Shannon, Boston, Beijing, Hong Kong, Singapore
FROM AIRFINANCE JOURNAL FEBRUARY 2008
Engine Finance Deal of the Year: ELF
ELF sells 28 engines to GSI for $157 million
Amount: $157 million
Senior debt financiers: KFW-IPEX Bank and NordLB
Security trustee and agent: NordLB
Equity bridge financing provider: NordLB
Lawyers: Paul Hastings, Janofsky & Walker (for ELF). Clyde & Co. (for
the lenders)
One of the most original and pioneering deals in engine finance is ELF’s
sale of 28 engines to GSI for $157 million. The innovation lies in the
use of a trust structure, which involved ELF and subsidiary Aviation
Lease Finance declaring trusts in favour of GSI over the engines and
their leases. As an affiliated entity of a German closed end investors’
fund, GSI’s purchase of the engines brings a new type of investor into
the engine sector.
The transaction was split into a debt financing and an equity bridge
financing, with the debt financing being provided by NordLB and KfW
Ipex-Bank as lenders, with NordLB acting as security trustee and agent.
The lenders were advised by Clyde & Co. NordLB, as sole lender, provided
the additional equity bridge finance. Law firm Paul, Hastings, Janofsky
& Walker advised ELF.
The deal consisted of a mixed portfolio of GE, CFM and Rolls-Royce
engines and was one of the largest engine portfolio deals of 2007.
The transaction also stands out for its speedy completion. The parties
avoided the lengthy process of first negotiating and entering into lease
novation agreements with the lessees before the sale. This enabled a
conclusion to the deal several months earlier than would have been the
case had all the leases needed to be novated beforehand.
“The novelty of this deal was the speed of implementation, with just
nine weeks from signing the letter of intent to closure,” says Norman
Fraser, senior associate at Paul, Hastings, Janofsky & Walker. He adds:
“Given the structure, we were able to reach financial close before
having to novate the leases.”
The transaction also had low implementation costs when compared to a
securitization, representing a viable alternative to the securitization
product.
An additional factor, which sets this deal apart from other engine
sales, is that, although GSI will own the portfolio, and therefore
benefit from the lease rentals, the German investment fund will use ELF
to service the portfolio.
Jon Sharp, chief executive officer of ELF, says: “The deal structure is,
as far as we are aware, a first anywhere. The trust structure allowed
rapid closing and, for that reason, we expect it to be copied for future
sales and syndications of transportation aspects subject to leases.”
Keith Wilson, a partner at Paul, Hastings, Janofsky & Walker, agrees
that the structure could be replicated in a variety of aviation deals.
“This is not an engine-specific structure,” he says. “It can be used for
aircraft or any other asset class.”
German banks KfW Ipex-Bank and NordLB provided the debt financing at a
time when banks were reeling from the impact of the sub-prime crisis.
The banks acted boldly and opportunistically in a market where financial
resources were limited and opportunities seldom. The deal may act as a
spur for other banks to get more involved in the engine market.
With international sales of jet engines increasing and a growing demand
for more environmentally friendly and efficient engines, similar
transactions could become commonplace in the future.