F-1 1 d739557df1.htm FORM F-1 Form F-1
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As filed with the Securities and Exchange Commission on June 9, 2014.

Registration No.                    

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

AVOLON HOLDINGS LIMITED

(Exact name of Registrant as specified in its charter)

 

 

 

Cayman Islands   7359   N/A

(State or other jurisdiction of

incorporation or organization)

 

(Primary standard industrial

classification code number)

 

(I.R.S. Employer

Identification No.)

The Oval, Building 1

Shelbourne Road

Ballsbridge, Dublin 4

Ireland

Telephone: +353 (1) 231 5800

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Puglisi & Associates

850 Library Avenue, Suite 204

Newark, Delaware 19711

(302) 738-6680

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Matthew D. Bloch, Esq.

Jennifer A. Bensch, Esq.

Weil, Gotshal & Manges LLP

767 Fifth Avenue,

New York, NY 10153

Telephone: (212) 310-8000

 

Richard D. Truesdell, Jr., Esq.

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, NY 10017

Telephone: (212) 450-4000

 

 

Approximate date of commencement of proposed sale to public: As soon as practicable after the Registration Statement becomes effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

 

Calculation of Registration Fee

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum

Aggregate

Offering Price(1)(2)

 

Amount of

Registration Fee

Common shares, par value $0.001 per share

  $100,000,000   $12,880

 

 

(1) Includes common shares that the underwriters have the option to purchase.
(2) Estimated solely for the purpose of computing the amount of the registration fee in accordance with Rule 457(o) promulgated under the Securities Act of 1933.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

Subject to completion, dated June 9, 2014

Prospectus

            Common Shares

 

LOGO

Avolon Holdings Limited

 

 

The selling shareholders are offering all of the              common shares to be sold in this offering. This is our initial public offering and no public market exists for our common shares. We are a newly formed holding company which, prior to consummation of this offering, will own 100% of the outstanding shares of Avolon Investments S.à r.l. We will not receive any proceeds from the sale of common shares by the selling shareholders in this offering.

We anticipate that the initial public offering price will be between $         and $         per common share.

 

 

We intend to apply for listing of our common shares on the          under the symbol “AVOL.”

 

 

Investing in our common shares involves risks. See “Risk Factors” beginning on page 13 of this prospectus.

 

 

PRICE $         PER SHARE

 

 

 

     Public
Offering Price
     Underwriting
Discounts and
Commissions
     Proceeds to
Selling
Shareholders
 

Per common share

   $                    $                    $                

Total

   $                    $                    $                

 

(1) We have agreed to reimburse the underwriters for certain FINRA-related expenses. See “Underwriting.”

The selling shareholders have granted the underwriters the right to purchase up to an additional              common shares to cover over-allotments at the initial public offering price less the underwriting discounts and commissions.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the common shares on or about                     , 2014.

 

 

 

J.P. Morgan   Morgan Stanley           Citigroup

The date of this prospectus is                     , 2014.


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TABLE OF CONTENTS

 

     Page  

Certain Terms Used in This Prospectus

     ii   

Financial Information

     iii   

Summary

     1   

Risk Factors

     13   

Cautionary Statement Concerning Forward-Looking Statements

     43   

Use of Proceeds

     44   

Dividend Policy

     45   

Capitalization

     46   

Our Corporate Reorganization

     47   

Selected Consolidated Financial Data

     48   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     50   

The Commercial Aircraft Industry

     68   

Business

     88   

Management

     100   

Principal and Selling Shareholders

     107   

Certain Relationships and Related Party Transactions

     110   

Description of Share Capital

     112   

Common Shares Eligible for Future Sale

     121   

Underwriting

     123   

Taxation

     127   

Enforceability of Civil Liabilities

     137   

Legal Matters

     138   

Experts

     138   

Expenses of This Offering

     138   

Where You Can Find Additional Information

     139   

Index to Financial Statements

     F-1   

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. We, the selling shareholders and the underwriters have not authorized anyone to provide you with any additional information or information that is different from the information contained in this prospectus. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus and any free writing prospectus prepared by us or on our behalf may only be used where it is legal to offer and sell these securities. The information in this prospectus or any free writing prospectus prepared by us or on our behalf is only accurate as of the date of this prospectus or such free writing prospectus, regardless of the time of delivery of this prospectus or such free writing prospectus or any sale of our common shares.

For investors outside the United States: Neither we, the selling shareholders nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. The distribution of this prospectus and any free writing prospectus and the offering and sale of the common shares may be restricted by law in your jurisdiction. If you have received this prospectus and any free writing prospectus, you are required by us, the selling shareholders and the underwriters to inform yourselves about and to observe any restrictions relating to this offering of the common shares and the distribution of this prospectus.

We obtained a substantial portion of the industry, market and competitive position data used throughout this prospectus from ICF SH&E, Inc., or “ICF SH&E”, an international air transport consulting firm. The principal business address of ICF SH&E is 630 Third Avenue, 11th Floor, New York, NY 10017.

 

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Certain of the industry, market and competitive position data used in this prospectus has been prepared by the Company on the basis of information obtained from Ascend Worldwide Limited, an international air transport consultancy firm, and the Company’s own internal estimates and research. Industry publications, research, surveys and studies generally state that they have been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. Although we believe that such publications, research, surveys and studies are reliable, we have not independently verified industry, market and competitive position data from third party sources.

CERTAIN TERMS USED IN THE PROSPECTUS

Unless otherwise noted or unless the context otherwise requires, all references in this prospectus to:

 

    “ACP” refer to Avolon Capital Partners, a joint venture between Avolon and Wells Fargo & Company.

 

    “Aggregate Net Book Value” refer, as of any date, to the sum of (i) our flight equipment and (ii) assets held for sale on such date.

 

    “Avolon,” the “Company,” “we,” “our,” and “us” refer to Avolon S.à r.l. and its consolidated subsidiaries for periods prior to the Share Exchange, and to Avolon Holdings and its consolidated subsidiaries for periods after the Share Exchange, giving effect thereto.

 

    “Avolon Holdings” refer to Avolon Holdings Limited, a Cayman Islands exempted company incorporated with limited liability on June 5, 2014, which is tax resident in Ireland.

 

    “Avolon S.à r.l.” refer to Avolon Investments S.à r.l., a private limited liability company incorporated under the laws of Luxembourg and the parent company of the Avolon business immediately prior to the Share Exchange.

 

    “Cinven” refer to the funds affiliated with Cinven Limited that are shareholders in Avolon.

 

    “Committed Portfolio” refer to the 87 aircraft for which we had entered into binding contracts or non-binding letters of intent to acquire through sale-leaseback transactions, direct orders from Boeing and Airbus or agreements with other lessors as of March 31, 2104. Of this amount, 30 aircraft were subject to non-binding letters of intent. These letters of intent represent our intention to acquire the aircraft, subject to the execution of definitive documentation which will include customary closing conditions. The remaining aircraft in our Committed Portfolio are subject to binding purchase contracts, which are also subject to customary closing conditions, and include five aircraft for which we must reconfirm our purchase contract prior to January 2017.

 

    “CVC” refer to the funds affiliated with CVC Capital Partners SICAV-FIS S.A. that are indirect shareholders in Avolon (or, as the context requires, the wholly owned special purpose vehicle through which such funds hold their investment in Avolon).

 

    “Managed Portfolio” refer to the eight aircraft that, as of March 31, 2014, we manage on behalf of other aircraft investors and two aircraft owned and managed by ACP, with whom we have entered into agreements to contribute personnel and other administrative resources.

 

    “Oak Hill” refer to the funds affiliated with Oak Hill Capital Partners that are shareholders in Avolon.

 

    “OEM” refer to original equipment manufacturer.

 

    “Owned Portfolio” refer to our owned fleet of 105 aircraft as of March 31, 2014.

 

    “Owned and Managed Portfolio” refer, collectively, to our Owned Portfolio and our Managed Portfolio.

 

    “Owned, Managed and Committed Portfolio” refer, collectively, to our Owned Portfolio, our Managed Portfolio and our Committed Portfolio.

 

   

“Share Exchange” refer to the reorganization transactions that will occur prior to completion of this offering in which Avolon Holdings will issue         of its common shares, assuming a public offering price of $        (the midpoint of the price range set forth on the cover of this prospectus), in exchange

 

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for all of the outstanding shares of Avolon S.à r.l., such that Avolon S.à r.l. will become a direct, wholly owned subsidiary of Avolon Holdings, as more fully described under “Our Corporate Reorganization.”

 

    “Sponsors” refer to Cinven, CVC, Oak Hill and Vigorous, our four largest shareholders.

 

    “Trustee” refer to State Street Trustees (Jersey) Limited, as trustee for the beneficiaries under a trust instrument between the trustee and Avolon Aerospace Limited.

 

    “Vigorous” refer to Vigorous Investment Pte Ltd, a subsidiary of GIC (Ventures) Pte Ltd (“GIC Ventures”). Vigorous is managed by GIC Special Investments Pte Ltd, a subsidiary of GIC Private Limited (“GIC”). GIC and GIC Ventures are wholly owned by the Government of Singapore. Vigorous is a shareholder of Avolon.

Unless otherwise stated herein, all information with respect to industry and market data as well as data relating to our Owned, Managed and Committed Portfolio is as of March 31, 2014.

FINANCIAL INFORMATION

This prospectus contains the historical financial statements and other financial information of Avolon S.à r.l., which is expected to be acquired by Avolon Holdings prior to consummation of this offering. Avolon Holdings’ common shares are being offered hereby by the selling shareholders. Avolon Holdings is a newly formed holding company, currently beneficially owned by the management shareholders of Avolon S.à r.l. and by the Trustee, and has engaged in operations and activities incidental to its formation, the Share Exchange and the initial public offering of our common shares. Prior to the consummation of this offering, each existing shareholder of Avolon S.à r.l. is expected to transfer all of its interests in Avolon S.à r.l. to Avolon Holdings in the Share Exchange, resulting in Avolon S.à r.l. becoming a wholly owned subsidiary of Avolon Holdings. The Share Exchange will be accounted for as Avolon Holdings succeeding to the business and activities of Avolon S.à r.l. for financial reporting purposes. Following the Share Exchange, the historical financial statements of Avolon Holdings will be retrospectively adjusted to include the historical financial results of Avolon S.à r.l. for all periods presented.

 

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SUMMARY

This summary highlights information contained elsewhere in this prospectus, but it does not contain all of the information that you may consider important in making your investment decision. Therefore, you should read the entire prospectus carefully, including, in particular, “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included elsewhere in this prospectus before deciding whether to purchase our common shares. Some of the statements in this summary constitute forward-looking statements, with respect to which you should review the section of this prospectus entitled “Cautionary Statement Concerning Forward-Looking Statements.”

Our Company

Avolon is a leading global aircraft leasing company focused on acquiring, managing and selling commercial aircraft. We were launched in May 2010 by an experienced team of aircraft leasing and financing professionals. Our strategy is to build and maintain a portfolio of young, modern, fuel-efficient commercial aircraft while seeking to maximize long-term earnings growth and generate attractive risk-adjusted returns through the aviation industry cycle. Since our founding, we have built an Owned Portfolio of aircraft totaling over $4,388.5 million in Aggregate Net Book Value as of March 31, 2014. Our Owned, Managed and Committed Portfolio of 202 aircraft made us the tenth largest aircraft lessor by current market value as of March 31, 2014, according to ICF SH&E. The average age of our Owned and Managed Portfolio, weighted by current market value, was the lowest of the ten largest operating lessors as identified by ICF SH&E. The average age of our Owned Portfolio, weighted by net book value, was 2.46 years as of March 31, 2014. For the year ended December 31, 2013 and the three months ended March 31, 2014, we reported total revenues of $449.8 million and $135.8 million, respectively, and net income of $112.8 million and $36.4 million, respectively.

As of March 31, 2014, our Owned, Managed and Committed Portfolio consisted of 202 aircraft, including 105 owned, 10 managed and 87 committed aircraft. Our Owned Portfolio consists primarily of narrowbody aircraft, including the Airbus A320 family and the Boeing 737-800, and select widebody aircraft, including the Airbus A330, the Boeing 777 and the Boeing 787. Our Committed Portfolio includes 44 next generation Airbus A320neo, Boeing 737 MAX and Boeing 787 family of aircraft, which are designed to deliver new levels of operating efficiency and are expected to be in high demand.

We are a global business, headquartered in Dublin, Ireland, with offices in China, Dubai, Singapore and the United States. Our global presence provides local access to airline customers and capital providers in key geographic regions, particularly emerging and high growth markets such as China, South East Asia, the Middle East and Latin America. As of March 31, 2014, our customer base comprised 46 airlines in 27 countries.

We lease our aircraft pursuant to net operating leases that require the lessee to pay for maintenance, insurance, taxes and all other aircraft operating expenses during the lease term. As lessor, we receive the investment benefits from, and assume the residual risk of, the aircraft. We select aircraft that we believe will retain a high residual value and will be less susceptible to asset impairment risk. We also provide fleet management services to other aircraft investors.

Our business model allows for flexibility to adjust to market conditions and to balance and manage risk. We use multiple aircraft acquisition channels to grow our business, thereby reducing dependence on large scale, long-dated capital commitments associated with direct orders from OEMs. Our portfolio consists of aircraft acquired through sale-leaseback transactions, aircraft ordered directly from OEMs and aircraft purchased from other lessors. We believe our deep industry relationships enable us to source transactions that are not broadly available. By changing the emphasis between the sale-leaseback, direct order and portfolio acquisition channels, we seek to accelerate growth and optimize value at different points in time during the aviation industry cycle.

 

 

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We maintain relationships with aircraft investors globally and seek to sell assets to proactively manage our portfolio in response to market conditions. Aircraft sales facilitate management of portfolio concentrations, provide ongoing liquidity of the portfolio, enable us to monetize value in our aircraft, help maintain visibility and momentum with our customers and are an effective tool for managing both asset residual value and lease remarketing risk.

We seek to mitigate asset, credit and liability risks associated with owning and leasing aircraft through our comprehensive risk management platform that uses proprietary analytical systems and credit scoring processes. These systems, tools and models, combined with formal risk committees, inform our decision-making process. The combination of young, modern aircraft and robust risk management has contributed to 100% fleet utilization and no unscheduled lease terminations, credit losses or asset impairments since our inception.

Our highly experienced executive leadership team is led by our Chief Executive Officer, Dómhnal Slattery, formerly the founding Chief Executive Officer of RBS Aviation Capital (“RBS AC”), now known as SMBC Aviation Capital and one of the largest aircraft lessors in the industry. Our President and Chief Commercial Officer is John Higgins, formerly Chief Commercial Officer of RBS AC; our Chief Financial Officer is Andy Cronin, formerly Senior Vice President Investor Markets at RBS AC; our Head of Strategy is Dick Forsberg, formerly Head of Portfolio Strategy at RBS AC; and our Chief Operating Officer and Head of Risk is Tom Ashe, formerly Head of Europe, the Middle East and Africa at RBS AC. This executive leadership team has on average over 23 years of experience in the aircraft leasing industry, covering several industry cycles, and deep and long-standing customer, lender, investor and OEM relationships. Our team seeks to provide thought leadership in the sector through materials such as white papers, discussion documents and webinars, an approach which is embedded in our core business activity. The team is supported by our Board of Directors, led by our Non-Executive Chairman, Denis Nayden, who was formerly Chairman and Chief Executive Officer of GE Capital Corporation and held several roles during his tenure, including oversight of GE Capital Aviation Services.

Airline Industry

According to ICF SH&E, commercial aviation is a critical component of the global economy. Demand for air transport is strongly correlated to economic activity and has grown at a rate in excess of 1.5 times the global gross domestic product (“GDP”) growth rate over the past 40 years. Published forecasts predict that, over the next 20 years, annual growth in air traffic, both passenger and cargo, will average around 5%, resulting in a further doubling of traffic within 15 years. To keep pace with this growth, according to analysis by ICF SH&E, the size of the global commercial aircraft fleet is expected to approximately double over the next two decades.

Airlines have increasingly turned to operating lessors to meet their aircraft needs. Since 1980, the percentage of the global active commercial aircraft fleet under operating lease has increased from less than 2% to nearly 41% in 2014, an average annual growth rate of approximately 14%, compared to fleet growth of 3.7% over the same period. Boeing Capital forecasts that operating leasing will account for over 50% of the in-service aircraft by the end of this decade.

Operations to Date

Owned, Managed and Committed Portfolio

Our Owned, Managed and Committed Portfolio consists of 202 young, modern, fuel-efficient aircraft, with lease arrangements with 46 airlines in 27 countries. Our Owned Portfolio of 105 aircraft includes 96 narrowbody and nine widebody aircraft, with an average age, weighted by net book value, of 2.46 years.

 

 

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As of March 31, 2014, we had committed to acquire a total of 87 aircraft at an estimated aggregate purchase price of approximately $4,871.3 million, with scheduled delivery dates through 2021.

As of March 31, 2014, our Owned, Managed and Committed Portfolio consisted of the following aircraft:

Owned, Managed and Committed Portfolio

 

Aircraft type

   Owned
Portfolio
     Managed
Portfolio
     Committed
Portfolio
     Total
Portfolio
 

Boeing 737-800

     38         1         24         63   

Airbus A320ceo

     46         1         10         57   

Boeing 737 MAX

                     20         20   

Airbus A320neo

                     20         20   

Airbus A330-200/300

     5                 4         9   

Airbus A319ceo

     4         4                 8   

Airbus A321ceo

     2                 4         6   

Embraer 190

     6                         6   

Boeing 787-8/9

     1                 4         5   

Boeing 777-300ER

     3                 1         4   

Boeing 777F

             4                 4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     105         10         87         202   

Our Business and Growth Strategies

Our objective is to build and maintain a portfolio of young, modern and fuel-efficient commercial aircraft while seeking to maximize long-term earnings growth and generate attractive risk-adjusted returns through the aviation industry cycle. In order to achieve our business objectives, we pursue the following strategies:

Focus on robust fleet growth through investment in young, modern, fuel-efficient aircraft.

Our investment strategy is focused on acquiring young, modern, fuel-efficient aircraft that we believe will remain in strong demand. As airlines face continuing high fuel prices, environmental regulation and an aging asset base, we believe that demand for modern, fuel-efficient aircraft will increase. According to forecasts by Boeing Capital, over 50% of the world’s aircraft will be under operating leases by 2020 compared to nearly 41% in 2014. We believe the robust order backlogs of next-generation aircraft at Boeing and Airbus, combined with these favorable industry dynamics, present a significant growth opportunity for Avolon. We also believe young, modern, fuel-efficient aircraft will have strong long-term value retention characteristics and lower re-marketing risks and will enable us to generate stable cash flows over the long term. In addition, we believe that maintaining a young, modern fleet will help minimize asset impairment risks.

Leverage multiple aircraft procurement channels to optimize growth and performance through the aviation industry cycle.

We intend to continue to utilize multiple procurement channels to source aircraft, including sale-leaseback transactions with airlines, direct orders with Airbus, Boeing and other OEMs, and portfolio acquisitions from other lessors to selectively build our portfolio. We believe that the utilization of multiple aircraft procurement channels will provide us the flexibility to enhance our portfolio and performance through the cycle as each channel can be calibrated to react to, and increase opportunity from, prevailing market conditions. The sale-leaseback channel helps us to manage risk as we have clear visibility into the counterparty and lease terms, with

 

 

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no placement risk. This channel provides us with flexibility to manage cycle risk and be responsive to market opportunities and conditions. Our direct orders are strategically important as they give us access to highly sought-after, next generation, fuel-efficient aircraft. We anticipate strong leasing demand from airlines due to the attractiveness of these aircraft and their limited availability. Portfolio acquisitions typically include multiple aircraft and multiple airlines and, as such, the transactions are more diversified than single sale-leaseback opportunities.

Actively sell aircraft through the aviation cycle.

The principle of active aircraft sales is central to our portfolio strategy. Aircraft sales facilitate management of portfolio concentrations, provide ongoing liquidity of the portfolio, enable us to monetize value in our aircraft, help us maintain visibility and momentum with our customers and are a tool for effectively managing both asset residual value and lease remarketing risk. We have a dedicated team of experienced professionals focused on aircraft sales across channels, including asset backed securitizations and other structured portfolio sales. Aircraft sales can also be a source of fee income from associated asset management opportunities, while allowing us to recycle and redeploy capital to fund further growth.

Utilize our deep, long-standing and valuable industry relationships.

We believe our team’s broad industry experience and expertise enables us to leverage relationships globally to drive our growth and performance. We have active relationships with over 150 airlines globally, which helps us place new aircraft, re-market end of lease aircraft and source transactions to grow our fleet through multiple acquisition channels. We believe our market knowledge enables us to source transactions that are not broadly available. We are actively involved with consultative bodies, events and forums that have been formed by the aircraft and major engine OEMs to engage with the industry on the development and design of new products. Our membership of these groups provides us with multiple opportunities to share opinions and seek to influence OEM development and design activity to align with customer requirements and drive future growth.

Leverage platform to expand asset management activity.

We have a scalable platform that includes technical, marketing, risk management and other capabilities critical to managing a fleet of leased aircraft. Providing asset management services provides us contracted fee income. Avolon currently manages eight aircraft on behalf of other aircraft investors, and ACP, our joint venture with Wells Fargo & Company, manages two aircraft.

Our Competitive Strengths

We believe the following strengths assist us in executing our business and growth strategies and underpin our ability to generate future earnings growth.

Scaled and efficient business with growth visibility.

Since our launch in 2010, we have grown the size of our Owned, Managed and Committed Portfolio to 202 young, modern and fuel-efficient narrowbody and widebody aircraft, making us the tenth largest aircraft lessor by current market value as of March 31, 2014 according to ICF SH&E. We believe our platform has extensive capabilities in key commercial, technical, risk management and financial functions and is designed to be efficient and fully scalable to accommodate future growth. We believe rigorous internal processes and controls and a transparent culture underpin our platform.

 

 

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We believe our size, scale, capitalization and industry contacts will enable us to capitalize on the opportunities afforded by the growing aircraft leasing industry. Our Owned Portfolio, with an Aggregate Net Book Value of $4,388.5 million as of March 31, 2014, is leased to airlines under long-term leases, and the average lease term remaining on our leases, weighted by the net book value of the aircraft, was 6.9 years as of such date, providing considerable predictability to our revenues. Additionally, we have a Committed Portfolio of 87 aircraft, of which 47 are scheduled for delivery through June 2016. We have entered into leases or letters of intent with respect to all new aircraft scheduled for delivery through the first quarter of 2016, with an average lease term of 10.2 years, weighted by acquisition price, providing growth and cash flow visibility.

Young, modern, fuel-efficient aircraft fleet.

Our Owned Portfolio consists of young, modern and fuel-efficient aircraft. As of March 31, 2014, the average age of our Owned Portfolio, weighted by net book value, was 2.46 years. We believe that our aircraft are in high demand among our airline customers and are readily deployable to markets throughout the world, demonstrated by the 100% utilization rate we have achieved for our aircraft since our launch in May 2010. We seek to acquire aircraft with high liquidity characteristics because we believe these aircraft have high residual value retention and are less likely to be exposed to asset impairment risk. We believe that our fleet of young, modern and fuel efficient aircraft will enable us to generate stable cash flows over the long term.

