FLY LEASING LIMITED/media/Files/F/Fly-Leasing/documents/annual... · past 90 days. Yes ☒ No ☐...

UNITED STATESSECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

(Mark One) REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934OR

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commissionfilenumber001-33701

FLY LEASING LIMITED(ExactnameofRegistrantasspecifiedinitscharter)

Bermuda(Jurisdiction of incorporation or organization)

West Pier Business CampusDun Laoghaire

County Dublin, A96 N6T7, Ireland(Address of principal executive office)

Vincent Cannon, West Pier Business Campus, Dun Laoghaire, County Dublin, A96 N6T7, IrelandTelephone number: +353 1 231 1900, Facsimile number: +353 1 231 1901

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of each class Name of each exchange on which registered American Depositary Shares New York Stock Exchange Common Shares, par value of $0.001 per share New York Stock Exchange*

* Notfortrading,butonlyinconnectionwiththeregistrationofAmericanDepositarySharesrepresentingtheseshares,pursuanttotherequirementsoftheSecuritiesandExchangeCommission.

Securities registered or to be registered pursuant to Section 12(g) of the Act.None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.None

Indicatethenumberofoutstandingsharesofeachoftheissuersclassesofcapitalorcommonstockasofthecloseoftheperiodcoveredbytheannualreport.

27,983,352CommonShares,parvalueof$0.001pershare.100ManagerShares,parvalueof$0.001pershare

Indicatebycheckmarkiftheregistrantisawell-knownseasonedissuer,asdefinedinRule405oftheSecuritiesAct.YesNo

Ifthisreportisanannualortransitionreport,indicatebycheckmark,iftheregistrantisnotrequiredtofilereportspursuanttoSection13or15(d)oftheSecuritiesExchangeActof1934.YesNo

Indicatebycheckmarkwhethertheregistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthe

past90days.YesNo

IndicatebycheckmarkwhethertheregistranthassubmittedelectronicallyandpostedonitscorporateWebsite,ifany,everyInteractiveDataFilerequiredtobesubmittedandpostedpursuanttoRule405ofRegulationS-Tduringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtosubmitandpostsuchfiles).YesNo

Indicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,anon-acceleratedfiler,oranemerginggrowthcompany.Seedefinitionoflargeacceleratedfiler,acceleratedfiler,andemerginggrowthcompanyinRule12b-2oftheExchangeAct.

Largeacceleratedfiler Acceleratedfiler Non-acceleratedfiler Emerginggrowthcompany

IfanemerginggrowthcompanythatpreparesitsfinancialstatementsinaccordancewithU.S.GAAP,indicatebycheckmarkiftheregistranthaselectednot

tousetheextendedtransitionperiodforcomplyingwithanyneworrevisedfinancialaccountingstandardsprovidedpursuanttoSection13(a)oftheExchangeAct.

Indicatebycheckmarkwhichbasisofaccountingtheregistranthasusedtopreparethefinancialstatementsincludedinthisfiling:

U.S.GAAPInternationalFinancialReportingStandardsasissuedbytheInternationalAccountingStandardsBoard Other

IfOtherhasbeencheckedinresponsetothepreviousquestion,indicatebycheckmarkwhichfinancialstatementitemtheregistranthaselectedtofollow:Item17Item18

Ifthisisanannualreport,indicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedinRule12b-2oftheExchangeAct).YesNo

PRELIMINARY NOTE

ThisAnnualReportshouldbereadinconjunctionwiththeconsolidatedfinancialstatementsandaccompanyingnotesincludedinthisreport.

TheconsolidatedfinancialstatementsarepreparedinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStates(GAAP)andarepresentedinU.S.Dollars.Thesestatementsanddiscussionbelowcontainforward-lookingstatementswithinthemeaningofthePrivateSecuritiesLitigationReformActof1995.Theseforward-lookingstatementsinclude,butarenotlimitedto,objectives,expectationsandintentionsandotherstatementscontainedinthisAnnualReportthatarenothistoricalfacts,aswellasstatementsidentifiedbywordssuchasexpects,anticipates,intends,plans,believes,seeks,estimates,orwordsofsimilarmeaning.Suchstatementsaddressfutureeventsandconditionsconcerningmatterssuchas,butnotlimitedto,ourearnings,cashflow,liquidityandcapitalresources,compliancewithdebtandotherrestrictivefinancialandoperatingcovenants,interestrates,dividends,acquisitionsanddispositionsofaircraft,andourabilitytocompletetheAirAsiaTransactions(asdefinedbelow)andachieveitsanticipatedbenefits.Thesestatementsarebasedoncurrentbeliefsorexpectationsandareinherentlysubjecttosignificantuncertaintiesandchangesincircumstances,manyofwhicharebeyondourcontrol.Actualresultsmaydiffermateriallyfromtheseexpectationsduetochangesinpolitical,economic,business,competitive,marketandregulatoryfactors.Webelievethatthesefactorsinclude,butarenotlimitedtothosedescribedunderItem3KeyInformationRiskFactorsandelsewhereinthisAnnualReport.

Excepttotheextentrequiredbyapplicablelaworregulation,weundertakenoobligationtoupdatetheseforwardlookingstatementstoreflectevents,developmentsorcircumstancesafterthedateofthisdocument,achangeinourviewsorexpectations,ortoreflecttheoccurrenceoffutureevents.

Unlessthecontextrequiresotherwise,whenusedinthisAnnualReport,(1)thetermsFly,Company,we,ourandusrefertoFlyLeasingLimitedanditssubsidiaries;(2)thetermB&BAirFundingreferstooursubsidiary,Babcock&BrownAirFundingILimited;(3)allreferencestooursharesrefertoourcommonsharesheldintheformofAmericanDepositaryShares,orADSs;(4)thetermBBAMLPreferstoBBAMLimitedPartnershipanditssubsidiariesandaffiliates;(5)thetermsBBAMandServicerrefertoBBAMAircraftManagementLP,BBAMAircraftManagement(Europe)Limited,BBAMAviationServicesLimitedandBBAMUSLPcollectively;(6)thetermManagerreferstoFlyLeasingManagementCo.Limited,theCompanysmanager;(7)thetermFly-Z/CLPreferstoFly-Z/CAircraftHoldingsLP;(8)thetermGAAMreferstoGlobalAviationAssetManagement;(9)thetermGAAMPortfolioreferstotheportfolioof49aircraftandotherassetsacquiredfromGAAM;(10)thetermECAF-ITransaction"referstotheportfolioof33aircraftsoldtoECAFILtd;and(11)thetermAirAsiaTransactionsreferstothependingacquisitionbyFlyof(i)aportfolioof34AirbusA320-200aircraftandsevenengines,onoperatingleases,fromAirAsiaBerhad(AirAsia)anditssubsidiary,AsiaAviationCapitalLimited(AACL)in2018,(ii)theportfolioof21AirbusA320neofamilyaircraftonoperatingleasestoAirAsiaanditsaffiliatedairlines(the"AirAsiaGroup")tobeacquiredastheaircraftdeliverbetween2019and2021and(iii)theoptionstopurchaseanadditional20AirbusA320neofamilyaircraft,notsubjecttolease,whichbegindeliveringasearlyas2019.

Unlessindicatedotherwise,allpercentagesandweightedaveragecharacteristicsoftheaircraftinourportfoliohavebeencalculatedusingnetbookvaluesasofDecember31,2017.

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Page

PART I Item1.IdentityofDirectors,SeniorManagementandAdvisersNotApplicable 3Item2.OfferStatisticsandExpectedTimetableNotApplicable 3Item3.KeyInformation 3Item4.InformationontheCompany 26Item4A.UnresolvedStaffCommentsNotApplicable 33Item5.OperatingandFinancialReviewandProspects 33Item6.Directors,SeniorManagementandEmployees 51Item7.MajorShareholdersandRelatedPartyTransactions 54Item8.FinancialInformation 64Item9.TheOfferandListing 65Item10.AdditionalInformation 66Item11.QuantitativeandQualitativeDisclosuresAboutMarketRisk 75Item12.DescriptionofSecuritiesOtherThanEquitySecurities 76

PART II Item13.Defaults,DividendArrearagesandDelinquenciesNotApplicable 77Item14.MaterialModificationstotheRightsofSecurityHoldersandUseofProceeds 77Item15.ControlsandProcedures 77Item16A.AuditCommitteeFinancialExpert 79Item16B.CodeofEthics 79Item16C.PrincipalAccountantFeesandServices 79Item16D.ExemptionsfromtheListingStandardsforAuditCommitteesNotApplicable 79Item16E.PurchasesofEquitySecuritiesbytheIssuerandAffiliatedPurchasers 80Item16F.ChangeinRegistrantsCertifyingAccountantNotApplicable 80Item16G.CorporateGovernance 80Item16H.MineSafetyDisclosure 80

PART III Item17.FinancialStatements F-1Item18.FinancialStatements F-2Item19.Exhibits 81

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PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Notapplicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Notapplicable.

ITEM 3. KEY INFORMATION

FlyLeasingLimitedisaBermudaexemptedcompanythatwasincorporatedonMay3,2007,undertheprovisionsofSection14oftheCompaniesAct1981ofBermuda.Weareprincipallyengagedinpurchasingcommercialaircraft,whichweleaseundermulti-yearcontractstoadiversegroupofairlinesthroughouttheworld.AlthoughweareorganizedunderthelawsofBermuda,wearearesidentofIrelandfortaxpurposesandaresubjecttoIrishcorporationtaxonourincomeinthesameway,andtothesameextent,asifwewereorganizedunderthelawsofIreland.WecompletedourinitialpublicofferingonOctober2,2007.WearelistedontheNewYorkStockExchangeunderthetickersymbolFLY.

AsofDecember31,2017,wehad85aircraftinourportfolio,ofwhich84wereheldforoperatingleaseandonewasrecordedasaninvestmentinfinancelease.

Selected Financial Data

ThefollowingselectedfinancialdatashouldbereadinconjunctionwithItem5OperatingandFinancialReviewandProspectsandourauditedconsolidatedfinancialstatementsandnotesrelatedtheretoincludedinItem18FinancialStatementsinthisAnnualReport.TheselectedfinancialdatapresentedbelowareouroperatingresultsfortheyearsendedDecember31,2017,2016,2015,2014and2013.

(Dollars in thousands, except per share data)

Years ended 2017 2016 2015 2014 2013 Statement of income data: Operatingleaserevenue $ 346,894 $ 313,582 $ 429,691 $ 406,563 $ 351,792Gainonsaleofaircraft 3,926 27,195 28,959 14,761 5,421Total revenues 353,251 345,039 462,397 425,548 360,634Total expenses 339,321 381,428 434,200 356,673 303,560Net income (loss) 2,598 (29,112) 22,798 60,184 53,940Earnings (loss) per share: Basic $ 0.09 $ (0.88) $ 0.52 $ 1.42 $ 1.55Diluted $ 0.09 $ (0.88) $ 0.52 $ 1.42 $ 1.55

Dividends declared and paid per share $ $ $ 1.00 $ 1.00 $ 0.88

(Dollars in thousands, except per share data)

As of December 31, 2017 2016 2015 2014 2013 Balance sheet data: Totalassets $ 3,595,615 $ 3,447,009 $ 3,424,480 $ 4,218,408 $ 3,660,679Totalliabilities 3,051,906 2,853,774 2,767,516 3,462,154 2,918,583Totalshareholdersequity 543,709 593,235 656,964 756,254 742,096Numberofsharesoutstanding 27,983,352 32,256,440 35,671,400 41,432,998 41,306,338

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Risk Factors

Therisksdiscussedbelowcouldmateriallyandadverselyaffectourbusiness,prospects,financialcondition,resultsofoperations,cashflowsandthetradingpriceofourshares.Additionalrisksanduncertaintiesnotcurrentlyknowntousorthatwecurrentlydeemtobeimmaterialalsomaymateriallyandadverselyaffectourbusiness,prospects,financialcondition,resultsofoperations,cashflowsandthetradingpriceofourshares.

Risks Related to Our Business

Factorsthatincreasetheriskofdeclineinaircraftvalueandachievableleaseratescouldhaveanadverseeffectonourfinancialresultsandgrowthprospectsandonourabilitytomeetourdebtobligations.

