLASS PERCENTAGES
CLASS B CLASS B CLASS B
MINIMUM SCHEDULED SUPPLEMENTAL
PAYMENT DATE CLASS CLASS CLASS
OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE
- ------------ ---------- ---------- ------------
Closing.............. 8.96% 8.96% 8.96%
April 1998........... 8.96% 8.96% 8.96%
May 1998............. 8.96% 8.96% 8.96%
June 1998............ 8.96% 8.96% 8.96%
July 1998............ 8.96% 8.96% 8.96%
August 1998.......... 8.96% 8.96% 8.96%
September 1998....... 8.96% 8.96% 8.96%
October 1998......... 8.96% 8.96% 8.95%
November 1998........ 8.96% 8.96% 8.95%
December 1998........ 8.96% 8.96% 8.95%
January 1999......... 8.96% 8.96% 8.94%
February 1999........ 8.96% 8.96% 8.94%
March 1999........... 8.96% 8.96% 8.93%
April 1999........... 8.96% 8.96% 8.93%
May 1999............. 8.96% 8.96% 8.92%
June 1999............ 8.96% 8.96% 8.91%
July 1999............ 8.96% 8.96% 8.90%
August 1999.......... 8.96% 8.96% 8.89%
September 1999....... 8.96% 8.96% 8.88%
October 1999......... 8.96% 8.96% 8.87%
November 1999........ 8.96% 8.96% 8.86%
December 1999........ 8.96% 8.96% 8.85%
January 2000......... 8.96% 8.96% 8.84%
February 2000........ 8.96% 8.96% 8.82%
March 2000........... 8.96% 8.96% 8.81%
April 2000........... 8.96% 8.96% 8.79%
May 2000............. 8.96% 8.96% 8.78%
June 2000............ 8.96% 8.96% 8.76%
July 2000............ 8.96% 8.96% 8.74%
August 2000.......... 8.96% 8.96% 8.72%
September 2000....... 8.96% 8.96% 8.71%
October 2000......... 8.96% 8.96% 8.69%
November 2000........ 8.95% 8.95% 8.67%
December 2000........ 8.95% 8.95% 8.64%
January 2001......... 8.95% 8.95% 8.62%
February 2001........ 8.95% 8.95% 8.60%
March 2001........... 8.95% 8.95% 8.57%
April 2001........... 8.95% 8.95% 8.55%
May 2001............. 8.95% 8.95% 8.52%
June 2001............ 8.94% 8.94% 8.50%
July 2001............ 8.94% 8.94% 8.47%
August 2001.......... 8.94% 8.94% 8.44%
September 2001....... 8.94% 8.94% 8.41%
October 2001......... 8.94% 8.93% 8.38%
November 2001........ 8.93% 8.93% 8.35%
December 2001........ 8.93% 8.93% 8.32%
January 2002......... 8.93% 8.92% 8.28%
February 2002........ 8.92% 8.92% 8.25%
March 2002........... 8.92% 8.92% 8.22%
April 2002........... 8.92% 8.91% 8.18%
May 2002............. 8.92% 8.91% 8.14%
June 2002............ 8.91% 8.90% 8.11%
July 2002............ 8.91% 8.90% 8.07%
August 2002.......... 8.90% 8.89% 8.03%
September 2002....... 8.90% 8.89% 7.99%
October 2002......... 8.90% 8.88% 7.95%
November 2002........ 8.89% 8.88% 7.90%
CLASS B CLASS B CLASS B
MINIMUM SCHEDULED SUPPLEMENTAL
PAYMENT DATE CLASS CLASS CLASS
OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE
- ------------ ---------- ---------- ------------
December 2002........ 8.89% 8.87% 7.86%
January 2003......... 8.88% 8.86% 7.82%
February 2003........ 8.88% 8.86% 7.77%
March 2003........... 8.87% 8.85% 7.72%
April 2003........... 8.87% 8.84% 7.68%
May 2003............. 8.86% 8.83% 7.63%
June 2003............ 8.85% 8.82% 7.58%
July 2003............ 8.85% 8.81% 7.53%
August 2003.......... 8.84% 8.81% 7.48%
September 2003....... 8.83% 8.80% 7.43%
October 2003......... 8.83% 8.78% 7.37%
November 2003........ 8.82% 8.77% 7.32%
December 2003........ 8.81% 8.76% 7.26%
January 2004......... 8.81% 8.75% 7.21%
February 2004........ 8.80% 8.74% 7.15%
March 2004........... 8.79% 8.73% 7.09%
April 2004........... 8.78% 8.71% 7.03%
May 2004............. 8.77% 8.70% 6.97%
June 2004............ 8.76% 8.68% 6.91%
July 2004............ 8.75% 8.67% 6.85%
August 2004.......... 8.74% 8.65% 6.79%
September 2004....... 8.73% 8.64% 6.72%
October 2004......... 8.72% 8.62% 6.66%
November 2004........ 8.71% 8.60% 6.59%
December 2004........ 8.70% 8.58% 6.52%
January 2005......... 8.69% 8.56% 6.45%
February 2005........ 8.68% 8.55% 6.38%
March 2005........... 8.66% 8.52% 6.31%
April 2005........... 8.65% 8.50% 6.24%
May 2005............. 8.64% 8.48% 6.17%
June 2005............ 8.62% 8.46% 6.09%
July 2005............ 8.61% 8.44% 6.02%
August 2005.......... 8.60% 8.41% 5.94%
September 2005....... 8.58% 8.39% 5.87%
October 2005......... 8.57% 8.36% 5.79%
November 2005........ 8.55% 8.33% 5.71%
December 2005........ 8.53% 8.31% 5.63%
January 2006......... 8.52% 8.28% 5.55%
February 2006........ 8.50% 8.25% 5.46%
March 2006........... 8.48% 8.22% 5.38%
April 2006........... 8.47% 8.19% 5.29%
May 2006............. 8.45% 8.16% 5.21%
June 2006............ 8.43% 8.12% 5.12%
July 2006............ 8.41% 8.09% 5.03%
August 2006.......... 8.39% 8.05% 4.94%
September 2006....... 8.37% 8.02% 4.85%
October 2006......... 8.35% 7.98% 4.76%
November 2006........ 8.33% 7.94% 4.67%
December 2006........ 8.31% 7.90% 4.57%
January 2007......... 8.29% 7.86% 4.48%
February 2007........ 8.26% 7.82% 4.38%
March 2007........... 8.24% 7.78% 4.29%
April 2007........... 8.22% 7.73% 4.19%
May 2007............. 8.19% 7.69% 4.09%
June 2007............ 8.17% 7.64% 3.99%
July 2007............ 8.14% 7.59% 3.88%
August 2007.......... 8.12% 7.54% 3.78%
A-12
174
CLASS B CLASS PERCENTAGES (CONTINUED)
CLASS B CLASS B CLASS B
MINIMUM SCHEDULED SUPPLEMENTAL
PAYMENT DATE CLASS CLASS CLASS
OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE
- ------------ ---------- ---------- ------------
September 2007....... 8.09% 7.49% 3.68%
October 2007......... 8.06% 7.44% 3.57%
November 2007........ 8.03% 7.39% 3.47%
December 2007........ 8.01% 7.33% 3.36%
January 2008......... 7.98% 7.28% 3.25%
February 2008........ 7.95% 7.22% 3.14%
March 2008........... 7.92% 7.16% 3.03%
April 2008........... 7.89% 7.10% 2.91%
May 2008............. 7.86% 7.04% 2.80%
June 2008............ 7.82% 6.98% 2.69%
July 2008............ 7.79% 6.91% 2.57%
August 2008.......... 7.76% 6.85% 2.45%
September 2008....... 7.72% 6.78% 2.34%
October 2008......... 7.69% 6.71% 2.22%
November 2008........ 7.65% 6.64% 2.09%
December 2008........ 7.62% 6.56% 1.97%
January 2009......... 7.58% 6.49% 1.85%
February 2009........ 7.54% 6.41% 1.73%
March 2009........... 7.50% 6.34% 1.60%
April 2009........... 7.47% 6.26% 1.47%
May 2009............. 7.43% 6.18% 1.35%
June 2009............ 7.39% 6.09% 1.22%
July 2009............ 7.34% 6.01% 1.09%
August 2009.......... 7.30% 5.92% 0.95%
September 2009....... 7.26% 5.83% 0.82%
October 2009......... 7.22% 5.74% 0.69%
November 2009........ 7.17% 5.65% 0.55%
December 2009........ 7.13% 5.55% 0.42%
January 2010......... 7.08% 5.46% 0.28%
February 2010........ 7.03% 5.36% 0.14%
March 2010........... 6.99% 5.26% 0.00%
April 2010........... 6.94% 5.15% 0.00%
May 2010............. 6.89% 5.05% 0.00%
June 2010............ 6.84% 4.94% 0.00%
July 2010............ 6.79% 4.83% 0.00%
August 2010.......... 6.74% 4.72% 0.00%
September 2010....... 6.68% 4.61% 0.00%
October 2010......... 6.63% 4.49% 0.00%
November 2010........ 6.58% 4.37% 0.00%
December 2010........ 6.52% 4.25% 0.00%
January 2011......... 6.46% 4.13% 0.00%
February 2011........ 6.41% 4.00% 0.00%
March 2011........... 6.35% 3.88% 0.00%
April 2011........... 6.29% 3.74% 0.00%
May 2011............. 6.23% 3.61% 0.00%
June 2011............ 6.17% 3.48% 0.00%
July 2011............ 6.11% 3.34% 0.00%
August 2011.......... 6.04% 3.20% 0.00%
September 2011....... 5.98% 3.06% 0.00%
October 2011......... 5.92% 2.91% 0.00%
November 2011........ 5.85% 2.76% 0.00%
December 2011........ 5.78% 2.61% 0.00%
January 2012......... 5.72% 2.46% 0.00%
February 2012........ 5.65% 2.30% 0.00%
March 2012........... 5.58% 2.14% 0.00%
CLASS B CLASS B CLASS B
MINIMUM SCHEDULED SUPPLEMENTAL
PAYMENT DATE CLASS CLASS CLASS
OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE
- ------------ ---------- ---------- ------------
April 2012........... 5.51% 1.98% 0.00%
May 2012............. 5.43% 1.81% 0.00%
June 2012............ 5.36% 1.65% 0.00%
July 2012............ 5.29% 1.48% 0.00%
August 2012.......... 5.21% 1.30% 0.00%
September 2012....... 5.13% 1.13% 0.00%
October 2012......... 5.06% 0.95% 0.00%
November 2012........ 4.98% 0.76% 0.00%