Highly experienced and proven management team with deep aviation and financial institution experience.

Our executive leadership team has on average over 23 years of experience in the aircraft leasing industry covering several industry cycles, and deep, long-standing customer, lender, investor and OEM relationships. This team has demonstrated its competency in the aircraft leasing industry by being instrumental in building RBS AC into one of the largest aircraft lessors in the industry, as well as founding our company and growing our portfolio into one of the ten largest in the industry by current market value in only four years. This team is supported by an additional 11 senior executives with an average of over 14 years of industry experience. Together, this combined team of executives, with an average age of 44, has extensive expertise in aircraft leasing, acquisitions, technical management, financing and risk management. We believe management’s deep industry relationships over an extended period allow us to source transactions that are not broadly available.

Sophisticated, rigorous and proactive risk management systems, tools and models.

Our business model is underpinned by a methodical approach to risk management that uses proprietary analytical tools and a rigorous corporate governance structure to manage asset, credit and liability risks closely and proactively. This framework has been developed and refined by the management team since our inception. Our asset risk management model uses a quantitative matrix to benchmark aircraft asset types in terms of their investment suitability and relative liquidity, with the objective of reducing asset impairment and lease re-marketing risk. Our customer risk management model uses a system of quantitative and qualitative factors to monitor credit quality and extends to over 110 airlines. We have not incurred any asset impairment charges since our founding nor have we had to terminate any aircraft leases prior to their scheduled expiration. We believe we have a conservative approach to liability risk management and we use a variety of forecasting methods and reporting frameworks to manage our liquidity risks. These risk management tools are used in conjunction with our formal risk management reporting structure, consisting of three executive risk committees, each of which reports to the risk management committee of our Board. The implementation of our risk management framework supports our objective to grow in a controlled fashion in a dynamic business environment.

Stable funding base and access to diverse sources of capital.

Our capital and financing structure has helped to establish Avolon as a leading aircraft lessor and a business of scale. Our growth has been financed by equity contributions from our Sponsors together with debt financing

 

 

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from a range of banks and financial institutions. As of March 31, 2014, we had total outstanding indebtedness of approximately $3,650.2 million consisting of term debt facilities, facilities backed by the European Export Credit Agencies (“ECA”) and the Export-Import Bank of the United States (“EXIM”), an asset-backed securitization and pre-delivery payment, second lien and warehouse facility debt. As of March 31, 2014, we had an additional $891.9 million of undrawn debt facilities, consisting of $741.9 million of committed secured debt and $150.0 million of unsecured revolving credit facilities. The volume, quality and mix of our committed financings, combined with our overall market presence, have created a substantial capital base, which we believe is capable of supporting further portfolio growth.

Prominent and strategic thought leadership.

We believe that one of the essential elements of an experienced and growth-focused aircraft leasing business is to have considered and empirically defensible views on key trends in the aviation industry. We have communicated our thought leadership through issuing industry white papers, hosting webinars, attending and speaking at major global industry conferences, contributing articles to prominent industry publications and presenting to banks and financial institutions on topics such as risk management. We are represented on a number of industry bodies, including the International Society of Transport Aircraft Trading (at Board level) and the Aviation Working Group. Our approach to thought leadership is embedded in our core business activity. We believe our insight into global aviation trends helps to inform our investment and sales decisions, our allocation of capital between procurement channels and our overall risk management processes.

Financing Strategy

The successful implementation of our financing strategy is a critical component of the success and growth of our business. The overall objective of our financing strategy is to provide the capital required to continue to grow our business through arrangements that provide us with maximum flexibility and a low cost of capital and that minimize risks relating to changes in market conditions.

We intend to fund our business with future earnings and cash flow from operations, existing debt facilities and potential future debt financing from multiple sources, which may include term debt facilities, ECA and EXIM backed facilities, unsecured revolving facilities, securitization debt and pre-delivery payment, second lien and warehouse facility debt as well as other debt capital markets products. We actively manage our debt maturity profile and interest rate exposure by generally seeking long-term, fixed rate debt facilities, which we believe best matches the characteristics of our assets. We seek to identify markets and products with favorable and flexible terms as well as to maximize the diversification of funding solutions and to reduce our reliance on any one market or financial institution.

As of March 31, 2014, we had committed financing from a total of 27 financial institutions (excluding holders of our publicly issued debt), with total outstanding indebtedness of $3,650.2 million. This outstanding indebtedness comprised $2,221.1 million of recourse and non-recourse term facilities, including accrued interest and capital lease obligations, $582.8 million of ECA and EXIM backed facilities, $618.1 million of securitization indebtedness and $228.2 million in the aggregate of pre-delivery payment and warehouse facility debt. In addition, as of March 31, 2014, we had $891.9 million of undrawn debt facilities, consisting of $741.9 million of committed secured debt and $150.0 million of unsecured revolving credit facilities. As of March 31, 2014, the weighted average interest rate of our outstanding indebtedness was 4.3% and the weighted average remaining maturity was 4.6 years. Floating rate debt accounted for approximately 23.8% of our total outstanding indebtedness as of such date. Partially hedging this exposure, we have interest rate derivatives that have notional profiles of approximately 14.2% of our total indebtedness as of March 31, 2014. Furthermore, 15.2% of our leases had rentals linked with floating rate benchmarks as of such date.

 

 

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Risks Affecting Us

Our business is subject to a number of risks, as discussed more fully in the section entitled “Risk Factors” beginning on page 13 of this prospectus, which you should read in its entirety. Some of these risks include:

 

    general economic and financial conditions;

 

    the financial condition of our lessees;

 

    our ability to obtain additional capital to finance our growth and operations on attractive terms;

 

    decline in the value of our aircraft and market rates for leases;

 

    the loss of key personnel;

 

    lessee defaults and attempts to repossess aircraft;

 

    our ability to regularly sell aircraft;

 

    our ability to successfully re-lease our existing aircraft and lease new aircraft;

 

    our ability to negotiate and enter into profitable leases;

 

    periods of aircraft oversupply during which lease rates and aircraft values decline;

 

    changes in the appraised value of our aircraft;

 

    changes in interest rates;

 

    competition from other aircraft lessors; and

 

    the limited number of aircraft and engine manufacturers.

Our Corporate Reorganization

Avolon Holdings Limited is a Cayman Islands exempted company incorporated with limited liability on June 5, 2014 solely for purposes of effectuating our initial public offering and is tax resident in Ireland. Currently, Avolon Holdings has a nominal issued share capital, all of which is beneficially owned by the management shareholders of Avolon S.à r.l and the Trustee. Prior to consummation of this offering, we will complete the Share Exchange pursuant to which Avolon Holdings will issue          of its common shares, assuming a public offering price of $         (the midpoint of the price range set forth on the cover of this prospectus), in exchange for all of the outstanding shares of Avolon S.à r.l., such that Avolon S.à r.l. will become a direct, wholly owned subsidiary of Avolon Holdings. As a result, the shareholders of Avolon S.à r.l. immediately prior to the Share Exchange will constitute all of the shareholders of Avolon Holdings immediately following the Share Exchange and prior to this offering. Avolon S.à r.l. is currently owned by our Sponsors, Cinven, CVC, Oak Hill and Vigorous, as well as members of our management and certain other investors. Avolon S.à r.l. is, and upon consummation of the Share Exchange Avolon Holdings will be, a holding company with no material assets other than our ownership interests in our operating subsidiaries. Please refer to “Our Corporate Reorganization” for additional information regarding the Share Exchange.

 

 

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The following chart sets forth our ownership structure upon consummation of this offering. This chart is for illustrative purposes only and does not purport to represent all legal entities owned or controlled by us.

 

LOGO

Corporate Information

Our principal executive offices are located at The Oval, Building 1, Shelbourne Road, Ballsbridge Dublin 4, Ireland. Our website is www.avolon.aero and our main telephone number is +353 (1) 231 5800. Information on our website is not part of or incorporated by reference into this prospectus and should not be relied upon in determining whether to make an investment in our common shares.

 

 

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The Offering

 

Common Shares Offered by the Selling Shareholders

            common shares.

 

Common Shares to be Issued and Outstanding After This Offering

            common shares.

 

Option to Purchase Additional Common Shares

The selling shareholders have granted the underwriters the option for a period of 30 days from the date of this prospectus to purchase up to an additional             common shares to cover over-allotments at the initial public offering price, less the underwriting discounts and commissions.

 

Use of Proceeds

We will not receive any proceeds from the sale of common shares by the selling shareholders in this offering. See “Use of Proceeds.”

 

Dividend Policy

We currently intend to retain future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends in the foreseeable future. See “Dividend Policy.”

 

Listing

We intend to apply for listing of our common shares on the             under the symbol “AVOL.”

 

Risk Factors

Investing in our common shares involves a high degree of risk. See “Risk Factors” beginning on page 13 of this prospectus for a discussion of factors you should carefully consider before investing in our common shares.

The number of common shares to be issued and outstanding after this offering is based on our common shares issued and outstanding as of                     , 2014, after giving effect to the Share Exchange, and excludes             common shares that will be reserved for future issuance under the management equity plan that we intend to adopt prior to the completion of this offering. See “Management—Management Equity Plan.”

Unless otherwise noted, the information in this prospectus gives effect to the issuance of             common shares to the holders of Avolon S.à r.l. in the Share Exchange, assuming a public offering price of $         (the midpoint of the price range set forth on the cover of this prospectus). See “Our Corporate Reorganization.”

 

 

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Summary Consolidated Financial Data

The following table sets forth our summary consolidated financial data for the periods and as of the dates indicated. The summary consolidated income statement data and cash flow data for each of the years ended December 31, 2011, 2012 and 2013 are derived from, and qualified by reference to, Avolon S.à r.l.’s audited consolidated financial statements included elsewhere in this prospectus. The balance sheet data as of March 31, 2014 and the summary consolidated income statement data and cash flow data for the three months ended March 31, 2013 and 2014 are derived from, and qualified by reference to, Avolon S.à r.l.’s unaudited condensed consolidated interim financial statements included elsewhere in this prospectus. The pro forma balance sheet data as of March 31, 2014 presented below is unaudited and gives effect to the Share Exchange as if it had occurred on March 31, 2014. We have prepared the unaudited condensed consolidated interim financial information set forth below on the same basis as Avolon S.à r.l.’s audited consolidated financial statements and have included all adjustments that we consider necessary for a fair presentation of our financial position and results of operations for such periods. The results for any interim period are not necessarily indicative of the results that may be expected for a full year.

Avolon Holdings is a newly formed holding company and has engaged in operations and activities incidental to its formation, the Share Exchange and the initial public offering of our common shares. Accordingly, summary financial information for Avolon Holdings is not presented.

Our historical results are not necessarily indicative of our future performance. You should read this information together with “Use of Proceeds,” “Capitalization,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and Avolon S.à r.l.’s consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

    Year Ended December 31,     Three Months Ended
March 31,
 
(in thousands, except share data)   2011     2012     2013     2013     2014  
                      (unaudited)  

Statement of Operations Data:

         

Revenues:

         

Lease revenue

  $ 133,586      $ 312,744      $ 415,006      $ 96,786      $ 118,223   

Other revenue and interest income

    688        13,153        34,767        7,769        17,531   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  $ 134,274      $ 325,897      $ 449,773      $ 104,555      $ 135,754   

Expenses

  $ (144,309   $ (266,098   $ (336,723   $ (75,915   $ (98,003
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income/(loss) before income tax and interest in earnings/(loss) from unconsolidated equity investees

    (10,035     59,799        113,050        28,640        37,751   

Earnings/ (loss) from unconsolidated equity investees, net of tax

  $ 1,395      $ —         $ (46   $ —         $ 53   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

  $ (8,640   $ 59,799      $ 113,004      $ 28,640      $ 37,804   

Income tax (expense) benefit

    5,659        1,362        (204     (137     (1,382
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (2,981   $ 61,161      $ 112,800      $ 28,503      $ 36,422   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per common share(1)

         

Pro forma weighted average shares outstanding (basic and diluted)(1)

         
                      As of March 31, 2014  
                      Actual     Pro Forma(2)  
                      (unaudited)  

Balance Sheet Data:

         

Flight equipment including assets held for sale (net of accumulated depreciation)

        $ 4,388,530      $                    

Cash and cash equivalents

        $ 176,297      $     

Restricted cash(3)

        $ 289,734      $     

Deposits on flight equipment

        $ 210,885      $     

Total assets

        $ 5,227,628      $     

Total debt

        $ 3,650,193      $     

Total liabilities

        $ 3,897,455      $     

Temporary equity and shareholders’ equity

        $ 1,330,173      $
 
  

 

 

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     Year Ended December 31,     Three Months Ended
March 31,
 
(in thousands, except Other Operating Data)    2011     2012     2013     2013     2014  
                      

(unaudited)

 

Cash flow Data:

          

Net cash provided by operating activities

   $ 65,970      $ 179,194      $ 242,834      $ 57,943      $ 63,031   

Net cash used in investing activities

   $ (1,706,556   $ (1,628,732   $ (874,078   $ (175,521   $ (188,584

Net cash provided by financing activities

   $ 1,690,210      $ 1,398,266      $ 755,324      $ 133,681      $ 123,926   

Other Operating Data:

          

Owned Portfolio at period end

     53        87        99        87        105   

Other Financial Data:

          

Adjusted net income(4)

   $ 2,863      $ 73,085      $ 125,151      $ 33,252      $ 45,922   
(1) Pro forma net income per common share and pro forma weighted average shares outstanding (basic and diluted) give effect to the Share Exchange as if it had occurred at the beginning of the period presented.
(2) Does not give effect to an estimated $             million of expenses payable by us in connection with this offering.
(3) Restricted cash comprises cash held by us but which is ring-fenced or used as security for specific financing arrangements, and to which we do not have unfettered access.
(4) Adjusted net income (defined as net income (loss) before non-cash interest expense, which includes the amortization of debt issuance costs and the unrealized gain (loss) on derivatives, and, in each case, the related tax effect) is a measure of both liquidity and operating performance that is not defined by generally accepted accounting principles in the United States (“U.S. GAAP”) and should not be considered as an alternative to net income, income from operations, or any other performance measure derived in accordance with U.S. GAAP. Adjusted net income is presented as a supplemental financial measure because management believes that it may be a useful performance measure that is used within our industry. We believe adjusted net income provides useful information regarding our earnings from ongoing operations, our ability to service our long-term debt and other fixed obligations, and our ability to fund our growth with internally generated funds. We use adjusted net income to assess our core operating performance on a consistent basis from period to period. In addition, adjusted net income helps us identify certain controllable expenses and make decisions designed to help us meet our near-term financial goals. Adjusted net income has limitations as an analytical tool, and you should not consider it in isolation from, or as a substitute for, our operating results or cash flows as reported under U.S. GAAP. Some of these limitations include:

 

    adjusted net income does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments,

 

    adjusted net income does not reflect changes in or cash requirements for our working capital needs; and

 

    our calculation of adjusted net income may differ from the adjusted net income or similarly titled measures of other companies in our industry, limiting its usefulness as a comparative measure.

 

 

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The following table reconciles cash flows from operating activities and net income, the most directly comparable U.S. GAAP measures of liquidity and performance, to adjusted net income:

Reconciliation of Cash Flows From Operating Activities and Net Income to Adjusted Net Income

 

     Year Ended
December 31,
    Three Months Ended
March 31,
 
(in thousands)    2011     2012     2013     2013     2014  
                       (unaudited)  

Net cash provided by operating activities

   $ 65,970      $ 179,194      $ 242,834      $ 57,943      $ 63,031   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation

     (46,615     (110,957     (145,615     (34,114     (39,954

Deferred income tax provision

     5,920        1,663        101        (134     (1,022

Amortization of debt issuance costs

     (9,444     (9,457     (18,766     (4,523     (5,711

Gain on disposal of flight equipment

     —          11,267        31,051        6,295        16,826   

Loss/ (earnings) from unconsolidated equity investees

     1,395        —          (46     —          53   

Unrealised (gain)/loss on derivatives

     (3,959     (2,199     6,390        (250     (4,134

Changes in operating assets and liabilities:

          

Increase in receivables

     1,193        3,010        957        (541     (1,865

(Increase)/decrease in other assets

     5,961        3,245        16,114        2,730        65   

Decrease in deferred revenue

     (6,725     (7,906     (9,993     (5,872     (2,146

Decrease in accounts payable, accrued expenses and other liabilities

     (16,677     (6,699     (10,227     6,969        11,279   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (2,981   $ 61,161      $ 112,800      $ 28,503      $ 36,422   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amortization of debt issuance costs

     9,444        9,457        18,766        4,523        5,711   

Unrealized (gain) loss on derivatives

    
3,959
  
    2,199        (6,390     250        4,134   

Tax effect

     (7,559     268        (25     (24     (345

Adjusted net income

   $ 2,863      $ 73,085      $ 125,151      $ 33,252      $ 45,922   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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RISK FACTORS

An investment in our common shares involves a high degree of risk. You should carefully consider each of the following risk factors and all of the other information set forth in this prospectus, including the consolidated financial statements and the related notes thereto appearing at the end of this prospectus, before deciding to invest in our common shares. If any of the following risks actually occur, our business, financial condition and results of operations could be harmed and we may not be able to achieve our goals. In such an event, the value of our common shares could decline and you could lose some or all of your investment.

Risks Relating to Our Business and Our Industry

Our business is affected by general economic and financial conditions.

Our business and results of operations are significantly affected by general business, financial market and economic conditions. The worsening of economic conditions, particularly if combined with high fuel prices, may have a material adverse effect on our lessees’ ability to meet their financial and other obligations under our operating leases, which, if our lessees default on their obligations to us or seek to renegotiate the terms of their leases, could have a material adverse effect on our financial condition, cash flow and results of operations. General business and economic conditions that could affect us include interest rate fluctuations, inflation, unemployment levels, restructurings and mergers in the airline industry, volatile fuel costs, demand for passenger and cargo air travel, volatility in both debt and equity capital markets, liquidity of the global financial markets, the availability and cost of credit, investor and consumer confidence, global economic growth and the strength of local economies in which we operate.

Our financial condition and results of operations are dependent, in part, on the financial strength of our lessees; lessee defaults, bankruptcies and other credit problems could have a material adverse effect on our financial condition, cash flow and results of operations.

Our financial condition and results of operations depend, in part, on the financial strength of our lessees, our ability to appropriately assess the credit risk of our lessees and the ability of our lessees to perform under our leases. Many of our lessees have expanded their airline operations through borrowings and long-term leases and may be highly leveraged. These lessees will depend on banks and the capital markets to provide working capital and to refinance existing indebtedness. In 2013, we generated the majority of our revenue from leases to airlines and as a result we are indirectly affected by all the risks facing airlines today. The ability of our lessees to perform their obligations under our leases will depend primarily on our lessees’ financial condition and cash flow, which may be affected by factors outside our control, including:

 

    passenger air travel demand, air cargo rates and air cargo demand;

 

    competition;

 

    economic conditions and currency fluctuations in the countries and regions in which the lessee operates;

 

    the price and availability of jet fuel;

 

    availability of financing and other circumstances affecting airline liquidity, including covenants in financings, collateral posting requirements contained in fuel hedging contracts and the ability of airlines to make or refinance principal payments as they come due;

 

    fare levels;

 

    geopolitical and other events, including war, acts of terrorism, outbreaks of epidemic diseases, aircraft accidents and natural disasters;

 

    increases in operating costs, including labor costs, insurance costs and other general economic conditions affecting our lessees’ operations;

 

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    labor difficulties;

 

    governmental regulation and associated fees affecting the air transportation business; and

 

    environmental regulations, including, but not limited to, restrictions on noise or carbon emissions.

To the extent that our lessees are affected by these risks, we may experience a decrease in demand for our aircraft along with reduced market lease rates, effective lease margins and aircraft values, which could require us to recognize impairments or fair value adjustments on our aircraft. Any of the foregoing could have a material adverse effect on our financial condition, cash flow and results of operations.

Most of our existing lessees are not rated investment grade by the principal U.S. rating agencies, may suffer liquidity or funding problems, and, at any point in time, may experience lease payment difficulties or be significantly in arrears in their obligations under our leases. Lessees encountering financial difficulties may seek reductions in their lease rates or other concessions, such as lowered maintenance obligations. Further or future downturns in the aviation industry could exacerbate the weakened financial condition and liquidity problems of some of our lessees and could further increase the risk of delayed, missed or reduced rental payments. We may not correctly assess the credit risk of each lessee or we may charge lease rates that do not correctly reflect these risks. Our lessees may not be able to continue to meet their financial and other obligations under our leases in the future. Delayed, missed or reduced rental payments from a lessee would decrease our revenues, margins and cash flow.

In addition, we may experience lessee defaults, lease restructurings, aircraft repossessions and airline bankruptcies and restructurings in the future. The terms and conditions of possible lease restructurings or reschedulings may result in a significant reduction or deferral of rental payments due over all or part of the remaining lease term, which may adversely affect our financial condition, results of operations and growth prospects. The terms of any revised payment schedules may be unfavorable and such payments may not be made. Our default levels may increase over time if economic conditions deteriorate. If lessees of a significant number of our aircraft default on their leases, our financial condition, cash flow and results of operations could be materially adversely affected.

We will need additional capital to finance our growth and refinance our existing debt, and we may not be able to obtain it on acceptable terms, or at all, which may limit our ability to grow and compete in the commercial aircraft leasing market.

Our ability to acquire additional assets and to refinance our existing debt depends to a significant degree on our ability to access the financing markets. Our access to debt and equity financing will depend on a number of factors including our historical and expected performance, compliance with the terms of our debt agreements, general market conditions, interest rate fluctuations and the relative attractiveness of alternative investments. We are exposed to risk from volatility and disruption in the financing markets in various ways, including difficulty or inability to finance the acquisition of aircraft, increased risk of default by our lessees, exposure to increased bank or counterparty risk and the risk that we will not be able to refinance any of our existing debt financings, as they come due, on favorable terms or at all. In addition, volatility or disruption in the financing markets could adversely affect banks and financial institutions causing lenders to increase the costs of such financing or to be reluctant or unable to provide us with financing on terms acceptable to us. We compete with other lessors and airlines when acquiring aircraft and our ability to grow our portfolio is dependent on our ability to access attractive financing. If we are unable to raise additional funds or obtain capital on terms acceptable to us, we may not be able to satisfy our aircraft acquisition commitments, which as of March 31, 2014 represented an aggregate of $2,573.0 million through December 31, 2015, including $1,852.5 million represented by letters of intent to purchase 29 aircraft. If we are unable to satisfy our purchase commitments, we may be forced to forfeit our deposits. Further, we would be exposed to potential breach of contract claims by our lessees and manufacturers. These risks may also be increased by the volatility and disruption in the capital and credit markets. Therefore, if we are unable to raise additional funds or obtain capital on acceptable terms, our growth opportunities will be

 

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limited and our ability to refinance our existing debt could be materially adversely affected, any of which could have a material adverse effect on our financial condition, cash flow and results of operations.

The value of the aircraft we acquire and the market rates for leases could decline, which would have a negative effect on our financial condition, cash flow and results of operations.