Aircraftvaluesandachievableleaserateshavefromtimetotimeexperiencedsharpdecreasesduetoanumberoffactorsincluding,butnotlimitedto,decreasesinpassengerandaircargodemand,increasesinfuelcosts,governmentregulationandincreasesininterestrates.Operatingleasesplacetheriskofrealizationofresidualvaluesonaircraftlessorsbecauseonlyaportionoftheequipmentsvalueiscoveredbycontractualcashflowsatleaseinception.Inadditiontofactorslinkedtotheaviationindustrygenerally,factorsthatmayaffectthevalueandachievableleaseratesofouraircraftinclude:

theparticularmaintenance,damageandoperatinghistoryoftheairframesandengines;

thenumberofoperatorsusingatypeofaircraftorengine;

whetheranaircraftissubjecttoaleaseand,ifso,whethertheleasetermsarefavorabletothelessor;

theageofouraircraft;

airworthinessdirectivesandservicebulletins;

aircraftnoiseandemissionstandards;

anytax,customs,regulatoryandotherlegalrequirementsthatmustbesatisfiedwhenanaircraftispurchased,soldorre-leased;

compatibilityofouraircraftconfigurationsorspecificationswithotheraircraftownedbyoperatorsofthattype;and

decreasesinthecreditworthinessofourlessees.

Anydecreaseinthevaluesofandachievableleaseratesforcommercialaircraftthatmayresultfromtheabovefactorsorotherunanticipatedfactorsmayhaveamaterialadverseeffectonourfinancialresultsandgrowthprospectsandourabilitytomeetourdebtobligations.

Ourbusinessmodeldependsonthecontinualleasingandre-leasingofouraircraft,andwemaynotbeabletodosoonfavorableterms,whichwouldnegativelyaffectourfinancialcondition,cashflowsandfinancialresults.

Ourbusinessmodeldependsonthecontinualleasingandre-leasingofouraircrafttogeneratesufficientcashflowstofinanceourgrowthandoperations,makepaymentsonourdebt,andmeetourothercorporateandcontractualobligations.Ourabilitytoleaseandre-leaseouraircraftwilldependongeneralmarketandcompetitiveconditionsatthetimetheleasesareenteredintoandexpire.Ourabilitytoleaseandre-leaseaircraftonfavorableterms,withoutsignificantoff-leasetimeandcosts,couldbenegativelyaffectedbyanumberoffactors,includinggeneralbusiness,economicandfinancialconditions,marketconditionsintheairlineindustry,airlinebankruptcies,restructuringsandmergers,theeffectsofterrorismandotherglobalconflicts,andotherfactors,includingthosedescribedintheseRiskFactorsandelsewhereinthisAnnualReport,andunanticipatedrisks,manyofwhichareoutsideofourcontrol.Ifweareunabletoleaseandre-leaseouraircraftonfavorableterms,ourfinancialcondition,cashflowsandfinancialresultsmaybenegativelyimpacted.

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Thevariabilityofsupplyanddemandforaircraftcoulddepressleaseratesandthevalueofourleasedassets,whichcouldhaveamaterialadverseeffectonourfinancialresults,ourgrowthprospectsandourabilitytomeetourdebtobligations.

Theaviationindustryhasexperiencedperiodsofaircraftoversupplyandweakdemand.Theeconomicdownturnandtheslowdowninairtravelbetween2008andearly2010contributedtoadecreaseinthedemandforaircraft.Morerecently,theairlineindustryhascommittedtoasignificantnumberofaircraftdeliveriesthroughorderplacementswithmanufacturers,andmanufacturershaveincreasedproductionratesofsomeaircrafttypesinresponse.Theincreaseinproductionlevelscouldresultinanoversupplyoftheseaircrafttypesifgrowthinairlinetrafficdoesnotmeetexpectations.Theoversupplyofaspecifictypeofaircraftinthemarketislikelytodepressleaseratesfor,andthevalueof,thataircrafttype.Anyoversupplyofnewaircraftalsocoulddepressleaseratesfor,andthevalueof,usedaircraft.

Thesupplyanddemandforaircraftisaffectedbyvariouscyclicalandnon-cyclicalfactorsthatarenotunderourcontrol,including:

passengerairtravelandaircargodemand;

geopoliticalandotherevents,includingwar,actsofterrorism,civilunrest,outbreaksofepidemicdiseasesandnaturaldisasters;

airlineoperatingcosts,includingfuelcosts;

generaleconomicconditionsaffectingourlesseesoperations;

governmentalregulation,includingnewairworthinessdirectives,statutorylimitsonageofaircraft,andrestrictionsincertainjurisdictionsontheageofaircraftforimport,climatechangeinitiativesandenvironmentalregulation,andotherfactorsleadingtoobsolescenceofaircraftmodels;

interestandforeignexchangerates;

airlinerestructuringsandbankruptcies;

increasedsupplyduetothesaleofaircraftportfolios;

availabilityandcostofcredit;

manufacturerproductionlevelsandtechnologicalinnovation;

retirementandobsolescenceofaircraftmodels;

manufacturersmergingorexitingtheindustryorceasingtoproduceaircraftorenginetypes;

accuracyofestimatesrelatingtofuturesupplyanddemandmadebymanufacturersandlessees;

reintroductionintoserviceofaircraftorenginespreviouslyinstorage;and

airportandairtrafficcontrolinfrastructureconstraints.

Anyofthesefactorsmayproducesharpandprolongeddecreasesinaircraftvaluesandachievableleaserates,whichwouldhaveanegativeimpactonthevalueofourfleet,andmaypreventouraircraftfrombeingleasedorre-leasedonfavorableterms,oratall.Anyofthesefactorscouldhaveamaterialadverseeffectonourfinancialresults,ourgrowthprospectsandourabilitytomeetourdebtobligations.

Wewillneedadditionalcapitaltofinanceourgrowth,fundpotentialaircraftpurchasecommitments,andrefinanceourexistingdebt,andwemaynotbeabletoobtainitonacceptableterms,oratall,whichmayadverselyaffectourfinancialcondition,cashflowsandfinancialresults,andinhibitourabilitytogrowandcompeteinthecommercialaircraftleasingmarket.

Wewillneedadditionalcapitaltofinanceourgrowth,fundpotentialaircraftpurchasecommitmentsandrefinanceourexistingdebt.Ourabilitytoacquireadditionalaircraftandtorefinanceourexistingdebtdependstoasignificantdegreeonourabilitytoaccessdebtandequitycapitalmarkets.Ouraccesstocapitalmarketswilldependonanumberoffactorsincludingourhistoricalandexpectedperformance,compliancewiththetermsofourdebtagreements,generalmarketconditions,interestratefluctuationsandtherelativeattractivenessofalternativeinvestments.Inaddition,volatilityordisruptioninthecapitalmarketsoradowngradeinourcreditratingscouldcauselenderstobereluctantorunabletoprovideuswithfinancingontermsacceptabletous,ortoincreasethecostsofsuchfinancing.

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Wecompetewithotherlessorsandairlineswhenacquiringaircraftandourabilitytogrowourportfolioisdependentonourabilitytoaccessattractivefinancing.Thetermsofourdebtfacilitiesincludesignificantrestrictionsonourabilitytoincuradditionalindebtedness.Dependingonthetermsofthesefacilitiesandmarketconditionsatthetime,wemayhavetorelymoreheavilyonadditionalequityissuances,oronlessefficientformsofdebtfinancingthatrequirealargerportionofourcashflowsfromoperations,therebyreducingfundsavailableforouroperations,futurebusinessopportunitiesandotherpurposes.Ifweareunabletoraiseadditionalfundsorobtaincapitalonattractiveterms,ourabilitytofinancegrowthopportunitiesandfundpotentialaircraftpurchasecommitmentswillbelimited,andourabilitytorefinanceourexistingdebtcouldbeadverselyaffected.Anyoftheforegoingcouldhaveamaterialadverseeffectonourfinancialcondition,cashflowsandfinancialresults,andinhibitourabilitytogrowandcompeteinthecommercialaircraftleasingmarket.

Wehaveenteredintoresidualvalueguaranteesthatmayrequireustomakesignificantcashdisbursements,whichwouldreduceourcashflowsandmaynegativelyimpactourfinancialresults.

Wehaveenteredintoresidualvalueguarantees(RVGs)inwhichweagreedtoguaranteetheresidualvalueofcertainwide-bodyaircraftleasedtocommercialairlinesbythirdparties.InanRVG,thethird-partylessoragreestopayusanupfrontfeeinexchangeforourcommitmenttopurchasetheaircraftforaspecifiedpriceattheexpiryoftheleasetermifthethird-partylessorelectstoexercisetheguarantee.WemayenterintoadditionalRVGs,ifweperceivetheeconomicbenefitoftheupfrontpaymenttoexceedtheriskofpayout.

Wecontinuouslyre-evaluateourriskrelatedtotheRVGsbasedonanumberoffactors,includingtheestimatedfuturebasevalueoftheaircraftbasedonthird-partyappraisalsandinformationonsimilaraircraftremarketinginthesecondarymarket.AssumingthatwewererequiredtopaythefullaggregateamountofouroutstandingRVGsandwereunabletoremarketanyoftheaircrafttooffsetourobligations,ourmaximumexposureasofDecember31,2017wouldhavebeen$82.5million.

TheRVGscontaincovenantsrequiringustopostcashcollateralassecurityforourobligationsupontheoccurrenceofcertaincorporateevents,includingachangeincontrol,adowngradeinourcorporatefamilyratingbeyondaspecifiedthreshold,orasaleofallorsubstantiallyallofourassets.AssumingthatwewererequiredtopostthefullaggregateamountofthecashcollateralatDecember31,2017,itwouldhavebeen$23.0million.

Ifwearerequiredtopayamounts,orpostcashcollateral,undertheRVGs,wemaynothavesufficientcashorotherfinancialresourcesavailabletodosoandmayneedtoseekfinancingtofundthesepayments.Moreover,anyunexpecteddecreaseinthemarketvalueoftheaircraftcoveredbyRVGswoulddecreaseourabilitytorecovertheamountspayabletosatisfyourobligationsandcauseustoincuradditionalchargestonetincome.Wecannotassureyouthatthethen-prevailingmarketconditionswouldallowustoleasetheunderlyingaircraftattheiranticipatedfairvaluesorinatimelymanner.HonoringourRVGscouldrequireustomakesignificantcashdisbursementsinagivenyear,which,inturn,wouldreduceourcashflow,andmaynegativelyimpactourfinancialresultsinthatyear.

Ourfuturegrowthandprofitabilitywilldependonourabilitytoacquireaircraftandmakeotherstrategicinvestments.

Growththroughfutureacquisitionsofadditionalcommercialaircraftrequirestheavailabilityofcapital.Evenifcapitalwereavailable,themarketforcommercialaircraftiscyclical,sensitivetoeconomicinstabilityandextremelycompetitive,andwemayencounterdifficultiesinacquiringaircraftonfavorableterms,oratall.Asignificantincreaseinourcosttoacquireaircraftmaymakeitmoredifficultforustomakeaccretiveacquisitions.Anyacquisitionofaircraftmaynotbeprofitabletous.Inaddition,acquisitionofadditionalaircraftandotherinvestmentsthatwemaymake,mayexposeustorisksthatmayharmourbusiness,financialcondition,cashflowsandfinancialresults,includingrisksthatwemay:

impairourliquiditybyusingasignificantportionofouravailablecashorborrowingcapacitytofinanceacquisitionsandinvestments;

significantlyincreaseourinterestexpenseandfinancialleveragetotheextentweincuradditionaldebttofinanceacquisitionsandinvestments;

incurorassumeunanticipatedliabilities,lossesorcostsassociatedwiththeaircraftthatweacquire,orinvestmentswemaymake;or

incurothersignificantcharges,includingassetimpairmentorrestructuringcharges.

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Weoperateinahighlycompetitivemarketforinvestmentopportunitiesinaircraft.

Theleasingandremarketingofcommercialjetaircraftishighlycompetitive.Wecompetewithotheraircraftleasingcompanies,includingAerCapHoldingsN.V.,AirLeaseCorp.,AircastleLimited,AviationCapitalGroup,BankofChinaAviation,BoeingCapitalCorporation,BohaiLeasing(which,in2016,acquiredAvolonHoldingsLimited,andCITAerospace),Castlelake,DubaiAerospaceEnterprise(which,in2017,acquiredAWAS),GECommercialAviationServicesLimited(GECAS),ICBCLeasing,IntrepidAviationLimited,JacksonSquareAviation,MacquarieBankLimited,ORIXandSMBCAviationCapital,amongothers.Wealsomayencountercompetitionfromotherentitiesthatselectivelycompetewithus,including:

airlines;

aircraftmanufacturers;

financialinstitutions(includingthoseseekingtodisposeofrepossessedaircraftatdistressedprices);

aircraftbrokers;

specialpurposevehiclesformedforthepurposeofacquiring,leasingandsellingaircraft;and

publicandprivatepartnerships,investorsandfunds,includingprivateequityandhedgefunds.