December 2012........ 4.90% 0.58% 0.00%
January 2013......... 4.82% 0.39% 0.00%
February 2013........ 4.74% 0.20% 0.00%
March 2013........... 4.65% 0.00% 0.00%
April 2013........... 4.57% 0.00% 0.00%
May 2013............. 4.48% 0.00% 0.00%
June 2013............ 4.40% 0.00% 0.00%
July 2013............ 4.31% 0.00% 0.00%
August 2013.......... 4.22% 0.00% 0.00%
September 2013....... 4.13% 0.00% 0.00%
October 2013......... 4.04% 0.00% 0.00%
November 2013........ 3.95% 0.00% 0.00%
December 2013........ 3.85% 0.00% 0.00%
January 2014......... 3.76% 0.00% 0.00%
February 2014........ 3.66% 0.00% 0.00%
March 2014........... 3.56% 0.00% 0.00%
April 2014........... 3.47% 0.00% 0.00%
May 2014............. 3.37% 0.00% 0.00%
June 2014............ 3.26% 0.00% 0.00%
July 2014............ 3.16% 0.00% 0.00%
August 2014.......... 3.06% 0.00% 0.00%
September 2014....... 2.95% 0.00% 0.00%
October 2014......... 2.85% 0.00% 0.00%
November 2014........ 2.74% 0.00% 0.00%
December 2014........ 2.63% 0.00% 0.00%
January 2015......... 2.52% 0.00% 0.00%
February 2015........ 2.40% 0.00% 0.00%
March 2015........... 2.29% 0.00% 0.00%
April 2015........... 2.18% 0.00% 0.00%
May 2015............. 2.06% 0.00% 0.00%
June 2015............ 1.94% 0.00% 0.00%
July 2015............ 1.82% 0.00% 0.00%
August 2015.......... 1.70% 0.00% 0.00%
September 2015....... 1.58% 0.00% 0.00%
October 2015......... 1.46% 0.00% 0.00%
November 2015........ 1.33% 0.00% 0.00%
December 2015........ 1.21% 0.00% 0.00%
January 2016......... 1.08% 0.00% 0.00%
February 2016........ 0.95% 0.00% 0.00%
March 2016........... 0.82% 0.00% 0.00%
April 2016........... 0.69% 0.00% 0.00%
May 2016............. 0.55% 0.00% 0.00%
June 2016............ 0.42% 0.00% 0.00%
July 2016............ 0.28% 0.00% 0.00%
August 2016.......... 0.14% 0.00% 0.00%
September 2016....... 0.00% 0.00% 0.00%
A-13
175
APPENDIX 7
CLASS C TARGET PRINCIPAL BALANCES
CLASS C CLASS C
MINIMUM SCHEDULED
PAYMENT DATE TARGET PRINCIPAL TARGET PRINCIPAL
OCCURRING IN BALANCE BALANCE
- ------------ ---------------- ----------------
($) ($)
Closing.............. 100,000,000 100,000,000
April 1998........... 100,000,000 100,000,000
May 1998............. 100,000,000 100,000,000
June 1998............ 100,000,000 100,000,000
July 1998............ 100,000,000 100,000,000
August 1998.......... 100,000,000 100,000,000
September 1998....... 100,000,000 100,000,000
October 1998......... 100,000,000 100,000,000
November 1998........ 100,000,000 100,000,000
December 1998........ 100,000,000 100,000,000
January 1999......... 100,000,000 100,000,000
February 1999........ 100,000,000 100,000,000
March 1999........... 100,000,000 100,000,000
April 1999........... 100,000,000 100,000,000
May 1999............. 100,000,000 100,000,000
June 1999............ 100,000,000 100,000,000
July 1999............ 100,000,000 100,000,000
August 1999.......... 100,000,000 100,000,000
September 1999....... 100,000,000 100,000,000
October 1999......... 99,999,825 99,996,772
November 1999........ 99,999,043 99,986,794
December 1999........ 99,997,412 99,969,890
January 2000......... 99,994,757 99,945,967
February 2000........ 99,990,934 99,914,956
March 2000........... 99,985,819 99,876,807
April 2000........... 99,979,299 99,831,475
May 2000............. 99,971,272 99,778,925
June 2000............ 99,961,645 99,719,125
July 2000............ 99,950,328 99,652,047
August 2000.......... 99,937,239 99,577,666
September 2000....... 99,922,300 99,495,959
October 2000......... 99,905,436 99,406,905
November 2000........ 99,886,576 99,310,486
December 2000........ 99,865,651 99,206,683
January 2001......... 99,842,596 99,095,480
February 2001........ 99,817,348 98,976,860
March 2001........... 99,789,845 98,850,810
April 2001........... 99,760,027 98,717,316
May 2001............. 99,727,838 98,576,363
June 2001............ 99,693,222 98,427,941
July 2001............ 99,656,123 98,272,036
August 2001.......... 99,616,490 98,108,638
September 2001....... 99,574,270 97,937,736
October 2001......... 99,529,413 97,759,319
November 2001........ 99,481,870 97,573,377
December 2001........ 99,431,592 97,379,901
January 2002......... 99,378,533 97,178,882
February 2002........ 99,322,645 96,970,309
March 2002........... 99,263,883 96,754,176
April 2002........... 99,202,204 96,530,472
May 2002............. 99,137,562 96,299,191
June 2002............ 99,069,916 96,060,325
July 2002............ 98,999,222 95,813,865
August 2002.......... 98,925,439 95,559,804
($) ($)
CLASS C CLASS C
MINIMUM SCHEDULED
PAYMENT DATE TARGET PRINCIPAL TARGET PRINCIPAL
OCCURRING IN BALANCE BALANCE
- ------------ ---------------- ----------------
September 2002....... 98,848,527 95,298,136
October 2002......... 98,768,445 95,028,853
November 2002........ 98,685,153 94,751,948
December 2002........ 98,598,612 94,467,415
January 2003......... 98,508,784 94,175,248
February 2003........ 98,415,631 93,875,439
March 2003........... 98,319,115 93,567,983
April 2003........... 98,219,199 93,252,875
May 2003............. 98,115,847 92,930,107
June 2003............ 98,009,023 92,599,674
July 2003............ 97,898,690 92,261,571
August 2003.......... 97,784,815 91,915,791
September 2003....... 97,667,362 91,562,331
October 2003......... 97,546,296 91,201,184
November 2003........ 97,421,584 90,832,345
December 2003........ 97,293,192 90,455,810
January 2004......... 97,161,088 90,071,572
February 2004........ 97,025,237 89,679,628
March 2004........... 96,885,608 89,279,972
April 2004........... 96,742,168 88,872,601
May 2004............. 96,594,886 88,457,508
June 2004............ 96,443,729 88,034,690
July 2004............ 96,288,668 87,604,143
August 2004.......... 96,129,670 87,165,861
September 2004....... 95,966,705 86,719,841
October 2004......... 95,799,743 86,266,077
November 2004........ 95,628,753 85,804,568
December 2004........ 95,453,706 85,335,307
January 2005......... 95,274,572 84,858,290
February 2005........ 95,091,322 84,373,515
March 2005........... 94,903,927 83,880,977
April 2005........... 94,712,357 83,380,672
May 2005............. 94,516,585 82,872,597
June 2005............ 94,316,582 82,356,747
July 2005............ 94,112,319 81,833,119
August 2005.......... 93,903,770 81,301,709
September 2005....... 93,690,906 80,762,514
October 2005......... 93,473,699 80,215,530
November 2005........ 93,252,123 79,660,753
December 2005........ 93,026,151 79,098,181
January 2006......... 92,795,755 78,527,809
February 2006........ 92,560,908 77,949,634
March 2006........... 92,321,585 77,363,654
April 2006........... 92,077,759 76,769,864
May 2006............. 91,829,404 76,168,262
June 2006............ 91,576,494 75,558,844
July 2006............ 91,319,004 74,941,607
August 2006.......... 91,056,907 74,316,549
September 2006....... 90,790,178 73,683,665
October 2006......... 90,518,792 73,042,952
November 2006........ 90,242,724 72,394,409
December 2006........ 89,961,949 71,738,032
January 2007......... 89,676,442 71,073,817
February 2007........ 89,386,179 70,401,762
A-14
176
CLASS C TARGET PRINCIPAL BALANCES (CONTINUED)
CLASS C CLASS C
MINIMUM SCHEDULED
PAYMENT DATE TARGET PRINCIPAL TARGET PRINCIPAL
OCCURRING IN BALANCE BALANCE
- ------------ ---------------- ----------------
($) ($)
March 2007........... 89,091,135 69,721,865
April 2007........... 88,791,286 69,034,121
May 2007............. 88,486,607 68,338,529
June 2007............ 88,177,075 67,635,085
July 2007............ 87,862,666 66,923,788
August 2007.......... 87,543,356 66,204,633
September 2007....... 87,219,121 65,477,618
October 2007......... 86,889,938 64,742,742
November 2007........ 86,555,784 64,000,000
December 2007........ 86,216,635 63,249,391
January 2008......... 85,872,469 62,490,911
February 2008........ 85,523,262 61,724,559
March 2008........... 85,168,991 60,950,331
April 2008........... 84,809,635 60,168,225
May 2008............. 84,445,170 59,378,239