Aircraft values and market rates for leases have from time to time experienced sharp decreases due to a number of factors including, but not limited to, decreases in passenger and air cargo demand, increases in fuel costs, government regulation and increases in interest rates. Operating leases place the risk of realization of residual values on aircraft lessors because only a portion of the aircraft’s value is covered by contractual cash flows under the lease. In addition to factors linked to the aviation industry generally, many other factors may affect the value of our aircraft and market rates for our leases, including:

 

    the particular maintenance, damage, operating history and documentary records of the aircraft and engine;

 

    manufacture and type or model of aircraft or engine, including the number of operators using that type of aircraft;

 

    whether the aircraft is subject to a lease, and if so, whether the lease terms are favorable to the lessor;

 

    aircraft age;

 

    the advent of newer models of such aircraft or aircraft types competing with such aircraft;

 

    the regulatory authority under which the aircraft is operated and regulatory actions, including mandatory grounding of the aircraft;

 

    any renegotiation of an existing lease on less favorable terms;

 

    any tax, customs, regulatory and legal requirements that must be satisfied before the aircraft can be purchased, sold or re-leased;

 

    compatibility of aircraft configurations or specifications with other aircraft operated by operators of that aircraft type;

 

    decreases in creditworthiness of lessees; and

 

    the availability of spare parts.

Any decrease in the value of our aircraft and market rates for leases, which may result from the above factors or other unanticipated factors, would have a material adverse effect on our financial condition, cash flow and results of operations.

The loss of key personnel would have a material adverse effect on our reputation and relationships with lessees, manufacturers, buyers and financiers of aircraft, which are a critical element to the success of our business.

We believe that our senior management’s reputation and relationships with lessees, manufacturers, buyers and financiers of aircraft are a critical element to the success of our business. We depend on the diligence, skill, experience and network of business contacts of our management team. We believe there are only a limited number of available qualified executives in the aircraft industry, and we therefore have encountered, and will likely continue to encounter, intense competition for qualified employees from other companies in our industry. Our future success will depend, to a significant extent, upon the continued service of our senior management personnel, particularly: Mr. Dómhnal Slattery, our Chief Executive Officer; Mr. John Higgins, our President and Chief Commercial Officer; Mr. Andy Cronin, our Chief Financial Officer; Mr. Tom Ashe, our Chief Operating Officer and Head of Risk and our other senior officers, each of whose services are critical to the success of our

 

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business strategies. If we were to lose the services of any of the members of our senior management team, it could have a material adverse effect our financial condition, cash flow and results of operations.

We may incur costs and suffer other negative consequences resulting from lessee defaults and our attempts to repossess aircraft.

If we are required to repossess an aircraft upon a default by a lessee, we may be required to incur significant costs. Those costs include legal and other expenses of court or other governmental proceedings, including the cost of posting security bonds or letters of credit necessary to effect repossession of the aircraft. These costs may be particularly high if the lessee is contesting the proceedings or is in bankruptcy. In addition, during these proceedings the relevant aircraft would not be generating revenue. We may also incur substantial maintenance, refurbishment or repair costs that a defaulting lessee has failed to pay and that are necessary to put the aircraft in suitable condition for re-lease or sale, or storage costs associated with any aircraft that we repossess and are unable to place immediately with another lessee. It may also be necessary to pay off liens, taxes and other governmental charges on the aircraft to obtain clear possession and to re-lease the aircraft effectively, including, in some cases, liens that the lessee may have incurred in connection with the operation of its other aircraft. We may also incur other costs in connection with the physical repossession of the aircraft. We have not yet repossessed any aircraft.

We may suffer other negative consequences as a result of a lessee default, the related termination of the lease and the repossession of the related aircraft. It is likely that our rights upon a lessee default will vary significantly depending upon the jurisdiction and the applicable law, including the need to obtain a court order for repossession of the aircraft and/or consent for deregistration or export of the aircraft. We anticipate that when a defaulting lessee is in bankruptcy, protective administration, insolvency or similar proceedings, additional limitations may apply. Certain jurisdictions give rights to the trustee in bankruptcy or a similar officer to assume or reject the lease or to assign it to a third party, or entitle the lessee or another third party to retain possession of the aircraft without paying lease rentals or performing all or some of the obligations under the relevant lease.

Additionally, certain of our lessees are owned, in whole or in part, by government-related entities, which could complicate our efforts to repossess our aircraft in that lessee’s domicile. Accordingly, we may be delayed in, or prevented from, enforcing certain of our rights under a lease and in re-leasing the affected aircraft. If we repossess an aircraft, we may not necessarily be able to export or deregister and profitably redeploy the aircraft. For instance, where a lessee or other operator flies only domestic routes in the jurisdiction in which the aircraft is registered, repossession may be more difficult, especially if the jurisdiction permits the lessee or the other operator to resist deregistration. We may also incur significant costs in retrieving or recreating aircraft records required for registration of the aircraft, and in obtaining the Certificate of Airworthiness for an aircraft. If, we incur significant costs in connection with repossessing our aircraft, are delayed in repossessing our aircraft or are unable to obtain possession of our aircraft as a result of lessee defaults, it could have a material adverse effect on our financial condition, cash flow and results of operations.

In addition, termination of the leasing of an aircraft as a result of a default by the lessee may have an impact on the debt financing of such aircraft. Any such termination may require a mandatory prepayment of the debt in respect of the aircraft after certain standstill and/or remarketing periods.

Our financial performance is in part dependent on our ability to regularly sell aircraft and we may not be able to do so on favorable terms or at all.

Our financial performance is in part dependent on our ability to regularly sell aircraft profitably. Our ability to sell our aircraft profitably or at all will depend on conditions in the airline industry and general market and competitive conditions at the time we seek to sell. In addition, our ability to sell our aircraft will be affected by the particular maintenance, damage and operating history of the aircraft and its engine. Failure to sell aircraft regularly and profitably could have a material adverse effect on our financial condition, cash flow and results of operations.

 

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Our business model depends on the continual re-leasing of our aircraft when current leases expire and the leasing of new aircraft on order, and we may not be able to do so on favorable terms, if at all.

Our business model depends on the continual re-leasing of our aircraft when our current leases expire in order to generate sufficient revenues to finance our operations and pay our debt service obligations. We currently have one lease expiring in 2015, five leases expiring in 2016 and seven leases expiring in 2017. In 2013, we generated revenue of $5.2 million from the lease that is scheduled to expire in 2015, revenue of $20.0 million from the leases that are scheduled to expire in 2016 and revenue of $26.2 million from the leases that are scheduled to expire in 2017. The aircraft subject to those leases that we do not sell prior to lease termination will need to be re-leased, or the current leases will need to be extended.

Because our leases are operating leases, only a portion of the aircraft’s value is covered by revenues generated from the lease and we may not be able to realize the aircraft’s residual value after expiration of the initial lease. We bear the risk of re-leasing or selling the aircraft in our fleet when our operating leases expire or when aircraft are returned to us prior to the expiration of any lease. Our ability to lease, re-lease or sell our aircraft will depend on conditions in the airline industry and general market and competitive conditions at the time the operating leases are entered into and expire. In addition, our ability to re-lease our aircraft will be affected by the particular maintenance, damage and operating history of the aircraft and its engines. Further, our ability to avoid significant off-lease time is likely to be adversely impacted by, among other things, increases in the cost of fuel, any deterioration in the financial condition of the airline industry, any major airline bankruptcies, any sale of large numbers of repossessed aircraft by financial institutions, the introduction of newer models of aircraft and other factors leading to oversupply (including manufacturer overproduction), and political and economic uncertainties.

We cannot assure you that we will be able to enter into profitable leases for any aircraft acquired, and our failure to do so would have a material adverse effect on our financial condition, cash flow and results of operations.

We cannot assure you that we will be able to enter into profitable leases upon the acquisition of the aircraft we purchase pursuant to our current or future purchase commitments. We rely upon our management team’s judgment and ability to evaluate the ability of lessees and other counterparties to perform their obligations to us and to negotiate transaction documents. However, we cannot assure you that our management team will be able to perform such functions in a manner that will achieve our investment objectives, which would have a material adverse effect on our financial condition, cash flow and results of operations.

From time to time, the aircraft industry has experienced periods of oversupply during which lease rates and aircraft values have declined, and any future oversupply could have a material adverse effect on our financial condition, cash flow and results of operations.

Historically, the aircraft leasing business has experienced periods of aircraft oversupply. The oversupply of a specific type of aircraft is likely to depress the lease rates for and the value of that type of aircraft. The supply and demand for aircraft is affected by various cyclical and non-cyclical factors that are outside of our control, including:

 

    passenger and air cargo demand;

 

    operating costs, including fuel costs;

 

    general economic conditions;

 

    geopolitical events, including war, prolonged armed conflict and acts of terrorism;

 

    outbreaks of communicable diseases and natural disasters;

 

    governmental regulation;

 

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    interest and foreign exchange rates;

 

    the availability of credit;

 

    airline restructurings and bankruptcies;

 

    manufacturer production levels and technological innovation;

 

    manufacturers merging or exiting the industry or ceasing to produce aircraft types;

 

    climate change initiatives, technological change, aircraft noise and emissions regulations, aircraft age limits and other factors leading to reduced demand for, early retirement or obsolescence of aircraft models;

 

    reintroduction into service of aircraft previously in storage; and

 

    airport and air traffic control infrastructure constraints.

During recent years, the airline industry has committed to a significant number of aircraft deliveries through order placements with manufacturers. In response, aircraft manufacturers have raised their production output. The increase in these production levels could result in an oversupply of aircraft if growth in airline traffic does not meet airline industry expectations. An oversupply of new aircraft could also adversely affect the rental rates for, and market values of, used aircraft.

In addition, many airlines have eliminated certain types of aircraft from their fleets, affecting the prices both of the aircraft types they eliminate and the types they continue to use. This elimination of certain aircraft has resulted in an increase in the availability of such aircraft in the market, a decrease in rental rates for such aircraft and a decrease in market values of such aircraft. We cannot assure you that airlines will continue to acquire the same types of aircraft, or that we will not acquire aircraft that will cease to be used by our potential lessees. Any of these factors may produce sharp and prolonged decreases in aircraft lease rates and values, or may have a negative effect on our ability to lease or re-lease the aircraft in our fleet or in our order book. Any of these factors could have a material adverse effect on our financial condition, cash flow and results of operations.

Changes in the appraised value of our aircraft could have a material adverse effect on our financial condition, cash flow and results of operations.

Aircraft appraisers play a significant role in shaping market perception of aircraft values. Each appraiser’s valuation is based on that appraiser’s professional opinion. Appraisals can be subjective because they are based on various assumptions and conditions with regard to the specific aircraft appraised and the commercial aviation industry generally. In addition, appraisers may use historical data, and subsequent changes or additions to such data may not be adequately captured in the appraised value.

Certain of our debt financing arrangements include loan-to-value tests that may require us to set aside a portion of our cash flows or make partial prepayments of debt outstanding under such arrangements in the event that the appraised value of our aircraft decreases. A decrease in the valuation of our aircraft by independent appraisers could also adversely affect our ability to sell or lease our aircraft on terms acceptable to us, or at all, or could decrease amounts available to us under our existing and future debt financing arrangements. In addition, we may be required to incur impairment charges or fair value adjustments to the extent that the appraiser’s valuation of our aircraft is less than the depreciated book value on our balance sheet. The occurrence of any of these events as a result of changes in the appraised value of our aircraft could have a material adverse effect on our financial condition, cash flow and results of operations.

Changes in interest rates may adversely affect our financial condition and results of operations.

We use floating rate debt to finance the acquisition of a portion of our aircraft. As of December 31, 2013, 23.8% of our total outstanding indebtedness was floating rate. We incurred floating rate interest expense of

 

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$22.0 million in the year ended December 31, 2013. If interest rates increase, we would be obligated to make higher interest payments to our lenders. Our practice has been to protect ourselves against interest rate increases on a portion of our floating-rate liabilities by entering into derivative financial instruments, such as interest rate caps and interest rate swaps. We remain exposed, however, to changes in interest rates to the extent that our derivative financial instruments are not correlated to our financial liabilities. In addition, we are exposed to the credit risk that the counterparties to our derivative financial instruments will default in their obligations. If we incur significant fixed rate debt in the future, increased interest rates prevailing in the market at the time of the incurrence or refinancing of such debt will also increase our interest expense.

Decreases in interest rates may also adversely affect our lease revenues generated from leases with lease rates tied to floating interest rates as well as interest revenue on cash deposits. In the year ended December 31, 2013, 16.1% of our lease revenue was attributable to leases with lease rates tied to floating interest rates. In addition, since our fixed rate leases are based, in part, on prevailing interest rates at the time we enter into the lease, if interest rates decrease, new fixed rate leases we enter into may be at lower lease rates and our lease revenue will be adversely affected.

Our ability to obtain debt financing and our cost of debt financing are dependent, in part, upon the internal financial strength ratings assigned to us by our lenders, and a downgrade of these ratings could adversely impact our financial condition, cash flow and results of operations.

Our ability to obtain debt financing, and our cost of debt financing, are dependent, in part, on the financial strength ratings assigned to us by our lenders. Maintaining these ratings depends in part on strong financial results and in part on other factors, including the outlook of our lenders on our sector and on the market generally. In the future we may seek to obtain public corporate credit ratings from ratings agencies as well. A rating downgrade by our lenders or by any rating agencies may result in higher pricing or less favorable terms under debt financings. Rating downgrades may therefore make it more difficult for us to satisfy our funding requirements and may adversely impact our financial condition, cash flows and results of operations.

Competition from other aircraft lessors or purchasers could have a material adverse effect on our financial condition, results of operations and growth prospects.

The aircraft leasing industry is highly competitive. We encounter competition in the acquisition of aircraft from other entities such as airlines, aircraft manufacturers, financial institutions, aircraft brokers, public and private partnerships, investors and funds with more capital to invest in aircraft, and other aircraft leasing companies that we do not currently consider our major competitors.

Competition for a leasing transaction is based principally upon lease rates, delivery dates, lease terms, reputation, management expertise, aircraft condition, specifications and configuration and the availability of the types of aircraft necessary to meet the needs of the customer. Some of our competitors may have greater operating and financial resources and access to lower capital costs than we have and may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments. In addition, some competing aircraft lessors may provide inducements to potential lessees that we cannot match. Competition in the purchase and sale of used aircraft is based principally on the availability of used aircraft, price, the terms of the lease to which an aircraft is subject and the creditworthiness of the lessee, if any. We may not always be able to compete successfully with our competitors and other entities, which could have a material adverse effect on our financial condition, results of operations and growth prospects.

There is a limited number of aircraft and engine manufacturers and the failure of any manufacturer to meet its obligations could have a material adverse effect on our financial condition, cash flow and results of operations.

The supply of large commercial jet aircraft is dominated by two airframe manufacturers, Boeing and Airbus, and three engine manufacturers, GE Aircraft Engines, Rolls Royce plc and Pratt & Whitney. As a result, we are

 

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dependent on these manufacturers’ success in remaining financially stable, producing products and related components which meet the airlines’ demands and fulfilling their contractual obligations to us. Should the manufacturers fail to respond appropriately to changes in the market environment or fail to fulfill their contractual obligations, we may experience any of the following:

 

    missed or late delivery of aircraft and engines ordered by us, which could result in an inability to meet our contractual obligations to our customers and/or the loss of pre-delivery payments by our customers to us for new ordered aircraft, resulting in lost or delayed revenues, lower growth rates and strained customer relationships;

 

    an inability to acquire aircraft and engines and related components on terms which will allow us to lease those aircraft and engines to customers at a profit, resulting in lower growth rates or a contraction in our aircraft portfolio;

 

    poor customer support from the manufacturers of aircraft, engines and components;

 

    manufacturer reputational damage, resulting in reduced demand for a particular manufacturer’s product, creating downward pressure on demand for those aircraft and engines in our fleet and reduced market lease rates and sale prices for those aircraft and engines; and

 

    reduction in our competitiveness due to deep discounting by the manufacturers, which may lead to reduced market lease rates and sale prices and may affect our ability to re-lease or sell some of the aircraft in our portfolio.

Any of these circumstances could have a material adverse effect on our financial condition, cash flow and results of operations.

There have been recent well-publicized delays by airframe manufacturers in meeting stated delivery schedules for new aircraft programs. Although we may have the right to terminate a purchase agreement in the event of protracted manufacturing delays, subject to certain grace periods, if we experience delivery delays for new aircraft types or aircraft for which we have made future commitments (such as the Airbus A320neo and the Boeing 737 MAX), it could delay the receipt of contracted cash flows, and affected lessees could be entitled to terminate their lease arrangements with respect to such aircraft if the delays extend beyond agreed-upon periods of time. Any such termination could negatively affect our cash flow and results of operations.

In addition, new aircraft types may not deliver the anticipated performance improvements, or could experience technical problems that result in the grounding of the aircraft, which in either case could adversely affect the values and lease rates of such aircraft.

Increases in fuel costs may adversely affect our lessees’ operating results, which could in turn negatively impact our business.

Fuel costs represent a major expense to airlines. Fuel prices can fluctuate widely depending primarily on international market conditions, geopolitical and environmental events and regulation, natural disasters, conflicts, war, regulatory changes and currency exchange rates. As a result, fuel prices are not within the control of our lessees and significant changes in fuel prices could materially and adversely affect their operating results. For instance, ongoing geopolitical disruption in North Africa, the Middle East and Ukraine has generated uncertainty regarding the world’s future fuel supply, which initially led to significant increases in fuel costs. If this unrest continues, fuel costs may rise further. Other events can also significantly affect fuel availability and prices, including natural disasters, decisions by the Organization of the Petroleum Exporting Countries regarding its members’ oil output, and changes in global demand for fuel from countries such as China.

Higher fuel costs may have a material adverse impact on airline profitability, including the profitability of our lessees. Due to the competitive nature of the airline industry, airlines may not be able to pass on increases in

 

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fuel prices to their customers by increasing fares. In addition, airlines may not be able to manage this risk by appropriately hedging their exposure to fuel price fluctuations. For these reasons, if fuel prices increase due to adverse supply and demand conditions, future terrorist attacks, acts of war, armed hostilities or natural disasters or for any other reason, our lessees may incur higher costs and generate lower net revenues, which would adversely impact their financial positions. Consequently, these conditions may (i) affect our lessees’ ability to make rental and other lease payments, (ii) result in lease restructurings and aircraft repossessions, (iii) increase our costs of servicing and marketing the aircraft, (iv) impair our ability to re-lease or otherwise dispose of the aircraft on a timely basis and/or at favorable rates and (v) reduce the value receivable for the aircraft upon any disposition. These results could have a material adverse effect on our financial condition, cash flow and results of operations.

Our level of indebtedness requires significant debt service payments.

As of March 31, 2014, our consolidated indebtedness was $3,650.2 million and represented 69.8% of our total assets as of that date, and our interest expense (including the impact of hedging activities) was $154.4 million for the year ended December 31, 2013 and $48.1 million for the three months ended March 31, 2014. Due to the capital intensive nature of our business and our strategy of expanding our aircraft portfolio, we expect that we will incur additional indebtedness in the future. If market conditions worsen and precipitate further declines in aircraft- and aviation-related markets, our operations may not generate sufficient cash to service our debt which will have a material adverse impact on us. Specifically, our level of indebtedness:

 

    causes a substantial portion of our cash flows from operations to be dedicated to interest and principal payments and therefore not available to fund our operations, working capital, capital expenditures, expansion, acquisitions or general corporate or other purposes;

 

    restricts the ability of some of our subsidiaries and joint ventures to make distributions to us;

 

    may place us at a disadvantage compared to competitors that have less debt;

 

    may impair our ability to obtain additional financing in the future;

 

    may limit our flexibility in planning for, or reacting to, changes in our business and industry; and

 

    may make us more vulnerable to downturns in our business, our industry or the economy in general.

Any of these circumstances could have a material adverse effect on our financial condition, cash flow and results of operations.

Aircraft have finite economic useful lives, depreciate over time and become more expensive to operate as they age, all of which could have a material adverse effect on our financial condition, cash flow and results of operations.

Aircraft are long-lived assets requiring long lead times to develop and manufacture, with particular types and models becoming obsolete or less in demand over time when newer, more advanced aircraft are manufactured. As commercial aircraft age, they will depreciate and will typically generate lower revenues and cash flows. As of March 31, 2014 the age of our Owned Portfolio, weighted by net book value, was 2.46 years. Our existing fleet, as well as the aircraft that we have ordered, have exposure to obsolescence, particularly if unanticipated events occur that shorten the life cycle of such aircraft types. These events include but are not limited to government regulation or changes in our airline customers’ preferences. These events may shorten the life cycle for aircraft types in our fleet and, accordingly, may negatively impact lease rates, trigger impairment charges or increase depreciation expense. We must be able to replace such older aircraft with newer aircraft or our ability to maintain or increase our revenues and cash flow will decline. In addition, if we sell an aircraft for a price that is less than the depreciated book value of the aircraft on our balance sheet, we will recognize a loss on the sale, which could materially adversely affect our results of operations for the period in which we recognize such loss.

 

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In general, the costs of operating an aircraft, including maintenance expenditures, increase with the age of the aircraft. Also, older aircraft typically are less fuel efficient than newer aircraft. Variable expenses like fuel, crew size or aging aircraft corrosion control programs and related airworthiness directives may make the operation of older aircraft less economically feasible and may result in increased lessee defaults and renegotiation of lease terms and also cause us to incur some of these increased maintenance expenses and regulatory costs. These expenses may also impact our ability to re-lease or sell such aircraft upon expiration of the existing lease, which could cause us to incur off-lease time.

Some countries have implemented, and others have considered, regulations restricting or prohibiting the import of aircraft above a certain age. If passed, such regulations may further impact our ability to re-lease or sell any such aircraft on favorable lease terms or at all.

Maintenance issues with any aircraft in our fleet could have a material adverse effect on our financial condition, cash flow and results of operations.

Although we may inspect an aircraft and its documented maintenance, usage, lease and other records prior to acquisition, we may not discover all defects during an inspection. Repairs and maintenance costs for existing aircraft are difficult to predict, generally increase as aircraft age and can be adversely affected by prior use. We use a predictive model to determine the amount of supplemental maintenance rent we recognize from lessees who pay us monthly reserves to cover the cost of future maintenance events, and the level of supplemental maintenance rent that we are able to recognize may be reduced if aircraft or engine maintenance costs increase. Even if we are entitled to receive maintenance payments, these payments may not cover the entire cost of maintenance required. Further, variable expenses like fuel, maintenance costs, crew size or aging aircraft corrosion control or modification programs and airworthiness directives could make the operation of older aircraft more costly to our lessees and may result in increased lessee defaults or decreased aircraft values. We may also incur some of these increased maintenance expenses and regulatory costs upon acquisition or re-leasing of our aircraft. Any of these expenses or costs could have a material adverse effect on our financial condition, cash flow and results of operations.

If our lessees fail to discharge aircraft liens, we may be obligated to pay the aircraft liens, which could have a material adverse effect on our financial condition, cash flow and results of operations.