Competitionforaleasingtransactionisbasedprincipallyuponleaserates,deliverydates,leaseterms,reputation,managementexpertise,aircraftcondition,specificationsandconfigurationandtheavailabilityofthetypesofaircraftnecessarytomeettheneedsofthecustomer.Someofourcompetitorshavesignificantlygreateroperatingandfinancialresourcesthanwehave.Inaddition,somecompetingaircraftlessorshavealoweroverallcostofcapitalandmayprovidefinancialservices,maintenanceservicesorotherinducementstopotentiallesseesthatwecannotprovide.

Competitioninthepurchaseandsaleofusedaircraftisbasedprincipallyontheavailabilityofusedaircraft,price,thetermsoftheleasetowhichanaircraftissubjectandthecreditworthinessofthelessee.

ManyofourcompetitorshaveorderpositionswithBoeingandAirbusthatguaranteethemthedeliveryofnew,highlydesirableaircraftinthefuture.Wedonotcurrentlyhaveanyorderpositionswithaircraftmanufacturers.

Werelyonourlesseescontinuingperformanceoftheirleaseobligations.

Weoperateasasuppliertoairlinesandareindirectlyimpactedbytherisksfacingairlinestoday.Oursuccessdependsuponthefinancialstrengthofourlessees,ourabilitytoassessthecreditriskofourlesseesandtheabilityoflesseestoperformtheircontractualobligationstous.Theabilityofeachlesseetoperformitsobligationsunderitsleasewilldependprimarilyonthelesseesfinancialconditionandcashflow,whichmaybeaffectedbyfactorsbeyondourcontrol,including:

competition;

farelevels;

aircargorates;

passengerairtravelandaircargodemand;

geopoliticalandotherevents,includingwar,actsofterrorism,civilunrest,outbreaksofepidemicdiseasesandnaturaldisasters;

increasesinoperatingcosts,includingtheavailabilityandcostofjetfuelandlaborcosts;

labordifficulties;

economicandfinancialconditionsandcurrencyfluctuationsinthecountriesandregionsinwhichthelesseeoperates;and

governmentalregulationof,oraffecting,theairtransportationbusiness,includingnoiseandemissionsregulations,climatechangeinitiativesandagelimitations.

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Weexpectthatsomelesseesmayencounterfinancialdifficultiesorsufferliquidityproblemsand,asaresult,willstruggletomakeleasepaymentsunderouroperatingleases.Forexample,in2017,werepossessedtwoaircraftpreviouslyleasedtoAirBerlin,afterAirBerlincommencedinsolvencyproceedingsinGermanyandtheUnitedStates.Wefurtherexpectthatlesseesexperiencingfinancialdifficultiesmayseekareductionintheirleaseratesorotherconcessionsinleaseterms.Wecouldexperienceincreaseddelinquencies,particularlyinanyfuturedownturnsintheairlineindustry,whichcouldworsenthefinancialconditionandliquidityproblemsoftheselessees.Inaddition,manyairlinesareexposedtocurrencyriskduetothefactthattheyearnrevenuesintheirlocalcurrenciesandcertainoftheirliabilitiesandexpensesaredenominatedinU.S.dollars,includingleasepaymentstous.Adelayed,missedorreducedrentalpaymentfromalesseedecreasesourrevenuesandcashflowsandmayadverselyaffectourabilitytomakepaymentsonourindebtedness.

Wearetypicallynotinpossessionofanyaircraftwhiletheaircraftareonleasetothelessees.Consequently,ourabilitytodeterminetheconditionoftheaircraftorwhetherthelesseesareproperlymaintainingtheaircraftislimitedtoperiodicinspectionsthatweperformorthatareperformedonourbehalfbythird-partyserviceprovidersoraircraftinspectors.Alesseesfailuretomeetitsmaintenanceobligationsunderaleasecould:

resultinagroundingoftheaircraft;

causeustoincurcostsinrestoringtheaircrafttoanacceptablemaintenanceconditiontore-leasetheaircraft;

adverselyaffectleasetermsinthere-leaseoftheaircraft;and

adverselyaffectthevalueoftheaircraft.

Wecannotassureyouthat,intheeventthatalesseedefaultsunderalease,anysecuritydepositpaidorletterofcreditprovidedbythelesseewillbesufficienttocoverthelesseesoutstandingorunpaidleaseobligationsandrequiredmaintenanceexpensesorbesufficienttodischargeliensthatmayhaveattachedtoouraircraft.

Leasedefaultscouldresultinsignificantexpensesandlossofrevenues.

Wehaveexperienced,andmayinthefutureexperience,lesseedefaults.Forexample,in2017,twoleaseswereterminatedpriortotheirexpirationdates.Repossession,re-registrationandflightandexportpermissionsafteralesseedefaulttypicallyresultingreatercoststhanthoseincurredwhenanaircraftisredeliveredattheendofalease.Thesecostsmayincludelegalandotherexpensesofcourtorothergovernmentalproceedings,includingthecostofpostingsuretybondsorlettersofcreditnecessarytoeffectrepossessionofanaircraftwhichcouldbesignificant,particularlyifthelesseeiscontestingtheproceedingsorisinbankruptcy.Delaysresultingfromrepossessionproceedingsalsowouldincreasetheperiodoftimeduringwhichanaircraftdoesnotgenerateleaserevenue.Inaddition,wemayincursubstantialmaintenance,refurbishmentorrepaircoststhatadefaultinglesseehasfailedtopayandthatarenecessarytoputtheaircraftinaconditionsuitableforre-leaseorsale.Wemayincurstoragecostsassociatedwithanyaircraftthatwerepossessandareunabletoimmediatelyplacewithanotherlessee.Inaddition,itmaybenecessarytopayoffliens,taxesandgovernmentalchargesontheaircrafttoobtainclearpossessionandtoremarkettheaircrafteffectively,includingliensthatadefaultinglesseemayhaveincurredinconnectionwiththeoperationofitsotheraircraft.

Itislikelythatourrightsuponalesseedefaultwillvarysignificantlydependinguponthejurisdictionofoperationandtheapplicablelaw,includingtheneedtoobtainacourtorderforrepossessionoftheaircraftand/orconsentsforderegistrationorre-exportoftheaircraft.Weanticipatethatwhenadefaultinglesseeisinbankruptcy,protectiveadministration,insolvencyorsimilarproceedings,additionallimitationsmayapply.Certainjurisdictionsgiverightstothetrusteeinbankruptcyorasimilarofficertoassumeorrejecttheleaseortoassignittoathirdparty,orentitlethelesseeoranotherthirdpartytoretainpossessionoftheaircraftwithoutpayingleaserentalsorperformingallorsomeoftheobligationsundertherelevantlease.Inaddition,certainofourlesseesareownedinwhole,orinpart,bygovernment-relatedentities,whichcouldmakeitdifficulttorepossessouraircraftinthatlesseesdomicile.Accordingly,wemaybedelayedin,orpreventedfrom,enforcingcertainofourrightsunderaleaseandinre-leasingtheaffectedaircraft.

Ifwerepossessanaircraft,wemaynotbeabletoexportorderegisterandprofitablyredeploytheaircraft.Forinstance,wherealesseeorotheroperatorfliesonlydomesticroutesinthejurisdictioninwhichanaircraftisregistered,repossessionmaybemoredifficult,especiallyifthejurisdictionpermitsthelesseeortheotheroperatortoresistderegistration.Significantcostsmayalsobeincurredinretrievingorrecreatingaircraftrecordsrequiredforregistrationoftheaircraftandobtainingacertificateofairworthinessfortheaircraftorengine.Inaddition,wemaynotbeabletore-leasearepossessedaircraftatasimilarleaserate.

Lesseedefaultsandrelatedexpensescouldresultinsignificantexpensesandlossofrevenues,whichmaymateriallyandadverselyaffectourfinancialcondition,cashflowsandfinancialresults.

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Ourlesseesfailuretocomplywiththeirmaintenanceobligationsonouraircraftcouldsignificantlyharmourfinancialcondition,cashflowsandfinancialresults.

Thestandardsofmaintenanceobservedbyourlesseesandtheconditionofaircraftatthetimeofsaleorleasemayaffectthemarketvaluesandrentalratesofouraircraft.Undereachofourleases,thelesseeisprimarilyresponsibleformaintainingtheaircraftandcomplyingwithallgovernmentalrequirementsapplicabletothelesseeandtotheaircraft,includingoperational,maintenance,governmentagencyoversight,registrationrequirementsandairworthinessdirectives.Alesseesfailuretoperformrequiredmaintenanceduringthetermofaleasecouldresultinadiminutioninthevalueofanaircraft,aninabilitytore-leasetheaircraftatfavorableratesoratall,orapotentialgroundingoftheaircraft.

Failurebyalesseetomaintainanaircraftwouldalsolikelyrequireustoincurmaintenanceandmodificationcostsupontheterminationoftheapplicablelease,whichcouldbesubstantial,torestoretheaircrafttoanacceptableconditionpriortore-leasingorsale.Evenifweareentitledtoreceivemaintenancepayments,thesepaymentsmaynotcovertheentirecostofactualmaintenancerequired.Ifweareunabletore-leaseanaircraftwhenitcomesoff-leasebecauseweneedtomakerepairsorconductmaintenance,wemayrealizeasubstantiallossofcashflowwithoutanycorrespondingdecreaseinourdebtserviceobligationswithrespecttothataircraft.Anyfailurebyourlesseestomaintainouraircraftmaymateriallyadverselyaffectourfinancialcondition,cashflowsandfinancialresults.

Ifweexperienceabnormallyhighmaintenanceorobsolescenceissueswithanyaircraftthatweacquire,ourfinancialresults,cashflowsandliquiditycouldbemateriallyandadverselyaffected.

Aircraftarelong-livedassets,requiringlongleadtimestodevelopandmanufacture,withparticulartypesandmodelsbecomingobsoleteandlessindemandovertimewhennewer,moreadvancedaircraftaremanufactured.Byacquiringusedaircraft,wehavegreaterexposuretomorerapidobsolescenceofourfleet,particularlyifthereareunanticipatedeventsshorteningthelifecycleofsuchaircraft,suchasgovernmentregulationorchangesinourairlinecustomerspreferences.Thismayresultinashorterlifecycleforourfleetand,accordingly,decliningleaserates,impairmentchargesorincreaseddepreciationexpense.

AsofDecember31,2017,theweightedaverageageofouraircraftwas6.4years.Ingeneral,thecostsofoperatinganaircraft,includingmaintenanceandmodificationexpenses,increasewiththeageoftheaircraft.Further,variableexpenseslikefuel,crewsizeoragingaircraftcorrosioncontrolormodificationprogramsandrelatedairworthinessdirectivescouldmaketheoperationofolderaircraftmorecostlytoourlesseesandmayresultinincreasedlesseedefaultsorrenegotiationofleaseterms.Wealsomayincursomeoftheseincreasedmaintenanceexpensesandregulatorycostsuponacquisitionorre-leasingofouraircraft.Anyoftheseexpensesorcostswouldhaveamaterialandadverseimpactonourfinancialresults.

Unlikenewaircraft,usedaircrafttypicallydonotcarrywarrantiesastotheircondition.Asaresult,wemaynotbeabletoclaimanywarrantyrelatedexpensesonusedaircraft.Althoughwemayinspectanexistingaircraftanditsdocumentedmaintenance,usage,leaseandotherrecordspriortoacquisition,wemaynotdiscoveralldefectsduringaninspection.Repairsandmaintenancecostsforexistingaircraftaredifficulttopredictandgenerallyincreaseasaircraftageandcanbeadverselyaffectedbyprioruse.Thesecostscouldhaveamaterialandadverseimpactonourcashflowsandourliquidity.

Theadventofsuperioraircraftandenginetechnologyortheintroductionofanewlineofaircraftcouldcauseourexistingaircraftportfoliotobecomeoutdatedandthereforelessdesirable,whichcouldadverselyaffectourfinancialresultsandgrowthprospects.

Asmanufacturersintroducetechnologicalinnovationsandnewtypesofaircraftandengines,certainaircraftinourexistingaircraftportfoliomaybecomelessdesirabletopotentiallesseesorpurchasers.Suchtechnologicalinnovationsmayincreasetherateofobsolescenceofexistingaircraftfasterthancurrentlyanticipatedbyourmanagementoraccountedforinouraccountingpolicy.Forexample,theBoeing787andtheAirbusA350,whichenteredproductioninrecentyears,provideimprovedfuelconsumptionandoperatingeconomicsascomparedtoearlieraircrafttypes.Inaddition,AirbushaslaunchedtheA320neofamily,andBoeinghaslaunchedthe737MAXfamilyofaircraft.Thesenextgenerationnarrow-bodyaircraftareexpectedtoimprovefuelconsumptionandtoreducenoise,emissionsandmaintenancecostsascomparedtocurrentmodels.Inaddition,Embraer,BombardierInc.,CommercialAircraftCorporationofChinaLtdandPJSCUnitedAircraftCorporationinRussiacoulddevelopaircraftmodelsthatwillcompetewithexistingAirbusandBoeingaircraft.Itisnotcertainhowthesenewaircraftofferingswillimpactthedemandandliquidityofexistingequipment.Inaddition,theimpositionofmorestringentnoiseoremissionsstandardsandthedevelopmentofmorefuelefficientenginescouldmakeaircraftinourportfoliolessattractiveforpotentiallesseesandlessvaluableinthemarketplace.Anyoftheseriskscouldadverselyaffectourabilitytoleaseorsellouraircraftonfavorabletermsoratallorourabilitytochargerentalamountsthatwewouldotherwiseseektocharge,allofwhichcouldhaveanadverseeffectonourfinancialresultsandgrowthprospects.

