COVID-19 has and continues to have a massive impact on the aviation sector. Across the globe, travel restrictions have resulted in falling in passenger numbers, many airlines are faced with the necessity to request deferral of lease rental payments. This has a knock-on effect on aircraft leasing companies, who face the inevitable situation of engaging with their creditors to seek similar concessions in the form of deferral of loan payments and/or extensions to financing facilities. Some airlines and lessors have had to take more drastic action to preserve their business operations including formal restructuring proceedings.
This article will look at some of the recent trends relating to aircraft lease rent deferrals and at 2 actual scenarios of restructuring options available to airlines and aircraft lessors under Irish law. Firstly in April, CityJet, a significant airline operating regional jets, entered into examinership and in August it successfully exited examinership. Secondly in late July, Nordic Aviation Capital, an Irish based aircraft lessor, applied to the High Court in Ireland and successfully negotiated court approval for a creditor scheme of arrangement, both reliefs are available under the Companies Act 2014 (the Act).
Aircraft lease amendment agreements – rent deferrals and variations
The fall in passenger numbers across the globe has resulted in many airlines approaching aircraft lessors seeking to defer rent payments under aircraft lease agreements. Initially, when the prevailing sense was that COVID-19 was likely to be a ‘short term’ inconvenience, we observed that rent deferrals were also short term i.e. averaging 3-6 months. As the situation of COVID-19 prevails and uncertainty continues there is an increasing tendency for rent deferrals to be for much longer periods.
We are also observing a trend towards amendment and variation of lease terms and temporary change to ‘power-by-the-hour’ (PBTH) payment arrangements. As the name suggests with PBTH the airline pays rent only for the time the aircraft is operating. Amending traditional lease terms to introduce a PBHT arrangement is a marked concession on the part of lessors as at the core of the leasing contract is the sanctity of the “hell or high water” clause where the airlines would pay rent regardless of whether the aircraft was in use, in storage or undergoing maintenance. This shows a potential short-term change in the aircraft leasing market. Some lessors have conceded to such amendments to payment terms as it preserves other obligations such as maintenance, service and repair of aircraft; insurance, maintenance and storage relating to the aircraft; and in some instances allows airlines to continue to operate the aircraft to preserve access and slots in key international airports.
A knock-on effect of the airlines deferring or defaulting on lease payments is that lessors then have to engage with their funders, investors, financiers and creditors. In some instances lessors have to seek similar concessions including short-term loan payment deferrals or extensions of the term of the facilities.
Some aviation businesses, airlines and aircraft lessors have sought to avail of this provision of the Act and seek relief available under Irish law to formally restructure overall debt and creditor liabilities. Examples of this are CityJet entering into, and successfully exiting, examinership and Nordic Aviation Capital availing of a scheme of arrangement that was approved by the Irish High Court.
Examinership is a process unique to Ireland which is similar (albeit not identical) to Chapter 11 proceedings in the USA. The statutory framework is set out in Part 10 of the Act. In brief, it enables an Irish company which is technically insolvent i.e. unable to pay its debts within the meaning of the Act, to examine and restructure its debts with the approval of the Irish High Court.
Prior to 21 August 2020, the examinership period, was 70 days with a maximum permitted extension of 30 days (statutory maximum of 100 days). In response to COVID-19 the Companies (Miscellaneous Provisions) (Covid-19) Act 2020 became law, extending the period of court protection during the interim period (i.e until 31 December 2020, or such other period as may be specified by order) to 150 days. During the examinership, there is a moratorium on creditor actions and the Irish company is insulated from creditor enforcement action.
CityJet’s entire fleet of 36 aircraft were grounded by the COVID-19 crisis. This intensified its financial difficulties leading to it petitioning the High Court to appoint an examiner on or about 19 April 2020. In the examinership application, the Irish High Court, based on the terms of the petition was satisfied that CityJet had a reasonable prospect of survival and, if its creditors accepted certain concessions, it could continue trading as a going concern.
The examiner was tasked with putting together a scheme of arrangement in respect of CityJet’s debts and liabilities requiring the support from shareholders and agreement of its creditors impacted by the scheme and restructuring of debt arrangements. The scheme of arrangement was presented to the shareholders and the creditors and as set out in the Act, required majority support. The Irish High Court approved the scheme of arrangement and, on 11 August 2020, it ordered the scheme approved.
CityJet successfully exiting the examinership shows how, with shareholder and creditor support, examinership can ensure the survival of Irish companies in light of challenges posed by the COVID-19 crisis.
Scheme of arrangement
The scheme of arrangement is another formal restructuring process available to Irish companies under Part 9 Chapter 1 Schemes of Arrangement of the Act. It can be used to restructure debts and it is a cheaper alternative to the examinership process.
Nordic Aviation Capital, an Irish based lessor, availed of Part 9 as a means to position itself for post COVID-19 operating environment and ensure stability during the recovery phase from the pandemic. The creditor scheme of arrangement is a mechanism available under Irish law that allows solvent companies to implement arrangements with lenders on application to the Irish High Court and comprised of debt standstill and deferral arrangements to counteract the negative impact of COVID-19. In order, for a scheme of arrangement to be successful, a special majority (the majority of either at least 75% in value of the creditors or class or creditors or members or class of members) is needed to approve the scheme.
Nordic Aviation Capital was successful in obtaining such approval and the Irish High Court noted in its approval that there was a high level of approval amongst creditor and commented that the scheme was fair and equitable. This was the first “COVID-19” court approved scheme of arrangement by an aircraft leasing company. We anticipate that other aircraft lessors will seek to avail of informal contractually agreed restructurings and/or seek to avail of the statutory scheme relief if the pandemic persists.
Prevailing travel restrictions, public health concerns and falling passenger numbers caused by COVID-19 has seen airlines struggle to survive and maintain a level of operation to preserve and maintain staff, slot allocations and routes. This has had an impact on all creditors and most seriously on aircraft lessors. Due to the domino effect, this has resulted or is likely to result in lessors seeking relief and concessions from their funders, investors and financiers.
In some situations, airlines and lessors have entered into informal confidential restructuring arrangements. For others, operating in Ireland and with significant debt and operational challenges, it is important that businesses engage with legal and business advisers to review and assess what other remedies, reliefs and protections may be available.
Relief and protection under the Act such as was seen in the CityJet examinership and with the Nordic Aviation Capital scheme of arrangement might be suitable and a viable option in some cases. The period of examinership and court protection has been extended to 150 days during the interim period, i.e. until 31 December, because of COVID-19 and, it is generally expected that this will be extended further to mid-year 2021. It is important to note that both CityJet and Nordic Aviation Capital exited these processes which can be seen as a positive for the aviation industry and it also shows the effectiveness of both regimes.
For more information and expert advice on the continuing impact of COVID-19 on your business operations, contact a member of our Aviation, International Asset Finance team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.