In the normal course of their business, our lessees are likely to incur aircraft liens that secure the payment of airport fees and taxes, customs duties, air navigation charges (including charges imposed by Eurocontrol, the European Organization for the Safety of Air Navigation), landing charges, salvage or other charges. These liens may secure substantial sums that may, in certain jurisdictions or for certain types of liens, particularly liens on entire fleets of aircraft, exceed the value of the particular aircraft to which the liens have attached. Aircraft may also be subject to mechanics’ liens as a result of maintenance performed by third parties on behalf of our lessees. Although we anticipate that the financial obligations relating to these liens will be the responsibility of our lessees, if they fail to fulfill such obligations, the liens may attach to our aircraft and ultimately affect our ability to realize value from the aircraft. In some jurisdictions, aircraft liens may give the holder the right to detain or, in limited cases, sell or cause the forfeiture of the aircraft. Until they are discharged, these liens could impair our ability to repossess, re-lease or sell our aircraft. Our lessees may not comply with the anticipated obligations under their leases to discharge aircraft liens arising during the terms of the leases. If they do not, we may find it necessary to pay the claims secured by such aircraft liens in order to repossess the aircraft. Such payments could have a material adverse effect on our financial condition, cash flow and results of operations.

If we, or our lessees, fail to maintain our aircraft, their value may decline and we may not be able to lease or re-lease our aircraft at favorable rates, if at all, which could have a material adverse effect on our financial condition, cash flow and results of operations.

We may be exposed to increased maintenance costs for our leased aircraft associated with a lessee’s failure to properly maintain the aircraft or pay supplemental maintenance rent. If an aircraft is not properly maintained,

 

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its market value may decline which would result in lower revenues from its lease or sale. Under our leases, our lessees are primarily responsible for maintaining the aircraft and complying with all governmental requirements applicable to the lessee and the aircraft, including operational, maintenance, government agency oversight, registration requirements and airworthiness directives. Although we require many of our lessees to pay us supplemental maintenance rent, failure of a lessee to perform required maintenance during the term of a lease could result in a decrease in value of an aircraft, an inability to re-lease an aircraft at favorable rates, if at all, or a potential grounding of an aircraft. Maintenance failures by a lessee would also likely require us to incur maintenance and modification costs upon the termination of the applicable lease, which could be substantial, to restore the aircraft to an acceptable condition prior to sale or re-leasing and may delay any subsequent sale or re-leasing. If we are unable to re-lease an aircraft when it comes off-lease because we need to make such repairs or conduct such maintenance, we may realize a substantial loss of cash flows without any corresponding cessation in our debt service obligations. We cannot assure you that, in the event a lessee defaults under a lease, any security deposit paid or letter of credit provided by the lessee as security for the performance of its obligations under the lease will be sufficient to cover the lessee’s outstanding or unpaid lease obligations and required maintenance expenses or be sufficient to discharge liens that may have attached to our aircraft. Our lessees’ failure to meet their obligations to pay supplemental maintenance rent or perform required scheduled maintenance or our inability to maintain our aircraft could have a material adverse effect on our financial condition, cash flow and results of operations.

Failure to close our aircraft acquisition commitments could have a material adverse effect on our financial condition, cash flow and results of operations.

As of March 31, 2014, we had entered into purchase commitments to acquire a total of 87 new aircraft for delivery through 2021. If we are unable to maintain our financing sources or find new sources of financing or if the various conditions to our existing commitments are not satisfied, we may be unable to close the purchase of some or all of the aircraft which we have commitments to acquire. If our aircraft acquisition commitments are not closed for these or other reasons, we will be subject to several risks, including the following:

 

    forfeiting deposits and pre-delivery payments and having to pay and expense certain significant costs relating to these commitments, such as actual damages, and legal, accounting and financial advisory expenses, and not realizing any of the benefits of completing the transactions;

 

    defaulting on our lease commitments, which could result in monetary damages and damage to our reputation and relationships with lessees; and

 

    failing to capitalize on other aircraft acquisition opportunities that were not pursued due to our management’s focus on these commitments.

If we determine that the capital we require to satisfy these commitments may not be available to us, either at all or on terms we deem attractive, we may eliminate or reduce any dividend program that may be in place at that time in order to preserve capital to apply to these commitments. These risks could have a material adverse effect on our financial condition, cash flow and results of operations.

The introduction of superior aircraft technology or a new line of aircraft could cause the aircraft that we acquire to become outdated or obsolete or oversupplied and therefore less desirable, which would have a material adverse effect on our financial condition, cash flow and results of operations.

As manufacturers introduce technological innovations and new types of aircraft, some of the aircraft in our fleet could become less desirable to potential lessees. Such technological innovations may increase the rate of obsolescence of existing aircraft faster than currently anticipated by our management, which could negatively affect the value of the aircraft in our fleet. New aircraft manufacturers could emerge to produce aircraft that compete with the aircraft we own. In addition, the imposition of increased regulation regarding stringent noise or emissions restrictions may make some of our aircraft less desirable and accordingly less valuable in the marketplace. The development of new aircraft and engine options could decrease the desirability of certain

 

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aircraft in our fleet and/or aircraft that we have ordered. This could, in turn, reduce both future residual values and lease rates for certain types of aircraft in our portfolio. Any of these risks may negatively affect our ability to lease or sell our aircraft on favorable terms, if at all, which would have a material adverse effect on our financial condition, cash flow and results of operations.

Decreases in the demand for or availability of the aircraft types in our portfolio could harm our business and results of operations should any difficulties specific to these particular types of aircraft occur.

As of March 31, 2014, our Owned and Committed Portfolio contained a mix of aircraft types including four Airbus A319 aircraft, 56 Airbus A320 aircraft, six Airbus A321 aircraft, 20 Airbus A320neo aircraft, nine Airbus A330 aircraft, 62 Boeing 737 aircraft, 20 Boeing 737 MAX aircraft, four Boeing 777 aircraft, five Boeing 787 aircraft and six Embraer 190 aircraft. Our business and financial results could be negatively affected if the market demand for any of these models of aircraft (or other types that we acquire in the future) declines or if such aircraft are redesigned or replaced by their manufacturers. Out of production aircraft may have a shorter useful life or lower residual values due to obsolescence. In addition, if any of these aircraft types (or other types that we acquire in the future) should encounter technical or other difficulties, such affected aircraft types may be subject to grounding or diminution in value and we may be unable to lease or sell such affected aircraft types on favorable terms or at all. The inability to lease or sell the affected aircraft types may reduce our revenues and net income to the extent the affected aircraft types comprise a significant percentage of our aircraft portfolio and could have a material adverse effect on our financial condition, cash flow and results of operations.

Airline reorganizations could impair our lessees’ ability to comply with their lease payment obligations to us.

In recent years, several airlines around the world have filed for protection under their local bankruptcy and insolvency laws and, in recent years, certain airlines have gone into liquidation. Any further bankruptcies, liquidations, consolidations or reorganizations may result in aircraft becoming available for lease or purchase at reduced lease values or acquisition prices and reduce the number of potential lessees and operators of particular models of aircraft, either of which would result in inflated supply levels and consequently decreased aircraft values for any such models and lease rates in general. Historically, some airlines involved in reorganizations have undertaken substantial fare discounting to maintain cash flows and encourage continued customer loyalty. Bankruptcies and reorganizations may lead to the grounding or abandonment of significant numbers of aircraft, rejection or other termination of leases and negotiated reductions in aircraft lease rentals, with the effect of depressing aircraft market values. In addition, requests for labor concessions may result in significant labor disputes involving strikes or slowdowns or may otherwise adversely affect labor relations, thereby worsening the financial condition of the airline industry and further reducing aircraft values and lease rates.

To the extent that a significant number of our leases are rejected by an airline customer in a reorganization and we are unable to re-lease such aircraft in a timely manner on commercially reasonable terms, our results of operations and financial condition, cash flow would be materially adversely affected.

Failure to obtain certain required licenses and approvals could adversely affect our ability to re-lease or sell aircraft, which would have a material adverse effect on our financial condition, cash flow and results of operations.

Lessees are subject to extensive regulation under the laws of the jurisdictions in which they are registered and in which they operate. As a result, certain aspects of our leases require licenses, consents or approvals, including consents from governmental or regulatory authorities for certain payments under our leases and for the import, export, registration or deregistration of the aircraft. Subsequent changes in applicable law or administrative practice may increase such requirements and governmental consent, once given, could be withdrawn. Furthermore, consents needed in connection with the future re-lease or sale of an aircraft may not be forthcoming. Any of these events could adversely affect our ability to re-lease or sell aircraft, which would have a material adverse effect on our financial condition, cash flow and results of operations.

 

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Some of our leases provide the lessees with early termination options.

As of March 31, 2014, 5.4% of the leases and letters of intent of the aircraft in our Owned and Committed Portfolio provide the lessees with early termination options. We also may enter into leases in the future that provide lessees with early termination options. If any lease is terminated early at a time when we cannot re-lease the aircraft at rates at least as favorable to us as the terminated lease or at all, our financial condition, cash flow and results of operations could be adversely affected.

Our aircraft and our operations may not be insured at all times as a result of lessees’ failure to maintain the required insurance during the course of a lease, lessees’ coverage limits becoming exhausted or lessees’ insurers excluding coverage for certain risks, which could have a material adverse effect on our financial condition, cash flow and results of operations.

While we do not directly control the operation of any aircraft we acquire, in certain jurisdictions aircraft lessors and/or owners are held strictly liable for losses resulting from the operation of aircraft, and in other jurisdictions aircraft lessors may be deemed liable on other theories of liability.

Our customers are required under their leases to indemnify us for, and insure against, liabilities arising out of use and operation of the aircraft, including third-party claims for death or injury to persons and damage to property for which we may be deemed liable. Our lessees are also required to maintain public liability, property damage and hull all risks insurance on the aircraft at agreed upon levels. They are not, however, required to maintain political risk insurance. The hull insurance is typically subject to standard market hull deductibles based on aircraft type that generally range from $250,000 to $750,000 per aircraft. These deductibles may be higher in some leases, and the lessees usually have fleet-wide aggregate limits on war risk insurance. Any hull insurance proceeds received in respect of such claims will be paid first to us or our financiers, in the event of a total loss of the aircraft, or, in the absence of a total loss of the aircraft, subject in some cases to minimum thresholds, to the lessee, to effect repairs. Proceeds of liability insurance for indemnification of third-party liabilities will be paid to the relevant third parties.

Following the terrorist attacks of September 11, 2001, aviation insurers significantly reduced the amount of insurance coverage available to airlines for liability to persons other than airline employees or passengers for claims resulting from acts of terrorism, war or similar events. At the same time, they significantly increased the premiums for such third-party war risk and terrorism liability insurance and coverage in general. Aided by a number of government indemnity schemes, the scope and price of such liability coverage has almost returned to pre-2001 levels, but the availability of such coverage in the future is uncertain. The amount and scope of third-party war risk and terrorism liability insurance that is available in the future may be below the amount and scope required under our leases and required by the market in general.

There can be no assurance that our lessees’ insurance, including any available governmental supplemental coverage, will be sufficient to cover all types of claims that may be asserted against us. While we maintain certain contingent insurance coverage to provide protection where a lessee’s insurance coverage may be unavailable or inadequate, such coverage may not be sufficient or may not be available in certain circumstances. Default by lessees in fulfilling their indemnification obligations, insolvency and/or financial default of the lessees’ insurers, or the lack of political risk, hull war or third-party war risk and terrorism liability insurance will reduce the proceeds that would be received upon an event of loss under the respective leases or upon a claim under the relevant liability insurance and may leave us exposed for hull losses or liability claims not covered by insurance.

Additional terrorist attacks or the fear of such attacks, even if not made directly on the airline industry, and unfavorable geopolitical conditions could negatively affect lessees and the airline industry, which could have a material adverse effect on our financial condition, cash flow and results of operations.

As a result of the September 11, 2001 terrorist attacks in the United States and subsequent terrorist attacks outside the United States, airlines have increased security restrictions and face increased costs for aircraft

 

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insurance and enhanced security measures. In addition, airlines have faced and continue to face increased difficulties in acquiring war risk and other insurance at reasonable costs. Conflicts in Iraq and Afghanistan, tension over Iran’s nuclear program, the civil war in Syria, civil unrest in Ukraine, and escalation of hostilities or political crises, in each case may lead to further instability in these regions. Future terrorist attacks, war or armed hostilities, or the fear of such events, could have a further adverse impact on the airline industry and on the financial condition of our leases, aircraft values and rental rates and may lead to restructurings.

Terrorist attacks and geopolitical conditions have negatively affected the airline industry and concerns about geopolitical conditions, war or armed hostilities and further terrorist attacks could continue to negatively affect airlines (including the our lessees) for the foreseeable future depending upon various factors including:

 

    higher costs to airlines due to increased security measures;

 

    losses in passenger revenue due to a decrease in travel;

 

    the price and availability of jet fuel and the ability to obtain fuel hedges under prevailing market conditions;

 

    higher financing costs and difficulty in raising financing;

 

    significantly higher costs of aircraft insurance coverage for future claims caused by acts of war, terrorism, sabotage, hijacking and other similar perils, and the extent to which such insurance will continue to be available or may exclude events such as radioactive dirty bombs, bio-hazardous materials and electromagnetic pulsing, which may damage or destroy aircraft;

 

    the ability of airlines to reduce their operating costs and conserve financial resources, taking into account the increased costs incurred as a consequence of terrorist attacks and geopolitical conditions, including those referred to above; and

 

    special charges recognized by some airlines, such as those related to the impairment of aircraft and other long lived assets stemming from the grounding of aircraft as a result of terrorist attacks, economic slowdown and/or airline reorganizations.

If current industry conditions should worsen due to future terrorist attacks, acts of war or armed hostilities, our lessees may incur higher costs and generate lower revenues, which would adversely impact their financial positions. Consequently, these conditions may affect our lessees’ ability to make rental and other lease payments or obtain the types and amounts of insurance required by the applicable leases (which may in turn lead to aircraft groundings), may result in additional lease restructurings and aircraft repossessions, may increase our cost of re-leasing or selling the aircraft, may impair our ability to re-lease the aircraft or lease the aircraft on a timely basis and/or at favorable rates and may reduce the value received for the aircraft upon any disposition, any of which could have a material adverse effect on our financial condition, cash flow and results of operations.

The effects of natural disasters may adversely affect the airline industry in the future, which may cause our lessees to not be able to meet their lease payment obligations to us, which could have a material adverse effect on our financial condition, cash flow and results of operations.

The lack of air travel demand and/or the inability of airlines to operate to or from certain regions due to severe weather conditions and natural disasters including floods, earthquakes and volcano eruptions could impact the financial health of certain airlines including our lessees. For example, the spread of volcanic ash in Europe in early 2010 and the tsunami in Japan and flooding in Thailand in 2011 caused the closure of airports and flight cancellations throughout the affected areas. The airline industry incurred substantial losses from these disruptions. Natural disasters could result in our lessees’ inability to satisfy their lease payment obligations to us, which in turn could have a material adverse effect on our financial condition, cash flow and results of operations. Additionally, the potential reduction in air travel demand could result in lower demand for aircraft and consequently lower market values that would adversely affect our ability to sell certain of our aircraft or re-lease other aircraft at favorable rates.

 

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Epidemic diseases, or the perception of their effect, could have a material adverse effect on our financial condition, cash flow and results of operations.

The 2003 outbreak of Severe Acute Respiratory Syndrome (“SARS”) was linked to air travel early in its development and had a severe impact on the aviation industry which was evidenced by a sharp reduction in passenger bookings, cancellation of many flights and employee layoffs. Since 2003, there have been several outbreaks of avian influenza beginning in Asia and, most recently, spreading to certain parts of Africa and Europe. Although human cases of avian influenza so far have been limited in number, the World Health Organization has expressed serious concern that a human influenza pandemic could develop from the avian influenza virus. More recently, in 2009, there was an outbreak of the H1N1 virus, or the swine flu, which depressed travel due to fears of a global pandemic. If an outbreak of either of these or other epidemic diseases were to occur, numerous responses, including travel restrictions, might be necessary to combat the spread of the disease. Even if restrictions are not implemented, it is likely that passengers would voluntarily choose to reduce travel. In 2012, Middle Eastern Respiratory Syndrome (“MERS”), a syndrome caused by the same virus that causes SARS, began to emerge in the Middle East. Scientists do not yet know for certain how MERS originated, how it spreads or whether it could erupt into a larger outbreak, as SARS did, in which case it could have a severe impact on the aviation industry. Additional outbreaks of SARS, a more widespread outbreak of MERS or the outbreak of other epidemic diseases, such as avian influenza, swine flu, or the fear of such events, could negatively affect passenger demand for air travel and the financial condition of the aviation industry, and ultimately could have a material adverse effect on our financial condition, cash flow and results of operations.

We cannot assure you that all lessees will comply with the registration requirements in the jurisdiction where they operate.

All of our aircraft are required to be registered at all times with appropriate governmental authorities. Generally, in jurisdictions outside the United States, failure by a lessee to maintain the registration of a leased aircraft would be a default under the applicable lease, entitling us to exercise our rights and remedies thereunder. See “Risk Factors—We may incur costs and suffer other negative consequences resulting from lessee defaults and our attempts to repossess aircraft.” If an aircraft were to be operated without a valid registration, the lessee operator or, in some cases, the owner or lessor might be subject to penalties, which could result in a lien being placed on such aircraft. Lack of registration could have other adverse effects, including inability to operate the aircraft and loss of insurance, which in turn could have a material adverse effect on our financial condition, cash flow and results of operations. We cannot assure you that all lessees will comply with these requirements.

Our limited control over our joint ventures may delay or prevent us from implementing our business strategy, which would have a material adverse effect on our financial condition, cash flow and results of operations.

We may on occasion enter strategic ventures with third parties for the purposes of securing favorable financing, sharing operational risk, and/or to earn management fees. Under our joint venture agreements, we share control over significant decisions with our joint venture partners. Since we do not have full control over our joint ventures and may not be able to exercise control over any future joint venture, we may not be able to require our joint ventures to take actions that we believe are necessary to implement our business strategy. Accordingly, this limited control would have a material adverse effect on our financial condition, cash flow and results of operations.

We are subject to various risks and requirements associated with transacting business in multiple countries which could have a material adverse effect on our financial condition, cash flow and results of operations.

Our international operations expose us to trade and economic sanctions and other restrictions imposed by the United States, the European Union (the “EU”) and other governments or organizations. The U.S. Departments of Justice, Commerce, State and Treasury and other federal agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against corporations and individuals for violations of economic sanctions laws, export control laws, the Foreign Corrupt Practices Act (“FCPA”), and other federal

 

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statutes and regulations, including those established by the Office of Foreign Assets Control (“OFAC”). In addition, the U.K. Bribery Act of 2010 (the “Bribery Act”) prohibits both domestic and international bribery, as well as bribery across both private and public sectors. An organization that “fails to prevent bribery” by anyone associated with the organization can be charged under the Bribery Act unless the organization can establish the defense of having implemented “adequate procedures” to prevent bribery. Under these laws and regulations, various government agencies may require export licenses, may seek to impose modifications to business practices, including cessation of business activities in sanctioned countries or with sanctioned persons or entities, and modifications to compliance programs, which may increase compliance costs, and may subject us to fines, penalties and other sanctions. A violation of these laws or regulations could adversely impact our business, operating results, and financial condition.

We have implemented and maintain policies and procedures designed to ensure compliance by us, our subsidiaries and our directors, officers, employees, consultants and agents with FCPA, OFAC, the Bribery Act and other export control, anti-corruption, anti-terrorism and anti-money laundering laws and regulations. We cannot assure you, however, that our directors, officers, employees, consultants and agents will not engage in conduct for which we may be held responsible, nor can we assure you that our business partners will not engage in conduct which could materially affect their ability to perform their contractual obligations to us or even result in our being held liable for such conduct. Violations of FCPA, OFAC, the Bribery Act and other export control, anti-corruption, anti-terrorism and anti-money laundering laws and regulations may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could have a material adverse effect on our business, financial condition, cash flows and results of operations.

A cyber-attack that bypasses our information technology, or IT, security systems, causing an IT security breach, may lead to a material disruption of our IT systems and the loss of business information which may hinder our ability to conduct our business effectively and may result in lost revenues and additional costs.

Parts of our business depend on the secure operation of our computer systems to manage, process, store, and transmit information associated with aircraft leasing. A cyber-attack could adversely impact our daily operations and lead to the loss of sensitive information, including our own proprietary information and that of our customers, suppliers and employees. Such losses could harm our reputation and result in competitive disadvantages, litigation, regulatory enforcement actions, lost revenues, additional costs and liability. While we devote substantial resources to maintaining adequate levels of cyber-security, our resources and technical sophistication may not be adequate to prevent all types of cyber-attacks.

Conflicts of interest may arise between us and clients who utilize our fleet management services, which could have a material adverse effect on our financial condition, cash flow and results of operations.

Conflicts of interest may arise between us and third-party aircraft owners, financiers and operating lessors who hire us to perform fleet management services such as leasing and remarketing services, cash management and treasury services, technical advisory services, accounting and administrative services. Our servicing contracts generally require that we act in good faith and do not discriminate against serviced aircraft in favor of our owned aircraft. Nevertheless, competing with our fleet management clients in practice may result in strained relationships with them, which could have a material adverse effect on our financial condition, cash flow and results of operations.

Provisions of the Dodd Frank Wall Street Reform and Consumer Protection Act, EU credit risk retention and due diligence requirements may limit our ability to finance new aircraft and refinance existing debt.

Historically we have financed a portion of our aircraft portfolio with securitization debt and we intend to continue to do so in the future. In Europe, the United States and elsewhere there is increased political and regulatory scrutiny of the asset-backed securities industry. This has resulted in the introduction of a number of regulations which are currently at various stages of implementation and which may have an adverse impact on

 

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the regulatory capital charge to certain investors in securitization exposures and/or the incentives for certain investors to hold asset-backed securities, and may thereby affect the marketability and liquidity of such securities.

The U.S. Dodd Frank Wall Street Reform and Consumer Protection Act, enacted 21 July 2010 (“Dodd Frank”), has been implemented in part and continues to be implemented by federal regulatory agencies, including the United States Securities and Exchange Commission (“SEC”), the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation and the United States Federal Reserve Board, among others. This legislation, among other things: (i) requires United States federal regulators to adopt regulations requiring securitizers or originators to retain at least 5% of the credit risk of securitized exposures unless the underlying exposures meet certain underwriting standards to be determined by regulation; (ii) increases oversight of credit rating agencies; and (iii) requires the SEC to promulgate rules generally prohibiting firms from underwriting or sponsoring a securitization that would result in a material conflict of interest with respect to investors in that securitization. Once fully implemented, Dodd Frank and the regulations promulgated thereunder could materially impact our business, growth prospects and cash flows. In particular, no assurance can be given that any new requirements imposed will not have a significant impact on our business, growth prospects, cash flows or our securitization activities. Provisions under Dodd Frank may require that we modify our business and cash flows structure or lead to additional costs or higher margin posting requirements, which would further impact our ability to finance acquisitions of additional aircraft.