June 2008............ 84,075,573 58,580,370
July 2008............ 83,700,823 57,774,616
August 2008.......... 83,320,898 56,960,973
September 2008....... 82,935,774 56,139,441
October 2008......... 82,545,431 55,310,016
November 2008........ 82,149,846 54,472,696
December 2008........ 81,748,998 53,627,479
January 2009......... 81,342,865 52,774,362
February 2009........ 80,931,424 51,913,343
March 2009........... 80,514,656 51,044,420
April 2009........... 80,092,538 50,167,590
May 2009............. 79,665,050 49,282,851
June 2009............ 79,232,169 48,390,202
July 2009............ 78,793,876 47,489,639
August 2009.......... 78,350,148 46,581,161
September 2009....... 77,900,966 45,664,765
October 2009......... 77,446,308 44,740,449
November 2009........ 76,986,154 43,808,212
December 2009........ 76,520,484 42,868,050
January 2010......... 76,049,276 41,919,962
February 2010........ 75,572,510 40,963,946
March 2010........... 75,090,167 40,000,000
April 2010........... 74,602,225 39,028,121
May 2010............. 74,108,665 38,048,308
June 2010............ 73,609,467 37,060,559
July 2010............ 73,104,610 36,064,870
August 2010.......... 72,594,075 35,061,242
September 2010....... 72,077,843 34,049,671
October 2010......... 71,555,892 33,030,155
November 2010........ 71,028,205 32,002,693
December 2010........ 70,494,760 30,967,283
January 2011......... 69,955,540 29,923,923
February 2011........ 69,410,523 28,872,610
March 2011........... 68,859,692 27,813,343
April 2011........... 68,303,027 26,746,121
May 2011............. 67,740,508 25,670,940
June 2011............ 67,172,117 24,587,800
July 2011............ 66,597,834 23,496,698
August 2011.......... 66,017,641 22,397,633
September 2011....... 65,431,519 21,290,603
October 2011......... 64,839,448 20,175,606
($) ($)
CLASS C CLASS C
MINIMUM SCHEDULED
PAYMENT DATE TARGET PRINCIPAL TARGET PRINCIPAL
OCCURRING IN BALANCE BALANCE
- ------------ ---------------- ----------------
November 2011........ 64,241,412 19,052,639
December 2011........ 63,637,389 17,921,703
January 2012......... 63,027,363 16,782,794
February 2012........ 62,411,314 15,635,910
March 2012........... 61,789,225 14,481,051
April 2012........... 61,161,076 13,318,214
May 2012............. 60,526,849 12,147,398
June 2012............ 59,886,527 10,968,601
July 2012............ 59,240,091 9,781,821
August 2012.......... 58,587,523 8,587,057
September 2012....... 57,928,804 7,384,306
October 2012......... 57,263,918 6,173,568
November 2012........ 56,592,845 4,954,840
December 2012........ 55,915,569 3,728,121
January 2013......... 55,232,071 2,493,409
February 2013........ 54,542,333 1,250,702
March 2013........... 53,846,339 0
April 2013........... 53,144,070 0
May 2013............. 52,435,508 0
June 2013............ 51,720,637 0
July 2013............ 50,999,439 0
August 2013.......... 50,271,896 0
September 2013....... 49,537,991 0
October 2013......... 48,797,707 0
November 2013........ 48,051,027 0
December 2013........ 47,297,933 0
January 2014......... 46,538,409 0
February 2014........ 45,772,437 0
March 2014........... 45,000,000 0
April 2014........... 44,221,082 0
May 2014............. 43,435,665 0
June 2014............ 42,643,733 0
July 2014............ 41,845,269 0
August 2014.......... 41,040,256 0
September 2014....... 40,228,678 0
October 2014......... 39,410,518 0
November 2014........ 38,585,759 0
December 2014........ 37,754,384 0
January 2015......... 36,916,378 0
February 2015........ 36,071,725 0
March 2015........... 35,220,406 0
April 2015........... 34,362,407 0
May 2015............. 33,497,710 0
June 2015............ 32,626,301 0
July 2015............ 31,748,162 0
August 2015.......... 30,863,277 0
September 2015....... 29,971,630 0
October 2015......... 29,073,206 0
November 2015........ 28,167,988 0
December 2015........ 27,255,960 0
January 2016......... 26,337,107 0
February 2016........ 25,411,412 0
March 2016........... 24,478,859 0
April 2016........... 23,539,434 0
May 2016............. 22,593,119 0
June 2016............ 21,639,901 0
A-15
177
CLASS C TARGET PRINCIPAL BALANCES (CONTINUED)
CLASS C CLASS C
MINIMUM SCHEDULED
PAYMENT DATE TARGET PRINCIPAL TARGET PRINCIPAL
OCCURRING IN BALANCE BALANCE
- ------------ ---------------- ----------------
($) ($)
July 2016............ 20,679,761 0
August 2016.......... 19,712,686 0
September 2016....... 18,738,660 0
October 2016......... 17,757,667 0
November 2016........ 16,769,691 0
December 2016........ 15,774,718 0
January 2017......... 14,772,731 0
February 2017........ 13,763,716 0
March 2017........... 12,747,657 0
April 2017........... 11,724,539 0
May 2017............. 10,694,346 0
($) ($)
CLASS C CLASS C
MINIMUM SCHEDULED
PAYMENT DATE TARGET PRINCIPAL TARGET PRINCIPAL
OCCURRING IN BALANCE BALANCE
- ------------ ---------------- ----------------
June 2017............ 9,657,064 0
July 2017............ 8,612,676 0
August 2017.......... 7,561,169 0
September 2017....... 6,502,527 0
October 2017......... 5,436,735 0
November 2017........ 4,363,778 0
December 2017........ 3,283,641 0
January 2018......... 2,196,309 0
February 2018........ 1,101,767 0
March 2018........... 0 0
A-16
178
APPENDIX 8
CLASS D TARGET PRINCIPAL BALANCES
CLASS D CLASS D
MINIMUM SCHEDULED
PAYMENT DATE TARGET PRINCIPAL TARGET PRINCIPAL
OCCURRING IN BALANCE BALANCE
- ------------ ---------------- ----------------
($) ($)
Closing.............. 110,000,000 110,000,000
April 1998........... 110,000,000 110,000,000
May 1998............. 110,000,000 110,000,000
June 1998............ 110,000,000 110,000,000
July 1998............ 110,000,000 110,000,000
August 1998.......... 110,000,000 110,000,000
September 1998....... 110,000,000 110,000,000
October 1998......... 110,000,000 110,000,000
November 1998........ 110,000,000 110,000,000
December 1998........ 110,000,000 110,000,000
January 1999......... 110,000,000 110,000,000
February 1999........ 110,000,000 110,000,000
March 1999........... 110,000,000 110,000,000
April 1999........... 110,000,000 110,000,000
May 1999............. 110,000,000 110,000,000
June 1999............ 110,000,000 110,000,000
July 1999............ 110,000,000 110,000,000
August 1999.......... 110,000,000 110,000,000
September 1999....... 110,000,000 110,000,000
October 1999......... 110,000,000 110,000,000
November 1999........ 110,000,000 110,000,000
December 1999........ 110,000,000 110,000,000
January 2000......... 110,000,000 110,000,000
February 2000........ 110,000,000 110,000,000
March 2000........... 110,000,000 110,000,000
April 2000........... 110,000,000 110,000,000
May 2000............. 110,000,000 110,000,000
June 2000............ 110,000,000 110,000,000
July 2000............ 110,000,000 110,000,000
August 2000.......... 110,000,000 110,000,000
September 2000....... 110,000,000 110,000,000
October 2000......... 110,000,000 109,999,467
November 2000........ 110,000,000 109,997,175
December 2000........ 110,000,000 109,992,508
January 2001......... 110,000,000 109,985,035
February 2001........ 110,000,000 109,974,404
March 2001........... 110,000,000 109,960,316
April 2001........... 110,000,000 109,942,503
May 2001............. 110,000,000 109,920,727
June 2001............ 110,000,000 109,894,765
July 2001............ 110,000,000 109,864,413
August 2001.......... 110,000,000 109,829,479
September 2001....... 110,000,000 109,789,782
October 2001......... 110,000,000 109,745,152
November 2001........ 110,000,000 109,695,426
December 2001........ 110,000,000 109,640,449
January 2002......... 110,000,000 109,580,070
February 2002........ 110,000,000 109,514,148
March 2002........... 110,000,000 109,442,544
April 2002........... 109,999,964 109,365,125
May 2002............. 109,999,750 109,281,762
June 2002............ 109,999,231 109,192,330
July 2002............ 109,998,291 109,096,708
August 2002.......... 109,996,824 108,994,779
($) ($)
CLASS D CLASS D