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Theconcentrationofaircrafttypesinourportfoliocouldharmourbusinessandfinancialresultsshouldanydifficultiesspecifictotheseparticulartypesofaircraftoccur.

AsofDecember31,2017,ouraircraftportfoliocontainedamixofaircrafttypes,includingAirbusA319aircraft,A320aircraft,A321aircraft,A330aircraft,andA340aircraft,andBoeing737aircraft,Boeing757aircraft,Boeing777aircraftandBoeing787aircraft.64%oftheseaircraftaresingle-aisle,narrow-bodyaircraft,and36%oftheseaircraftarewide-bodyaircraft,asmeasuredbynetbookvalue.Ourbusinessandfinancialresultscouldbenegativelyaffectedifthemarketdemandforanyoftheseaircrafttypes(orothertypesthatweacquireinthefuture)declines,ifanyofthemisredesignedorreplacedbyitsmanufacturer.Out-of-productionaircraft,suchastheBoeing757andAirbusA340,currentmodelsoftheA320family,knownastheCEO,andBoeing737,knownasNextGeneration,mayhaveshorterusefullivesorlowerresidualvaluesduetoobsolescence.Inaddition,ifanyoftheseaircrafttypes(orothertypesthatweacquireinthefuture)shouldencountertechnicalorotherdifficulties,suchaffectedaircrafttypesmaybesubjecttogroundingordiminutioninvalue,andwemaybeunabletoleasesuchaffectedaircrafttypesonfavorabletermsoratall.Theinabilitytoleasetheaffectedaircrafttypesmayharmourbusinessandfinancialresultstotheextenttheaffectedaircrafttypescompriseasignificantpercentageofouraircraftportfolio.

Wehavewrittendownthevalueofsomeofourassetsandwemayberequiredtorecordfurtherwrite-downsorlossesuponsaleofassets.

Wetestourassetsforrecoverabilitywhenevereventsorchangesincircumstancesindicatethatthecarryingamountsforsuchassetsarenotrecoverablefromtheirexpected,undiscountedcashflows.Wealsoperformafleet-widerecoverabilityassessmentatleastannually.Thisrecoverabilityassessmentisacomparisonofthecarryingvalueofeachaircrafttoitsundiscountedexpectedfuturecashflows.Wedeveloptheassumptionsusedintherecoverabilityassessment,includingthoserelatingtocurrentandfuturedemandforeachaircrafttype,basedonmanagementsexperienceintheaircraftleasingindustryaswellasfrominformationreceivedfromthirdpartysources.

IntheyearsendedDecember31,2017,2016and2015,werecognizedimpairmentchargesof$22.0million,$96.1millionand$66.1million,respectively.Theimpairmentchargesin2016and2017relatedprimarilytowide-bodyaircraft,allofwhicharenearingtheendoftheirusefullives.Inthefuture,ifexpectedcashflowsrelatedtoanyofouraircraftareadverselyaffectedbyfactorsincludingcreditdeteriorationofalessee,declinesinrentalrates,shortenedeconomiclife,residualvalueriskandothermarketconditions,thenwemayberequiredtorecognizeadditionalimpairmentchargesthatwouldreduceourtotalassetsandshareholdersequity.Forexample,asaircraftapproachtheendoftheireconomicusefullives,theircarryingvaluesmaybemoresusceptibletonon-recoverabledeclinesinvaluebecausesuchassetswillhaveashorteropportunityinwhichtobenefitfromamarketrecovery.

Inaddition,ifwedisposeofanaircraftforapricethatislessthanitsbookvalue,thenwewouldberequiredtorecognizealossthatwouldreduceourtotalassetsandshareholdersequity.Assetwritedownsorlossesonsaleofassetsnegativelyimpactourfinancialresultsduringtheperiod.Areductioninourshareholdersequitymaynegativelyimpactourabilitytocomplywithcovenantsincertainofourdebtfacilitiesrequiringustomaintainaminimumtangiblenetworth,andcouldresultinaneventofdefaultundersuchfacilities.

Ourfinancialperformance,andourabilitytomeetourpotentialaircraftpurchasecommitments,willdependinpartinourabilitytosellaircraft,andwemaynotbeabletodosoonfavorableterms,oratall.

Ourfinancialperformancewilldependinpartinourabilitytosellaircraftprofitably.Inaddition,ifwecompletetheAirAsiaTransactions,weintendtosellanumberoftheaircraftintheinitial34aircraftportfoliotoreduceourleverage,manageourlesseeandgeographicconcentrations,andprovidepartofthefundingforourpurchaseandleasebacktotheAirAsiaGroupof21newAirbusA320neofamilyaircraftcurrentlyonorder,anddeliveringbetween2019and2021.Whenwedecidetodisposeofanaircraft,BBAM,asourservicer,willarrangethedispositionpursuanttothetermsoftherelevantservicingagreement.Indoingso,BBAMwillcompetewithotheraircraftleasingcompanies,aswellaswithothertypesofentitieswithwhichwecompete.Ourabilitytosellouraircraftprofitably,oratall,willdependonconditionsintheairlineindustryandgeneralmarketandcompetitiveconditionsatthetimeweseektosell.Inaddition,ourabilitytosellouraircraftwillbeaffectedbythemaintenance,damageandoperatinghistoryoftheaircraftanditsengines.Failuretosellaircraftregularlyandprofitablycouldhaveamaterialadverseeffectonourfinancialcondition,cashflowsandfinancialresults,andourabilitytomeetourpotentialaircraftpurchasecommitments.

Aircraftlienscouldimpairourabilitytorepossess,re-leaseorselltheaircraftinourportfolio.

Inthenormalcourseofbusiness,liensthatsecurethepaymentofairportfeesandtaxes,customduties,airnavigationcharges,landingcharges,crewwages,maintenancecharges,salvageorotherobligationsarelikely,dependingonthelawsofthejurisdictionswhereaircraftoperate,toattachtotheaircraftinourportfolio(or,ifapplicable,totheenginesseparately).Theliensmaysecuresubstantialsumsthatmay,incertainjurisdictionsorforlimitedtypesofliens(particularlyfleetliens),exceedthevalueoftheaircrafttowhichthelienshaveattached.Untiltheyaredischarged,theliensdescribedabovecouldimpairourabilitytorepossess,re-leaseorsellouraircraft.

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Ifourlesseesfailtofulfilltheirfinancialobligations,liensmayattachtoouraircraft.Insomejurisdictions,aircraftliensorseparateengineliensmaygivetheholderthereoftherighttodetainor,inlimitedcases,sellorcausetheforfeitureoftheaircraft(or,ifapplicable,theenginesseparately).Wecannotassureyouthatthelesseeswillcomplywiththeirobligationsundertheleasestodischargeliensarisingduringthetermsoftheleases.Wemay,insomecases,finditnecessarytopaytheclaimssecuredbysuchliensinordertorepossessorselltheaircraftorobtaintheaircraftorenginesfromacreditorthereof.Thesepayments,andassociatedlegalandotherexpenses,wouldberequiredexpensesforus,andwouldnegativelyimpactourcashflowsandfinancialresults.

Wecannotassureyouthatlesseesandgovernmentalauthoritieswillcomplywiththeregistrationandderegistrationrequirementsinthejurisdictionswhereourlesseesoperate.

Allofouraircraftarerequiredtoberegisteredatalltimeswithappropriategovernmentalauthorities.Generally,injurisdictionsoutsidetheUnitedStates,failurebyalesseetomaintaintheregistrationofaleasedaircraftwouldbeadefaultundertheapplicablelease,entitlingustoexerciseourrightsandremediesthereunder.Ifanaircraftweretobeoperatedwithoutavalidregistration,thelesseeor,insomecases,theownerorlessormightbesubjecttopenalties,whichcouldresultinalienbeingplacedonsuchaircraft.Failuretocomplywithregistrationrequirementsalsocouldhaveotheradverseeffects,includinginabilitytooperatetheaircraftandlossofinsurance.Wecannotassureyouthatalllesseeswillcomplywiththeserequirements.

Anaircraftcannotberegisteredintwocountriesatthesametime.Beforeanaviationauthoritywillregisteranaircraftthathaspreviouslybeenregisteredinanothercountry,itmustreceiveconfirmationthattheaircrafthasbeenderegisteredbythatcountrysaviationauthority.Inordertoderegisteranaircraft,thelesseemustcomplywithapplicablelawsandregulations,andtherelevantgovernmentalauthoritymustenforcetheselawsandregulations.Failurebylesseesandgovernmentalauthoritiestocomplywithorenforcederegistrationrequirementsinthejurisdictionsinwhichtheyoperatecouldimpairourabilitytorepossess,re-leaseorsellouraircraft,andcauseustoincurassociatedlegalandotherexpenses,whichwouldnegativelyimpactourcashflowsandfinancialresults.

Ourlesseesmayhaveinadequateinsurancecoverageorfailtofulfilltheirrespectiveindemnityobligations,whichcouldresultinusnotbeingcoveredforclaimsassertedagainstusandmaynegativelyaffectourbusiness,financialconditionandfinancialresults.

Althoughwedonotexpecttocontroltheoperationofourleasedaircraft,ourownershipoftheaircraftcouldgiverise,insomejurisdictions,tostrictliabilityforlossesresultingfromtheiroperation.Ourlesseesarerequiredtoindemnifyusfor,andinsureagainst,liabilitiesarisingoutoftheuseandoperationoftheaircraft,includingthird-partyclaimsfordeathorinjurytopersonsanddamagetopropertyforwhichwemaybedeemedliable.Lesseesarealsorequiredtomaintainpublicliability,propertydamageandhullallrisksandhullwarrisksinsuranceontheaircraftatagreeduponlevels.However,theyarenotgenerallyrequiredtomaintainpoliticalriskinsurance.Theremaybecircumstancesunderwhichitwouldbedesirableforustomaintaintop-upand/orpoliticalriskcoverageatourexpense,whichwouldaddtoouroperatingexpenses.

FollowingtheterroristattacksofSeptember11,2001,aviationinsurerssignificantlyreducedtheamountofinsurancecoverageavailabletoairlinesforliabilitytopersonsotherthanemployeesorpassengersforclaimsresultingfromactsofterrorism,warorsimilarevents.Atthesametime,theysignificantlyincreasedthepremiumsforsuchthird-partywarriskandterrorismliabilityinsuranceandcoverageingeneral.Asaresult,theamountofsuchthird-partywarriskandterrorismliabilityinsurancethatisavailableatanytimemaybebelowtheamountrequiredundertheinitialleasesandrequiredbythemarketingeneral.

Wecannotassureyouthattheinsurancemaintainedbyourlesseeswillbesufficienttocoveralltypesofclaimsthatmaybeassertedagainstus.Anyinadequateinsurancecoverageordefaultbylesseesinfulfillingtheirindemnificationorinsuranceobligations,aswellasthelackofavailableinsurance,couldreducetheproceedsuponaneventoflossandcouldsubjectustouninsuredliabilities,eitherofwhichcouldadverselyaffectourbusiness,financialconditionandfinancialresults.

Risksassociatedwiththeconcentrationofourlesseesincertaingeographicalregionscouldharmourbusiness.

Inadditiontoglobaleconomicconditions,ourbusinessisexposedtolocaleconomicandpoliticalconditionsthatcaninfluencetheperformanceoflesseeslocatedinaparticularregion.Suchconditionscanbeadversetous,andmayincluderegionalrecessionandfinancialorpoliticalemergencies,additionalregulationor,inextremecases,seizureofouraircraft.Theeffectoftheseconditionsonpaymentstouswillbemoreorlesspronounced,dependingontheconcentrationoflesseesintheregionwithadverseconditions.IntheyearendedDecember31,2017,wehadourlargestconcentrationoftotalrevenuesinAsiaandtheSouthPacific(44%),followedbyEurope(33%),theMiddleEastandAfrica(11%),NorthAmerica(7%),andMexico,SouthandCentralAmerica(5%).Severerecessioninanyoftheseregions,ortheinabilitytoresolvefinancialorpoliticalemergenciesinanyparticularregionwherewehavemanycustomers,couldresultinadditionalfailuresofairlinesandcouldhaveamaterialadverseeffectonourbusiness,financialconditionandfinancialresults.

