BACKGROUND<$>

The growth of the Bermuda Aircraft Register, which has existed since 1931, has paralleled the growth of international business, both in terms of quantity and sophistication.

Traditionally, the majority of aircraft registered in Bermuda have been corporate and private executive types, usually of the “heavy metal” category, many of which are the latest and most expensive models produced by the principal manufacturers such as the Gulfstream V, the Bombardier Global Express and the Falcon 900. The trend for the highest quality has continued with recent registrations of the most modern corporate aircraft such as the Boeing Business Jet, the Airbus Corporate Jetliner and even the huge Boeing 777 in the private category.

The reasons for choosing Bermuda as a jurisdiction of registration are familiar: Bermuda is seen as having the cachet that attracts the highest quality. The Bermuda Department of Civil Aviation (“BDCA”) is seen as flexible and prepared to accept more than one internationally recognised set of airworthiness and licensing requirements, thereby allowing an aircraft to be registered in Bermuda and be maintained according to its existing maintenance schedule.

In addition, the Bermuda Registration mark VP-B plus two further letters is seen as a neutral mark as opposed to a major European mark or the American “N” mark which might invite unwelcome attention if the aircraft was being operated in certain jurisdictions which were unfriendly towards European countries or the United States.

The BDCA is recognised as being a very responsive, unbureaucratic authority, yet at the same time offering very high standards of professional and administrative services, thereby generating an international respect for the Register.

THE COMMERCIAL FLEET<$>

Whereas the private category has enjoyed steady growth, in recent years there has been an increasing use of the Register for commercially operated aircraft, for the reasons outlined below.

Aircraft financing transactions in Bermuda will inevitably have some involvement of either manufacturers, lenders or government entities in the U.S.A and Europe. Ideally those parties would wish to see the aircraft registered in their own jursidictions but there are various reasons why an aircraft might be registered abroad:

1. The foreign airline will as a matter of national pride wish to register in its own country.

2. A particular new aircraft might not yet be type-certificated in a lender’s jurisdiction, the cost of doing which could be very substantial.

3. Where aircraft are being leased to developing or third world countries, such countries may have had historical enmity with the United States or Europe. As a matter of saving face, it may be more acceptable for the foreign airline to register the aircraft in a neutral country such as Bermuda.

LEGAL ISSUES<$>

Factors such as lessors’ and lenders’ concerns about recovery of the aircraft at the end of a lease term, the ability to deregister and repossess the aircraft speedily and the threat of requisition have all prompted the use of a neutral register such as Bermuda.

Bermuda has been able to take advantage of such circumstances in the following ways:

1. Bermuda is a “Category 1” aviation regulatory authority as recognised by the United States FAA. The United Kingdom CAA has also assessed Bermuda and judged the BDCA to meet ICAO standards in terms of the provision of aviation safety oversight. Accordingly, if an aircraft is to be leased to a foreign airline whose governing authority does not meet these high standards, then the aircraft might be prohibited from flying into the United States or Europe. Registration in Bermuda might therefore be an acceptable alternative.

2. It is crucial for lenders to know that under the legal system of the state of registry the aircraft can be immediately deregistered at the end of the financing period or upon an event of default. An irrevocable power of attorney would normally be required by the lenders to ensure that the lender has the legal ability to request deregistration. At the same time, some form of undertaking (for example, the Letter of Assurance issued by the BDCA in such circumstances) should be sought from the registry to the effect that the registry recognises the true ownership of the aircraft and will only entertain a deregistration request received from the lenders pursuant to such irrevocable power of attorney.

3. Lenders will also be concerned about any possibility of the aircraft being requisitioned by the Government of the foreign lessee. Whilst this risk will always remain as long as the aircraft is being operated in the foreign jurisdiction, registration of the aircraft in Bermuda will often be required due to the perception of Bermuda’s political stability and final appeal to the Privy Council.

4. Lenders will also require reassurance that the legal system of the state of registry adequately protects the lenders’ interest in such areas as registration and release of mortgages and the nature of liens which may be enforced by, for example, maintenance organisations. Again, Bermuda’s regulatory framework, including its recent Aircraft Mortgage Register, is seen as both sophisticated and efficient, thereby providing the necessary comfort level for lenders.

5. Given that aircraft manufacturers and financiers are eager to tap into markets which are in the developing countries of the world, there will be concerns that, unlike Bermuda, emerging jurisdictions may suffer from a lack of infrastructure and technical support. In addition, the legal infrastructure must be sufficient so that if necessary legal action can be taken, even against the foreign Government, to ensure return of the aircraft.

REGISTRATION STRUCTURES

Registration of an aircraft in Bermuda typically involves the use of a Bermuda exempted company but increasingly Bermuda purpose and charitable trusts have been used in more complex transactions to create off-balance sheet transactions where the parties to the transactions may wish to be distanced or “ring-fenced” from the transaction. In such circumstances, the shares of the Bermuda exempted company are held by the purpose or charitable trust so that none of the parties to the transaction will own the company or include the company as a balance sheet asset. The trustee of the purpose/charitable trust will be a party to the transaction and may be obliged to charge the shares of the Bermuda company as security for the purchase/lease of the aircraft.

Many such structures involve export credit financings of aircraft, whereby an agency such as the Export-Import Bank of the United States (Exim) guarantees loans made to Bermuda companies in order to finance the acquisition by non-US airlines of US-manufactured aircraft.

In these transactions, Bermuda exempted companies (often owned by purpose trusts as described above) have acquired title to the subject aircraft and then leased the aircraft to the airline whilst the loans forming the 85% export credit portion of the financing are met by the issue of promissory notes by the Bermuda lessor.

Exim financings have also been taken one step further in that the Exim-guaranteed debt, being backed by the full faith and credit of the United States Government, is of a AAA nature and therefore the guaranteed loans can be securitised in the U.S.A. through publicly issued securities.

The securitisation procedure is relatively simple in that the Exim-guaranteed notes are assigned to a trustee which then issues certificates of beneficial interest in the trust assets, i.e. the Exim-guaranteed notes. The payments on the notes, which are received by the trustee, are then made available to the certificate holders. Registration with the SEC is required but is now relatively uncomplicated.

The principal benefit of Exim securitisations is that because of the increased liquidity of the debt, airlines have been able to acquire long-term fixed rate debt as well as floating-rate debt at attractive rates. In addition, public investors typically are easier to deal with than are many commercial lenders, thereby streamlining the transaction.

CONCLUSION<$>

The growth of commercial registration of aircraft in Bermuda serves to underline the sophistication of Bermuda’s infrastructure and the responsiveness of its Government as well as the flexibility and adaptability of its international business laws.

Bermuda Aircraft Register booms