In addition, Article 122a of the Capital Requirements Directive 2006/48/EC (as amended by Directive 2009/111/EC), now replaced from January 1, 2014 by Article 405 of the Capital Requirements Regulation (EU) No 575/2013 (the “CRR”) restricts European Economic Area regulated institutions from investing in asset-backed securities unless the originator, sponsor or original lender in respect of the relevant securitization has explicitly disclosed to the European Economic Area regulated institution that it will retain, on an ongoing basis, a net economic interest of not less than 5% in respect of certain specified credit risk tranches or asset exposures as contemplated by the CRR. The CRR also requires a European Economic Area regulated institution to be able to demonstrate that it has undertaken certain due diligence in respect of, amongst other things, the securitization debt it has acquired and the underlying exposures, and that procedures are established for such due diligence activities to be conducted on an on-going basis.

Though many aspects of the detail and effect of such requirements remain unclear, the CRR and any other changes to the regulation or regulatory treatment of securitizations in Europe, the United States and elsewhere for some or all potential investors may have a negative impact on our ability to finance new aircraft with asset-backed securities, which in turn could adversely affect our business, growth prospects and cash flows.

New CRA Regulations due to take effect in the EU may increase our cost of regulatory compliance.

On May 31, 2013, the finalized text of Regulation (EU) No. 462/2013 of the European Parliament and of the Council of May 21, 2013 (“CRA3”) amending Regulation (EU) No. 1060/2009 on credit rating agencies (the “CRA Regulation”) was published in the Official Journal of the European Union. The majority of CRA3 became effective on June 20, 2013 (the “CRA3 Effective Date”), although certain provisions will not apply until later. CRA3 makes significant amendments to the CRA Regulation on issues including the reliance of firms on external credit ratings, sovereign debt ratings, competition in the credit rating agency industry, the civil liability of credit rating agencies and the independence of credit rating agencies. CRA3 provides (among other things) issuers, originators and sponsors must disclose on a website to be established by the European Securities and Markets Authority (“ESMA”) specific information on structured finance instruments on an on-going basis. Although the obligation to publish such information is effective from the CRA3 Effective Date, draft technical standards have not yet been published by ESMA and no such website is currently publicly available. ESMA published on February 11, 2014 draft technical standards to the European Commission in relation to the information to be published in order to comply with this requirement. It is not possible for us or any other party

 

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to comply with this disclosure requirement until such time as the technical standards are finalized and the website made available. However, once the disclosure requirements are known, compliance will lead to additional costs, which would impact our business, growth prospects and cash flows.

Creditors of any special purpose companies used for our financings will have priority over our shareholders in the event of a distribution of such subsidiaries’ assets.

Currently, all of the aircraft we acquire are held in separate special purpose companies that are either subsidiaries of the Company or “orphan” companies whose shares are held in trust. Liens on those assets are held by a collateral agent for the benefit of the lenders under the respective facility. In addition, funds generated from the lease of aircraft generally are applied first to amounts due to lenders, with certain exceptions. Creditors of such entities will have priority over us and our shareholders in any distribution of any such entity’s assets in a liquidation, reorganization or otherwise.

We may lose our foreign private issuer status which would then require us to comply with domestic reporting regime under the Securities Exchange Act of 1934, as amended, and cause us to incur significant legal, accounting and other expenses.

We are a foreign private issuer, as such term is defined in Rule 405 under the Securities Act and, therefore, we are not required to comply with all of the periodic disclosure and current reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) applicable to U.S. domestic issuers. In order to maintain our current status as a foreign private issuer, either (a) a majority of our common shares must be either directly or indirectly owned of record by non-residents of the United States or (b) (i) a majority of our executive officers or directors may not be United States citizens or residents, (ii) more than 50 percent of our assets cannot be located in the United States and (iii) our business must be administered principally outside the United States. If we lost this status, we would be required to comply with the Exchange Act reporting and other requirements applicable to U.S. domestic issuers, which are more detailed and extensive than the requirements for foreign private issuers. We may also be required to make changes in our corporate governance practices in accordance with various SEC and            rules. The regulatory and compliance costs to us under U.S. securities laws if we are required to comply with the reporting requirements applicable to a U.S. domestic issuer may be significantly higher than the cost we would incur as a foreign private issuer. As a result, we expect that a loss of foreign private issuer status would increase our legal and financial compliance costs and would make some activities highly time consuming and costly. We also expect that if we were required to comply with the rules and regulations applicable to U.S. domestic issuers, it would make it more difficult and expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified members of our board of directors (“Board”).

As a result of becoming a public company, we will incur increased costs and become subject to additional financial and other reporting and corporate governance requirements that may be difficult for us to satisfy.

We have historically operated our business as a private company. After this offering, we will be required to file certain reports under the Exchange Act with the SEC with respect to our business and financial condition. We will also become subject to other reporting and corporate governance requirements, including the requirements of the             , and certain provisions of the Sarbanes-Oxley Act of 2002 and the regulations promulgated thereunder, which will impose significant compliance obligations upon us. As a public company, we will be required to:

 

    prepare and distribute certain reports and other shareholder communications in compliance with our obligations under the federal securities laws and             rules;

 

    create or expand the roles and duties of our Board and the committees thereof;

 

    institute comprehensive financial reporting and disclosure compliance functions;

 

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    supplement our internal accounting, auditing and tax functions, including hiring additional staff with expertise in public company accounting and financial reporting;

 

    enhance and formalize closing procedures at the end of our accounting periods;

 

    enhance our investor relations function;

 

    establish new internal policies, including those relating to disclosure controls and procedures; and

 

    involve and retain to a greater degree outside counsel and accountants in the activities listed above.

We expect these changes will increase our legal and financial compliance costs and make some activities more time consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These changes will also require a significant commitment of additional resources and our management’s and Board’s attention. We may not be successful in implementing these requirements and this could materially and adversely affect our business and results of operations. In addition, these laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common shares, fines, sanctions and other regulatory action and potentially civil litigation. If we fail to implement the requirements with respect to our internal accounting and audit functions, our ability to report our results of operations on a timely and accurate basis could be impaired.

We are exposed to significant regional political and economic risks due to the location of our lessees in certain geographical regions, which could have a material adverse effect on our financial condition, cash flow and results of operations. 

Through our lessees, we are exposed to local economic and political conditions in multiple regions, including the Middle East, Africa, Asia/Pacific, Europe, Latin America and North America. Such conditions can be adverse to us, and may include additional regulation or, in extreme cases, seizure of our aircraft. The effect of these conditions on payments to us will be more or less pronounced depending on the concentration of lessees in the region with adverse conditions. We have our largest concentration of leases in emerging markets in Asia, followed by Europe and Latin America. Severe recession in any of these regions, or the inability to resolve financial or political emergencies in any particular region where we have many customers, could result in additional failures of airlines and could have a material adverse effect on our financial condition, cash flow and results of operations.

We derived approximately 51.8% and 53.9% of our lease revenues for the year ended December 31, 2013 and the three months ended March 31, 2014, respectively, from airlines in emerging market countries. Emerging market countries have less developed economies and infrastructure and are often more vulnerable to economic and geopolitical challenges. The emerging markets in which our aircraft’s lessees are based include Brazil, Chile, China, Colombia, Ethiopia, Hungary, India, Indonesia, Malaysia, Mexico, the Philippines, Russia, Thailand, Turkey and the United Arab Emirates. These countries may experience significant fluctuations in GDP, interest rates and currency exchange rates, as well as civil disturbances, government instability, nationalization and expropriation of private assets and the imposition of unexpected taxes or other charges by government authorities. Legal systems in emerging market countries may be less developed. For example, certain countries may not have fully implemented the Cape Town Convention on International Interests in Mobile Equipment, a treaty that, among other things, established international standards for the registration, protection and enforcement of lessors’ and financiers’ rights in aircraft, which could make it more difficult for us to enforce our legal rights in such countries. The occurrence of any of these events in markets served by our lessees, particularly if combined with high fuel prices, could adversely affect the value of our aircraft subject to lease in such regions or the ability of our lessees that operate in these markets to meet their lease obligations.

 

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The effects of various environmental laws and regulations may negatively affect the airline industry, which may in turn have a material adverse effect on our financial condition, cash flow and results of operations.

The airline industry is subject to various environmental laws and regulations, which are subject to change and have become more stringent. In particular, governmental regulations regarding aircraft and engine noise and emissions levels apply based on where the relevant aircraft is registered and operated. For example numerous international jurisdictions have adopted noise regulations applicable to aircraft. The United States and the International Civil Aviation Organization (“ICAO”) have adopted standards for noise levels applicable to engines manufactured or certified on or after 2006. The EU, which imposes similar standards, has established a framework imposing operating limits on aircraft that do not comply with those standards.

In addition, the United States and other jurisdictions have stringent limits on nitrogen oxide, carbon monoxide and carbon dioxide emissions from engines. Further, European countries generally have more strict environmental regulations and, in particular, the European Parliament has included aviation in the European Emissions Trading Scheme (“ETS”), which regulates greenhouse gas emissions. While carbon emissions from intra-EU flights are subject to EU ETS and international flights outside of the EU were meant to be subject to EU ETS, the EU recently suspended the enforcement of the ETS requirements for such extra-EU flights, instead deferring to a proposal issued by the ICAO in October 2013 to develop a global cap and trade program to reduce international aviation emissions, which would be in force by 2020. The potential impact of ETS and the forthcoming ICAO requirements on costs will ultimately depend on a number of factors, including baseline emissions, the price of emission credits and the number of future flights subject to ETS and the forthcoming ICAO requirements. These costs have not been completely defined and may fluctuate. Any and all of the foregoing regulations could limit the economic life of our aircraft and engines, reduce their value, limit our ability to lease or sell the non-compliant aircraft and engines or, if engine modifications are permitted, require us to make significant additional investments in our aircraft and engines to make them compliant.

In addition, climate change legislation has in the past been introduced in the United States, including a proposal to require transportation fuel producers and importers to purchase greenhouse gas emission credits. It is currently unknown, however, if any such or future legislation will pass the United States Congress or, if passed and enacted into law, how it would specifically apply to the airline industry. Such legislation or regulation may have a materially adverse impact on the airline industry, particularly if regulators were to conclude that greenhouse gas emissions from commercial aircraft cause significant harm to the upper atmosphere or have a greater impact on climate change than other industries. Potential actions may include the imposition of requirements to purchase emission offsets or credits, which could require participation in emission trading (such as is required in the EU), substantial taxes on emissions and growth restrictions on airline operations, among other potential regulatory actions.

Compliance with current or future legislation, regulations, taxes or duties imposed to deal with environmental concerns could cause the lessees to incur higher costs and lead to higher ticket prices, which could mean lower demand for travel, thereby generating lower net revenues and resulting in an adverse impact on the financial condition of our lessees. Consequently, such compliance may affect our lessees’ ability to make rental and other lease payments and reduce the value received for the aircraft upon any disposition, which would have a material adverse effect on our financial condition, cash flow and results of operations.

We are subject to various laws and regulations that could have a material adverse effect on our financial condition, cash flow and results of operations.

In addition to the general aviation authority regulations and requirements regarding maintenance of the aircraft, aircraft may be subject to further maintenance or modification requirements imposed by airworthiness directives issued by aviation authorities. Airworthiness directives and similar requirements typically set forth particular special maintenance actions or modifications to certain aircraft types or models that the owners or operators of aircraft must implement.

 

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Each lessee generally is responsible for complying with all or a substantial portion of airworthiness directives applicable to its aircraft and is required to maintain the aircraft’s airworthiness. However, if a lessee fails to satisfy its obligations, or if we have obligations as to contributions towards the cost of compliance with airworthiness directives (or similar requirements) under a lease or if the aircraft is not subject to a lease, we may be forced to bear (or, to the extent required under the relevant lease, to share) the cost of any airworthiness directives compliance, which could have a material adverse effect on our financial condition, cash flow and results of operations.

A new standard for lease accounting is expected to be announced in the future, but we are unable to predict the impact of such a standard at this time.

In August 2010, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) issued an Exposure Draft on Lease Accounting (“Exposure Draft”) that proposes substantial changes to existing lease accounting that will affect all lease arrangements. Subsequent meetings of the joint committee of the FASB and the IASB have made further changes to the proposed lease accounting standard.

The FASB and the IASB issued a revised Exposure Draft in May 2013. The proposal did not include a proposed effective date; rather it stated that the feedback of interested parties would be considered and that the FASB and IASB are aware that the proposals affect almost every reporting entity and that the proposed changes to accounting for leases are significant.

In March 2014, the FASB and the IASB continued redeliberations of the proposals included in the May 2013 Exposure Draft, specifically discussing the following topics: (1) lessee accounting model, (2) lessor accounting model, (3) lessor Type A accounting, (4) lessee small-ticket leases, (5) lease term, and (6) lessee accounting: short-term leases. While the FASB and the IASB made tentative decisions on these items, they did not reach the same conclusions with respect to every item.

Under the current proposed accounting model, lessees will be required to record an asset representing the right to use the leased item for the lease term (the “Right-of-Use Asset”) and a liability to make lease payments. The Right-of-Use Asset and liability incorporate the rights arising under the lease and are based on the lessee’s assessment of expected payments to be made over the lease term. For Right-of-Use assets, the FASB supported a dual-model approach that would allow lessees to use a straight-line expense pattern for certain leases, whereas the IASB supported a single-model approach under which all leases would be treated as financing arrangements.

The FASB and the IASB tentatively agreed to make only minor modifications to the current lessor model. That is, lessors would consider criteria similar to the existing lease classification criteria under IAS 17 to determine the accounting from the lessor standpoint. However, the FASB and the IASB’s approaches differed as follows:

 

    FASB approach—Type A leases that include a manufacturer’s profit would be precluded from immediate profit recognition unless control of the leased asset (as evaluated under the proposed revenue recognition standard) were transferred to the lessee.

 

    IASB approach—Profit recognition should be accounted for in accordance with existing manufacturer or dealer-lessor guidance.

The FASB and the IASB continue to deliberate on the proposed accounting standard. Currently, management is unable to assess what impact the adoption of the new finalized lease standard would have on our financial statements.

 

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Risks Relating to Our Common Shares and this Offering

The market price and trading volume of our common shares may be volatile, which could result in rapid and substantial losses for our shareholders.

The market price of our common shares may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our common shares may fluctuate and cause significant price variations to occur. If the market price of our common shares declines significantly, you may be unable to resell your common shares at or above your purchase price, if at all. Some of the factors that could negatively affect our common share price or result in fluctuations in the price or trading volume of our common shares include:

 

    variations in our quarterly operating results which can fluctuate as a result of, among other factors, the timing of aircraft sales which can significantly affect our revenues, adjustments to our accrued maintenance liability and changes in interest rates that can affect the value of derivatives which we mark to market;

 

    failure to meet earnings estimates;

 

    publication of research reports about us, other aircraft lessors or the aviation industry or the failure of securities analysts to cover our common shares after this offering;

 

    additions or departures of key management personnel;

 

    adverse market reaction to any indebtedness we may incur or equity securities we may issue in the future;

 

    changes in our dividend payment policy or failure to execute our existing policy;

 

    actions by shareholders;

 

    changes in market valuations of similar companies;

 

    announcements by us or our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments;

 

    speculation about our business in the press or investment community;

 

    changes or proposed changes in laws or regulations affecting the aviation industry or enforcement of these laws and regulations or announcements relating to these matters; and

 

    general market, political and economic conditions and local conditions in the markets which our lessees are located.

In addition, the stock market has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to changes in the operating performance of listed companies. Broad market and industry factors may significantly affect the market price of companies’ common shares, including ours, regardless of actual operating performance. These fluctuations may be even more pronounced in the trading market for our common shares shortly following this offering. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This kind of litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

Our common shares have no prior trading history in the United States or elsewhere, and an active market may not develop.

Prior to this offering there has been no public market for our common shares. The initial public offering price for our common shares will be determined through negotiations with the underwriters and may bear no relationship to the price at which the common shares will trade upon completion of this offering. Although we

 

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intend to apply to have our common shares listed on                     , an active trading market for our common shares may never develop or may not be sustained following this offering. If an active market for our common shares does not develop, it may be difficult to sell your shares at all.

Future sales of common shares by our existing shareholders could cause our common share price to decline which could adversely affect our ability to fund our growth and operations.

If our existing shareholders sell, or indicate an intention to sell, substantial amounts of our common shares in the public market after the lock-up and other legal restrictions on resale discussed in this prospectus no longer apply, the trading price of our common shares could decline. Upon completion of this offering we will have a total of              million common shares issued and outstanding. All of the common shares sold in this offering will be freely tradable, without restriction, in the public market, unless held by our affiliates.

The underwriters of this offering may, in their sole discretion, permit our officers, directors, and our Sponsors who are subject to the contractual lock-up to sell common shares prior to the expiration of the lock-up agreements.

We expect that the lock-up agreements pertaining to this offering will expire 180 days from the date of this prospectus, although those lock-up agreements may be extended for up to an additional 18 days under certain circumstances. After the lock-up agreements expire, up to an additional              million common shares will be eligible for sale in the public market. These common shares are held by affiliates and will be subject to volume limitations under Rule 144 under the Securities Act.

Additionally, we intend to register common shares for issuance under our Management Equity Plan. Such shares may be freely sold in the public market upon issuance, unless restricted pursuant to their terms. Further, we expect to enter into a relationship agreement with our Sponsors that will, among other things, require us to file a registration statement to register the resale of the common shares held by our Sponsors and to cooperate in certain public offerings of such shares. Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction in the public market immediately upon the effectiveness of the registration statement, except for shares purchased by affiliates. Sales of a substantial number of our common shares, or the perception in the market that the holders of a large number of shares intend to sell, could reduce the market price of our common shares.

Our Sponsors will continue to exert significant influence over us after the consummation of this offering and their interests may conflict with those of the other shareholders or with each other.

Following the completion of this offering, our Sponsors will beneficially own approximately     % of our issued and outstanding common shares in the aggregate, or     % if the underwriters exercise their option to purchase additional shares in full. Prior to the completion of this offering, we expect to enter into a relationship agreement with our Sponsors with respect to, among other things, voting on certain matters requiring shareholder approval, including the election of directors. Collectively, the Sponsors will have voting control over a majority of our Board. As a result, we are and will be immediately after this offering controlled by our Sponsors, and our Sponsors will be able to exercise significant influence over our management and affairs and matters requiring shareholder approval, including the election of directors and the approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. This may adversely affect the trading price for our common shares because investors may perceive disadvantages in owning shares in companies with controlling shareholders. Consequently, this concentration of ownership may have the effect of delaying or preventing a change of control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if that change of control would benefit our other shareholders. The interests of our Sponsors may conflict with your interests as a holder of our common shares.

 

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We are exempt from some of the corporate governance requirements of             .

We are a foreign private issuer, as defined by the SEC for purposes of the Exchange Act. As a result, for so long as we remain a foreign private issuer (or a “controlled company” within the meaning of              rules), we will be exempt from, and you will not be provided with the benefits of, some of the corporate governance requirements of             . We are permitted to follow the practice of companies incorporated in the Cayman Islands in lieu of the provisions of              corporate governance rules, except that:

 

    we are required to have an audit committee that satisfies the requirements of Rule 10A-3 under the Exchange Act;

 

    we are required to disclose any significant ways in which our corporate governance practices differ from those followed by U.S. domestic companies under              listing standards;

 

    our chief executive officer is obligated to promptly notify              in writing after any of our executive officers becomes aware of any non-compliance with any applicable provisions of              corporate governance rules; and

 

    we must submit an executed written affirmation regarding our compliance with              rules annually to             . In addition, we must submit an interim written affirmation within five business days of certain events as and when required by the interim written affirmation form specified by             .

The standards applicable to us are considerably different than the standards applied to U.S. domestic issuers with shares listed on             . Under the laws of the Cayman Islands there are no director independence requirements. We intend to rely on the following exemptions as a foreign private issuer listed on                        :

 

    a majority of our Board will not be independent;

 

    we do not expect that the remuneration committee or the nomination and corporate governance committee of our Board will be comprised solely of independent directors;

 

    we will not hold at least one executive session of solely independent members of our Board each year; and

 

    we will not adopt corporate governance guidelines.

As a result of our foreign private issuer status, you will not be provided with the benefits of certain corporate governance requirements of             , which may adversely affect the market price of our common shares.

Our Sponsors have the right to, and have no duty to abstain from exercising such right to, engage or invest in the same or similar businesses as us.

Our Sponsors have other business activities in addition to their ownership of us. Our Sponsors have the right to, and have no duty to abstain from exercising such right to, engage or invest in the same or similar businesses as us, do business with any of our customers, partners or vendors, or employ or otherwise engage any of our officers, directors or employees. If our Sponsors or any of their officers, directors or employees acquire knowledge of a potential transaction that could be a corporate opportunity, they have no duty to offer such corporate opportunity to us, our shareholders or our affiliates.

In the event that any of our directors and officers who is also a director, officer or employee of one of our Sponsors acquires knowledge of a corporate opportunity or is offered a corporate opportunity, provided that this knowledge was not acquired solely in such person’s capacity as our director or officer and such person acted in good faith, then such person is deemed to have fully satisfied such person’s fiduciary duty to us and is not liable to us if such Sponsor pursues or acquires such corporate opportunity or if such person did not present the corporate opportunity to us.

 

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Holders of our common shares will not be able to trade those shares on any exchange outside the United States.

We do not intend to apply to have our common shares listed on any exchange other than in the United States on                             . As a result, a holder of our common shares outside the United States may not be able to sell those common shares as readily as such holder would be able to if our common shares were listed on a stock exchange in that holder’s home jurisdiction.

We do not anticipate paying cash dividends on our common shares, which could reduce the return on your investment.

We do not expect to pay cash dividends on our common shares in the foreseeable future. We currently intend to retain our future earnings, if any, to fund the development and growth of our business. Accordingly, any return on your investment must come from appreciation of our common shares.

We are a holding company and rely on dividends, distributions and other payments, advances and transfers of funds from our subsidiaries to meet our obligations and to pay dividends.

We have no direct operations and derive all of our cash flow from our subsidiaries. Because we conduct our operations through our subsidiaries, we depend on those entities for dividends and other payments or distributions to meet our operating needs and to pay dividends. Legal and contractual restrictions in any existing and future outstanding indebtedness we or our subsidiaries incur, may limit our ability to obtain cash from our subsidiaries. The deterioration of the earnings from, or other available assets of, our subsidiaries for any reason could limit or impair their ability to pay dividends or make other distributions to us.

If securities analysts do not publish research or reports about our business or if they publish negative evaluations of our common shares, the price of our shares could decline.

We believe that the trading price for our common shares will be affected by research or reports that industry or financial analysts publish about us or our business. If one or more of the analysts who may elect to cover us downgrade their evaluations of our common shares, the price of our common shares could decline. If one or more of these analysts cease coverage of the Company, we could lose visibility in the market for our common shares, which in turn could cause our share price to decline.

Risks Related to Investment in a Cayman Islands Company

Certain provisions of Cayman Islands law and our organizational documents could delay or prevent an otherwise beneficial takeover or takeover attempt of us.

Certain provisions of Cayman Islands law and our organizational documents could make it more difficult or more expensive for a third party to acquire us.