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Therisksassociatedwiththegeographicalconcentrationofourlesseesmaybecomeexacerbatedasouraircraftarere-leasedtolesseesorsubleasedtosublesseesinotherregionsorasweacquireadditionalaircraft.

Wederivedapproximately67%ofourtotalrevenuesfortheyearendedDecember31,2017fromairlinesinemergingmarkets.Emergingmarketshavelessdevelopedeconomiesandinfrastructureandareoftenmorevulnerabletobusinessandpoliticaldisturbances.TheemergingmarketsinwhichourlesseeswerebasedhaveincludedBrazil,Chile,China,theCzechRepublic,Ethiopia,India,Indonesia,Malaysia,Mexico,Moldova,thePhilippines,Russia,Thailand,Turkey,theUnitedArabEmiratesandVietnam.ThesecountriesmayexperiencesignificantfluctuationsinGDP,interestratesandcurrencyexchangerates,aswellascivildisturbances,governmentinstability,nationalizationandexpropriationofprivateassetsandtheimpositionofunexpectedtaxesorotherchargesbygovernmentauthorities.Theoccurrenceofanyoftheseeventsinmarketsservedbyourlesseesandtheresultingeconomicinstabilitymayadverselyaffectourownershipinterestinaircraftortheabilityoflesseeswhichoperateinthesemarketstomeettheirleaseobligations.Asaresult,lesseesthatoperateinemergingmarketcountriesmaybemorelikelytodefaultthanlesseesthatoperateindevelopedcountries.Inaddition,legalsystemsinemergingmarketcountriesmaybelessdeveloped,whichcouldmakeitmoredifficultforustoenforceourlegalrightsinsuchcountries.Forexample,certaincountriesmaynothavefullyimplementedtheCapeTownConventiononInternationalInterestsinMobileEquipment,atreatythat,amongotherthings,establishedinternationalstandardsfortheregistration,protectionandenforcementoflessorsandfinanciersrightsinaircraft.Thesemattersmaynotberesolvedontermsfavorabletous,orinatimelyfashion.

Wemayenterintostrategicventureswhichposerisksincludingalackofcompletecontrolovertheenterprise,andpotentialunforeseenrisks,anyofwhichmayhaveamaterialadverseeffectonourfinancialresultsandgrowthprospects.

Wemayoccasionallyenterintostrategicventuresorinvestmentswiththirdparties.Forexample,wehavea57%investmentinajointventurethatownstwoBoeing767-300aircraft.Wemayhavelimitedmanagementrightsinourstrategicventuresandmaynotcontroldecisionsregardingtheremarketingorsaleofaircraftownedbythesestrategicventures.Ifweareunabletoresolveadisputewithastrategicpartnerthatretainsmaterialmanagerialvetorights,wemightreachanimpassethatcouldrequireustoliquidateourinvestmentatatimeandinamannerthatwouldresultinourlosingsomeorallofouroriginalinvestmentintheventure.Thesestrategicventuresandinvestmentsalsomaysubjectustounforeseenrisks,includingadversetaxconsequencesandadditionalreportingandcompliancerequirements.Anyoftheserisksmayhaveamaterialadverseeffectonourfinancialresultsandgrowthprospects.

Risks Related to the Aviation Industry

Airlinereorganizationscouldimpairourlesseesabilitytocomplywiththeirleasepaymentobligationstous.

Inrecentyears,multipleairlineshavesoughttoreorganizeandseekprotectionfromcreditorsundertheirlocallawsandcertainairlineshavegoneintoliquidation.Bankruptcieshaveledtothegroundingofsignificantnumbersofaircraft,rejectionofleasesandnegotiatedreductioninaircraftleaserentals,withtheeffectofdepressingaircraftmarketvalues.Additionalreorganizationsorliquidationsbyairlinesunderapplicablebankruptcyorreorganizationlawsorfurtherrejectionorabandonmentofaircraftbyairlinesinbankruptcyproceedingsmaydepressaircraftvaluesandaircraftleaserates.Additionalgroundedaircraftandlowermarketvalueswouldadverselyaffectourabilitytosellouraircraftorre-leaseouraircraftatfavorablerates.

Changesinfuelpricescanadverselyaffecttheprofitabilityoftheairlineindustryandourlesseesabilitytomeettheirleasepaymentobligationstous.

Fuelcostsrepresentamajorexpensetoairlines,significantlyimpactingtheprofitabilityoftheairlineindustryandourlesseesoperatingresults.Fuelpricesfluctuatewidely,drivenprimarilybyinternationalmarketconditions,geopoliticalandenvironmentalevents,regulatorychangesandcurrencyexchangerates.Inrecentyears,fuelpriceshavebeenvolatile,increasinganddecreasingrapidlyduetofactorsoutsideofairlinescontrol.

Higherfuelcostsmayhaveamaterialadverseimpactonairlineprofitability,includingtheprofitabilityofourlessees.Duetothecompetitivenatureoftheairlineindustry,airlinesmaynotbeabletopassonincreasesinfuelpricestotheircustomersbyincreasingfares.Iftheypassonthehighercosts,itmayadverselyaffectdemandforairtravel,whichwouldreducerevenuestoourcustomers.Inaddition,airlinesmaynotbeabletomanagethisriskbyappropriatelyhedgingtheirexposuretofuelpricefluctuations.

Asustainedperiodoflowerfuelcostsmayadverselyaffectregionaleconomiesthatdependonoilrevenue,includingthoseinwhichourlesseesoperate.

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Governmentregulationscouldrequiresubstantialexpenditures,reduceourprofitabilityandlimitourgrowth.

Certainaspectsofourbusinessaresubjecttoregulationbystate,federalandforeigngovernmentalauthorities.Aircraftaresubjecttoregulationsimposedbyaviationauthoritiesregardingaircraftmaintenanceandairworthiness.Lawsaffectingtheairworthinessofaircraftgenerallyaredesignedtoensurethatallaircraftandrelatedequipmentarecontinuouslymaintainedinproperconditiontoenablesafeoperationoftheaircraft.Aircraftmanufacturersalsomayissuetheirownrecommendations.Airworthinessdirectivesandsimilarrequirementstypicallysetforthparticularspecialmaintenanceactionsormodificationstocertainaircrafttypesormodelsthattheownersoroperatorsofaircraftmustimplement.

Eachlesseegenerallyisresponsibleforcomplyingwithairworthinessdirectiveswithrespecttoitsaircraftandisrequiredtomaintaintheaircraftsairworthiness.Totheextentthatalesseefailstocomplywithairworthinessdirectivesrequiredtomaintainitscertificateofairworthinessorothermanufacturerrequirementsinrespectofanaircraftoriftheaircraftisnotcurrentlysubjecttoalease,wemayhavetobearthecostofsuchcompliance.Undermanyleases,wehaveagreedtosharewithourlesseesthecostofobligationsunderairworthinessdirectives(orsimilarrequirements).Theseexpenditurescanbesubstantialand,totheextentwearerequiredtopaythem,ourfinancialconditionandcashflowscouldbemateriallyandadverselyaffected.

Inadditiontotheseexpenditures,whichmaybesubstantial,significantnewrequirementswithrespecttonoisestandards,emissionstandardsandotheraspectsofouraircraftortheiroperationcouldcauseourcoststoincreaseandcouldcausethevalueofouraircraftportfoliotodecrease.Othergovernmentalregulationsrelatingtonoiseandemissionslevelsmaybeimposednotonlybythejurisdictionsinwhichtheaircraftareregistered,possiblyaspartoftheairworthinessrequirements,butalsobyotherjurisdictionswheretheaircraftoperate.Inaddition,mostcountriesaviationlawsrequireaircrafttobemaintainedunderanapprovedmaintenanceprogramhavingdefinedproceduresandintervalsforinspection,maintenanceandrepair.Totheextentthatouraircraftareoff-leaseoralesseedefaultsineffectingsuchcompliance,wearerequiredtocomplywithsuchrequirementsatourexpense.

Theeffectsofvariousenvironmentalregulationsmaynegativelyaffecttheairlineindustry.Thismaycauselesseestodefaultontheirleasepaymentobligationstous.

Theairlineindustryissubjecttoincreasinglystringentfederal,state,localandinternationalenvironmentallawsandregulationsconcerningemissionstotheair,dischargestosurfaceandsubsurfacewaters,safedrinkingwater,aircraftnoise,themanagementofhazardoussubstances,oilsandwastematerials,andotherregulationsaffectingaircraftoperations.Governmentalregulationsregardingaircraftandenginenoiseandemissionslevelsapplybasedonwheretherelevantaircraftisregisteredandoperated.

Jurisdictionsthroughouttheworldhaveadoptednoiseregulationswhichrequireallaircrafttocomplywithnoiselevelstandards.Inadditiontothecurrentrequirements,theUnitedStatesandtheInternationalCivilAviationOrganization(ICAO)adoptedsetofstandardsfornoiselevelswhichappliestoenginesmanufacturedorcertifiedonorafterJanuary1,2006.Currently,U.S.regulationsdonotrequireanyphase-outofaircraftthatqualifywiththeolderstandardsapplicabletoenginesmanufacturedorcertifiedpriortoJanuary1,2006,buttheEuropeanUnionimposesoperatinglimitationsonaircraftthatdonotcomplywiththenewstandardsandincorporatesaviation-relatedemissionsintotheEuropeanUnionsEmissionsTradingScheme(ETS).ICAOhasalsoadoptednew,morestringentnoiselevelstandardstoapplytonewairplanetypedesignwithamaximumcertificatedtakeoffweightof55,000kgormoreonorafterDecember31,2017;orwithmaximumcertificatedtakeoffweightoflessthan55,000kgonorafterDecember31,2020.TheUnitedStateshasproposednoiseregulationstoharmonizewiththenewICAOstandards.

ThepotentialimpactofETSandICAOstandardsoncostshavenotbeencompletelyidentified.Concernsoverglobalwarmingalsocouldresultinmorestringentlimitationsontheoperationofaircraft.Anyoftheseregulationscouldlimittheeconomiclifeoftheaircraftandengines,reducetheirvalue,limitourabilitytoleaseorsellthenon-compliantaircraftandenginesor,ifenginemodificationsarepermitted,requireustomakesignificantadditionalinvestmentsintheaircraftandenginestomakethemcompliant.Inaddition,compliancewithcurrentorfutureregulations,taxesordutiesimposedtodealwithenvironmentalconcernscouldcauselesseestoincurhighercostsandleadtohigherticketprices,whichcouldmeanlowerdemandfortravel,therebygeneratinglowernetrevenuesandresultinginanadverseimpactonthefinancialconditionofourlessees.

Failuretoobtaincertainrequiredlicenses,consentsandapprovalscouldnegativelyaffectourabilitytore-leaseorsellaircraft,whichwouldnegativelyaffectourbusiness,financialconditionandfinancialresults.

Aircraftleasesoftenrequirespecificlicenses,consentsorapprovals.Theseincludeconsentsfromgovernmentalorregulatoryauthoritiesforcertainpaymentsundertheleasesandfortheimport,re-exportorderegistrationoftheaircraft.Subsequentchangesinapplicablelaworadministrativepracticemayincreaseorotherwisemodifytheserequirements.Inaddition,agovernmentalconsent,oncegiven,mightbewithdrawn.Anyoftheseeventscouldadverselyaffectourabilitytore-leaseorsellaircraft,whichwouldnegativelyaffectourbusiness,financialconditionandfinancialresults.

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Iftheeffectsofterroristattacksandgeopoliticalconditionsadverselyimpactthefinancialconditionoftheairlines,ourlesseesmightnotbeabletomeettheirleasepaymentobligations,whichwouldhaveanadverseeffectonourfinancialresultsandgrowthprospects.

War,armedhostilitiesorterroristattacks,orthefearofsuchevents,coulddecreasedemandforairtravelorincreasetheoperatingcostsofourcustomers.ThesituationsinIraq,Afghanistan,Syria,Iran,NorthAfricaandUkraineremainunsettled,andotherinternationalincidents,suchasterroristattacksinBelgium,France,GermanyandTurkey,tensionoverNorthKoreasnuclearprogramandterritorialdisputesinEastAsia,mayleadtoregionalorbroaderinternationalinstability.Futureterroristattacks,warorarmedhostilities,largeprotestsorgovernmentinstability,orthefearofsuchevents,couldfurthernegativelyimpacttheairlineindustryandmayhaveanadverseeffectonthefinancialconditionandliquidityofourlessees,aircraftvaluesandrentalratesandmayleadtoleaserestructuringsoraircraftrepossessions,allofwhichcouldadverselyaffectourfinancialresultsandgrowthprospects.