MINIMUM SCHEDULED
PAYMENT DATE TARGET PRINCIPAL TARGET PRINCIPAL
OCCURRING IN BALANCE BALANCE
- ------------ ---------------- ----------------
September 2002....... 109,994,732 108,886,428
October 2002......... 109,991,919 108,771,542
November 2002........ 109,988,294 108,650,013
December 2002........ 109,983,767 108,521,734
January 2003......... 109,978,253 108,386,602
February 2003........ 109,971,667 108,244,514
March 2003........... 109,963,927 108,095,372
April 2003........... 109,954,953 107,939,076
May 2003............. 109,944,664 107,775,533
June 2003............ 109,932,985 107,604,647
July 2003............ 109,919,838 107,426,326
August 2003.......... 109,905,147 107,240,481
September 2003....... 109,888,839 107,047,023
October 2003......... 109,870,840 106,845,863
November 2003........ 109,851,078 106,636,915
December 2003........ 109,829,481 106,420,097
January 2004......... 109,805,978 106,195,323
February 2004........ 109,780,499 105,962,511
March 2004........... 109,752,976 105,721,582
April 2004........... 109,723,339 105,472,455
May 2004............. 109,691,520 105,215,053
June 2004............ 109,657,452 104,949,296
July 2004............ 109,621,068 104,675,109
August 2004.......... 109,582,302 104,392,417
September 2004....... 109,541,088 104,101,145
October 2004......... 109,497,362 103,801,220
November 2004........ 109,451,057 103,492,568
December 2004........ 109,402,110 103,175,118
January 2005......... 109,350,458 102,848,800
February 2005........ 109,296,036 102,513,543
March 2005........... 109,238,782 102,169,278
April 2005........... 109,178,633 101,815,937
May 2005............. 109,115,527 101,453,451
June 2005............ 109,049,402 101,081,754
July 2005............ 108,980,197 100,700,779
August 2005.......... 108,907,850 100,310,462
September 2005....... 108,832,301 99,910,736
October 2005......... 108,753,490 99,501,537
November 2005........ 108,671,357 99,082,802
December 2005........ 108,585,840 98,654,468
January 2006......... 108,496,882 98,216,473
February 2006........ 108,404,423 97,768,754
March 2006........... 108,308,404 97,311,250
April 2006........... 108,208,766 96,843,901
May 2006............. 108,105,452 96,366,646
June 2006............ 107,998,402 95,879,426
July 2006............ 107,887,560 95,382,181
August 2006.......... 107,772,867 94,874,854
September 2006....... 107,654,266 94,357,385
October 2006......... 107,531,701 93,829,717
November 2006........ 107,405,114 93,291,793
December 2006........ 107,274,449 92,743,556
January 2007......... 107,139,650 92,184,951
February 2007........ 107,000,660 91,615,920
A-17
179
CLASS D TARGET PRINCIPAL BALANCES (CONTINUED)
CLASS D CLASS D
MINIMUM SCHEDULED
PAYMENT DATE TARGET PRINCIPAL TARGET PRINCIPAL
OCCURRING IN BALANCE BALANCE
- ------------ ---------------- ----------------
($) ($)
March 2007........... 106,857,423 91,036,410
April 2007........... 106,709,884 90,446,364
May 2007............. 106,557,987 89,845,729
June 2007............ 106,401,676 89,234,450
July 2007............ 106,240,898 88,612,474
August 2007.......... 106,075,596 87,979,746
September 2007....... 105,905,716 87,336,215
October 2007......... 105,731,204 86,681,828
November 2007........ 105,552,004 86,016,532
December 2007........ 105,368,064 85,340,276
January 2008......... 105,179,329 84,653,009
February 2008........ 104,985,745 83,954,678
March 2008........... 104,787,259 83,245,234
April 2008........... 104,583,816 82,524,625
May 2008............. 104,375,365 81,792,802
June 2008............ 104,161,850 81,049,716
July 2008............ 103,943,221 80,295,316
August 2008.......... 103,719,423 79,529,553
September 2008....... 103,490,405 78,752,379
October 2008......... 103,256,113 77,963,745
November 2008........ 103,016,495 77,163,603
December 2008........ 102,771,500 76,351,905
January 2009......... 102,521,074 75,528,603
February 2009........ 102,265,166 74,693,649
March 2009........... 102,003,725 73,846,998
April 2009........... 101,736,698 72,988,602
May 2009............. 101,464,034 72,118,414
June 2009............ 101,185,682 71,236,389
July 2009............ 100,901,591 70,342,480
August 2009.......... 100,611,709 69,436,641
September 2009....... 100,315,985 68,518,827
October 2009......... 100,014,369 67,588,993
November 2009........ 99,706,810 66,647,094
December 2009........ 99,393,256 65,693,085
January 2010......... 99,073,659 64,726,922
February 2010........ 98,747,967 63,748,560
March 2010........... 98,416,130 62,757,955
April 2010........... 98,078,099 61,755,064
May 2010............. 97,733,822 60,739,843
June 2010............ 97,383,250 59,712,248
July 2010............ 97,026,334 58,672,237
August 2010.......... 96,663,024 57,619,767
September 2010....... 96,293,270 56,554,794
October 2010......... 95,917,023 55,477,277
November 2010........ 95,534,233 54,387,174
December 2010........ 95,144,852 53,284,441
January 2011......... 94,748,829 52,169,038
February 2011........ 94,346,117 51,040,922
March 2011........... 93,936,666 49,900,053
April 2011........... 93,520,427 48,746,388
May 2011............. 93,097,353 47,579,888
June 2011............ 92,667,393 46,400,510
July 2011............ 92,230,500 45,208,215
August 2011.......... 91,786,625 44,002,962
September 2011....... 91,335,720 42,784,710
October 2011......... 90,877,737 41,553,420
($) ($)
CLASS D CLASS D
MINIMUM SCHEDULED
PAYMENT DATE TARGET PRINCIPAL TARGET PRINCIPAL
OCCURRING IN BALANCE BALANCE
- ------------ ---------------- ----------------
November 2011........ 90,412,628 40,309,052
December 2011........ 89,940,344 39,051,565
January 2012......... 89,460,838 37,780,920
February 2012........ 88,974,061 36,497,078
March 2012........... 88,479,967 35,200,000
April 2012........... 87,978,507 33,889,646
May 2012............. 87,469,634 32,565,978
June 2012............ 86,953,300 31,228,957
July 2012............ 86,429,459 29,878,543
August 2012.......... 85,898,062 28,514,700
September 2012....... 85,359,062 27,137,389
October 2012......... 84,812,413 25,746,570
November 2012........ 84,258,067 24,342,208
December 2012........ 83,695,978 22,924,263
January 2013......... 83,126,098 21,492,699
February 2013........ 82,548,380 20,047,477
March 2013........... 81,962,779 18,588,561
April 2013........... 81,369,247 17,115,913
May 2013............. 80,767,737 15,629,496
June 2013............ 80,158,204 14,129,273
July 2013............ 79,540,600 12,615,208
August 2013.......... 78,914,880 11,087,264
September 2013....... 78,280,998 9,545,405
October 2013......... 77,638,906 7,989,594
November 2013........ 76,988,559 6,419,794
December 2013........ 76,329,911 4,835,971
January 2014......... 75,662,916 3,238,088
February 2014........ 74,987,529 1,626,110
March 2014........... 74,303,702 0
April 2014........... 73,611,391 0
May 2014............. 72,910,550 0
June 2014............ 72,201,134 0
July 2014............ 71,483,096 0
August 2014.......... 70,756,391 0
September 2014....... 70,020,974 0
October 2014......... 69,276,800 0
November 2014........ 68,523,823 0
December 2014........ 67,761,998 0
January 2015......... 66,991,281 0
February 2015........ 66,211,625 0
March 2015........... 65,422,986 0
April 2015........... 64,625,320 0
May 2015............. 63,818,580 0
June 2015............ 63,002,723 0
July 2015............ 62,177,704 0
August 2015.......... 61,343,478 0
September 2015....... 60,500,000 0
October 2015......... 59,647,226 0
November 2015........ 58,785,112 0
December 2015........ 57,913,612 0
January 2016......... 57,032,683 0
February 2016........ 56,142,281 0
March 2016........... 55,242,360 0
April 2016........... 54,332,878 0
May 2016............. 53,413,789 0
June 2016............ 52,485,050 0
A-18
180
CLASS D TARGET PRINCIPAL BALANCES (CONTINUED)
CLASS D CLASS D
MINIMUM SCHEDULED
PAYMENT DATE TARGET PRINCIPAL TARGET PRINCIPAL
OCCURRING IN BALANCE BALANCE
- ------------ ---------------- ----------------