Our amended and restated memorandum and articles of association (our “memorandum and articles of association”) contain provisions that could delay, defer or discourage a change in control of us or management. These provisions could also discourage a proxy contest and make it more difficult for shareholders to elect directors and take other corporate actions. Such provisions and certain provisions of Cayman Islands law, as discussed below, could increase the cost of acquiring us or otherwise discourage a third party from acquiring us or removing incumbent management.

Our memorandum and articles of association permit our Board to issue preference shares from time to time, with such rights and preferences as they consider appropriate. Our Board could authorize the issuance of preference shares with terms and conditions and under circumstances that could have an effect of discouraging a takeover or other transaction.

 

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In addition, our memorandum and articles of association contain certain other provisions which could have an effect of discouraging a takeover or other transaction or preventing or making it more difficult for shareholders to change the direction or management of the Company, including, the inability of shareholders to act by written consent, a limitation on the ability of shareholders to call special meetings of shareholders and advance notice provisions. As a result, our shareholders may have less input into the management of the Company than they might otherwise have if these provisions were not included in our memorandum and articles of association.

The Cayman Islands have provisions under the Companies Law (2013 Revision) (the “Companies Law”) to facilitate mergers and consolidations between Cayman Islands companies and between Cayman Islands companies and non-Cayman Islands companies. These provisions, contained within Part XVI of the Companies Law, are broadly similar to the merger provisions as provided for under Delaware Law.

There are however a number of important differences that could impede a takeover. First, the threshold for approval of the merger plan by shareholders is higher. The threshold is a special resolution of the shareholders (being 66 23% of those present in person or by proxy and voting) together with such other authorization, if any, as may be specified in the memorandum and articles of association.

Additionally, the consent of each holder of a fixed or floating security interest (in essence a documented security interest as opposed to one arising by operation of law) is required to be obtained unless the Grand Court of the Cayman Islands waives such requirement.

The merger provisions contained within Part XVI of the Companies Law do contain shareholder appraisal rights similar to those provided for under Delaware law. Such rights are limited to a merger under Part XVI and do not apply to schemes of arrangement as discussed below.

The Companies Law also contains separate statutory provisions that provide for the merger, reconstruction and amalgamation of companies. These are commonly referred to in the Cayman Islands as “schemes of arrangement.”

The procedural and legal requirements necessary to consummate these transactions are more rigorous and take longer to complete than the procedures typically required to consummate a merger in the United States. Under Cayman Islands law and practice, a scheme of arrangement in relation to a solvent Cayman Islands company must be approved at a shareholders’ meeting by a majority of each class of the company’s shareholders who are present and voting (either in person or by proxy) at such meeting. The shares voted in favor of the scheme of arrangement must also represent at least 75% of the value of each relevant class of the company’s shareholders present and voting at the meeting. The convening of these meetings and the terms of the amalgamation must also be sanctioned by the Grand Court of the Cayman Islands. Although there is no requirement to seek the consent of the creditors of the parties involved in the scheme of arrangement, the Grand Court typically seeks to ensure that the creditors have consented to the transfer of their liabilities to the surviving entity or that the scheme of arrangement does not otherwise materially adversely affect creditors’ interests. Furthermore, the court will only approve a scheme of arrangement if it is satisfied that:

 

    the statutory provisions as to majority vote have been complied with;

 

    the shareholders who voted at the meeting in question fairly represent the relevant class of shareholders to which they belong;

 

    the scheme of arrangement is such as a businessman would reasonably approve; and

 

    the scheme of arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law.

 

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If the scheme of arrangement is approved, the dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of U.S. corporations, providing rights to receive payment in cash for the judicially determined value of the shares.

In addition, if an offer by a third party to purchase shares in us has been approved by the holders of at least 90% of our issued and outstanding shares (not including such a third party) pursuant to an offer within a four-month period of making such an offer, the purchaser may, during the two months following expiration of the four-month period, require the holders of the remaining shares to transfer their shares on the same terms on which the purchaser acquired the first 90% of our issued and outstanding shares. An objection can be made to the Grand Court of the Cayman Islands, but this is unlikely to succeed unless there is evidence of fraud, bad faith, collusion or inequitable treatment of the shareholders.

Holders of our common shares may face difficulties in protecting their interests because we are incorporated under Cayman Islands law.

Our corporate affairs are governed by our memorandum and articles of association, by the Companies Law, and the common law of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as under statutes or judicial precedent in existence in jurisdictions in the United States. Therefore, shareholders may have more difficulty in protecting their interests in the face of actions by our management or Board than would shareholders of a corporation incorporated in a jurisdiction in the United States, due to the comparatively less developed nature of Cayman Islands law in this area.

Shareholders of Cayman Islands exempted companies such as Avolon have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of our shareholders. Our directors have discretion under our memorandum and articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

A shareholder can bring a suit personally where its individual rights have been, or are about to be, infringed. Where an action is brought to redress any loss or damage suffered by us, we would be the proper plaintiff, and a shareholder could not ordinarily maintain an action on our behalf, except where it was permitted by the courts of the Cayman Islands to proceed with a derivative action. Our Cayman Islands counsel, Maples and Calder, is not aware of any reported decisions in relation to a derivative action brought in a Cayman Islands court. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands, a shareholder may be permitted to bring a claim derivatively on the Company’s behalf, where:

 

    a company is acting or proposing to act illegally or outside the scope of its corporate authority;

 

    the act complained of, although not acting outside the scope of its corporate authority, could be effected only if authorized by more than a simple majority vote; or

 

    those who control the company are perpetrating a “fraud on the minority.”

There is uncertainty as to shareholders’ ability to enforce certain foreign civil liabilities in the Cayman Islands or Ireland.

Avolon is an exempted company incorporated with limited liability under the laws of the Cayman Islands and is tax resident in Ireland where our corporate headquarters is located. Substantially all of our assets are located outside of the United States. As a result, it may be difficult for our shareholders to enforce judgments obtained in U.S. courts predicated upon the civil liability provisions of the federal securities laws of the United States or any state of the United States against us.

 

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We have been advised by our Cayman Islands counsel, Maples and Calder, that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, the courts of the Cayman Islands will—based on the principle that a judgment by a competent foreign court imposes upon the judgment debtor an obligation to pay the sum for which judgment has been given—recognize and enforce a foreign judgment of a court of competent jurisdiction if such judgment is final, for a liquidated sum, not in respect of taxes or a fine or penalty, is not inconsistent with a Cayman Islands judgment in respect of the same matters, and was not obtained in a manner, and is not of a kind, the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands. There is doubt, however, as to whether the Grand Court of the Cayman Islands will (1) recognize or enforce judgments of U.S. courts predicated upon the civil liability provisions of the federal securities laws of the United States or any state of the United States, or (2) in original actions brought in the Cayman Islands, impose liabilities predicated upon the civil liability provisions of the federal securities laws of the United States or any state of the United States, on the grounds that such provisions are penal in nature.

The Grand Court of the Cayman Islands may stay proceedings if concurrent proceedings are being brought.

In addition, it may not be possible to enforce court judgments obtained in the United States against us in Ireland based on the civil liability provisions of the U.S. federal or state securities laws. We have been advised by Maples and Calder, Irish counsel to the Company, that the United States currently does not have a treaty with Ireland providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters.

The following requirements must be met before a judgment of a U.S. court will be deemed to be enforceable in Ireland:

 

    the judgment must be for a definite sum;

 

    the judgment must be final and conclusive; and

 

    the judgment must be provided by a court of competent jurisdiction.

An Irish court will also exercise its right to refuse enforcement if the U.S. judgment was obtained by fraud, if the judgment violates Irish public policy, if the judgment is in breach of natural justice or if it is irreconcilable with an earlier foreign judgment. There is some uncertainty as to whether the courts of Ireland would recognize or enforce judgments of U.S. courts obtained against us or our directors or officers based on the civil liabilities provisions of the U.S. federal or state securities laws or hear actions against us or those persons based on those laws. Therefore, a final judgment for the payment of money rendered by any U.S. federal or state court based on civil liability, whether or not based solely on U.S. federal or state securities laws, would not automatically be enforceable in Ireland.

Risks Relating to Taxation

Changes in our effective tax rate may reduce our net income in future periods.

Avolon Holdings will take steps to ensure that it remains tax resident in Ireland. We believe that, as an Irish tax resident entity, our status should improve our ability to maintain a competitive worldwide effective corporate tax rate; however, we cannot give any assurance as to what our effective tax rate will be because of, among other things, uncertainty regarding the tax policies of the jurisdictions where we operate. In general, under current Irish legislation, a company is regarded as resident for tax purposes in Ireland if it is centrally managed and controlled in Ireland. Trading income (active business income) of an Irish resident company is generally taxable at the Irish corporation tax rate of 12.5%. Non-trading income of an Irish resident company is taxable at a rate of 25% and capital gains at a rate of 33%. It is possible that in the future, whether as a result of a change in law or the practice of any relevant tax authority or as a result of any change in the conduct of our affairs, we could become, or be regarded as having become, tax resident in a jurisdiction other than Ireland. Should we cease to be an Irish tax resident, we may be subject to a charge to Irish capital gains tax as a result of a deemed disposal of our assets.

 

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Our actual effective tax rate may vary from our expectation and that variance may be material. Additionally, the tax laws of Ireland, the United States and other jurisdictions could change in the future, and such changes could cause a material change in our effective tax rate.

A number of factors may increase our future effective tax rates, including:

 

    the jurisdictions in which profits are determined to be earned and taxed;

 

    the resolution of issues arising from tax audits with various tax authorities;

 

    loss of tax treaty benefits in one or more jurisdictions;

 

    changes in the valuation of our deferred tax assets and liabilities;

 

    increases in expense not deductible for tax purposes, including transaction costs and impairments of goodwill in connection with acquisitions;

 

    changes in available tax credits;

 

    changes in share-based compensation;

 

    changes in tax laws or the interpretation of such tax laws, and changes in generally accepted accounting principles; and

 

    challenges to the transfer pricing policies related to our structure.

Our tax position could be adversely impacted by changes in tax rates generally, tax laws, tax treaties or tax regulations or changes in the interpretation of such laws, treaties or regulations by the tax authorities in Ireland, the United States and other jurisdictions.

Such changes may be more likely or become more likely as a result of recent economic trends in the jurisdictions in which we operate, particularly if such trends continue. For example, Ireland has suffered from the consequences of worldwide adverse economic conditions and the credit ratings on its debt have been downgraded. Such changes could cause a material and adverse change in our worldwide effective tax rate and we may have to take action, at potentially significant expense, to seek to mitigate the effect of such changes. In addition, any amendments to the current double taxation treaties between Ireland and other jurisdictions, including the United States, could subject us to increased taxation.

Failure to manage the risks associated with such changes, or misinterpretation of the laws relating to taxation, could result in increased charges, financial loss, including penalties, and reputational damage and materially and adversely affect our results, financial condition and prospects.

We operate in multiple jurisdictions and may become subject to a wide range of income and other taxes that could have a material adverse effect on our financial condition, cash flow and results of operations.

We operate in multiple jurisdictions and may become subject to a wide range of income and other taxes. If we are unable to execute our operations on a tax-efficient basis in these jurisdictions, our operations may be subject to significant income and other taxes. Moreover, as our aircraft are operated by our lessees in multiple jurisdictions, we may have nexus or taxable presence as a result of our aircraft operating in various jurisdictions. Such operations may result in us being subject to various foreign, state and local taxes in such jurisdictions. Our leases typically require our lessees to indemnify us in respect of any such taxes but if any lease does not require such indemnification or if any lessees fail to make such indemnification, our financial condition, cash flow and results of operations could be materially adversely affected if we become subject to significant income and other taxes that we are not currently subject to.

 

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We may be or may become a passive foreign investment company, or PFIC, for U.S. federal income tax purposes.

Whether the Company is or may be a PFIC is a complex determination based on all of the relevant facts and circumstances, including the classification of various assets and income under the PFIC rules. While the Company does not believe it is a PFIC, there can be no assurances that this is the case. Further, this determination must be made annually and our circumstances may change in any given year. We do not intend to make decisions regarding our business operations with the specific purpose of reducing the likelihood of our becoming a PFIC. Accordingly, our business plan may result in our engaging in activities that could cause us to become a PFIC. If we are or become a PFIC, U.S. Holders may be subject to increased U.S. federal income taxes on a sale or other disposition of our common shares and on the receipt of certain distributions and will be subject to increased U.S. federal income tax reporting requirements. See “Taxation—Material U.S. Federal Income Tax Considerations” for a more detailed discussion of the consequences if we are treated as a PFIC.

We may fail to qualify for tax treaty benefits, U.S. statutory tax exemptions and withholding tax exemptions, which would reduce our net income and cash flow by the amount of the applicable tax.

Some of our aircraft are leased for use within the United States and special U.S. tax rules apply to U.S. source transportation income, which would include lease revenue from aircraft used for flights to or from the United States. U.S. source transportation income that is not connected with a U.S. trade or business may be subject to 30% withholding tax or, alternatively, could be subject to a 4% gross transportation tax. U.S. source transportation income connected to a U.S. trade or business may be taxable in the United States on a net income basis. In order for us to be exempt from U.S. federal income taxation on each category of U.S. source transportation income, we must qualify for benefits of the tax treaty between the United States and Ireland (the “Tax Treaty”) and must not maintain a “permanent establishment” within the United States. Qualification for benefits under the Tax Treaty depends on many factors, including that our principal class of shares be substantially and regularly traded on one or more recognized stock exchanges. We may not satisfy all the requirements of the Tax Treaty and thereby may not qualify each year for the benefits of the Tax Treaty. Similarly, whether or not we maintain a permanent establishment within the United States depends on a number of factors, and there can be no assurance that we will not be treated as having a permanent establishment. Failure to so qualify for benefits of the Tax Treaty or the maintenance of a permanent establishment within the United States could result in the income attributable to aircraft used for flights to, from or within the United States being subject to U.S. federal income taxation. The imposition of such taxes would adversely affect our business and would result in decreased cash available for distribution to our shareholders.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This document includes forward-looking statements, beliefs or opinions, including statements with respect to our business, financial condition, results of operations and plans. These forward-looking statements involve known and unknown risks and uncertainties, many of which are beyond our control and all of which are based on our management’s current beliefs and expectations about future events. Forward-looking statements are sometimes identified by the use of forward-looking terminology such as “believe,” “expects,” “may,” “will,” “could,” “should,” “shall,” “risk,” “intends,” “estimates,” “aims,” “plans,” “predicts,” “continues,” “assumes,” “positioned” or “anticipates” or the negative thereof, other variations thereon or comparable terminology or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. Forward-looking statements may and often do differ materially from actual results. No assurance can be given that such future results will be achieved. Forward-looking statements appear in a number of places throughout this document and include statements regarding the intentions, beliefs or current expectations of our management or those of ICF SH&E with respect to future events and are subject to risks relating to future events and other risks, uncertainties and assumptions relating to our business concerning, among other things, the results of operations, financial condition, liquidity, prospects, growth, strategies, and our dividend policy and the industry in which we operate, most of which are difficult to predict and many of which are beyond our control. These risks, uncertainties and assumptions include, but are not limited to, the following:

 

    general economic and financial conditions;

 

    the financial condition of our lessees;

 

    our ability to obtain additional capital to finance our growth and operations on attractive terms;

 

    decline in the value of our aircraft and market rates for leases;

 

    the loss of key personnel;

 

    lessee defaults and attempts to repossess aircraft;

 

    our ability to regularly sell aircraft;

 

    our ability to successfully re-lease our existing aircraft and lease new aircraft;

 

    our ability to negotiate and enter into profitable leases;

 

    periods of aircraft oversupply during which lease rates and aircraft values decline;

 

    changes in the appraised value of our aircraft;

 

    changes in interest rates;

 

    competition from other aircraft lessors; and

 

    the limited number of aircraft and engine manufacturers.

These and other important factors, including those discussed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus, may cause our actual events or results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements contained in this prospectus. Such forward-looking statements contained in this prospectus speak only as of the date of this prospectus. We expressly disclaim any obligation or undertaking to update these forward-looking statements contained in the prospectus to reflect any change in our expectations or any change in events, conditions, or circumstances on which such statements are based unless required to do so by applicable law.

 

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USE OF PROCEEDS

All of the common shares offered by this prospectus will be sold by the selling shareholders. We will not receive any proceeds from the sale of such common shares by the selling shareholders. We have agreed to pay the expenses of this offering, other than underwriting discounts and commissions.

 

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DIVIDEND POLICY

We currently intend to retain future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends in the foreseeable future. Any future determination to pay cash dividends will depend on the discretion of our shareholders at their general meeting, or, with respect to interim dividends, of our Board, and will also depend on, among other things, our financial condition, results of operations, capital requirements, general business conditions, and any contractual restrictions and other factors that our shareholders or Board may deem relevant.

Under Cayman Islands law, a Cayman Islands company may pay a dividend on its shares out of either profit or share premium amount, provided that in no circumstances may a dividend be paid if this would result in the Company being unable to pay its debts due in the ordinary course of business.

We are a holding company and have no material assets other than our direct and indirect ownership of our operating subsidiaries. If we were to distribute a dividend at some point in the future, we would cause the operating subsidiaries to make distributions to us in an amount sufficient to cover any such dividends. Certain of our subsidiaries’ financing agreements limit their ability to make distributions to us.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of March 31, 2014 (1) on an actual basis (presenting the amounts as reported in the historical financial results of Avolon S.à r.l. (our predecessor for accounting purposes)) and (2) on a pro forma basis to give effect to the Share Exchange as if it had occurred on March 31, 2014.

This table should be read in conjunction with “Use of Proceeds,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Avolon S.à r.l.’s consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

     As of March 31, 2014  
     Actual      Pro forma (1)  
     (unaudited)  
(in thousands)       

Cash and cash equivalents

   $ 176,297       $                

Restricted cash(2)

     289,734      
  

 

 

    

 

 

 

Debt:

     

Non-recourse term facilities

   $ 1,160,005      

Full recourse term facilities

     957,911      

Emerald securitization

     618,104      

ECA and EXIM backed facilities

     582,761      

Warehouse facility

     150,026      

Lines of credit

     78,190      

Loan interest accrued but not paid

     11,850      

Capital lease obligation

     91,346      
  

 

 

    

 

 

 

Total debt(3)

     3,650,193      
  

 

 

    

 

 

 

Temporary equity and shareholders’ equity:

     

Class A common stock

     3,173      

Class B common stock

     1,315,754      

Class C common stock

     727      

Common shares

     —        

Legal reserve

     10,519      

Total temporary equity and shareholders’ equity

     1,330,173      
  

 

 

    

 

 

 

Total capitalization

   $ 4,980,366      
  

 

 

    

 

 

 

 

(1) Does not give effect to an estimated $         million of expenses payable by us in connection with this offering.
(2) Restricted cash comprises cash held by us but which is ring-fenced or used as security for specific financing arrangements, and to which we do not have unfettered access.
(3) As of March 31, 2014, we also had $891.9 million of undrawn debt facilities, consisting of $741.9 million of committed secured debt and $150.0 million of unsecured revolving credit facilities.

 

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OUR CORPORATE REORGANIZATION

Avolon Holdings was incorporated in the Cayman Islands as an exempted company with limited liability on June 5, 2014 solely for purposes of effectuating our initial public offering and is tax resident in Ireland. Avolon Holdings has a nominal issued share capital, all of which is beneficially owned by the management shareholders of Avolon S.à r.l. and the Trustee, and has engaged in operations and activities incidental to its formation, the Share Exchange and the initial public offering of our common shares. Avolon Holdings will have only nominal assets and no liabilities prior to the Share Exchange.

Avolon S.à r.l. was incorporated in May 2010 as a private limited liability company under the laws of Luxembourg. Pursuant to Avolon S.à r.l.’s articles of association and the investment and shareholders deed adopted at the time of its formation (together, the “Formation Documents”), the Company will effectuate an “exit” transaction constituting an initial public offering (an “IPO exit”) upon receipt of consent of a majority in interest held by Cinven, CVC and Oak Hill. This offering will constitute an IPO exit under the Formation Documents.

Pursuant to the Formation Documents, the existing shareholders agreed to take certain actions in connection with an IPO exit, including exchanging their existing shares for shares in an IPO entity. Accordingly, Avolon Holdings intends to enter into a share exchange agreement with the shareholders of Avolon S.à r.l. pursuant to which each shareholder will transfer all of its outstanding shares of Avolon S.à r.l. to Avolon Holdings in exchange for the issuance by Avolon Holdings of an aggregate of              of its common shares, assuming an initial public offering price of $        , the midpoint of the price range on the cover of this prospectus, prior to consummation of this offering. Upon the transfer of Avolon S.à r.l.’s shares to Avolon Holdings, and corresponding issue of common shares to Avolon S.à r.l. by Avolon Holdings, Avolon S.à r.l. will become a direct, wholly owned subsidiary of Avolon Holdings.

The number of common shares of Avolon Holdings to be issued to the holders of the various share classes of Avolon S.à r.l. in the Share Exchange will vary depending upon the initial public offering price. Accordingly, the relative ownership among our existing shareholders will differ depending upon such price. Assuming an initial public offering price of $        , the midpoint of the price range on the cover of this prospectus, immediately after the Share Exchange and prior to the sale of common shares in this offering, our Sponsors would beneficially own     % of our outstanding common shares, officers and directors would beneficially own     %, and the remainder would be beneficially owned by other investors, including the Trustee. At the low-end of the price range on the cover of this prospectus, those percentages would be     %,     % and     %, respectively, for our Sponsors, officers and directors, and other investors, and at the high-end of the price range those percentages would be     %,     % and     %, respectively, for our Sponsors, officers and directors, and other investors. The total number of common shares in issue and outstanding would remain unchanged.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth our selected consolidated financial data for the periods and as of the dates indicated. The balance sheet data as of December 31, 2012 and 2013 and the summary consolidated income statement data and cash flow data for each of the years ended December 31, 2011, 2012 and 2013 are derived from, and qualified by reference to, Avolon S.à r.l.’s audited consolidated financial statements included elsewhere in this prospectus.

The balance sheet data as of March 31, 2014 and the summary consolidated income statement data and cash flow data for the three months ended March 31, 2013 and 2014 are derived from, and qualified by reference to, Avolon S.à r.l.’s unaudited condensed consolidated interim financial statements included elsewhere in this prospectus. We have prepared the unaudited consolidated financial information set forth below on the same basis as Avolon S.à r.l.’s audited consolidated financial statements and have included all adjustments that we consider necessary for a fair presentation of our financial position and results of operations for such periods. The results for any interim period are not necessarily indicative of the results that may be expected for a full year.

In connection with this offering, we converted our audited financial statements from International Financial Reporting Standards as adopted by the European Union to U.S. GAAP. As we had only six full months of operations in 2010, we believe the results for the period May 21, 2010 (the date of inception) through December 31, 2010 are not meaningful and not representative of the business. Accordingly, the financial statements for such period were not converted to U.S. GAAP. In addition, balance sheets as of December 31, 2011 and March 31, 2013 are not required in the consolidated financial statements included elsewhere in this prospectus and, accordingly, were not converted to U.S. GAAP. The corresponding financial data for periods not converted to U.S. GAAP have been omitted from the table below.