Terroristattacksandgeopoliticalconditionshavenegativelyaffectedtheairlineindustry,andconcernsaboutgeopoliticalconditionsandfurtherterroristattackscouldcontinuetonegativelyaffectairlines(includingourlessees)fortheforeseeablefuture,dependinguponvariousfactors,including:(i)highercoststotheairlinesduetotheincreasedsecuritymeasures;(ii)decreasedpassengerdemandandrevenueduetosafetyconcernsortheinconvenienceofadditionalsecuritymeasures;(iii)thepriceandavailabilityofjetfuel;(iv)higherfinancingcostsanddifficultyinraisingthedesiredamountofproceedsonfavorableterms,oratall;(v)thesignificantlyhighercostsofaircraftinsurancecoverageforfutureclaimscausedbyactsofwar,terrorism,sabotage,hijackingandothersimilarperils,andtheextenttowhichsuchinsurancehasbeenorwillcontinuetobeavailable;(vi)theabilityofairlinestoreducetheiroperatingcostsandconservefinancialresources,takingintoaccounttheincreasedcostsincurredasaconsequenceofterroristattacksandgeopoliticalconditions,includingthosereferredtoabove;and(vii)specialchargesrecognizedbysomeairlines,suchasthoserelatedtotheimpairmentofaircraftandotherlonglivedassetsstemmingfromtheaboveconditions.

Epidemicdiseases,severeweatherconditions,naturaldisastersortheirperceivedeffectsmaynegativelyimpacttheairlineindustryandourlesseesabilitytomeettheirleasepaymentobligationstous,which,inturn,couldhaveanadverseeffectonourfinancialresultsandgrowthprospects.

Overthepastseveralyears,therehavebeenoutbreaksofepidemicdiseases,suchasEbolavirusdiseaseandZikavirusdisease.Ifanoutbreakofepidemicdiseasesweretooccur,numerousresponses,includingtravelrestrictions,mightbenecessarytocombatthespreadofthedisease.Evenifrestrictionsarenotimplemented,itislikelythatpassengerswouldvoluntarilychoosetoreducetravel.Outbreaksofepidemicdiseases,orthefearofsuchevents,couldresultintravelbansorcouldhaveanadverseeffectonourfinancialresults.Similarly,demandforairtravelortheinabilityofairlinestooperatetoorfromcertainregionsduetosevereweatherconditionsornaturaldisasters,suchasfloods,earthquakesorvolcaniceruptions,couldhaveanadverseeffectonourlesseesabilitytomaketheirleasepaymentobligationstous,whichcouldnegativelyimpactourfinancialresultsandgrowthprospects.

Wearesubjecttovariousrisksandrequirementsassociatedwithtransactingbusinessinmultiplecountrieswhichcouldhaveamaterialadverseeffectonourbusiness,financialconditionandfinancialresults.

OurinternationaloperationsexposeustotradeandeconomicsanctionsandotherrestrictionsimposedbytheUnitedStates,theEuropeanUnion(theEU)andothergovernmentsororganizations.TheU.S.DepartmentsofJustice,Commerce,StateandTreasuryandotherfederalagenciesandauthoritieshaveabroadrangeofcivilandcriminalpenaltiestheymayseektoimposeagainstcorporationsandindividualsforviolationsofeconomicsanctionslaws,exportcontrollaws,theForeignCorruptPracticesAct(FCPA),andotherfederalstatutesandregulations,includingthoseestablishedbytheOfficeofForeignAssetsControl(OFAC).Inaddition,theU.K.BriberyActof2010(theBriberyAct)prohibitsbothdomesticandinternationalbribery,aswellasbriberyacrossbothprivateandpublicsectors.AnorganizationthatfailstopreventbriberybyanyoneassociatedwiththeorganizationcanbechargedundertheBriberyActunlesstheorganizationcanestablishthedefenseofhavingimplementedadequateprocedurestopreventbribery.Undertheselawsandregulations,variousgovernmentagenciesmayrequireexportlicenses,mayseektoimposemodificationstobusinesspractices,includingcessationofbusinessactivitiesinsanctionedcountriesorwithsanctionedpersonsorentities,andmodificationstocomplianceprograms,whichmayincreasecompliancecosts,andmaysubjectustofines,penaltiesandothersanctions.Aviolationoftheselawsorregulationscouldadverselyimpactourbusiness,financialconditionandfinancialresults.

TheEuropeanUnionandtheUnitedStateshaveimposedsanctionsonRussiaandcertainbusinesses,sectorsandindividualsinRussia,includingtheairlineindustry.TheEuropeanUnionandtheUnitedStateshavealsosuspendedthegrantingofcertaintypesofexportlicensestoRussia.RussiahasimposeditsownsanctionsoncertainindividualsintheUnitedStatesandmayimposeothersanctionsontheUnitedStatesandtheEuropeanUnionand/orcertainbusinessesorindividualsfromtheseregions.WecannotassureyouthatthecurrentsanctionsoranyfurthersanctionsimposedbytheEuropeanUnion,theUnitedStatesorotherinternationalinterestswillnotmateriallyadverselyaffectourbusiness,financialconditionandfinancialresults.

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In2016,theUnitedStatesandEuropeanUnionliftedcertainnuclear-relatedsecondarysanctionsasprovidedbytheJointComprehensivePlanofAction(JCPOA)withIran.Amongotherthings,thesaleorleaseofcivilpassengeraircrafttomostIranianairlinesisnowpermitted,subjecttoreceiptofanappropriatelicense.Transactionswithsanctionedindividualsandentities,includingaircraftsaleandleasetransactionswithsuchpersons,remainprohibited,andtheUnitedStatesretainstheauthoritytorevokethesanctionsreliefprovidedbytheJCPOAifIranfailstomeetitscommitmentsthereunder.WhilewedonotcurrentlydobusinessinIranorwithIranianairlines,wemayseektodosointhefutureincompliancewithapplicablelawsandregulations.

WeandourManagerhaveimplementedandmaintainpoliciesandproceduresdesignedtoensurecompliancewithFCPA,OFAC,theBriberyActandotherexportcontrol,anti-corruption,anti-terrorismandanti-moneylaunderinglawsandregulations.Wecannotassureyou,however,thatourdirectors,officers,consultantsandagentswillnotengageinconductforwhichwemaybeheldresponsible,norcanweassureyouthatourbusinesspartnerswillnotengageinconductwhichcouldmateriallyaffecttheirabilitytoperformtheircontractualobligationstousorevenresultinourbeingheldliableforsuchconduct.Moreover,whilewebelievethatwehavebeenincompliancewithallapplicablesanctionslawsandregulations,andintendtomaintainsuchcompliance,therecanbenoassurancethatwewillbeincomplianceinthefuture,particularlyasthescopeofcertainlawsmaybeunclearandmaybesubjecttochange.ViolationsofFCPA,OFAC,theBriberyActandotherexportcontrol,anti-corruption,anti-terrorismandanti-moneylaunderinglawsandregulationsmayresultinseverecriminalorcivilsanctions,andwemaybesubjecttootherliabilities,whichcouldhaveamaterialadverseeffectonourbusiness,financialconditionandfinancialresults.

AdverseconditionsanddisruptionsinEuropeaneconomiescouldhaveamaterialadverseeffectonourbusiness.Ourbusinesscanbeaffectedbyanumberoffactorsthatarebeyondourcontrol,suchasgeneralgeopolitical,economicandbusinessconditions.Politicaluncertaintyhascreatedfinancialandeconomicuncertainty,mostrecentlyasaresultoftheUnitedKingdom'sJune2016referendum(commonlyreferredtoas"Brexit")towithdrawfromtheEuropeanUnion(theEU).TheeconomicconsequencesofBrexit,includingthepossiblerepealofopen-skiesagreements,couldhaveamaterialadverseeffectonourbusiness.Further,manyofthestructuralissuesfacingtheEUfollowingtheglobalfinancialcrisisof2008andBrexitremain,andproblemscouldresurfacethatcouldaffectmarketconditions,and,possibly,ourbusiness,financialresultsandliquidity,particularlyiftheyleadtotheexitofoneormorecountriesfromtheEuropeanMonetaryUnion(the"EMU")ortheexitofadditionalcountriesfromtheEU.IfoneormorecountriesexitedtheEMU,therewouldbesignificantuncertaintywithrespecttooutstandingobligationsofcounterpartiesanddebtorsinanyexitingcountry,whethersovereignorotherwise,anditwouldlikelyleadtocomplexandlengthydisputesandlitigation.

Wedependonaircraftandenginemanufacturerssuccessinremainingfinanciallystableandproducingaircraft.

Thesupplyofcommercialaircraftisdominatedbyafewairframemanufacturers,includingBoeing,Airbus,Embraer,ATRandBombardier,andalimitednumberofenginemanufacturers,suchasGEAircraftEngines,Rolls-Royceplc,Pratt&Whitney,adivisionofUnitedTechnologiesCorporation,IAEInternationalAeroEnginesAGandCFMInternational,Inc.Asaresult,wewillbedependentonthesuccessofthesemanufacturersinremainingfinanciallystable,producingproductsandrelatedcomponentswhichmeettheairlinesdemands,providingcustomersupportandfulfillinganycontractualobligationstheymayhavetous.

Intheeventthatthemanufacturersprovidedeepdiscountswithrespecttocertainaircraft,thatcouldaffectourabilitytoeffectivelycompeteinthemarket,wemaynotbeabletoremarketsimilaraircraftinourfleetataprofitoratall.Thiscouldalsoleadtoreducedmarketleaseratesandaircraftvalues.

Risks Related to Our Relationship with BBAM LP

BBAMhasconflictsofinterestwithusandmayfavortheirownbusinessinterestandthoseoftheirothermanagedentitiestoourdetriment.

ConflictsofinterestwillarisebetweenusandBBAMLPwithrespecttoouroperationsandbusinessopportunities.BBAMLPacquires,managesandremarketsaircraftforleaseorsaleforusandforotherentities,includingentitiesinwhichtheownersofBBAMLP,SummitAviationPartnersIILLCanditsaffiliates(Summit),OnexCorporationanditsaffiliates(Onex),andGICPrivateLimited(GIC)mayhaveaneconomicinterest.Wemaycompetedirectlywithsuchothermanagedentitiesforinvestmentopportunities.Forexample,BBAMperformsaircraftacquisition,dispositionandmanagementservicespursuanttoajointmarketingagreementwithNomuraBabcock&BrownCo.,Ltd,referredtoasNBB,andmanagesandservicesotherinvestmentvehicles,includingtheInclineAviationFund,pursuanttolong-term,exclusiveagreements.BBAMhasarrangedasignificantnumberofaircraftacquisitionsanddispositionspursuanttotheseagreements.WeexpectthatBBAMwillcontinuetoarrangeacquisitionanddispositionopportunitieswithNBB,andforotherinvestmentvehicles,andthatwemaycompetewiththesepartiesforsuchopportunities.AconflictofinterestwillariseifBBAMidentifiesanaircraftacquisitionopportunitythatwouldmeetourinvestmentobjectivesaswellasthoseofanothervehiclemanagedorservicedbyBBAM.BBAM,OnexandGICalsomayparticipateinotherventuresthatacquireandleasecommercialjetaircraft.WedonothaveanyexclusiverighttoparticipateinaircraftacquisitionopportunitiesoriginatedoridentifiedbyBBAM.UnderouragreementswithBBAMLP,ourManagerhasagreedtoactinthebestinterestsofourshareholders.However,neitherBBAMnoranyotherBBAMLPaffiliatewillberestrictedfrompursuing,orofferingtoanotherparty,anyinvestmentordisposalopportunity,orwillberequiredbyFlytoestablishanyinvestmentprotocolinrelationtoprioritizationofanyinvestmentordisposalopportunity.Wemaypurchaseaircraftfrom,orsellaircraftto,entitiesmanagedbyBBAM,orentitiesinwhichSummit,OnexorGIChasanownershipinterest.Althoughsuchpurchaseswillrequireapprovalbyourindependentdirectors,thepricingandothertermsofthesetransactionsmaybelessadvantageoustousthaniftheyhadbeentheresultoftransactionsamongunaffiliatedthirdparties.

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UnderourservicingagreementswithBBAM,ifaconflictofinterestarisesastoouraircraftandotheraircraftmanagedbyBBAM,BBAMmustperformtheservicesingoodfaith,and,totheextentthatouraircraftorotheraircraftmanagedbyBBAMhavesubstantiallysimilarcharacteristicsthatarerelevantforpurposesoftheparticularservicestobeperformed,BBAMhasagreednottodiscriminateamongouraircraftorbetweenanyofouraircraftandanyothermanagedaircraftonanunreasonablebasis.Nevertheless,despitethesecontractualundertakings,BBAMasServicermayfavoritsowninterestsandtheinterestsofothermanagedentitiesoverourinterests.ConflictsmayarisewhenouraircraftareleasedtoentitiesthatalsoleaseotheraircraftmanagedbyBBAManddecisionsaffectingsomeaircraftmayhaveanadverseimpactonothers.Forexample,whenalesseeinfinancialdistressseekstoreturnsomeofitsaircraft,BBAMmayberequiredtodecidewhichaircrafttoacceptforreturnandmayfavoritsoranothermanagedentitysinterestoverours.Conflictsalsomayarise,forexample,whenouraircraftarebeingmarketedforre-leaseorsaleatatimewhenotheraircraftmanagedbyBBAMarebeingsimilarlymarketed.