($) ($)
July 2016............ 51,546,617 0
August 2016.......... 50,598,446 0
September 2016....... 49,640,492 0
October 2016......... 48,672,713 0
November 2016........ 47,695,064 0
December 2016........ 46,707,501 0
January 2017......... 45,709,982 0
February 2017........ 44,702,462 0
March 2017........... 43,684,897 0
April 2017........... 42,657,245 0
May 2017............. 41,619,462 0
June 2017............ 40,571,504 0
July 2017............ 39,513,328 0
August 2017.......... 38,444,891 0
September 2017....... 37,366,149 0
October 2017......... 36,277,060 0
November 2017........ 35,177,581 0
December 2017........ 34,067,667 0
January 2018......... 32,947,277 0
February 2018........ 31,816,367 0
March 2018........... 30,674,894 0
April 2018........... 29,522,816 0
May 2018............. 28,360,089 0
($) ($)
CLASS D CLASS D
MINIMUM SCHEDULED
PAYMENT DATE TARGET PRINCIPAL TARGET PRINCIPAL
OCCURRING IN BALANCE BALANCE
- ------------ ---------------- ----------------
June 2018............ 27,186,671 0
July 2018............ 26,002,519 0
August 2018.......... 24,807,591 0
September 2018....... 23,601,843 0
October 2018......... 22,385,234 0
November 2018........ 21,157,720 0
December 2018........ 19,919,260 0
January 2019......... 18,669,810 0
February 2019........ 17,409,329 0
March 2019........... 16,137,774 0
April 2019........... 14,855,103 0
May 2019............. 13,561,273 0
June 2019............ 12,256,242 0
July 2019............ 10,939,969 0
August 2019.......... 9,612,411 0
September 2019....... 8,273,526 0
October 2019......... 6,923,272 0
November 2019........ 5,561,607 0
December 2019........ 4,188,489 0
January 2020......... 2,803,877 0
February 2020........ 1,407,728 0
March 2020........... 0 0
A-19
181
APPENDIX 9
POOL FACTORS
PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS
OCCURRING IN A-1 A-2 B-1 C-1 D-1
------------ -------- -------- -------- -------- --------
Closing.............. 100.00% 100.00% 100.00% 100.00% 100.00%
April 1998........... 100.00% 97.42% 99.52% 100.00% 100.00%
May 1998............. 100.00% 96.44% 99.21% 100.00% 100.00%
June 1998............ 100.00% 95.22% 98.91% 100.00% 100.00%
July 1998............ 100.00% 94.50% 98.60% 100.00% 100.00%
August 1998.......... 100.00% 93.49% 98.28% 100.00% 100.00%
September 1998....... 100.00% 92.26% 97.97% 100.00% 100.00%
October 1998......... 100.00% 91.52% 97.66% 100.00% 100.00%
November 1998........ 100.00% 90.49% 97.34% 100.00% 100.00%
December 1998........ 100.00% 89.30% 97.03% 100.00% 100.00%
January 1999......... 100.00% 88.60% 96.71% 100.00% 100.00%
February 1999........ 100.00% 87.77% 96.39% 100.00% 100.00%
March 1999........... 100.00% 86.56% 96.07% 100.00% 100.00%
April 1999........... 100.00% 85.67% 95.75% 100.00% 100.00%
May 1999............. 100.00% 84.98% 95.42% 100.00% 100.00%
June 1999............ 100.00% 83.59% 95.10% 100.00% 100.00%
July 1999............ 100.00% 82.68% 94.77% 100.00% 100.00%
August 1999.......... 100.00% 81.96% 94.45% 100.00% 100.00%
September 1999....... 100.00% 80.55% 94.12% 100.00% 100.00%
October 1999......... 100.00% 79.63% 93.79% 100.00% 100.00%
November 1999........ 100.00% 78.90% 93.46% 99.99% 100.00%
December 1999........ 100.00% 77.46% 93.12% 99.97% 100.00%
January 2000......... 100.00% 76.50% 92.79% 99.95% 100.00%
February 2000........ 100.00% 75.74% 92.46% 99.91% 100.00%
March 2000........... 100.00% 74.28% 92.12% 99.88% 100.00%
April 2000........... 100.00% 73.31% 91.78% 99.83% 100.00%
May 2000............. 100.00% 72.52% 91.44% 99.78% 100.00%
June 2000............ 100.00% 71.05% 91.10% 99.72% 100.00%
July 2000............ 100.00% 70.05% 90.76% 99.65% 100.00%
August 2000.......... 100.00% 69.26% 90.42% 99.58% 100.00%
September 2000....... 100.00% 67.77% 90.07% 99.50% 100.00%
October 2000......... 100.00% 66.77% 89.72% 99.41% 100.00%
November 2000........ 100.00% 65.99% 89.28% 99.31% 100.00%
December 2000........ 100.00% 64.82% 88.93% 99.21% 99.99%
January 2001......... 100.00% 63.63% 88.58% 99.10% 99.99%
February 2001........ 100.00% 62.64% 88.23% 98.98% 99.98%
March 2001........... 100.00% 61.39% 87.87% 98.85% 99.96%
April 2001........... 100.00% 60.34% 87.52% 98.72% 99.95%
May 2001............. 100.00% 59.25% 87.16% 98.58% 99.93%
June 2001............ 100.00% 58.00% 86.71% 98.43% 99.90%
July 2001............ 100.00% 56.93% 86.35% 98.27% 99.88%
August 2001.......... 100.00% 55.85% 85.99% 98.11% 99.84%
September 2001....... 100.00% 54.56% 85.63% 97.94% 99.81%
October 2001......... 100.00% 53.50% 85.17% 97.76% 99.77%
November 2001........ 100.00% 52.41% 84.81% 97.57% 99.72%
December 2001........ 100.00% 51.10% 84.45% 97.38% 99.67%
January 2002......... 100.00% 50.05% 83.99% 97.18% 99.62%
February 2002........ 100.00% 48.95% 83.62% 96.97% 99.56%
March 2002........... 100.00% 47.61% 83.25% 96.75% 99.49%
April 2002........... 100.00% 46.54% 82.79% 96.53% 99.42%
May 2002............. 100.00% 45.42% 82.42% 96.30% 99.35%
June 2002............ 100.00% 44.13% 81.95% 96.06% 99.27%
July 2002............ 100.00% 43.02% 81.58% 95.81% 99.18%
August 2002.......... 100.00% 41.93% 81.11% 95.56% 99.09%
September 2002....... 100.00% 40.60% 80.74% 95.30% 98.99%
October 2002......... 100.00% 39.51% 80.27% 95.03% 98.88%
PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS
OCCURRING IN A-1 A-2 B-1 C-1 D-1
------------ -------- -------- -------- -------- --------
November 2002........ 100.00% 38.40% 79.89% 94.75% 98.77%
December 2002........ 100.00% 37.08% 79.42% 94.47% 98.66%
January 2003......... 100.00% 35.98% 78.95% 94.18% 98.53%
February 2003........ 100.00% 34.85% 78.57% 93.88% 98.40%
March 2003........... 100.00% 33.58% 78.09% 93.57% 98.27%
April 2003........... 100.00% 32.51% 77.62% 93.25% 98.13%
May 2003............. 100.00% 31.34% 77.15% 92.93% 97.98%
June 2003............ 100.00% 30.19% 76.68% 92.60% 97.82%
July 2003............ 100.00% 29.02% 76.20% 92.26% 97.66%
August 2003.......... 100.00% 27.84% 75.81% 91.92% 97.49%
September 2003....... 100.00% 26.68% 75.34% 91.56% 97.32%
October 2003......... 100.00% 25.52% 74.77% 91.20% 97.13%
November 2003........ 100.00% 24.35% 74.30% 90.83% 96.94%
December 2003........ 100.00% 23.16% 73.82% 90.46% 96.75%
January 2004......... 100.00% 21.16% 71.52% 90.07% 96.54%
February 2004........ 100.00% 20.05% 71.06% 89.68% 96.33%
March 2004........... 100.00% 18.90% 70.60% 89.28% 96.11%
April 2004........... 100.00% 17.84% 70.06% 88.87% 95.88%
May 2004............. 100.00% 16.73% 69.59% 88.46% 95.65%
June 2004............ 100.00% 15.66% 69.05% 88.03% 95.41%
July 2004............ 100.00% 14.55% 68.59% 87.60% 95.16%
August 2004.......... 100.00% 13.47% 68.05% 87.17% 94.90%
September 2004....... 100.00% 12.37% 67.59% 86.72% 94.64%
October 2004......... 100.00% 11.29% 67.05% 86.27% 94.36%
November 2004........ 100.00% 10.21% 66.51% 85.80% 94.08%
December 2004........ 100.00% 9.12% 65.97% 85.34% 93.80%
January 2005......... 100.00% 8.02% 65.43% 84.86% 93.50%
February 2005........ 100.00% 6.90% 64.96% 84.37% 93.19%
March 2005........... 100.00% 5.75% 64.35% 83.88% 92.88%
April 2005........... 100.00% 4.65% 63.81% 83.38% 92.56%
May 2005............. 100.00% 3.52% 63.27% 82.87% 92.23%
June 2005............ 100.00% 2.41% 62.73% 82.36% 91.89%
July 2005............ 100.00% 1.28% 62.19% 81.83% 91.55%
August 2005.......... 100.00% 0.18% 61.58% 81.30% 91.19%
September 2005....... 99.21% 0.00% 61.05% 80.76% 90.83%
October 2005......... 98.25% 0.00% 60.44% 80.22% 90.46%
November 2005........ 97.31% 0.00% 59.83% 79.66% 90.08%
December 2005........ 96.35% 0.00% 59.30% 79.10% 89.69%
January 2006......... 95.43% 0.00% 58.69% 78.53% 89.29%
February 2006........ 94.50% 0.00% 58.09% 77.95% 88.88%
March 2006........... 93.52% 0.00% 57.49% 77.36% 88.46%
April 2006........... 92.61% 0.00% 56.89% 76.77% 88.04%
May 2006............. 91.68% 0.00% 56.29% 76.17% 87.61%
June 2006............ 90.79% 0.00% 55.62% 75.56% 87.16%
