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Secured Aviation Transactions: Jurisdictional Analysis, Political Risks, and Russian Aircraft Nationalization Implications

Jurisdictional analysis is a critical part of rating aviation-related structured secured products, including Enhanced Equipment Trust Certificates (EETCs) and other debt obligations backed by aircraft, engines, parts, and/or other aviation assets (Aircraft Lending Facilities; together with EETCs, collectively, Aviation Loan Structures) and issued by airlines, aircraft lessors, and parties that finance such assets. The rating of EETCs and Aircraft Lending Facilities relies heavily on the underlying assumption that, in the event of an obligor bankruptcy, a security trustee or indenture trustee (acting on behalf of the certificate holders or other finance parties) will be able to repossess, deregister, and/or export relevant aircraft from a given jurisdiction in a timely and largely uncontested manner.

In general, bankruptcy courts around the globe may respect the asset ownership stature and may acknowledge lessors’ rights to repossess their own assets if a lessee defaults under the terms of a lease (including, in some jurisdictions, self-help remedies). Additionally, DBRS Morningstar notes that some jurisdictions have set time frames under which a lessor has the right to repossess equipment. The ownership of aircraft can afford significant additional protection to a lessor, however, the remedies available in an Aviation ABS Lease Structure are different than those available to secured debtholders attempting to take possession of the assets owned by an insolvent company.

Therefore, in order to have Aviation Loan Structures rated, market participants should conduct jurisdictional risk assessment. From there, if market participants take a view that such jurisdictional risk assessment is favorable, they would have made a determination that either (1) there is a high likelihood of repossessing aircraft in a given jurisdiction or (2) the structural elements of Aviation Loan Structures provide sufficient mitigation to overcome any identified jurisdictional risks. Jurisdictional risk assessment may include a review of existing and to-be-instituted legislation, legal precedent, and enforceability.