February 2006 
Volume 04, Issue 9 
Focus on Finance


Ratification of global aircraft financing treaty gives financiers extra security in funding jets


The term "asset-backed financing" might sound like financial jargon. But if you've taken out a loan to buy a car or a house, you've participated in asset-backed financing.

In such programs, if the purchaser fails to make payments, the lender can repossess the item. This reduces the risk to the lender—and the cost charged to the purchaser.

Common transactions such as this are not so simple when it comes to aircraft purchases, however. But a new treaty is about to change that—and that's good news for Boeing Capital Corporation, financiers and other aviation stakeholders.

Late last year Malaysia became the eighth country to ratify the Cape Town Treaty, enabling this important international agreement to take effect March 1. Formally known as the Cape Town Convention and Aircraft Protocol, the treaty facilitates international financing and leasing of large airplanes and engines by establishing a legal framework and rights to protect financiers' interests in aircraft.

This treaty is particularly important to Boeing Capital Corporation, said Scott Scherer, vice president of Aircraft Financial Services for Boeing Capital.

"The protection afforded by the Cape Town Treaty is crucial for stimulating financing and leasing in the global aviation industry," Scherer said. "It establishes a common framework to allow financial entities to place greater reliance on their rights involving repossession, sale, lease and aircraft deregistration."

Before the treaty was ratified, if an international carrier defaulted on a loan or filed bankruptcy, it was difficult for lenders such as Boeing Capital to recover their assets. Now that the ratifying nations have agreed on a rules-based legal system, enforcement rights exist to protect lenders against insolvencies and defaults in those nations.

The treaty also provides for a new international registry, which establishes a lender's priority over assets. Parties having an interest in aircraft (or its engines) can electronically register that interest at an international level to ensure that they remain protected. These transactions will be recorded at the International Registry of Mobile Assets, based in Dublin.

"Boeing Capital and its industry partners have been at the forefront of creating and urging countries to ratify this treaty," Scherer said. "It will reduce the cost and risk of financing international customers' aircraft, and will ultimately help open up new markets of capital and third-party financing."

Not just for lenders

The Cape Town Treaty supports institutions that finance large aircraft and their engines by establishing a legal framework and rights to protect these financiers' interests in aircraft. But lenders aren't the only ones that the treaty benefits. Here's a look at some other stakeholders the treaty supports.

Governments: Reduces their risk in connection with providing export credit.

Aircraft manufacturers and suppliers: Expands their markets, letting them sell more airplanes and parts.

Airlines: Lets them access financing at lower rates and improves their operating efficiency by enhancing their ability to sublease their aircraft to airlines in other countries when they have excess capacity.

Passengers: Enables them to fly on more modern aircraft with safety enhancements and increased levels of service.

The Export-Import Bank of the United States, the official export credit agency of the United States, also supports the treaty. Ex-Im Bank is a key lender to other nations wanting to purchase U.S.-made products—including aircraft—and plays a key role with developing nations seeking to create or renew modern aircraft fleets.

Since 2003 Ex-Im has offered a one-third reduction of its fees to buyers in countries that ratify and fully implement the Cape Town Treaty, as countries that are party to the treaty pose less risk to a lender.

Boeing is the United States' largest exporter, exporting nearly $15.5 billion in 2004. Approximately 70 percent of commercial airplane sales are made to customers in countries outside the United States.

Not only will the Cape Town Treaty reduce risk and enhance security for financiers, but it also will benefit other stakeholders such as governments, aircraft manufacturers and suppliers, airlines, and passengers (see box at left).

The Cape Town Treaty was adopted in November 2001 in Cape Town, South Africa. The treaty, signed by many nations, required ratification by eight countries to go into effect. In 2004 the United States was the fifth country to ratify the treaty; other nations that have ratified include Panama, Ethiopia, Nigeria, Pakistan, Oman and Ireland. (Since Malaysia's ratification, Senegal also has approved the treaty.)

"The Cape Town Treaty is crucial to our business, given the significant and increasing demand for capital to support the sale of modern aircraft," Scherer said. "Cape Town, together with the way Boeing is designing, building and supporting airplanes with the capital markets in mind, will increase Boeing Capital's ability to support future aircraft purchases."


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