July 2006............ 89.87% 0.00% 55.02% 74.94% 86.71%
August 2006.......... 88.98% 0.00% 54.36% 74.32% 86.25%
September 2006....... 88.07% 0.00% 53.77% 73.68% 85.78%
October 2006......... 87.15% 0.00% 53.11% 73.04% 85.30%
November 2006........ 86.25% 0.00% 52.46% 72.39% 84.81%
December 2006........ 85.33% 0.00% 51.81% 71.74% 84.31%
January 2007......... 84.43% 0.00% 51.16% 71.07% 83.80%
February 2007........ 83.53% 0.00% 50.51% 70.40% 83.29%
March 2007........... 82.58% 0.00% 49.86% 69.72% 82.76%
April 2007........... 81.69% 0.00% 49.16% 69.03% 82.22%
May 2007............. 80.76% 0.00% 48.52% 68.34% 81.68%
June 2007............ 79.86% 0.00% 47.82% 67.64% 81.12%
A-20
182
POOL FACTORS (CONTINUED)
PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS
OCCURRING IN A-1 A-2 B-1 C-1 D-1
------------ -------- -------- -------- -------- --------
July 2007............ 78.94% 0.00% 47.12% 66.92% 80.56%
August 2007.......... 78.03% 0.00% 46.43% 66.20% 79.98%
September 2007....... 77.12% 0.00% 45.74% 65.48% 79.40%
October 2007......... 76.19% 0.00% 45.06% 64.74% 78.80%
November 2007........ 75.27% 0.00% 44.38% 64.00% 78.20%
December 2007........ 74.35% 0.00% 43.64% 63.25% 77.58%
January 2008......... 73.41% 0.00% 42.97% 62.49% 76.96%
February 2008........ 72.48% 0.00% 42.24% 61.72% 76.32%
March 2008........... 71.51% 0.00% 41.52% 60.95% 75.68%
April 2008........... 70.57% 0.00% 40.80% 60.17% 75.02%
May 2008............. 69.70% 0.00% 40.09% 59.38% 74.36%
June 2008............ 68.83% 0.00% 39.38% 58.58% 73.68%
July 2008............ 67.96% 0.00% 38.62% 57.77% 73.00%
August 2008.......... 67.09% 0.00% 37.92% 56.96% 72.30%
September 2008....... 66.23% 0.00% 37.18% 56.14% 71.59%
October 2008......... 65.37% 0.00% 36.44% 55.31% 70.88%
November 2008........ 64.52% 0.00% 35.70% 54.47% 70.15%
December 2008........ 63.68% 0.00% 34.92% 53.63% 69.41%
January 2009......... 62.84% 0.00% 34.20% 52.77% 68.66%
February 2009........ 62.01% 0.00% 33.43% 51.91% 67.90%
March 2009........... 61.12% 0.00% 32.72% 51.04% 67.13%
April 2009........... 60.33% 0.00% 31.97% 50.17% 66.35%
May 2009............. 59.52% 0.00% 31.22% 49.28% 65.56%
June 2009............ 58.72% 0.00% 30.43% 48.39% 64.76%
July 2009............ 57.90% 0.00% 29.70% 47.49% 63.95%
August 2009.......... 57.10% 0.00% 28.93% 46.58% 63.12%
September 2009....... 56.30% 0.00% 28.17% 45.66% 62.29%
October 2009......... 55.49% 0.00% 27.42% 44.74% 61.44%
November 2009........ 54.69% 0.00% 26.67% 43.81% 60.59%
December 2009........ 53.88% 0.00% 25.89% 42.87% 59.72%
January 2010......... 53.06% 0.00% 25.16% 41.92% 58.84%
February 2010........ 52.25% 0.00% 24.40% 40.96% 57.95%
March 2010........... 51.41% 0.00% 23.65% 40.00% 57.05%
April 2010........... 50.60% 0.00% 22.86% 39.03% 56.14%
May 2010............. 49.76% 0.00% 22.13% 38.05% 55.22%
June 2010............ 48.94% 0.00% 21.37% 37.06% 54.28%
July 2010............ 48.11% 0.00% 20.61% 36.06% 53.34%
August 2010.......... 47.27% 0.00% 19.87% 35.06% 52.38%
September 2010....... 46.44% 0.00% 19.14% 34.05% 51.41%
October 2010......... 45.59% 0.00% 18.38% 33.03% 50.43%
November 2010........ 44.75% 0.00% 17.64% 32.00% 49.44%
December 2010........ 43.92% 0.00% 16.92% 30.97% 48.44%
January 2011......... 43.09% 0.00% 16.22% 29.92% 47.43%
February 2011........ 42.29% 0.00% 15.49% 28.87% 46.40%
March 2011........... 41.46% 0.00% 14.81% 27.81% 45.36%
April 2011........... 40.72% 0.00% 14.08% 26.75% 44.31%
PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS
OCCURRING IN A-1 A-2 B-1 C-1 D-1
------------ -------- -------- -------- -------- --------
May 2011............. 39.99% 0.00% 13.39% 25.67% 43.25%
June 2011............ 39.25% 0.00% 12.71% 24.59% 42.18%
July 2011............ 38.52% 0.00% 12.02% 23.50% 41.10%
August 2011.......... 37.79% 0.00% 11.34% 22.40% 40.00%
September 2011....... 37.06% 0.00% 10.67% 21.29% 38.90%
October 2011......... 36.32% 0.00% 9.99% 20.18% 37.78%
November 2011........ 35.58% 0.00% 9.32% 19.05% 36.64%
December 2011........ 34.83% 0.00% 8.66% 17.92% 35.50%
January 2012......... 34.09% 0.00% 8.03% 16.78% 34.35%
February 2012........ 33.36% 0.00% 7.37% 15.64% 33.18%
March 2012........... 32.62% 0.00% 6.74% 14.48% 32.00%
April 2012........... 31.88% 0.00% 6.12% 13.32% 30.81%
May 2012............. 31.16% 0.00% 5.49% 12.15% 29.61%
June 2012............ 30.41% 0.00% 4.92% 10.97% 28.39%
July 2012............ 29.63% 0.00% 4.33% 9.78% 27.16%
August 2012.......... 28.83% 0.00% 3.73% 8.59% 26.00%
September 2012....... 27.98% 0.00% 3.18% 7.38% 24.91%
October 2012......... 27.15% 0.00% 2.62% 6.17% 23.71%
November 2012........ 26.34% 0.00% 2.06% 4.95% 22.44%
December 2012........ 25.54% 0.00% 1.54% 3.73% 21.07%
January 2013......... 24.74% 0.00% 1.02% 2.49% 19.66%
February 2013........ 23.94% 0.00% 0.51% 1.25% 18.22%
March 2013........... 23.12% 0.00% 0.00% 0.00% 16.90%
April 2013........... 21.92% 0.00% 0.00% 0.00% 15.56%
May 2013............. 20.91% 0.00% 0.00% 0.00% 14.21%
June 2013............ 19.91% 0.00% 0.00% 0.00% 12.84%
July 2013............ 18.91% 0.00% 0.00% 0.00% 11.47%
August 2013.......... 17.91% 0.00% 0.00% 0.00% 10.08%
September 2013....... 16.94% 0.00% 0.00% 0.00% 8.68%
October 2013......... 16.01% 0.00% 0.00% 0.00% 7.26%
November 2013........ 15.07% 0.00% 0.00% 0.00% 5.84%
December 2013........ 14.14% 0.00% 0.00% 0.00% 4.40%
January 2014......... 13.22% 0.00% 0.00% 0.00% 2.94%
February 2014........ 12.31% 0.00% 0.00% 0.00% 1.48%
March 2014........... 11.38% 0.00% 0.00% 0.00% 0.00%
April 2014........... 10.14% 0.00% 0.00% 0.00% 0.00%
May 2014............. 8.89% 0.00% 0.00% 0.00% 0.00%
June 2014............ 7.63% 0.00% 0.00% 0.00% 0.00%
July 2014............ 6.36% 0.00% 0.00% 0.00% 0.00%
August 2014.......... 5.10% 0.00% 0.00% 0.00% 0.00%
September 2014....... 3.82% 0.00% 0.00% 0.00% 0.00%
October 2014......... 2.57% 0.00% 0.00% 0.00% 0.00%
November 2014........ 1.31% 0.00% 0.00% 0.00% 0.00%
December 2014........ 0.04% 0.00% 0.00% 0.00% 0.00%
January 2015......... 0.00% 0.00% 0.00% 0.00% 0.00%
A-21
183
APPENDIX 10
EXTENDED POOL FACTORS
PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS
OCCURRING IN A-1 A-2 B-1 C-1 D-1
- ------------ -------- -------- -------- -------- --------
Closing.............. 100.00% 100.00% 100.00% 100.00% 100.00%
April 1998........... 100.00% 99.08% 100.00% 100.00% 100.00%
May 1998............. 100.00% 98.41% 100.00% 100.00% 100.00%
June 1998............ 100.00% 97.73% 100.00% 100.00% 100.00%
July 1998............ 100.00% 97.06% 100.00% 100.00% 100.00%
August 1998.......... 100.00% 96.38% 100.00% 100.00% 100.00%
September 1998....... 100.00% 95.70% 100.00% 100.00% 100.00%
October 1998......... 100.00% 94.98% 100.00% 100.00% 100.00%
November 1998........ 100.00% 94.30% 100.00% 100.00% 100.00%
December 1998........ 100.00% 93.61% 100.00% 100.00% 100.00%
January 1999......... 100.00% 92.92% 100.00% 100.00% 100.00%
February 1999........ 100.00% 92.22% 100.00% 100.00% 100.00%
March 1999........... 100.00% 91.49% 100.00% 100.00% 100.00%
April 1999........... 100.00% 90.79% 99.52% 100.00% 100.00%
May 1999............. 100.00% 90.09% 99.21% 100.00% 100.00%
June 1999............ 100.00% 89.35% 98.91% 100.00% 100.00%
July 1999............ 100.00% 88.64% 98.60% 100.00% 100.00%
August 1999.......... 100.00% 87.90% 98.28% 100.00% 100.00%
September 1999....... 100.00% 87.18% 97.97% 100.00% 100.00%
October 1999......... 100.00% 86.44% 97.66% 100.00% 100.00%
November 1999........ 100.00% 85.72% 97.34% 100.00% 100.00%
December 1999........ 100.00% 84.96% 97.03% 100.00% 100.00%
January 2000......... 100.00% 84.20% 96.71% 100.00% 100.00%
February 2000........ 100.00% 83.45% 96.39% 100.00% 100.00%
March 2000........... 100.00% 82.68% 96.07% 100.00% 100.00%
April 2000........... 100.00% 81.92% 95.75% 100.00% 100.00%
May 2000............. 100.00% 81.15% 95.42% 100.00% 100.00%
June 2000............ 100.00% 80.38% 95.10% 100.00% 100.00%
