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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