Implications for aviation finance post-Brexit

Paul Holland, partner at Dentons examines the implications of the UK’s decision to leave the EU on the aviation finance market and what impact it could have on existing deals and cross-border arrangements.

Has the UK’s vote in favour of Brexit had any immediate impact on the aviation finance market?

In general finance, the markets are open and liquidity and prices have not been affected. There is a degree of uncertainty around the floor in other practice areas and certain deals are on hold but in the aircraft finance market I’m not aware of any issues that are stopping deals happening and even within the used aircraft market, we are closing deals.

There is an issue with the export credit agencies at the moment but this predates Brexit—the European export credit agencies are closed for business for aircraft finance and that is a far bigger issue in the market than Brexit.

What do you think will be the long term effects on such funding (eg potential impact on pricing/availability etc)?

Again I can’t see any. The asset class is probably the most international asset class you can possibly have unlike, for example, real estate which is built on and tied to a particular jurisdiction. Aircraft are unique security in the sense that they fly all around the world and the engines are often separated from the airframe and so it is a very complicated form of financing. As a result, it attracts a lot of international finance and so the fact that the UK will be coming out of the EU in two years’ time has a small impact on the global international aircraft finance market.

I don’t think there is going to be any currency impact either. The whole aircraft market is dollar denominated, even Airbus aircraft are sold in dollars. We are very internationally focused—we are normally financing Asia or Middle Eastern aircraft. The deals involving UK aircraft are quite rare.

Do you think the decision will have an impact on how deals are structured and whether they will continue to include the UK as a location (eg in respect of registration and security)?

The short answer is no again. The UK is a very sophisticated tax jurisdiction which doesn’t lend itself to structuring so what we do is we try and find a jurisdiction that is mature, common law based, secure, well understood and tax neutral. That normally leads us to somewhere like the Cayman Islands.

Ireland on the other hand has low corporate tax and a comprehensive set of double taxation treaties and is a good jurisdiction for structuring—and has made a big play for the aviation business market. The UK isn’t, so unless you are dealing with a UK English airline you wouldn’t ordinarily structure anything through the UK and so the impact of Brexit will be minimal.

Where the UK has a role is in respect of English law and the UK courts. Nearly all of our documents and transactions are subject to English law and I don’t see that changing.

What are the implications of Brexit for existing deals? What do you think will be the impact on existing cross-border arrangements (eg Open Skies Agreement/EU Emissions Trading System (ETS))?

Currently we are regulated by the European Aviation Safety Authority (EASA) which is an EU body and so I would imagine that as part of the exit negotiations we would either remain a member or we would maintain some sort of relationship there.

We also have the European Common Aviation Area (ECAA)—the Open Skies arrangement—and again I imagine as and when we come out of the EU we would need to negotiate the ability to fly in and out of Europe. But planes fly in and out of Europe everyday so there is a bit of negotiation to be done but I don’t see the position changing.

VAT is an EU tax and when we come out of the EU we would be able to control our own VAT rates so it’s possible on second hand trading of aircraft assets there could be some tax implications. However, I think the desire on the UK side would be to keep the status quo. That could mean that we would agree to whatever European laws there are currently and come to an agreement to adopt the current tax position.

So there are some issues to be addressed but I think there should be a common will for both parties to resolve them in the way that causes the least disruption and probably to get as close as possible to the current arrangements.

Are there any potential upsides of Brexit for aviation finance?

I’ve been involved in transactions where non-EU companies have tried to acquire a stake in European airlines and EU laws state that all EU airlines need to be owned at least 50% by EU nationals. The rule is absolute and there is no way you can structure around it. Assuming that the UK doesn’t adopt a similar rule—that UK airlines need to be majority owned by UK nationals—when we leave the EU, then it could mean that non-UK airlines could build stakes in our UK airlines or set up their own UK English airline.

Is there anything else that lenders or other key stakeholders ought to be thinking about?

The impact is neutral. I don’t think the EU ETS will be impacted. I think the governing law will remain English law and English courts will remain the jurisdiction of choice.

Interviewed by Fran Benson.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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