Bonding Solutions for Aircraft Leasing Companies

Ireland is a global leader in aircraft financing and leasing. Approximately 60% of the world’s leased aircraft are managed or leased through Irish companies. Today, most of the world’s major aircraft lessors, financiers, and arrangers have established Irish operations from which they finance and lease aircraft globally, 14 of the top 15 aircraft lessors are headquartered in Ireland. Based in Ireland, Surety Bonds is a leading provider of bonding solutions for aircraft leasing companies. 

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It is possible to register aircraft which are operated by airlines in countries other than Ireland with the Irish Aviation Authority (IAA). Aircraft lessors and financiers do so because they want to eliminate the deregistration risk and to ensure that the aircraft is supervised by a competent authority and maintained to a standard that will make the aircraft readily marketable and not adversely affect the residual value of the aircraft.

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Maintenance Reserves

One of the key areas to the future residual value of an aircraft is that it is maintained to a high standard, this is achieved through specific leasing agreements and maintenance contracts relating to the service of the aircraft. In the aviation sector Maintenance Reserves are payments made by the Lessee to the Lessor to accrue for those scheduled maintenance events that require significant aircraft grounding time and/or turn-around time for certain major component overhauls.

The importance of Maintenance Reserves is to protect asset value and is a key consideration to Lessors.

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Many airlines have sufficient credit stature that their prominence in the marketplace means they can negotiate out of paying maintenance reserves. On the other hand, Lessors will show less flexibility for smaller or less credit-worthy Lessees and require these operators to pay maintenance reserves which impede on working capital and cash flow.

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In some leases, the Lessee may have the option, rather than paying cash reserves, to provide the Lessor with a Maintenance Reserve Letter of Credit (MRLC) in an amount equal to an agreed projected aggregate notional value of maintenance reserves. An MRLC is usually provided by a bank and is predominantly cash collateralized therefore defeating the purpose of not paying monthly reserve payments. A potential alternative solution proposed by the Surety Bonds team is an Aviation Maintenance Bond provided by a surety (insurance company) replacing the MRLC with a bond, therefore, freeing up crucial working capital and increasing cash flow. The bond would be an on-demand instrument, issued by an “A” rated insurer with an amount that is “capped” to reflect the projected maximum exposure during the lease.

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Bonding Solutions for the Aviation Industry:

• Aviation Maintenance Bonds: If maintenance reserves are either not collected, subject to a redelivery payment scheme, or are under‐funded, then the lessor will be subject to maintenance exposure. In monetary terms, maintenance exposure equals the value of maintenance utility consumed less the value of maintenance reserves collected at a particular point in time, an Aviation Maintenance Bond would mitigate the exposure for the lessor where funds have not been paid or are were under-funded.

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Advantages of Replacing MRLC’s with a Surety Bond

• Free up banking lines: the stark contrast with a surety bond is that the capacity provided by the sureties does not impact on a group’s banking facility, thus freeing up working capital for core business activities

• Obtain more competitive pricing for bonds: the cost of capital for sureties is different from that of banks and often allows the surety market to offer very competitive pricing, where appropriate

• Access additional capacity: additional capacity is often available for clients to utilize for other guarantee requirements they may have; there would be no cost implications of having the additional capacity available. Costs are based purely on utilization

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If you are looking for an alternative to a Maintenance Reserve Letter of Credit but are daunted by the process and legislation, let Surety Bonds put your mind at ease and secure the correct terms for your obligations on your behalf. For all your Bonding Solutions for the Aircraft Leasing Industry, contact us today, to discuss your requirements.