Avolon Holdings is a newly formed holding company and has engaged in operations and activities incidental to its formation, the Share Exchange and the initial public offering of our common shares. Accordingly, summary financial information for Avolon Holdings is not presented.

Our historical results are not necessarily indicative of our future performance. You should read this information together with “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Avolon S.à r.l.’s consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

     Year Ended December 31,     Three Months Ended March 31,  
(in thousands)    2011     2012     2013     2013     2014  
                       (unaudited)  

Statement of Operations Data:

          

Revenues:

          

Lease revenue

   $ 133,586      $ 312,744      $ 415,006      $ 96,786      $ 118,223   

Other revenue and interest income

     688        13,153        34,767        7,769        17,531   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

   $ 134,274      $ 325,897      $ 449,773      $ 104,555      $ 135,754   

Expenses

   $ (144,309   $ (266,098   $ (336,723   $ (75,915   $ (98,003
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income/(loss) before income tax and interest in earnings/(loss) from unconsolidated equity investees

     (10,035     59,799        113,050        28,640        37,751   

Earnings/(loss) from unconsolidated equity investees, net of tax

   $ 1,395      $ —        $ (46   $ —        $ 53   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

   $ (8,640   $ 59,799      $ 113,004      $ 28,640      $ 37,804   

Income tax (expense) benefit

     5,659        1,362        (204     (137     (1,382
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (2,981   $ 61,161      $ 112,800      $ 28,503      $ 36,422   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Year Ended December 31,     Three Months Ended March 31,  
(in thousands, except share data)    2011     2012     2013     2013     2014  
                       (unaudited)  

Net income (loss) per share:

          

Class A:

          

Basic

   $ (0.01   $ 36.56      $ 40.40      $ 13.20      $ 11.61   

Diluted

   $ (0.01   $ 12.06      $ 21.42      $ 5.28      $ 6.97   

Class B:

          

Basic

   $ (0.50   $ 6.19      $ 9.69      $ 2.46      $ 3.12   

Diluted

   $ (0.50   $ 6.19      $ 9.69      $ 2.46      $ 3.12   

Class C:

          

Basic

   $ (0.40   $ 5.27      $ 9.36      $ 2.31      $ 3.04   

Diluted

   $ (0.40   $ 5.27      $ 9.36      $ 2.31      $ 3.04   

Weighted average shares outstanding:

          

Class A:

          

Basic

     12,498        31,742        50,985        38,487        57,731   

Diluted

     12,498        96,187        96,187        96,218        96,218   

Class B:

          

Basic

     5,973,034        9,652,830        11,383,171        11,331,980        11,400,234   

Diluted

     5,973,034        9,652,830        11,383,171        11,331,980        11,400,234   

Class C:

          

Basic

     50,766        50,766        50,766        50,766        50,766   

Diluted

     50,766        50,766        50,766        50,766        50,766   

Pro forma net income per common share(1)

          

Pro forma weighted average shares outstanding (basic and diluted)(1)

          

Balance Sheet Data (at end of period):

          

Flight equipment including assets held for sale (net of accumulated depreciation)

     $ 3,575,991      $ 4,260,412       

$

4,388,530

  

Cash and cash equivalents

     $ 53,844      $ 177,924        $ 176,297   

Restricted cash(2)

     $ 182,233      $ 256,426        $ 289,734   

Deposits on flight equipment

     $ 211,844      $ 206,781        $ 210,885   

Total assets

     $ 4,125,063      $ 5,070,478        $ 5,227,628   

Total debt

     $ 2,804,780      $ 3,536,792        $ 3,650,193   

Total liabilities

     $ 2,978,445      $ 3,776,727        $ 3,897,455   

Temporary equity and shareholders’ equity

     $ 1,146,618      $ 1,293,751        $ 1,330,173   

Cash flow Data:

          

Net cash provided by operating activities

   $ 65,970      $ 179,194      $ 242,834      $ 57,943      $ 63,031   

Net cash used in investing activities

   $ (1,706,556   $ (1,628,732   $ (874,078   $ (175,521   $ (188,584

Net cash provided by financing activities

   $ 1,690,210      $ 1,398,266      $ 755,324      $ 133,681      $ 123,926   
(1) Pro forma net income per common share and pro forma weighted average shares outstanding (basic and diluted) give effect to the Share Exchange as if it had occurred at the beginning of the period presented.
(2) Restricted cash comprises cash held by us but which is ring-fenced or used as security for specific financing arrangements, and to which we do not have unfettered access.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of Avolon S.à r.l.’s financial condition and results of operations and should be read in conjunction with “Selected Consolidated Financial Data” and Avolon S.à r.l.’s consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements, based on current expectations and related to future events and our future financial performance, that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under “Risk Factors” and elsewhere in this prospectus.

On June 5, 2014, Avolon Holdings was incorporated under the laws of the Cayman Islands to become the holding company for Avolon S.à r.l. in connection with this offering pursuant to the Share Exchange. See “Our Corporate Reorganization” for a complete description of the Share Exchange. Avolon Holdings has engaged in operations and activities incidental to its formation, the Share Exchange and the initial public offering of our common shares. Accordingly, financial information for Avolon Holdings and a discussion and analysis of its results of operations and financial condition for the period of its operations prior to the Share Exchange would not be meaningful and are not presented. Following the Share Exchange, the historical financial statements of Avolon Holdings will be retrospectively adjusted to include the historical financial results of Avolon S.à r.l. for all periods presented.

Overview

Avolon is a leading global aircraft leasing company focused on acquiring, managing and selling commercial aircraft. We were launched in May 2010 by an experienced team of aircraft leasing and financing professionals. Our strategy is to build and maintain a portfolio of young, modern, fuel-efficient commercial aircraft while seeking to maximize long-term earnings growth and generate attractive risk-adjusted returns through the aviation industry cycle. Since our founding, we have built an owned portfolio of aircraft totaling over $4,388.5 million in Aggregate Net Book Value as of March 31, 2014. The average age of our Owned and Managed Portfolio, weighted by current market value, was the lowest of the ten largest operating lessors as identified by ICF SH&E. The average age of our Owned Portfolio, weighted by net book value, was 2.46 years as of March 31, 2014.

As of March 31, 2014, our Owned, Managed and Committed Portfolio consisted of 202 aircraft, including 105 owned, 10 managed and 87 committed aircraft. Our portfolio of 202 aircraft made us the tenth largest aircraft lessor by current market value as of March 31, 2014, according to ICF SH&E. Our portfolio consists primarily of narrowbody aircraft, including the Airbus A320 family and the Boeing 737-800, and select widebody aircraft, including the Airbus A330, the Boeing 777 and the Boeing 787. Our Committed Portfolio includes 44 next generation Airbus A320neo, Boeing 737 MAX and Boeing 787 family of aircraft, which are designed to deliver new levels of operating efficiency and are expected to be in high demand.

We are a global business, headquartered in Dublin, Ireland, with offices in China, Dubai, Singapore and the United States. Our global presence provides local access to airline customers and capital providers in key geographic regions, particularly emerging and high growth markets such as China, South East Asia, the Middle East and Latin America.

We have sourced debt and equity capital from multiple sources, and our financing strategy is to provide the capital required to continue to grow our business through arrangements that provide us with maximum flexibility and a low cost of capital and that minimize risks relating to changes in market conditions. As of March 31, 2014 we had total outstanding indebtedness of $3,650.2 million with a weighted average remaining maturity of 4.6 years and an average interest rate of 4.3%. In addition to this indebtedness, as of March 31, 2014, we also had undrawn facilities of $891.9 million, consisting of $741.9 million of committed secured debt and $150.0 million of unsecured revolving credit facilities.

We will not receive any of the proceeds from this offering. Prior to consummation of this offering, each existing shareholder of Avolon S.à r.l. will transfer all of its interests in Avolon S.à r.l. to Avolon Holdings in the

 

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Share Exchange, resulting in Avolon S.à r.l. becoming a wholly owned subsidiary of Avolon Holdings. The Share Exchange will be accounted for as Avolon Holdings succeeding to the business and activities of Avolon S.à r.l. for financial reporting purposes. Following the Share Exchange, the historical financial statements of Avolon Holdings will be retrospectively adjusted to include the historical financial results of Avolon S.à r.l. for all periods presented. We also expect to take a one-time share based compensation expense at the time of the Share Exchange in respect of the founder shares subscribed for by the management investment vehicles and the Trustee in connection with the formation of Avolon Holdings. The charge will be determined as the difference between the amounts initially subscribed and the initial offering price. We expect our selling, general and administrative expenses to increase as a result of being a public company. In addition, in 2013 we granted options to acquire shares of Avolon S.à r.l. to certain of our employees. These options will vest in connection with this offering and, as a result, we expect to take a one time share based compensation expense of $2.1 million during the period in which the offering is completed.

Factors Affecting Our Results

Our results are dependent on the aviation industry, which is cyclical, economically sensitive to prevailing economic conditions and highly competitive. Airlines are affected by numerous external factors, including fuel price volatility, political and economic instability, currency volatility, natural disasters, terrorist activities, health concerns, labor actions and other political and economic events around the world, which can also have an impact on the market values of our aircraft. Our airline customers’ ability to address these factors and meet their lease obligations affect our revenues and income.

According to ICF SH&E, commercial aviation is a critical component of the global economy. Demand for air transport is strongly correlated to economic activity and has grown at a rate in excess of 1.5 times the global GDP growth rate over the past 40 years. Published forecasts predict that, over the next 20 years, annual growth in air traffic, both passenger and cargo, will average around 5%, resulting in a further doubling of traffic within 15 years. To keep pace with this growth, according to analysis by ICF SH&E, the size of the global commercial aircraft fleet is expected to approximately double over the next two decades.

Our results are also impacted by the number, type, age and condition of the aircraft we own, the price we pay or receive for aircraft purchased or sold, the number of aircraft purchased or sold in a period, changes in interest rates and credit spreads, which may affect lease revenues and borrowing costs, and the utilization rate of our aircraft. Since our inception, we have experienced a 100% utilization rate.

Financial Overview

We recorded income before income tax and interest in earnings from unconsolidated equity investees of $37.8 million in the three months ended March 31, 2014, inclusive of $16.8 million of net gains on disposal of flight equipment, arising from our program of selling aircraft, offset by $4.1 million adverse movement in the fair value of interest rate derivatives. This compares to income before income tax and interest in earnings from unconsolidated equity investees of $28.6 million in the three months ended March 31, 2013, inclusive of $6.3 million net gain on disposal of flight equipment offset by $0.3 million adverse movement in the fair value of interest rate derivatives. The increase was primarily due to higher volumes of leased assets and higher net gains on disposal of flight equipment within the period.

We recorded income before income tax and interest in earnings from unconsolidated equity investees of $113.1 million in the year ended December 31, 2013, inclusive of $31.1 million of net gains on disposal of flight equipment, arising from our program of selling aircraft and an $8.2 million gain in the fair value of interest rate derivatives. This compares to income before income tax and interest in earnings from unconsolidated equity investees of $59.8 million in the year ended December 31, 2012, inclusive of $11.3 million net gains on disposal of flight equipment offset by $3.2 million adverse movement in the fair value of interest rate derivatives. The increase was primarily due to higher volumes of leased assets, the benefits of full year ownership of assets acquired during 2012 and higher net gains on disposal of flight equipment.

See “—Results of Operations” below for a more detailed discussion of our results for the applicable periods.

 

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Our Fleet

The following table shows our fleet as of the periods presented.

 

    As of December 31,     As of
March 31, 2014
 
    2011     2012     2013    

Owned Portfolio (number of aircraft)

    53        87        99        105   

Managed Portfolio (number of aircraft)

    2        4        10        10   

Weighted average age (years) (Owned Portfolio)(1)

   
1.37
  
    1.84        2.37        2.46   

Weighted average remaining lease term (years) (Owned Portfolio)(1)

   
7.4
  
    7.0        7.0        6.9   

Flight equipment, net (in thousands)

  $
2,224,023
  
  $ 3,536,899      $ 4,133,185      $ 4,388,530   

Assets held for sale (in thousands)

  $

  
  $ 39,092      $ 127,227      $   

Aggregate Net Book Value (in thousands) (Owned Portfolio)

  $ 2,224,023      $ 3,575,991      $ 4,260,412      $ 4,388,530   

 

  (1)  Weighted by net book value.

Key Metrics

Revenue

Our revenues consist primarily of lease revenue from aircraft leases, net gain on disposal of flight equipment, management fee revenue and interest income.

Lease Revenue. Our aircraft are subject to net operating leases where the lessee pays lease rentals and is responsible for maintaining the aircraft and paying operational, maintenance and insurance costs. Many of our leases require the payment of supplemental maintenance rent based on aircraft utilization and lease term, or an end-of lease compensation amount calculated with reference to the technical condition of the aircraft at lease expiration. We record as lease revenue all supplemental maintenance rent not expected to be reimbursed to lessees in the case of the former, and the amount of the end-of-lease adjustment paid to us, if any, in the case of the latter. We use a predictive model to determine the amount of supplemental maintenance rent revenue. This revenue may be reduced in subsequent periods if maintenance costs increase. Our lease revenues are highly correlated with the volume of flight equipment consolidated on our balance sheet. In addition, 15.2% of our leases have rentals linked to floating interest rate benchmarks, with the remaining 84.8% of our leases having lease rentals fixed for the duration of the lease term.

Because the terms of our leases are generally for multiple years and have staggered maturities, there are lags between changes in market conditions and their impact on our results, as contracts remain in effect that do not yet reflect current market lease rates. Therefore, current market conditions may not be fully reflected in current results. Lease payments are generally due in advance and we recognize lease revenue only to the extent collection is reasonably assured.

Lease revenue from our top five customers represented 51%, 36% and 40%, respectively, of our total revenues for the year ended December 31, 2011, 2012 and 2013. No customer accounted for more than 10% of lease revenues in 2013 or 2012. In the year ended December 31, 2011, two customers each accounted for more than 10% of lease revenue. The distribution of lease revenue by location of each airline’s principal place of business is presented below:

 

    Years Ended December 31,  
(dollars in thousands)   2011     2012     2013  

Asia Pacific

  $ 33,723         25   $ 89,074         28   $ 106,111         26

Europe, Middle East & Africa

    69,125         52        145,009         47        166,488         40   

Americas

    30,738         23        78,661         25        142,407         34   
 

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

  $ 133,586         100   $ 312,744         100   $ 415,006         100
 

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Net Gain on Disposal of Flight Equipment. Our net gain on disposal of flight equipment arises from our program of regularly selling aircraft, generally with the leases attached, to investors, financial institutions, other lessors and, less frequently, airlines. The net gain or loss on disposal of flight equipment is largely dependent on the condition of the asset being sold, airline industry conditions, funding available to the buyer, prevailing interest rates and the supply and demand balance for the type of asset and lease contract being sold. In general, we secure signed term sheets to sell an aircraft 3 to 6 months prior to the transaction closing and record the net gain as revenue when the purchaser has funded and completed the transaction. In 2013, we disposed of 14 aircraft (including one constituting an insured total loss) and recorded a net gain on disposal of flight equipment of $31.1 million, and in 2012 we sold four aircraft and recorded a net gain on disposal of flight equipment of $11.3 million. During the three months ended March 31, 2014 we sold one aircraft for a net gain of $16.8 million. As of March 31, 2014 we had not signed any commitments for future disposals. Net gain on disposal of flight equipment recorded in one reporting period may not be comparable to the net gain on disposal of flight equipment in other periods due to the timing of such transactions in addition to the variation between aircraft prices.

Management Fee Revenue. We generate management fee revenue through a variety of management services that we provide to joint ventures and third-party owners of aircraft. Our management services include leasing and remarketing services, cash management and treasury services, technical advisory services and accounting and administrative services which include secondment of staff. We also record fees and gains generated from selling aircraft prior to taking delivery of the aircraft as management fee revenues.

Interest Income. Our interest income is derived primarily from deposit interest on unrestricted and restricted cash balances and interest recognized on financial instruments we hold. The amount of interest revenue we recognize in any period is influenced by the amount of free or restricted cash balances, the principal balance of financial instruments we hold, contracted or effective interest rates, and movements in provisions for financial instruments which can affect adjustments to valuations or provisions.

Expenses

Our primary expenses consist of depreciation, interest on debt, and selling, general and administrative expenses.

Depreciation. We generally depreciate flight equipment on a straight-line basis over a 25 year life from the date of manufacture to a 15% salvage value. Our depreciation expense is influenced by the depreciable life of the flight equipment and the estimated residual value of the flight equipment. We incur no depreciation on assets held for sale. Adjusted carrying value is the original cost of our flight equipment, including purchase expenses, adjusted for subsequent capitalized improvements and impairments.

Interest on Debt. Our interest on debt expense arises from the funding structures and related derivative instruments described in “—Indebtedness.” As of March 31, 2014, we had total outstanding indebtedness of $3,650.2 million with a weighted average interest rate of 4.3% and a weighted average remaining maturity of 4.6 years. As of March 31, 2014, 76.2% of our total outstanding indebtedness was fixed rate debt. Interest on debt expense in any period is primarily affected by contracted interest rates, principal amounts of indebtedness, including notional values of derivative financial instruments and unrealized mark-to-market gains or losses on derivative financial instruments.

Selling, General and Administrative Expenses. Our principal selling, general and administrative expenses consist of personnel expenses, including salaries, benefits, charges for share-based compensation, severance compensation, professional and advisory costs and office and travel expenses. The level of our selling, general and administrative expenses is influenced primarily by the number of our employees and the extent of transactions or ventures we pursue that require the assistance of outside professionals or advisors. A portion of our selling, general and administrative expenses are in currencies other than US dollars and as a result our performance is exposed to fluctuation with currency exchange rates. Taking into account the overall quantum of our expenses, we do not hedge our currency exposures on selling, general and administrative expenses.

 

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Liquidity and Capital Resources

Liquidity

We generally fund our operations, which primarily consist of aircraft purchases, principal and interest payments on our debt, and operating expenses, through available cash balances, internally generated funds and proceeds from our debt incurrences and equity issuances.

We have substantial cash requirements as we continue to expand our fleet through our purchase commitments. We believe that our available liquidity, consisting of unrestricted cash balances and undrawn unsecured revolving credit facilities, which aggregated $326.3 million as of March 31, 2014, combined with cash generated from our business, will be sufficient to satisfy our operating requirements for the next 12 months. In addition to our available liquidity, we have undrawn secured debt commitments of $741.9 million available to fund our capital expenditure requirements.

We intend to fund our business with future earnings and cash flow from operations, existing debt facilities and future debt financing. Accordingly, our ability to acquire assets and grow our business is dependent in part on our ability to obtain such financing. See “Risk Factors—We will need additional capital to finance our growth and refinance our existing debt, and we may not be able to obtain it on acceptable terms, or at all, which may limit our ability to grow and compete in the commercial aircraft leasing market.” We believe that funds will be available to support our growth strategy. However, future deterioration in our performance or our markets could limit our ability to access these sources of financing and/or increase our cost of capital, which may negatively impact our ability to raise additional funds and grow our business.

 

    As of December 31,      As of
March 31,
2014
 
(in thousands)   2012      2013     
                  (unaudited)  

Unrestricted cash

  $ 53,844       $ 177,924       $ 176,297   

Undrawn unsecured revolving credit facilities

    —           150,000         150,000   
 

 

 

    

 

 

    

 

 

 

Available liquidity

  $ 53,844       $ 327,924       $ 326,297   
 

 

 

    

 

 

    

 

 

 

Restricted cash

  $ 182,233       $ 256,426       $ 289,734   

Our net cash provided by operating activities increased to $63.0 million in the three months ended March 31, 2014, compared to $57.9 million in the three months ended March 31, 2013. The increase is due to the growth in our Owned Portfolio over the intervening periods. Our net cash provided by operating activities increased to $242.8 million in the year ended December 31, 2013, compared to $179.2 million in the year ended December 31, 2012, and $66.0 million in the year ended December 31, 2011. This growth in operating cash flow was primarily due to the growth of our Owned Portfolio, in addition to the full year benefit of aircraft of which we took delivery in the preceding years.

During the three months ended March 31, 2014, we incurred $226.5 million of debt financings. This included $178.3 million of bank term facilities, $30.0 million of warehouse facility debt and $18.2 million of other lines of credit.

During the three months ended March 31, 2014, we repaid $112.7 million of debt financings. This included $74.9 million of bank term facilities, $10.0 million in securitization debt, $1.6 million of warehouse facility debt, $11.8 million of ECA and EXIM backed facilities, $2.6 million of capital lease obligations and $11.8 million of other lines of credit.

During the year ended December 31, 2013, we incurred $2,209.0 million of debt financings. This included $649.1 million of bank term facilities, $636.2 million in securitization debt, $523.5 million of warehouse facility debt, $186.9 million of ECA and EXIM backed facilities and $213.3 million of other lines of credit.

 

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During the year ended December 31, 2013, we repaid $1,477.2 million of debt financings. This included $599.2 million of bank term facilities, $6.6 million in securitization debt, $490.0 million of warehouse facility debt, $37.6 million of ECA and EXIM backed facilities, $137.5 million of capital lease obligations and $206.3 million of other lines of credit.

See “—Indebtedness” for additional details regarding our outstanding debt.

Indebtedness

Since our launch in May 2010, we have raised debt capital to support our growth from diverse sources, including both recourse and non-recourse secured commercial bank debt, export credit agency supported financing, asset-backed securitization and unsecured revolving credit facilities. Since inception, we have sought to minimize our exposure to external market risk. In accordance with this strategy, we seek to minimize our exposure to long-term interest rates through the use of fixed rate funding and interest rate derivatives, to maximize the duration of our debt and to actively manage the availability of committed financing to match our committed pipeline of acquisitions with available cash balances, cash generated from operations (including aircraft sales) and debt financings. We expect to continue the diversification of our capital base as our credit profile continues to evolve.

As of March 31, 2014, the weighted average interest rate of our outstanding indebtedness was 4.3% and the weighted average remaining maturity was 4.6 years. Our fixed rate debt accounted for 76.2% of our total outstanding indebtedness as of such date and we also used interest rate derivatives to further hedge our position. We had $891.9 million in undrawn debt facilities, including $150.0 million of unsecured facilities, as of March 31, 2014. As of March 31, 2014, all of our drawn debt was secured by pledged assets and/or cash collateral. We were in compliance with our debt covenants as of December 31, 2013 and March 31, 2014.