July 2000............ 100.00% 79.61% 94.77% 100.00% 100.00%
August 2000.......... 100.00% 78.80% 94.45% 100.00% 100.00%
September 2000....... 100.00% 78.02% 94.12% 100.00% 100.00%
October 2000......... 100.00% 77.21% 93.79% 100.00% 100.00%
November 2000........ 100.00% 76.43% 93.46% 100.00% 100.00%
December 2000........ 100.00% 75.61% 93.12% 100.00% 100.00%
January 2001......... 100.00% 74.79% 92.79% 100.00% 100.00%
February 2001........ 100.00% 73.97% 92.46% 100.00% 100.00%
March 2001........... 100.00% 73.15% 92.12% 100.00% 100.00%
April 2001........... 100.00% 72.32% 91.78% 100.00% 100.00%
May 2001............. 100.00% 71.49% 91.44% 100.00% 100.00%
June 2001............ 100.00% 70.66% 91.10% 100.00% 100.00%
July 2001............ 100.00% 69.80% 90.76% 100.00% 100.00%
August 2001.......... 100.00% 68.96% 90.42% 100.00% 100.00%
September 2001....... 100.00% 68.09% 90.07% 100.00% 100.00%
October 2001......... 100.00% 67.22% 89.72% 100.00% 100.00%
November 2001........ 100.00% 66.35% 89.28% 99.99% 100.00%
December 2001........ 100.00% 65.47% 88.93% 99.97% 100.00%
January 2002......... 100.00% 64.60% 88.58% 99.95% 100.00%
February 2002........ 100.00% 63.72% 88.23% 99.91% 100.00%
March 2002........... 100.00% 62.84% 87.87% 99.88% 100.00%
April 2002........... 100.00% 61.92% 87.52% 99.83% 100.00%
May 2002............. 100.00% 61.04% 87.16% 99.78% 100.00%
June 2002............ 100.00% 60.12% 86.71% 99.72% 100.00%
July 2002............ 100.00% 59.20% 86.35% 99.65% 100.00%
August 2002.......... 100.00% 58.28% 85.99% 99.58% 100.00%
September 2002....... 100.00% 57.36% 85.63% 99.50% 100.00%
October 2002......... 100.00% 56.44% 85.17% 99.41% 100.00%
PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS
OCCURRING IN A-1 A-2 B-1 C-1 D-1
- ------------ -------- -------- -------- -------- --------
November 2002........ 100.00% 55.48% 84.81% 99.31% 100.00%
December 2002........ 100.00% 54.55% 84.45% 99.21% 99.99%
January 2003......... 100.00% 53.60% 83.99% 99.10% 99.99%
February 2003........ 100.00% 52.64% 83.62% 98.98% 99.98%
March 2003........... 100.00% 51.68% 83.25% 98.85% 99.96%
April 2003........... 100.00% 50.71% 82.79% 98.72% 99.95%
May 2003............. 100.00% 49.75% 82.42% 98.58% 99.93%
June 2003............ 100.00% 48.78% 81.95% 98.43% 99.90%
July 2003............ 100.00% 47.79% 81.58% 98.27% 99.88%
August 2003.......... 100.00% 46.79% 81.11% 98.11% 99.84%
September 2003....... 100.00% 45.79% 80.74% 97.94% 99.81%
October 2003......... 100.00% 44.79% 80.27% 97.76% 99.77%
November 2003........ 100.00% 43.79% 79.89% 97.57% 99.72%
December 2003........ 100.00% 42.79% 79.42% 97.38% 99.67%
January 2004......... 100.00% 37.79% 78.95% 97.18% 99.62%
February 2004........ 100.00% 36.80% 78.57% 96.97% 99.56%
March 2004........... 100.00% 35.83% 78.09% 96.75% 99.49%
April 2004........... 100.00% 34.84% 77.62% 96.53% 99.42%
May 2004............. 100.00% 33.82% 77.15% 96.30% 99.35%
June 2004............ 100.00% 32.83% 76.68% 96.06% 99.27%
July 2004............ 100.00% 31.81% 76.20% 95.81% 99.18%
August 2004.......... 100.00% 30.81% 75.81% 95.56% 99.09%
September 2004....... 100.00% 29.79% 75.34% 95.30% 98.99%
October 2004......... 100.00% 28.74% 74.77% 95.03% 98.88%
November 2004........ 100.00% 27.71% 74.30% 94.75% 98.77%
December 2004........ 100.00% 26.69% 73.82% 94.47% 98.66%
January 2005......... 100.00% 25.64% 71.52% 94.18% 98.53%
February 2005........ 100.00% 24.59% 71.06% 93.88% 98.40%
March 2005........... 100.00% 23.54% 70.60% 93.57% 98.27%
April 2005........... 100.00% 22.49% 70.06% 93.25% 98.13%
May 2005............. 100.00% 21.41% 69.59% 92.93% 97.98%
June 2005............ 100.00% 20.36% 69.05% 92.60% 97.82%
July 2005............ 100.00% 19.28% 68.59% 92.26% 97.66%
August 2005.......... 100.00% 18.21% 68.05% 91.92% 97.49%
September 2005....... 100.00% 17.13% 67.59% 91.56% 97.32%
October 2005......... 100.00% 16.03% 67.05% 91.20% 97.13%
November 2005........ 100.00% 14.93% 66.51% 90.83% 96.94%
December 2005........ 100.00% 13.86% 65.97% 90.46% 96.75%
January 2006......... 100.00% 12.74% 65.43% 90.07% 96.54%
February 2006........ 100.00% 11.64% 64.96% 89.68% 96.33%
March 2006........... 100.00% 10.54% 64.35% 89.28% 96.11%
April 2006........... 100.00% 9.42% 63.81% 88.87% 95.88%
May 2006............. 100.00% 8.30% 63.27% 88.46% 95.65%
June 2006............ 100.00% 7.18% 62.73% 88.03% 95.41%
July 2006............ 100.00% 6.06% 62.19% 87.60% 95.16%
August 2006.......... 100.00% 4.92% 61.58% 87.17% 94.90%
September 2006....... 100.00% 3.78% 61.05% 86.72% 94.64%
October 2006......... 100.00% 2.65% 60.44% 86.27% 94.36%
November 2006........ 100.00% 1.51% 59.83% 85.80% 94.08%
December 2006........ 100.00% 0.35% 59.30% 85.34% 93.80%
January 2007......... 99.33% 0.00% 58.69% 84.86% 93.50%
February 2007........ 98.35% 0.00% 58.09% 84.37% 93.19%
March 2007........... 97.37% 0.00% 57.49% 83.88% 92.88%
April 2007........... 96.37% 0.00% 56.89% 83.38% 92.56%
May 2007............. 95.38% 0.00% 56.29% 82.87% 92.23%
June 2007............ 94.40% 0.00% 55.62% 82.36% 91.89%
A-22
184
EXTENDED POOL FACTORS (CONTINUED)
PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS
OCCURRING IN A-1 A-2 B-1 C-1 D-1
- ------------ -------- -------- -------- -------- --------
July 2007............ 93.39% 0.00% 55.02% 81.83% 91.55%
August 2007.......... 92.40% 0.00% 54.36% 81.30% 91.19%
September 2007....... 91.39% 0.00% 53.77% 80.76% 90.83%
October 2007......... 90.40% 0.00% 53.11% 80.22% 90.46%
November 2007........ 89.40% 0.00% 52.46% 79.66% 90.08%
December 2007........ 88.38% 0.00% 51.81% 79.10% 89.69%
January 2008......... 87.38% 0.00% 51.16% 78.53% 89.29%
February 2008........ 86.37% 0.00% 50.51% 77.95% 88.88%
March 2008........... 85.36% 0.00% 49.86% 77.36% 88.46%
April 2008........... 84.33% 0.00% 49.16% 76.77% 88.04%
May 2008............. 83.32% 0.00% 48.52% 76.17% 87.61%
June 2008............ 82.30% 0.00% 47.82% 75.56% 87.16%
July 2008............ 81.28% 0.00% 47.12% 74.94% 86.71%
August 2008.......... 80.25% 0.00% 46.43% 74.32% 86.25%
September 2008....... 79.23% 0.00% 45.74% 73.68% 85.78%
October 2008......... 78.21% 0.00% 45.06% 73.04% 85.30%
November 2008........ 77.17% 0.00% 44.38% 72.39% 84.81%
December 2008........ 76.15% 0.00% 43.64% 71.74% 84.31%
January 2009......... 75.11% 0.00% 42.97% 71.07% 83.80%
February 2009........ 74.08% 0.00% 42.24% 70.40% 83.29%
March 2009........... 73.06% 0.00% 41.52% 69.72% 82.76%
April 2009........... 72.03% 0.00% 40.80% 69.03% 82.22%
May 2009............. 71.00% 0.00% 40.09% 68.34% 81.68%
June 2009............ 69.96% 0.00% 39.38% 67.64% 81.12%
July 2009............ 68.92% 0.00% 38.62% 66.92% 80.56%
August 2009.......... 67.90% 0.00% 37.92% 66.20% 79.98%
September 2009....... 66.86% 0.00% 37.18% 65.48% 79.40%
October 2009......... 65.82% 0.00% 36.44% 64.74% 78.80%
November 2009........ 64.79% 0.00% 35.70% 64.00% 78.20%
December 2009........ 63.76% 0.00% 34.92% 63.25% 77.58%
January 2010......... 62.72% 0.00% 34.20% 62.49% 76.96%
February 2010........ 61.70% 0.00% 33.43% 61.72% 76.32%
March 2010........... 60.66% 0.00% 32.72% 60.95% 75.68%
April 2010........... 59.63% 0.00% 31.97% 60.17% 75.02%
May 2010............. 58.60% 0.00% 31.22% 59.38% 74.36%
June 2010............ 57.57% 0.00% 30.43% 58.58% 73.68%
July 2010............ 56.55% 0.00% 29.70% 57.77% 73.00%
August 2010.......... 55.51% 0.00% 28.93% 56.96% 72.30%
September 2010....... 54.49% 0.00% 28.17% 56.14% 71.59%
October 2010......... 53.47% 0.00% 27.42% 55.31% 70.88%
November 2010........ 52.44% 0.00% 26.67% 54.47% 70.15%
December 2010........ 51.47% 0.00% 25.89% 53.63% 69.41%
January 2011......... 50.50% 0.00% 25.16% 52.77% 68.66%
February 2011........ 49.54% 0.00% 24.40% 51.91% 67.90%
March 2011........... 48.59% 0.00% 23.65% 51.04% 67.13%
April 2011........... 47.63% 0.00% 22.86% 50.17% 66.35%
May 2011............. 46.67% 0.00% 22.13% 49.28% 65.56%
June 2011............ 45.73% 0.00% 21.37% 48.39% 64.76%
