How to mitigate the risk of aircraft default and repossession

Eleanor Steed
By Eleanor Steed June 27, 2017 14:59

How to mitigate the risk of aircraft default and repossession

IBA and Allen & Overy say that a determined strategy to monitor risk will allow lessors, banks and investors to avoid the pitfalls of defaults and repossessions. In a joint seminar held recently in London, aviation consultancy IBA and law firm, Allen & Overy, revealed how to mitigate the risk of default or repossession.

The key measures discussed that lessors should take for reducing risk include:

•    Implement an appropriate asset management programme
•    Base the level of oversight on the specific transaction and the risk/reward profile, but continuously reassess and stay proactive and flexible
•    Obtain all the data possible, analyse it and ask the Lessee questions about it – always be looking over the horizon
•    Have a contingency and remarketing plan in place, but understand the costs involved with transition and remember that a repossession will not always give the best outcome
•    Be proactive – if a problem arises the best place to be is on the ground with the Lessee
•    Relationships built in country with the Lessee’s key personnel will pay off – get the best advice in country

Phil Seymour, CEO of IBA, said: “There is a range of challenging situations for lessors to be aware of, and it’s important to take action as soon as things start to go wrong. We have seen examples ranging from aircraft maintenance being ignored, lessors not getting paid due to a lack of reserves whilst the operator can afford to fly and generate revenue, to aircraft being at technical risk and lessors simultaneously being denied their income. In any of these situations we would caution lessors to closely monitor the fleet and records, keep a close eye on maintenance status, and in the worst case scenario consider the possibility of a voluntary repossession. Even in the ideal scenario that a lessor is getting paid and the aircraft is being looked after, we would advise the Lessor to remain alert for danger signs between regular inspection visits, such as falling utilisation, removal of serviceable engines, or shifting operator circumstances.”

Building a picture of the operator and macro environment by looking at key factors such as, fleet and route data, political, economic and regulatory changes, records and maintenance issues, key staff moves, and order deferrals will allow operators to predict and swerve potential issues.

Phil Seymour added: “When a repossession is the best solution, there’s a lot to think about. From aircraft tracking and physical state to whether records and manuals have been withheld, ransomed or damaged, the first mover has the advantage – lessors should get ahead in all of these areas.”

James Partridge from Allen & Overy said: “If the situation is not amicable then, in addition to exploring if a consensual repossession is possible, lessors also need to start scenario planning at an early stage for a hostile repossession as well as possible litigation against the Lessee and any guarantor.  This can often involve proceedings in more than one jurisdiction and requires careful planning and co-ordination to maximise the prospects of success.”

Eleanor Steed
By Eleanor Steed June 27, 2017 14:59