Aircraft mortgage finance explained

Aircraft mortgage finance secures loans or finance leases over aircraft objects through a security agreement under applicable national law and, where the Cape Town framework applies, through registration of an international interest in the International Registry. Creditors rely on that asset security, together with airline or guarantor credit, when financing airframes, engines and helicopters.

Aircraft mortgage finance and the Cape Town interest

The Convention on International Interests in Mobile Equipment was concluded in Cape Town on 16 November 2001, together with the Protocol on Matters Specific to Aircraft Equipment, under the joint auspices of ICAO and UNIDROIT. ICAO states that the Convention and Protocol shall be read and interpreted together as a single instrument under Article 6(1) of the Convention.

The primary aim, as published by ICAO, is to resolve uncertainty in obtaining certain and opposable rights to high value aviation assets that have no fixed location. Legal systems differ in their treatment of securities, title retention and leases, which increases financing cost and hampers credit for such assets.

Article 2 of the Convention provides for an international interest in uniquely identifiable objects in designated categories, including airframes, aircraft engines and helicopters. An international interest may be granted by a chargor under a security agreement, vested in a conditional seller under a title reservation agreement, or vested in a lessor under a leasing agreement. Applicable law determines which of those categories an interest falls into. A national aircraft mortgage or charge under a security agreement is therefore the domestic security interest that, when Convention conditions are met, can constitute the international interest registered for priority purposes.

Article 16 establishes the International Registry for registrations of international interests, prospective international interests, registrable non consensual rights and interests, assignments, acquisitions by subrogation, notices of national interests and subordinations. UNIDROIT's overview describes registration as central to priority and public notice for international interests in aircraft objects.

EXIM asset backed practice and ASU terms

The Export Import Bank of the United States (US EXIM) states that its aircraft financing support for foreign purchasers of eligible US manufactured aircraft is governed by the OECD Sector Understanding on Export Credits for Civil Aircraft (the 2011 ASU). That sector understanding sits as Annex III within the wider OECD Arrangement framework for officially supported export credits.

EXIM lends, or guarantees a loan extended by a financial institution, to a special purpose entity that then leases the aircraft to the airline, or in certain exceptional circumstances to the airline itself. The published credit decision rests on the creditworthiness of the airline or lessee and any guarantor, plus security from the finance lease structure, a first priority mortgage on the financed aircraft, and other risk mitigants. The first priority mortgage is therefore an explicit element of EXIM's described asset backed aircraft security package.

ASU based EXIM support for a new aircraft may finance up to 85 percent of the US contract price net of manufacturer and supplier credit memoranda, but not more than 100 percent of the US content of the aircraft, subject to risk based reductions. Maximum repayment term is described as up to twelve years under the 2011 ASU, with amortisation to zero in quarterly or, in special circumstances, semi annual instalments on level principal or mortgage style principal and interest bases.

Mortgage, lease and registry mechanics

In loan structures, the borrower (often an owning SPV) grants a mortgage or charge over the airframe and, where separately financed or required, over engines, and the creditor registers the international interest. In finance lease structures, the lessor's interest under the leasing agreement can itself be an international interest under Article 2, and EXIM's published finance lease path uses an SPV lessor with a first priority mortgage on the financed aircraft as additional security.

National aircraft registries record ownership and, under many systems, mortgages or equivalent entries. Cape Town registration is a separate electronic international registration that governs Convention priority among registered interests. Creditors typically complete both national filings required by the state of registration and International Registry registrations where the Convention and Aircraft Protocol apply.

ICAO notes that airlines of states that adopt the Convention and Protocol may receive a ten percent discount on export credit premiums under applicable ASU premium rules linked to Cape Town compliance, reflecting the risk reduction intended by the treaty framework.

Priority, remedies and related security

Cape Town registration establishes priority among registered international interests according to the Convention's priority rules. Default remedies and declarations by Contracting States affect repossession timing and insolvency related rights. Creditors assess declarations, including those relevant to Alternative A insolvency regimes under the Aircraft Protocol, when valuing enforcement speed.

Related security commonly includes:

• assignments of lease rentals or aircraft earnings
• assignments of insurance with loss payable endorsements
• charges over maintenance reserves and security deposits
• share pledges over the owning or leasing SPV

Those elements address cash flow and insurance proceeds. The aircraft mortgage and registered international interest address the airframe and engine collateral.

Desk summary

Aircraft mortgage finance combines a security agreement mortgage or equivalent charge with Cape Town international interest registration where applicable, often inside an SPV lease structure used by official lenders such as US EXIM. Asset priority and enforceability depend on national perfection, International Registry registration, Protocol declarations and the airline or guarantor credit that sits alongside the mortgage.