July 2011............ 44.78% 0.00% 20.61% 47.49% 63.95%
August 2011.......... 43.84% 0.00% 19.87% 46.58% 63.12%
September 2011....... 42.89% 0.00% 19.14% 45.66% 62.29%
October 2011......... 41.95% 0.00% 18.38% 44.74% 61.44%
November 2011........ 41.01% 0.00% 17.64% 43.81% 60.59%
December 2011........ 40.08% 0.00% 16.92% 42.87% 59.72%
January 2012......... 39.16% 0.00% 16.22% 41.92% 58.84%
February 2012........ 38.23% 0.00% 15.49% 40.96% 57.95%
March 2012........... 37.31% 0.00% 14.81% 40.00% 57.05%
April 2012........... 36.39% 0.00% 14.08% 39.03% 56.14%
PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS
OCCURRING IN A-1 A-2 B-1 C-1 D-1
- ------------ -------- -------- -------- -------- --------
May 2012............. 35.48% 0.00% 13.39% 38.05% 55.22%
June 2012............ 34.58% 0.00% 12.71% 37.06% 54.28%
July 2012............ 33.69% 0.00% 12.02% 36.06% 53.34%
August 2012.......... 32.81% 0.00% 11.34% 35.06% 52.38%
September 2012....... 31.95% 0.00% 10.67% 34.05% 51.41%
October 2012......... 31.13% 0.00% 9.99% 33.03% 50.43%
November 2012........ 30.31% 0.00% 9.32% 32.00% 49.44%
December 2012........ 29.50% 0.00% 8.66% 30.97% 48.44%
January 2013......... 28.70% 0.00% 8.03% 29.92% 47.43%
February 2013........ 27.90% 0.00% 7.37% 28.87% 46.40%
March 2013........... 27.11% 0.00% 6.74% 27.81% 45.36%
April 2013........... 26.31% 0.00% 6.12% 26.75% 44.31%
May 2013............. 25.56% 0.00% 5.49% 25.67% 43.25%
June 2013............ 24.83% 0.00% 4.92% 24.59% 42.18%
July 2013............ 24.11% 0.00% 4.33% 23.50% 41.10%
August 2013.......... 23.40% 0.00% 3.73% 22.40% 40.00%
September 2013....... 22.68% 0.00% 3.18% 21.29% 38.90%
October 2013......... 21.98% 0.00% 2.62% 20.18% 37.78%
November 2013........ 21.31% 0.00% 2.06% 19.05% 36.64%
December 2013........ 20.65% 0.00% 1.54% 17.92% 35.50%
January 2014......... 20.03% 0.00% 1.02% 16.78% 34.35%
February 2014........ 19.43% 0.00% 0.51% 15.64% 33.18%
March 2014........... 18.85% 0.00% 0.00% 14.48% 32.00%
April 2014........... 18.29% 0.00% 0.00% 13.32% 30.81%
May 2014............. 17.75% 0.00% 0.00% 12.15% 29.61%
June 2014............ 17.22% 0.00% 0.00% 10.97% 28.39%
July 2014............ 16.68% 0.00% 0.00% 9.78% 27.16%
August 2014.......... 16.15% 0.00% 0.00% 8.59% 26.00%
September 2014....... 15.63% 0.00% 0.00% 7.38% 24.91%
October 2014......... 15.12% 0.00% 0.00% 6.17% 23.71%
November 2014........ 14.60% 0.00% 0.00% 4.95% 22.44%
December 2014........ 14.10% 0.00% 0.00% 3.73% 21.07%
January 2015......... 13.59% 0.00% 0.00% 2.49% 19.66%
February 2015........ 13.10% 0.00% 0.00% 1.25% 18.22%
March 2015........... 12.61% 0.00% 0.00% 0.00% 16.90%
April 2015........... 12.15% 0.00% 0.00% 0.00% 15.56%
May 2015............. 11.70% 0.00% 0.00% 0.00% 14.21%
June 2015............ 11.26% 0.00% 0.00% 0.00% 12.84%
July 2015............ 10.82% 0.00% 0.00% 0.00% 11.47%
August 2015.......... 10.39% 0.00% 0.00% 0.00% 10.08%
September 2015....... 9.97% 0.00% 0.00% 0.00% 8.68%
October 2015......... 9.56% 0.00% 0.00% 0.00% 7.26%
November 2015........ 9.17% 0.00% 0.00% 0.00% 5.84%
December 2015........ 8.79% 0.00% 0.00% 0.00% 4.40%
January 2016......... 8.42% 0.00% 0.00% 0.00% 2.94%
February 2016........ 8.05% 0.00% 0.00% 0.00% 1.48%
March 2016........... 7.69% 0.00% 0.00% 0.00% 0.00%
April 2016........... 7.34% 0.00% 0.00% 0.00% 0.00%
May 2016............. 6.99% 0.00% 0.00% 0.00% 0.00%
June 2016............ 6.64% 0.00% 0.00% 0.00% 0.00%
July 2016............ 6.31% 0.00% 0.00% 0.00% 0.00%
August 2016.......... 5.98% 0.00% 0.00% 0.00% 0.00%
September 2016....... 5.66% 0.00% 0.00% 0.00% 0.00%
October 2016......... 5.34% 0.00% 0.00% 0.00% 0.00%
November 2016........ 5.03% 0.00% 0.00% 0.00% 0.00%
December 2016........ 4.72% 0.00% 0.00% 0.00% 0.00%
January 2017......... 4.43% 0.00% 0.00% 0.00% 0.00%
February 2017........ 4.15% 0.00% 0.00% 0.00% 0.00%
A-23
185
EXTENDED POOL FACTORS (CONTINUED)
PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS
OCCURRING IN A-1 A-2 B-1 C-1 D-1
- ------------ -------- -------- -------- -------- --------
March 2017........... 3.90% 0.00% 0.00% 0.00% 0.00%
April 2017........... 3.65% 0.00% 0.00% 0.00% 0.00%
May 2017............. 3.42% 0.00% 0.00% 0.00% 0.00%
June 2017............ 3.19% 0.00% 0.00% 0.00% 0.00%
July 2017............ 2.98% 0.00% 0.00% 0.00% 0.00%
August 2017.......... 2.77% 0.00% 0.00% 0.00% 0.00%
September 2017....... 2.56% 0.00% 0.00% 0.00% 0.00%
October 2017......... 2.37% 0.00% 0.00% 0.00% 0.00%
November 2017........ 2.18% 0.00% 0.00% 0.00% 0.00%
December 2017........ 1.99% 0.00% 0.00% 0.00% 0.00%
January 2018......... 1.81% 0.00% 0.00% 0.00% 0.00%
February 2018........ 1.64% 0.00% 0.00% 0.00% 0.00%
March 2018........... 1.48% 0.00% 0.00% 0.00% 0.00%
April 2018........... 1.34% 0.00% 0.00% 0.00% 0.00%
May 2018............. 1.22% 0.00% 0.00% 0.00% 0.00%
June 2018............ 1.11% 0.00% 0.00% 0.00% 0.00%
July 2018............ 1.01% 0.00% 0.00% 0.00% 0.00%
August 2018.......... 0.92% 0.00% 0.00% 0.00% 0.00%
September 2018....... 0.82% 0.00% 0.00% 0.00% 0.00%
PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS
OCCURRING IN A-1 A-2 B-1 C-1 D-1
- ------------ -------- -------- -------- -------- --------
October 2018......... 0.74% 0.00% 0.00% 0.00% 0.00%
November 2018........ 0.65% 0.00% 0.00% 0.00% 0.00%
December 2018........ 0.58% 0.00% 0.00% 0.00% 0.00%
January 2019......... 0.51% 0.00% 0.00% 0.00% 0.00%
February 2019........ 0.44% 0.00% 0.00% 0.00% 0.00%
March 2019........... 0.38% 0.00% 0.00% 0.00% 0.00%
April 2019........... 0.33% 0.00% 0.00% 0.00% 0.00%
May 2019............. 0.28% 0.00% 0.00% 0.00% 0.00%
June 2019............ 0.24% 0.00% 0.00% 0.00% 0.00%
July 2019............ 0.20% 0.00% 0.00% 0.00% 0.00%
August 2019.......... 0.16% 0.00% 0.00% 0.00% 0.00%
September 2019....... 0.12% 0.00% 0.00% 0.00% 0.00%
October 2019......... 0.10% 0.00% 0.00% 0.00% 0.00%
November 2019........ 0.07% 0.00% 0.00% 0.00% 0.00%
December 2019........ 0.05% 0.00% 0.00% 0.00% 0.00%
January 2020......... 0.03% 0.00% 0.00% 0.00% 0.00%
February 2020........ 0.01% 0.00% 0.00% 0.00% 0.00%
March 2020........... 0.00% 0.00% 0.00% 0.00% 0.00%
A-24
186
APPENDIX 11
APPRAISED VALUES OF INITIAL AIRCRAFT AT SEPTEMBER 30, 1998
NUMBER OF SERIAL APPRAISED VALUE
INITIAL LESSEE AIRCRAFT NUMBER AT SEPTEMBER 30, 1998
- -------------- ----------- ------ ----------------------
(DOLLARS IN THOUSANDS)
Aeropostale................. 1 23788 $ 21,420
Air Liberte................. 1 49822 19,433
Olympic..................... 1 25371 27,137
TAP......................... 1 25161 25,020
Transwede................... 1 25165 20,860
Flightlease................. 1 410 25,377
Flightlease................. 1 409 25,210
Transavia................... 1 27635 29,863
KLM......................... engine 704279 5,593
Britannia................... 1 23807 36,390
Caledonia................... 1 393 31,310
Monarch..................... 1 279 30,467
Unijet...................... 1 26256 67,767
TransAer.................... 1 414 31,503
Alaska Airlines............. 1 25104 28,210
TWA......................... 1 49824 20,423
TWA......................... 1 49825 18,270
Malev....................... 1 11569 16,460
Malev....................... 1 11565 16,353
Malev....................... 1 11564 15,627
Transaero................... 1 24367 34,870
Onur Air.................... 1 597 44,623
China Hainan................ 1 26295 26,783
Asiana...................... 1 24798 56,127
China Airlines.............. 1 555 50,720
Varig....................... 1 24106 62,673
Passaredo................... 1 437 30,183
VASP........................ 1 24299 21,407
Aero Mexico................. 1 26272 42,727
TAESA....................... 1 24234 22,340
Air Pacific................. 1 26260 68,913
Icelandair.................. 1 23811 21,423
Guyana Airways.............. 1 24260 33,953
----------- ----------
32 + engine $1,029,437
==========
A-25
187
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