Portfolio growth
Portfolio growth means that lease terms and conditions have to be renegotiated and re-registered for change of ownership on a frequent basis.
Industry body the Aviation Working Group (AWG) has developed a voluntary electronic e-ledger system called the Global Aircraft Trading System (GATS).
This update will allow the electronic trading of aircraft in an efficient, secure and predictable manner, MH&C says.
e-platform
The GATS e-platform will go live on 31 March with a ‘simulated transaction period’, where interested parties can become familiar with the new digital platform.
GATS will build upon the existing practice of holding aircraft equipment in owner trust structures.
Trading and e-trading occurs through the sale of the beneficial ownership of the trust assets, while the legal title to the aircraft asset continues to be held in trust by the identified and continuing legal-title holder.
However, the aircraft and its related lease can be traded by transferring the beneficial interest in the trust.
Trust instruments
The AWG has provided draft GATS trust instruments in jurisdictions such as Ireland and Singapore, and the states of Delaware and Utah in the US.
The use of trusts allows for the economic and beneficial ownership of the aircraft or equipment to be transferred to a new beneficial owner, without impacting on the contractual rights, remedies and protections agreed in the underlying lease between the lessor and the airline lessee, MH&C says.
GATS’ aim is to simplify and streamline aircraft trading, and to increase confidence and transparency.
e-signatures
The GATS platform is operated by Kerry-based fintech giant Fexco, and will be fully digital, employing e-signatures and e-delivery of documents.
While GATS was created with aircraft lessors in mind, there are measures inbuilt in the design to protect the rights of lessees, investors and airlines.
The system will strengthen the principle that a lessee’s contractual obligations cannot be increased as a result of aircraft equipment trading.
Transfer
A transfer of the beneficial interest and the creation of a security interest in a GATS trust can take effect, without changing the contractual provisions of the lease agreement.
With the consent and agreement of all parties, technical amendments can be effected by a notification mechanism.
GATS features standard transfer documents that are executed electronically, but will not standardise leasing documents, as these will continue to be negotiated and agreed between lessors and lessees.
Global scale
MH&C points out that some issues still remain for GATS before it becomes operational on a global scale.
Trusts are not a universally accepted legal concept, and not all jurisdictions are familiar with trust structures, while others do not recognise the legal concept of a trust.
This may require additional training and information for the lessee and their local regulators at the stage of lease negotiation.
Tax considerations
There are also likely to be tax considerations, such as withholding tax and corporation tax, which should be analysed.
Take-up of the new system looks promising, MH&C says, with SMBC Aviation Capital already signing a lease through GATS.
Widespread adoption should minimise the disruption associated with aircraft trading and lease novations, experts believe.