Underthetermsofourservicingagreements,wearenotentitledtobeinformedofallconflictsofinterestinvolvingBBAMandarelimitedinourrighttoreplaceBBAMbecauseofconflictsofinterest.AnyreplacementServicermaynotprovidethesamequalityofserviceormaynotaffordustermsasfavorableasthetermscurrentlyofferedbyBBAM.IfBBAM,astheservicer,makesadecisionthatisadversetoourinterests,ourbusiness,financialcondition,financialresultsandcashflowscouldsuffer.

EvenifweweretobecomedissatisfiedwithBBAMLPsperformance,thereareonlylimitedcircumstancesunderwhichweareabletoterminateourmanagementandservicingagreementsandwemaynotterminatecertainofourservicingagreementswithoutthepriorwrittenconsentofthirdparties,includinginsurancepolicyproviderorlenders.

OurmanagementagreementwithourManagerexpiresonJuly1,2025.Atthattime,themanagementagreementwillautomaticallyrenewforfiveyears,unlesswemakeapaymenttotheManagerequalto$6.0million,plus,solongasthemanagementexpenseamountdoesnotexceed$12.0million,50%oftheexcess(ifany)ofthemanagementexpenseamountover$6.0million.Wemayterminatethemanagementagreementsooneronlyif:

atleast75%ofourindependentdirectorsandholdersof75%ormoreofallofouroutstandingcommonshares(measuredbyvote)determinebyresolutionthattherehasbeenunsatisfactoryperformancebyourManagerthatismateriallydetrimentaltous;

ourManagermateriallybreachesthemanagementagreementandfailstoremedysuchbreachwithin90daysofreceivingwrittennoticefromusrequiringittodoso,orsuchbreachresultsinliabilitytousandisattributabletoourManagersgrossnegligence,fraudordishonesty,orwillfulmisconductinrespectoftheobligationtoapplythestandardofcare;

anylicense,permitorauthorizationheldbytheManagerwhichisnecessaryforittoperformtheservicesanddutiesunderthemanagementagreementismateriallybreached,suspendedorrevoked,orotherwisemadesubjecttoconditionswhich,inthereasonableopinionofourboardofdirectors,wouldpreventtheManagerfromperformingtheservicesandthesituationisnotremediedwithin90days;

BBAMAviationServicesLimitedoroneofitsaffiliatesceasestohold(directlyorindirectly)morethan50%ofthevotingequityof,andeconomicinterestin,theManager;

ourManagerbecomessubjecttobankruptcyorinsolvencyproceedingsthatarenotdischargedwithin75days,unlessourManageriswithdrawnandreplacedwithin90daysoftheinitiationofsuchbankruptcyorinsolvencyproceedingswithanaffiliateorassociateofBBAMthatisabletomakecorrectlytherepresentationsandwarrantiessetoutinthemanagementagreement;

ourManagervoluntarilycommencesanyproceedingorfilesanypetitionseekingbankruptcy,insolvency,receivershiporsimilarlaw,ormakesageneralassignmentforthebenefitofitscreditors,unlessourManageriswithdrawnandreplacedwithin15dayswithanaffiliateorassociateofBBAMthatisabletomakecorrectlytherepresentationsandwarrantiessetoutinthemanagementagreement;or

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anorderismadeforthewindingupofourManager,unlessourManageriswithdrawnandreplacedwithin15dayswithanaffiliateorassociateofBBAMthatisabletomakecorrectlytherepresentationsandwarrantiessetoutinthemanagementagreement.

WehavetherighttoterminatetheservicingagreementforB&BAirFunding(withthepriorwrittenconsentofthefinancialguarantyproviderforB&BAirFunding,whichwerefertoasthepolicyprovider)andthepolicyproviderhastheindependentrighttoterminatetheagreement(withoutourconsent)inthefollowinglimitedcircumstances:

BankruptcyorinsolvencyofBBAMLP;

BBAMLPceasestoown,directlyorindirectly,atleast50%oftheServicer;

Summitceasestoown,directlyorindirectly,atleast33.33%ofthepartnershipinterestsinBBAMLP;providedthatasalethatresultsinsuchownershipbeingatalevelbelow33.33%shallnotconstituteaservicerterminationeventifthesaleistoapubliclylistedentityorotherpersonwithanetworthofatleast$100.0million;and

50%ormoreoftheServicerskeyfinanceandlegalteamortechnicalandmarketingteamceasetobeemployedbyBBAMLPandarenotreplacedwithemployeeswithreasonablycomparableexperiencewithin90days.

Inaddition,wearerequiredtoobtainwrittenconsentofcertainofourlenderspriortoterminatingcertainofourservicingagreements.

OurmanagementandservicingagreementslimitourremediesagainstBBAMLPforunsatisfactoryperformanceandprovidecertainterminationrightstothepolicyprovider.

UnderourmanagementandservicingagreementswithBBAMLP,inmanycaseswemaynothavetherighttorecoverdamagesfromBBAMLPforunsatisfactoryperformance.Moreover,wehaveagreedtoindemnifyourManager,BBAMLPandtheiraffiliatesforbroadcategoriesoflossesarisingoutoftheperformanceofservices,unlesstheyarefinallyadjudicatedtohavebeencauseddirectlybyourManagersorBBAMLPsgrossnegligence,fraud,deceitorwillfulmisconductinrespectofitsobligationtoapplyitsstandardofcareor,inthecaseoftheservicingagreementforB&BAirFunding,conflictsofintereststandardintheperformanceofitsservices.Inaddition,becauseofoursubstantialdependenceonBBAMLP,ourboardofdirectorsmaybereluctanttoinitiatelitigationagainstBBAMLPtoenforcecontractualrightsunderourmanagementandservicingagreements.

UndercertaincircumstancestheproviderofthefinancialguarantyinsurancepolicywithrespecttothenotesissuedbyB&BAirFunding(theSecuritizationNotes),andcertainofourlendersmayhavetherighttoterminateBBAMastheservicerforcertainofouraircraftwithoutourconsentandmayterminatetheServiceratatimewhichmaybedisadvantageoustous.

BBAMmayresignasServicerunderourservicingagreementsundercertaincircumstances,whichwouldsignificantlyimpairourabilitytore-leaseorsellaircraftandserviceourleases.

BBAMmayresignunderoneormoreofourservicingagreementsundercertaincircumstancesifitreasonablydeterminesthatdirectionsgiven,orservicesrequired,would,ifcarriedout,beunlawfulunderapplicablelaw,belikelytoleadtoaninvestigationbyanygovernmentalauthorityhavingjurisdictionoverBBAMoritsaffiliates,exposeBBAMtoliabilitiesforwhich,inBBAMsgoodfaithopinion,adequatebondorindemnityhasnotbeenprovidedorplaceBBAMinaconflictofinterestwithrespecttowhich,inBBAMsgoodfaithopinion,BBAMcouldnotcontinuetoperformitsobligationsundertheservicingagreementwithrespecttoallservicedaircraftoranyaffectedaircraft,asthecasemaybe(butwithrespecttotheforegoingcircumstance,BBAMmayresignonlywithrespecttotheaffectedaircraft).Whetherornotitresigns,BBAMisnotrequiredtotakeanyactionoftheforegoingkind.BBAMmayalsoresignifitbecomessubjecttotaxesforwhichwedonotindemnifyit.BBAMsdecisiontoresignwouldsignificantlyimpairourabilitytore-leaseorsellaircraftandserviceourleases.

Acyber-attackthatbypassesBBAMsinformationtechnology,orIT,securitysystems,causinganITsecuritybreach,mayleadtoamaterialdisruptionofourITsystemsandthelossofbusinessinformation,whichmayhinderourabilitytoconductourbusinesseffectivelyandmayresultinlostrevenuesandadditionalcosts.

WedependonthesecureoperationofBBAMscomputersystems,tomanage,process,store,andtransmitinformationassociatedwithaircraftleasing.Acyber-attackonthesecomputersystemscouldadverselyimpactourdailyoperationsandleadtothelossofsensitiveinformation,includingourownproprietaryinformationandthatofourcustomers.Suchlossescouldharmourreputationandresultincompetitivedisadvantages,litigation,regulatoryenforcementactions,lostrevenues,additionalcostsandliability.WhileBBAMdevotessubstantialresourcestomaintainingadequatelevelsofcyber-security,itsresourcesandtechnicalsophisticationmaynotbeadequatetopreventalltypesofcyber-attacks.

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Risks Related to Our Indebtedness

Wehavesubstantialindebtednessthatimposesconstraintsonouroperations.

Weandoursubsidiarieshaveasignificantamountofindebtedness.AsofDecember31,2017,ourtotalconsolidatedindebtedness,netofunamortizeddebtdiscountsandloancosts,was$2.6billion.

Thetermsofourdebtfacilitiessubjectustocertainrisksandoperationalrestrictions,including:

mostoftheaircraftandrelatedleasesinourportfoliosecuredebtobligations,thetermsofwhichrestrictourabilitytosellaircraftandrequireustouseproceedsfromsalesofaircraft,inpart,torepayoutstandingdebt;

wearerequiredtodedicateasignificantportionofourcashflowsfromoperationstodebtservicepayments,therebyreducingtheamountofourcashflowsavailabletofundworkingcapital,makecapitalexpendituresandsatisfyotherneeds;

restrictionsonoursubsidiariesabilitytodistributeexcesscashflowstousundercertaincircumstances;

lessee,geographicalandotherconcentrationrequirementslimitourflexibilityinleasingouraircraft;

requirementstoobtaintheconsentofthirdpartiesincludinglenders,theinsurancepolicyproviderandratingagencyconfirmationsforcertainactions;and

restrictionsonoursubsidiariesabilitytoincuradditionaldebt,paydividendsormakeotherrestrictedpayments,createliensonassets,sellassets,enterintotransactionswithouraffiliates,makefreighterconversionsandmakecertaininvestmentsorcapitalexpenditures.

Inaddition,theindenturesandagreementsgoverningcertainofourindebtednesscontainfinancialandoperatingcovenantsthat,amongotherthings,requireustomaintainspecifiedfinancialratiosandtests.Ourabilitytomeetthesefinancialandoperatingcovenantscanbeaffectedbyeventsbeyondourcontrol,andwemaybeunabletomeetthem.Asaresultoftheserestrictions,wemaybelimitedinhowweconductandgrowourbusiness,orunabletocompeteeffectivelyortotakeadvantageofnewbusinessopportunities.

Forexample,B&BAirFundingisrequiredtoapplyallofitsavailablecashflow,afterpaymentofcertainexpenses(includinginterest),torepaytheprincipalontheSecuritizationNotes,andthecashflowfromtheaircraftintheB&BAirFundingportfolioisnotavailabletous.WealsohaveadebtfacilityprovidedbyNorddeutscheLandesbankGironzentrale(NordLBFacility).Substantiallyallcashflowsassociatedwiththeseaircraft,afterpaymentofcertainexpenses,areappliedtopaymentofinterestandprincipalandthereforearenotavailablefordistributiontous.

Abreachofthecovenantsorrestrictionsundertheindenturesandagreementsgoverningcertainofourindebtednesscouldresultinaneventofdefaultundertheapplicableindebtedness.Suchadefaultmayallowholdersofourdebtsecuritiesorourlenders,asapplicable,toacceleratetherelatedindebtedness,whichmayresultintheaccelerationofotherindebtednesstowhichacross-accelerationorcross-defaultprovisionapplies.Inaddition,suchlendersordebtholderscouldterminatecommitmentstolendmoney,ifany.Furthermore,ifwewereunabletorepaytheindebtednessthendueandpayable,securedlenderscouldproceedagainsttheaircraft,ifany,securingsuchindebtedness.Intheeventourlendersorholdersofourdebtsecuritiesacceleratetherepaymentofourborrowings,wemaynothavesufficientassetstorepaythatindebtedness.

Therestrictionsdescribedabove,aswellasrestrictionsinourotherfinancingfacilities,mayimpairourabilitytooperateandtocompeteeffectivelywithourcompetitors.Similarrestrictionsmaybecontainedinthetermsoffuturefinancingsthatwemayenterintotofinanceourgrowth.

Inaddition,iftheAirAsiaTransactionsarecompletedascurrentlycontemplated,wewillincuradditionalsecuredindebtednessofapproximately$0.7billioninconnectionwiththeacquisitionoftheinitial34aircraftportfolio,whichwouldfurtherexacerbatetherisksoutlinedaboveanddescribedelsewhereintheseRiskFactorsandthisAnnualReport.

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Oursubstantialindebtednesscouldadverselyaffectourfinancialconditionandpreventusfromfulfillingourobligationsunderourborrowings.

Subjecttothelimitscontainedintheagreementsgoverningourexistingandfutureindebtedness,wemaybeabletoincursubstantialadditionaldebtfromtimetotimetofinanceaircraft,workingcapital,capitalexpenditures,investmentsoracquisitions,orforotherpurposes.Ifwedoso,therisksrelatedtoourhighlevelofdebtcouldintensify.Specifically,ourhighlevelofdebtcouldhaveimportantconsequences,includingthefollowing:

makingitmoredifficultforustosatisfyourdebtobligationswithrespecttothenotesandourotherdebt;

limitingourabilitytoobtainadditionalfinancingtofundtheacquisitionofaircraftorforothergeneralcorporaterequirements;

requiringasubstantialportionofourcashflowstobededicatedtodebtservicepaymentsinsteadofotherpurposes,therebyreducingtheamountofcashflowsavailableforaircraftacquisitionsandothergeneralcorporatepurposes;

increasingourvulnerabilitytogeneraladverseeconomicandindustryconditions;

exposingustotheriskofincreasedinterestratesascertainofourborrowings,includingborrowingsunderourvariouscreditfacilities,areatvariableratesofinterest;

limitingourflexibilityinplanningforandreactingtochangesintheaircraftindustry;

placingusatadisadvantagecomparedtoothercompetitors;and

increasingourcostofborrowing.

Wemaynotbeabletogeneratesufficientcashtoserviceallofourindebtedness,andmaybeforcedtotakeotheractionstosatisfyourobligationsunderourindebtedness,whichmaynotbesuccessful.

Ourabilitytomakescheduledpaymentsonorrefinanceourdebtobligations,dependsonourfinancialconditionandoperatingperformance,whicharesubjecttoprevailingeconomicandcompetitiveconditionsandtofinancial,business,legislative,regulatoryandotherfactorsbeyondourcontrol.Wemaybeunabletomaintainalevelofcashflowsfromoperatingactivitiessufficienttopermitustopaytheprincipalof,premium,ifany,orinterestonourindebtedness.

Ifourcashflowsandcapitalresourcesareinsufficienttofundourdebtserviceobligations,wecouldfacesubstantialliquidityproblemsandcouldbeforcedtoreduceordelayaircraftpurchasesortodisposeofmaterialassets,orseekadditionaldebtorequitycapitalortorestructureorrefinanceourindebtedness.Wemaynotbeabletoeffectanysuchmeasuresoncommerciallyreasonabletermsoratalland,evenifsuccessful,thoseactionsmaynotallowustomeetourscheduleddebtserviceobligations.Certainagreementsgoverningourindebtednessrestrictourabilitytodisposeofassetsandusetheproceedsfromthosedispositions.Wemaynotbeabletoconsummatethosedispositionsortoobtainproceedsinanamountsufficienttomeetdebtserviceobligationsthendue.

Ourinabilitytogeneratesufficientcashflowstosatisfyourdebtobligations,ortorefinanceourindebtednessoncommerciallyreasonabletermsoratall,wouldmateriallyandadverselyaffectourfinancialpositionandfinancialresultsandourabilitytosatisfyourobligations.

Ifwecannotmakescheduledpaymentsonourindebtedness,wewillbeindefaultandholdersofourdebtsecuritiesorourlenders,asapplicable,maybeabletodeclaresuchindebtednesstobedueandpayable,terminatecommitmentstolendmoney,forecloseagainsttheaircraft,ifany,securingsuchindebtednessorpursueotherremedies,includingpotentiallyforcingusintobankruptcyorliquidation.

Wehaveasignificantamountofnon-recoursedebt.

AsofDecember31,2017,wehadtotaldebt,netofunamortizeddebtdiscountsandloancosts,of$2.6billion.Ofthisamount,$677.0millionwasnon-recoursetoFly,exceptforcertainlimitedobligationswhichtypicallyincludereimbursementforcertainexpensesandcostsincurredbythelenders.Thesenon-recourseloansmaybeprovidedthroughloanfacilitiesthataretypicallycross-collateralizedandcontaincross-defaultprovisionsagainstalloftheloansadvancedwithineachfacility,aswellasthroughindividualloansagainstindividualaircraft.AsofDecember31,2017,wehadthefollowingnon-recoursedebtfacilitiesthatprovidedfinancingagainstmultipleaircraft:

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Facility (1) Amount Outstanding

at December 31, 2017 (2)Number of

Aircraft Financed Maturity DateSecuritizationNotes $ 101.6million 9 November2033NordLBFacility $ 153.2million 6 November2018

(1) Excludes$431.9millionoutstandingforsevenaircraftfinancedbyindividualnon-recourseloans.(2) Excludesunamortizeddebtdiscountsandloancosts.

Thematuritydatesfornon-recourseloansrangefromNovember2018toNovember2033.Ingeneral,uponadefaultonanon-recourseloan,thelenderswillhavetheabilitytoforecloseuponanyorallavailablecollateral(includingaircraft,leasesandsharesofaircraft-owningand/oraircraft-leasingspecialpurposesentities)tosatisfyamountsdueundertheloan.However,thelenderscannotmakeaclaimagainstusforpaymentoftheseoutstandingobligations,exceptforthelimitedpaymentobligationsdescribedabove.Thenon-recoursenatureoftheseloansmeansthatwemaydecide,foreconomicreasons,todefaultonanon-recourseloanifandwhenwebelievethattheaircraftandotherassetssecuringsuchloanareworthlessthantheamountoutstandingundertheloan.Althoughthedirectfinancialimpacttousundersuchadefaultonanon-recourseloanislimited,thesedefaultsmayimpactourreputationasaborrowerandimpairourabilitytosecurefutureborrowings,whichcouldhaveamaterialadverseimpactonourabilitytogrowouraircraftportfolioandearnings.

Wehaveasignificantamountofrecoursedebtoutstanding,includingdebtofoursubsidiariesthatwehaveguaranteed.

Wehad$2.0billionofrecoursedebtoutstandingasofDecember31,2017,includingdebtofoursubsidiariesthatwehaveguaranteed.Weexpecttoincuradditionalrecourseindebtednessinthefuture.Althoughtheserecourseloansmaybesecuredbyaircraftandtheirassociatedleases,wehaveguaranteedandwillberesponsiblefortimelypaymentofalldebtserviceandotheramountsdueundertheseloansintheeventthattheunderlyingleasesdonotprovidesufficientcashflowstomeetrequireddebtpayments.Inthiscase,wewillberequiredtomakepaymentsfromourunrestrictedcash,whichcouldhaveamateriallyadverseimpactonourabilitytogrowthroughfutureacquisitionsofaircraft.Inaddition,theTermLoan,theCBAFacility,theMagellanAcquisitionLimitedFacility,theFlyAcquisitionIIIFacility,our2021Notesand2024Notes,andcertainofourotherrecourseindebtednesscontaincross-defaultprovisionstootherrecourseindebtednesswhichiftriggeredcouldsignificantlyincreasetheamountofindebtednesswhichispayablebyusatthetimeofthecross-default.

Certainoftheagreementsgoverningourrecoursedebtmaylimitouroperationalflexibilitywhichcouldnegativelyaffectourfinancialcondition,cashflowandresultsofoperations.

Certainoftheagreementsgoverningourrecoursedebt,includingourwarehouseandtermloanfacilities,containcovenantsthatrequireustocomplywithoneormoreofthefollowing:maximumloan-to-valueratios,minimumtangiblenetworthandminimumliquidityrequirements;andinterestcoverageratios.Complyingwithsuchcovenantsmayattimesrequireustodepositcashasadditionalcollateralandtoforegouseofsuchcashforotherneedsoropportunities.Moreover,ourfailuretocomplywithanyofthesecovenants(iftheperiodoftimetoexerciseanytemporarycurehaslapsed)couldconstituteadefaultundersuchagreementsandcouldpotentiallytriggeracross-defaultandaccelerationofsome,ifnotall,ofourthenoutstandingdebtinourrecoursecreditfacilities,whichwouldnegativelyaffectourfinancialcondition,cashflowsandresultsofoperations.

Weareaholdingcompanyandcurrentlyrelyonoursubsidiariestoprovideuswithfundsnecessarytomeetourfinancialobligations.

Weareaholdingcompanyandourprincipalassetsaretheinvestmentsweholdinoursubsidiaries,whichowneitherdirectlyorindirectlythroughtheirsubsidiaries,theaircraftinourportfolio.Asaresult,wedependoncashflowsfromoursubsidiariestogeneratethefundsnecessarytomeetourfinancialobligations.Ourexistingsubsidiariesarelegallydistinctfromusandmaybesignificantlyrestrictedfrompayingdividendsorotherwisemakingfundsavailabletouspursuanttotheagreementsgoverningtheirfinancingarrangements.Ifweareunabletocomplywiththecovenantscontainedintheseagreements,thentheamountsoutstandingunderthesedebtfacilitiesmaybecomeimmediatelydueandpayable,cashgeneratedbyaircraftfinancedthroughthesefacilitiesmaybeunavailabletousand/orwemaybeunabletodrawadditionalamountsunderthesefacilities.Theeventsthatcouldcausesomeofoursubsidiariestobenoncompliantundertheirloanagreements,suchasalesseedefault,maybebeyondourcontrol,buttheyneverthelesscouldhaveasubstantialadverseimpactontheamountofourcashflowsavailabletofundworkingcapital,makecapitalexpendituresandsatisfyothercashneeds.Foradescriptionoftheoperatingandfinancialrestrictionsinourdebtfacilities,seethesectiontitledOperatingandFinancialReviewandProspectsFinancing.

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Wearesubjecttointerestraterisk.

Certainofourdebtfacilitieshavefloatinginterestrates,creatingtheriskofanincreaseininterestratesandtheriskthatcashflowsmaybeinsufficienttomakescheduledinterestpaymentsifinterestratesweretoincrease.Tolimitthisrisk,wehaveenteredintointerestrateswapcontractswithoneormorecounterparties.Weremainexposed,however,tochangesininterestratestotheextentthatourinterestrateswapcontractsarenotcorrelatedtoourfinancialliabilities.Inaddition,ifanycounterpartyweretodefaultonitsobligations,thenamismatchinthefloatingrateinterestobligationsandfixedrateleasepaymentsmayarise,whichcouldimpairourabilitytomeetourfinancialobligations.Ifanyofourinterestrateswapcontractswereterminatedearly,wecouldbeobligatedtomakeamaterialpaymenttoourcounterparties.

Risks Related to Taxation

Weexpectthatwewillbetreatedasapassiveforeigninvestmentcompany,oraPFIC,forthecurrenttaxableyearandfortheforeseeablefuture,whichcouldhaveadverseU.S.federalincometaxconsequencestoaU.S.shareholder.

WeexpectthatwewillbetreatedasaPFICforU.S.federalincometaxpurposesforthecurrenttaxableyearandfortheforeseeablefuture.AssumingweareaPFIC,aU.S.holderofourshareswillbesubjecttothePFICrules,withavarietyofpotentiallyadversetaxconsequencesundertheU.S.federalincometaxlaws.Suchconsequencesdependinpartonwhethersuchshareholderelectstotreatusasaqualifiedelectingfund(aQEF).AbsentaQEFelectionormark-to-marketelection,aU.S.shareholderwhodisposesorisdeemedtodisposeofoursharesatagain,orwhoreceivesorisdeemedtoreceivecertaindistributionswithrespecttoourshares,generallywillberequiredtotreatsuchgainordistributionsasordinaryincomeandtopayaninterestchargeonthetaximposed.IfaU.S.shareholdermakesaQEFelectioninthefirsttaxableyearinwhichtheU.S.shareholderownsourshares,thensuchU.S.shareholderwillberequiredforeachtaxableyeartoincludeinincomeaproratashareofourordinaryearningsasordinaryincomeandaproratashareofournetcapitalgainsaslong-termcapitalgain,subjecttoaseparatevoluntaryelectiontodeferpaymentoftaxes,whichdeferralissubjecttoaninterestcharge.Suchinclusionoftaxableincomeisrequiredeveniftheamountexceedscashdistributions,ifany.Moreover,ourdistributions,ifany,willnotqualifyforthereducedrateofU.S.federalincometaxthatappliestoqualifieddividendspaidtonon-corporateU.S.taxpayers.

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