 

     As of March 31, 2014  
     Drawn and
    Amortized    
         Undrawn      
(in thousands)    (unaudited)  

Types of Debt

     

Non-recourse term facilities

   $ 1,160,005       $ 11,722   

Full recourse term facilities

     957,911         431,000   

Securitization

     618,104         —     

ECA and EXIM backed facilities

     582,761         —     

Warehouse facility

     150,026         278,474   

Lines of credit

     78,190         170,746   

Loan interest accrued but not paid

     11,850         —     
  

 

 

    

 

 

 
   $ 3,558,847       $ 891,942   
  

 

 

    

 

 

 

Capital lease obligation

     

Capital lease

   $ 91,010       $ —     

Capital lease interest accrued but not paid

     336         —     
  

 

 

    

 

 

 
   $ 91,346       $ —     
  

 

 

    

 

 

 

Total Indebtedness

   $ 3,650,193       $ 891,942   
  

 

 

    

 

 

 

Non-recourse Term Facilities

As of March 31, 2014, 36 aircraft were financed by non-recourse bank term facilities. All of the loans contain provisions that require the payment of principal and interest on a quarterly or monthly basis throughout the terms of the loans, which mature at varying dates from 2016 to 2025. The interest rates on the fixed rate loans are based on rates of between 3.87% and 5.97% and, on the floating rate loans, 3 or 6 month LIBOR plus

 

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margins ranging from 2.83% to 4.40%. Our bank term debt loans contain customary financial covenants, such as minimum cash balances, minimum tangible net worth and maximum debt to equity ratio, and, in some cases, also include loan to value covenants, and customary events of default. As of March 31, 2014, we had one facility, which was secured by cash collateral of $72.8 million to facilitate aircraft substitutions.

Securitization

In October 2013, Emerald Aviation Finance (“Emerald”), our asset-backed securitization vehicle, issued $636.2 million aggregate principal amount of fixed rate asset-backed notes (the “Emerald Notes”) which comprised $546.0 million aggregate principal amount of Class A-1 Notes carrying a fixed coupon rate of 4.65% and $90.2 million of Class B-1 Notes carrying a fixed coupon of 6.35%. The Class A-1 Notes rank higher than Class B-1 Notes in order of priority of payment. The proceeds of the Emerald Notes were used to refinance 20 aircraft. The Emerald Notes are secured by ownership interests in aircraft-owning subsidiaries of Emerald and the individual aircraft leases, any cash or other assets held by the security trustee and rights under the service provider agreements with us and certain other agreements and assets. The Emerald Notes amortize on a monthly basis, with a margin step-up beginning in 2020. The Emerald Notes are neither obligations of nor are they guaranteed by Avolon, and impose no loan to value covenants or other covenants on Avolon. The Emerald Notes contain customary covenants and events of default with respect to Emerald. Avolon retains the residual equity in Emerald and acts as the servicer for the aircraft owned by Emerald for which it receives servicing fees. As of March 31, 2014, a total of 20 aircraft were being financed with the proceeds from these Notes.

Full Recourse Term Facilities and Capital Lease Obligations

As of March 31, 2014, 29 aircraft were financed by full recourse term facilities and capital lease obligations. All of the loans contain provisions that require the payment of principal and interest throughout the terms of the loans. The interest rates on the fixed rate loans are between 3.61% and 5.72% and the interest rates on the floating rate loans are based on 1, 3 or 6 month LIBOR plus margins ranging from 2.15% to 4.57%. Additionally, a full recourse second lien facility bearing a fixed rate of 9.875% partially finances 13 aircraft. Our capital lease obligations amortize quarterly over the period of 12 years from drawdown with interest accruing at a fixed rate of 4.06%.

ECA and EXIM Backed Facilities

As of March 31, 2014, 15 aircraft were financed with the proceeds of ECA or EXIM backed facilities under which the subject loan is amortised quarterly over the period of 12 years from drawdown with interest accruing at fixed rates between 2.40% and 3.27%. These facilities mature at varying dates from 2023 to 2025. The loan documentation contains covenants and events of default customary for export credit agency supported financings, including financial covenants, such as minimum cash balances, minimum tangible net worth and maximum debt to equity ratio covenants.

Warehouse Facility

As of March 31, 2014, we had in place a $428.5 million revolving credit facility, which is a full recourse revolving credit facility to finance the acquisition of aircraft. The warehouse facility has an availability period until May 2015. As of March 31, 2014, $150.0 million was outstanding under the warehouse facility and it accrued interest at LIBOR plus 3.25% on drawn balances and at 1.00% on undrawn balances. Borrowings under the warehouse facility are secured by collateral including mortgages over the aircraft assets and pledges of ownership interests in the aircraft. At March 31, 2014, five aircraft were financed by this facility. The warehouse facility includes customary financial covenants, such as minimum cash balances, minimum tangible net worth and customary events of default.

 

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Lines of Credit

As of March 31, 2014, we had in place three pre-delivery payment (“PDP”) facilities, with maturities ranging from 2014 through 2016. The total commitment value of these facilities is $136.5 million, of which $78.2 million was outstanding at March 31, 2014. These facilities are used in funding pre-delivery payments for aircraft we have ordered and are secured by security assignments of our right under the related purchase agreements to purchase the aircraft which are subject to the financing. Tranches of the PDP facilities bear interest at floating rates based on 3 month LIBOR plus margins ranging from 2.00% to 3.00%. As of March 31, 2014, our PDP facilities have been utilized to finance payments relating to ten aircraft. Our PDP facilities include customary financial covenants, such as minimum cash balances, minimum tangible net worth and customary events of default. We also have two unsecured revolving credit facilities, with aggregate commitments of $150.0 million and availability periods until July 2016 and January 2017, respectively. The unsecured facilities were undrawn as of March 31, 2014. The unsecured facilities accrue interest monthly at LIBOR plus 2.00% on drawn balances and 0.50% on undrawn balances. The unsecured facilities contain customary financial covenants, including minimum cash balance, minimum tangible net worth, interest coverage ratio, debt incurrence limitations and customary events of default.

Contractual Obligations

Our contractual obligations as of March 31, 2014 were as follows:

 

     2014      2015      2016      2017      2018      Thereafter  
(in thousands)                  (unaudited)                

Principal repayments

   $ 194,411       $ 328,772       $ 571,699       $ 489,481       $ 366,207       $ 1,688,975   

Interest repayments(1)

     88,026         136,901         118,580         93,754         78,961         160,970   

Purchase commitments

     1,853,623         719,323         172,311         —           303,738         1,822,335   

Lease obligations(2)

     375         500         500         500         500         9,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,136,435       $ 1,185,496       $ 863,090       $ 583,735       $ 749,406       $ 3,681,280   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  Includes estimated interest payments for floating rate debt based on LIBOR plus the applicable margins, as of March 31, 2014.
(2)  Relates to committed lease payments for our offices.

 

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Comparative Results from Operations

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

 

    Three Months
Ended March 31,
 
(in thousands)   2013     2014  
    (unaudited)  

Revenues

   

Lease revenue

  $ 96,786      $ 118,223   

Management fee revenue

    1,192        354   

Net gain on disposal of flight equipment

    6,295        16,826   

Interest income

    282        351   
 

 

 

   

 

 

 

Total revenue

  $ 104,555      $ 135,754   
 

 

 

   

 

 

 

Expenses

   

Depreciation

    (34,114     (39,954

Interest expenses

    (34,017     (48,063

Selling, general and administrative costs

    (7,784     (9,986
 

 

 

   

 

 

 

Total expenses

  $ (75,915   $ (98,003
 

 

 

   

 

 

 

Income before income tax and interest in earnings from unconsolidated equity investees

    28,640        37,751   

Income tax (expense)

    (137     (1,328

Earnings from unconsolidated equity investees, net of tax

           53   
 

 

 

   

 

 

 

Net income

  $ 28,503      $ 36,422   
 

 

 

   

 

 

 

Revenue

Lease Revenue

Lease revenue increased by $21.4 million, or 22.1%, to $118.2 million for the three months ended March 31, 2014 compared to $96.8 million for the three months ended March 31, 2013, primarily as a result of an increase in the size of our portfolio and an increase in lease rates. Our owned portfolio continued its expansion during the three months ended March 31, 2014, building from 99 aircraft delivered as of December 31, 2013 to 105 aircraft as of March 31, 2014. As a result, our Aggregate Net Book Value rose from $4,260.4 million at December 31, 2013 to $4,388.5 million at March 31, 2014. In addition to the full-year benefit of aircraft delivered during 2013, lease revenue benefited from new deliveries in 2013 and 2014, which was offset in part by the disposal of 14 aircraft (including one constituting an insured total loss) during 2013. All of the aircraft in our fleet were on lease in each of the three months ended March 31, 2013 and 2014. Our lease revenues included supplemental maintenance rent of $1.6 million in the three months ended March 31, 2014 and $1.9 million in the three months ended March 31, 2013.

Management Fee Revenue

Management fee revenue decreased by $0.8 million, or 66.7%, to $0.4 million for the three months ended March 31, 2014 compared to $1.2 million for the three months ended March 31, 2013, primarily as a result of the recognition of $1.0 million of fees generated from the sale of two aircraft prior to delivery during the three months ended March 31, 2013.

Net Gain on Disposal of Flight Equipment

Net gain on disposal of flight equipment increased by $10.5 million, or 166.7%, to $16.8 million for the three months ended March 31, 2014 compared to $6.3 million for the three months ended March 31, 2013, as a result of our program of aircraft sales. During the three months ended March 31, 2014 we sold one aircraft compared to three aircraft sold during the three months ended March 31, 2013.

 

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Expenses

Depreciation

Depreciation expense increased by $5.9 million, or 17.3%, to $40.0 million for the three months ended March 31, 2014 compared to $34.1 million for the three months ended March 31, 2013. The increase in depreciation was attributable to the acquisition of seven aircraft in the three months ended March 31, 2014 and 26 aircraft during the year ended December 31, 2013, offset by the disposal of one aircraft during the three months ended March 31, 2014 and 14 aircraft during the year ended December 31, 2013 (including one constituting an insured total loss).

Interest Expense

Interest expense increased by $14.1 million, or 41.5%, to $48.1 million (including $4.1 million adverse fair value adjustment on derivative financial instruments) for the three months ended March 31, 2014 compared to $34.0 million (including $0.3 million adverse fair value adjustment on derivative financial instruments) for the three months ended March 31, 2013. The increase was primarily the result of an increase in debt outstanding to $3,650.2 million as of March 31, 2014 from $2,903.6 million as of March 31, 2013.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $2.2 million, or 28.2%, to $10.0 million for the three months March 31, 2014 compared to $7.8 million for the three months ended March 31, 2013. The change was due to both increased variable costs associated with a larger delivered fleet and an increase in headcount. Our selling, general and administrative expenses as a percentage of total revenue remained constant at approximately 7% for the three months ended March 31, 2014 and March 31, 2013.

Taxes

The effective tax rate for the three months ended March 31, 2014 was 3.7% compared to 0.5% for the three months ended March 31, 2013. The effective tax rate differs from the Luxembourg statutory rate due to certain non-taxable income items in Luxembourg and the taxing of a significant portion of our activities in Ireland at lower tax rates.

Net Income

Net income increased by $7.9 million, or 27.7%, to $36.4 million for the three months ended March 31, 2014 compared to $28.5 million for the three months ended March 31, 2013. The increase in net income was primarily attributable to the acquisition and leasing of additional aircraft, an increase in the net gain on disposal of flight equipment and an increase in our lease yields.

 

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Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

 

     Years Ended December 31,  
(in thousands)    2011     2012     2013  

Revenues

      

Lease revenue

   $ 133,586      $ 312,744      $ 415,006   

Management fee revenue

     315        691        2,468   

Net gain on disposal of flight equipment

     —          11,267        31,051   

Interest income

     373        1,195        1,248   
  

 

 

   

 

 

   

 

 

 

Total revenues

   $ 134,274      $ 325,897      $ 449,773   
  

 

 

   

 

 

   

 

 

 

Expenses

      

Depreciation

     (46,615     (110,957     (145,615

Interest expense

     (72,164     (125,325     (154,360

Selling, general and administrative costs

     (25,530     (29,816     (36,748
  

 

 

   

 

 

   

 

 

 

Total expenses

   $ (144,309   $ (266,098   $ (336,723
  

 

 

   

 

 

   

 

 

 

(Loss)/income before income tax and interest in earnings/(loss) from unconsolidated equity investees

     (10,035     59,799        113,050   

Income tax benefit/(expense)

     5,659        1,362        (204

Earnings/(loss) from unconsolidated equity investees, net of tax

     1,395        —          (46
  

 

 

   

 

 

   

 

 

 

Net (loss)/income

     (2,981     61,161        112,800   

Other comprehensive income

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Total comprehensive (loss)/income for the year

   $ (2,981   $ 61,161      $ 112,800   
  

 

 

   

 

 

   

 

 

 

Revenue

Lease Revenue

Lease revenue increased by $102.3 million, or 32.7%, to $415.0 million for the year ended December 31, 2013 compared to $312.7 million for the year ended December 31, 2012, primarily as a result of an increase in the size of our portfolio and the benefit of full year revenues for the aircraft delivered in 2012. Our owned portfolio continued its expansion in 2013, building from 87 aircraft delivered as of December 31, 2012 to 99 aircraft as of December 31, 2013. As a result, our Aggregate Net Book Value rose from $3,576.0 million at December 31, 2012 to $4,260.4 million at December 31, 2013. In addition to the full-year benefit of aircraft delivered during the year ended December 31, 2012, lease revenue benefited from new deliveries in 2013, which was offset in part by the disposal of 14 aircraft (including one constituting an insured total loss) during the year ended December 31, 2013. All of the aircraft in our fleet were on lease in the year ended December 31, 2012 and the year ended December 31, 2013. Our lease revenues included supplemental maintenance rent of $6.1 million in the year ended December 31, 2013 and $6.9 million in the year ended December 31, 2012.

Management Fee Revenue

Management fee revenue increased by $1.8 million, or 257.1%, to $2.5 million for the year ended December 31, 2013 compared to $0.7 million for the year ended December 31, 2012, primarily as a result of the growth in our managed portfolio and included recognition of $1.0 million of fees generated from the sale of two aircraft prior to delivery.

Net Gain on Disposal of Flight Equipment

Net gain on disposal of flight equipment increased by $19.8 million, or 175.2%, to $31.1 million for the year ended December 31, 2013 compared to $11.3 million for the year ended December 31, 2012, as a result of our

 

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program of aircraft sales. During the year ended December 31, 2013, we sold 14 aircraft (including one constituting an insured total loss) compared to four aircraft sold during the year ended December 31, 2012. Net gain on disposal of flight equipment in 2013 included net insurance proceeds relating to one insured total loss.

Expenses

Depreciation

Depreciation expense increased by $34.6 million, or 31.2%, to $145.6 million for the year ended December 31, 2013 compared to $111.0 million for the year ended December 31, 2012. The increase in depreciation was attributable to the acquisition of 26 aircraft during 2013, in addition to the full-year effect of the aircraft delivered during the year ended December 31, 2012, offset by the disposal of 14 aircraft (including one constituting an insured total loss) during the year ended December 31, 2013.

Interest Expense

Interest expense increased by $29.1 million, or 23.2%, to $154.4 million (including $8.2 million positive fair value adjustment on derivative financial instruments) for the year ended December 31, 2013 compared to $125.3 million (including $3.2 million adverse fair value adjustment on derivative financial instruments) for the year ended December 31, 2012. The increase was primarily the result of an increase in debt outstanding to $3,536.8 million as of December 31, 2013 from $2,804.8 million as of December 31, 2012.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $6.9 million, or 23.2%, to $36.7 million for the year ended December 31, 2013 compared to $29.8 million for the year ended December 31, 2012. The change is due to both increased variable costs associated with a larger delivered fleet and an increase in headcount. Our selling, general and administrative expenses as a percentage of total revenue decreased to 8% in the year ended December 31, 2013 compared to 9% in the year ended December 31, 2012.

Taxes

The effective tax rate for the year ended December 31, 2013 was 0.2% compared to (2.3)% for the year ended December 31, 2012. The effective tax rate differs from the Luxembourg statutory rate due to certain non-taxable income items in Luxembourg and the taxing of a significant portion of our activities in Ireland at lower tax rates.

Net Income

Net income increased by $51.6 million, or 84.3%, to $112.8 million for the year ended December 31, 2013 compared to $61.2 million for the year ended December 31, 2012. The increase in net income was primarily attributable to the acquisition and leasing of additional aircraft and an increase in the net gain on disposal of flight equipment.

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Revenue

Lease Revenue

Lease revenue increased by $179.1 million, or 134.1%, to $312.7 million for the year ended December 31, 2012 compared to $133.6 million for the year ended December 31, 2011, primarily as a result of an increase in the size of our portfolio. Our owned portfolio continued its expansion in 2012, building from 53 aircraft delivered as of December 31, 2011 to 87 aircraft delivered as of December 31, 2012. As a result, our Aggregate Net Book Value rose from $2,224.0 million at December 31, 2011 to $3,576.0 million at December 31, 2012. In addition to the full-year benefit of aircraft delivered during the year ended December 31, 2011, lease revenue benefited from new deliveries in 2012, which was offset in part by the disposal of four aircraft during the year

 

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ended December 31, 2012. All of the aircraft in our fleet were on lease in the years ended December 31, 2012 and 2011. Our lease revenues included supplemental maintenance rent of $6.9 million in the year ended December 31, 2012 and $2.8 million in the year ended December 31, 2011.

Management Fee Revenue

Management fee revenue increased by $0.4 million, or 133.3%, to $0.7 million for the year ended December 31, 2012 compared to $0.3 million for the year ended December 31, 2011, primarily as a result of the growth in our managed portfolio from two aircraft as of December 31, 2011 to four aircraft as of December 31, 2012.

Net Gain on Disposal of Flight Equipment

Net gain on disposal of flight equipment was $11.3 million for the year ended December 31, 2012. We commenced our program of aircraft sales in 2012 and, accordingly, we recorded no net gain on disposal of flight equipment for the year ended December 31, 2011. During the year ended December 31, 2012 we sold four aircraft.

Interest Income

Interest income increased by $0.8 million, or 200.0%, to $1.2 million for the year ended December 31, 2012 compared to $0.4 million for the year ended December 31, 2011.

Expenses

Depreciation

Depreciation expense increased by $64.4 million, or 138.2%, to $111.0 million for the year ended December 31, 2012 compared to $46.6 million for the year ended December 31, 2011. The increase in depreciation was attributable to the acquisition of 38 aircraft during the year ended December 31, 2012, in addition to the full-year effect of the aircraft delivered during the year ended December 31, 2011, offset by the disposal of 4 aircraft during the year ended December 31, 2012.

Interest Expense

Interest expense increased by $53.1 million, or 73.5%, to $125.3 million (including $3.2 million adverse fair value adjustment on derivative financial instruments) for the year ended December 31, 2012 compared to $72.2 million (including $5.1 million adverse fair value adjustment on derivative financial instruments) for the year ended December 31, 2011. The increase was primarily the result of an increase in debt outstanding to $2,804.8 million as of December 31, 2012 from $1,813.0 million as of December 31, 2011.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $4.3 million, or 16.9%, to $29.8 million for the year ended December 31, 2012 compared to $25.5 million for the year ended December 31, 2011. The change is due to both increased variable costs associated with a larger delivered fleet and an increase in headcount. Our selling, general and administrative expenses as a percentage of total revenue decreased to 9.1% in the year ended December 31, 2012 compared to 19.0% in the year ended December 31, 2011, which was our first full year of operations.

Taxes

The effective tax rate for the year ended December 31, 2012 was (2.3)% compared to 56.4% for the year ended December 31, 2011, as a result of the loss before income tax incurred in the year ended December 31, 2011 of $10.0 million. The effective tax rate differs from the Luxembourg statutory rate due to certain non-taxable income items in Luxembourg and the taxing of a significant portion of our activities in Ireland at lower tax rates.

 

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Net Income

Net income increased by $64.2 million to $61.2 million for the year ended December 31, 2012 compared to a loss of $3.0 million for the year ended December 31, 2011, our first full year of operations. The increase in net income was primarily attributable to the acquisition and leasing of additional aircraft and an increase in aircraft sales.

Off-balance sheet arrangements

We have not established any unconsolidated entities for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. We have, however, from time to time established subsidiaries, entered into joint ventures or created other partnership arrangements or trusts with the limited purpose of leasing aircraft or facilitating borrowing arrangements. See Note 21 “Variable Interest Entities” of Notes to Consolidated Financial Statements in Avolon S.à r.l.’s consolidated financial statements for the year ended December 31, 2013 contained elsewhere in this prospectus for more information regarding our involvement with variable interest entities.

Critical Accounting Policies

This Management’s discussion and analysis of our financial condition and results of operations is based upon Avolon S.à r.l.’s consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of our consolidated financial statements in conformity with U.S. GAAP requires our management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, revenues and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. While we believe that the estimates and related assumptions used in the preparation of the consolidated financial statements are appropriate, actual results could differ from those estimates. We believe the following critical accounting policies could have a significant impact on our results of operations, financial condition and financial statement disclosures, and may require subjective and complex estimates and judgments.

Flight equipment

Flight equipment is stated at cost less accumulated depreciation. Costs incurred in the acquisition of flight equipment or related leases are included in the cost of the flight equipment. We generally depreciate flight equipment on a straight-line basis over a 25 year life from the date of manufacture to a 15% salvage value. Salvage values are determined based on estimated values at the end of the useful lives of the flight equipment assets, which are supported by historical data and experience within the industry. Changes in the assumption of useful lives or salvage values for flight equipment could have a significant impact on our results of operations and financial condition. At the time flight equipment are retired or sold, the cost, accumulated depreciation and other related balances are removed from the related accounts and the difference, net of proceeds, is recorded as a gain or loss in the consolidated income statement. We apply ASC 360 which addresses financial accounting and reporting for the impairment of long lived assets and requires that all long lived assets be evaluated for impairment where circumstances indicate that the carrying amount of such assets may not be recoverable.

Management evaluates recoverability whenever events or circumstances indicate that the carrying amount may not be recoverable. Indicators may include, but are not limited to, a significant lease restructuring or early lease termination, decrease in appraiser values, significant air traffic decline, the introduction of newer technology flight equipment or engines, a flight equipment type is no longer in production or a significant airworthiness directive is issued. We group our assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. In relation to flight equipment, the impairment assessment is performed on each individual flight equipment.

 

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Recoverability of a flight equipment’s carrying amount is measured by comparing the carrying amount of the flight equipment to future undiscounted cash flows expected to be generated by the flight equipment. The undiscounted cash flows consist of cash flows from currently contracted leases, future projected lease rates and estimated residual or scrap values for each flight equipment. We develop assumptions used in the recoverability analysis based on knowledge of active experience in the flight equipment leasing market and aviation industry, as well as information received from third party industry sources. The factors considered in estimating the undiscounted cash flows are affected by changes in future periods due to changes in contracted lease rates, economic conditions, technology and demand for a particular flight equipment type. In the event that carrying value of the flight equipment exceeds the undiscounted cash flows, an impairment charge is recognized by the amount by which the carrying value exceeds its estimated fair value. This becomes its new cost basis and is depreciated over its remaining useful life.

We have not incurred impairment charges since our inception. As of March 31, 2014, the Aggregate Net Book Value of our flight equipment was $4,388.5 million and we also recorded lease incentive assets of $13.1 million. We estimate that the current market value of our portfolio as of such date exceeded the Aggregate Net Book Value by $418.2 million, the base value exceeded the Aggregate Net Book Value by $636.1 million, and the lease encumbered value exceeded the Aggregate Net Book Value plus lease incentive assets by $1,138.7 million.

Current market value is our estimate of the most likely sales price that may be generated for an aircraft under the market circumstances that are perceived to exist at the time. Base value is our estimate of the underlying economic value of an aircraft in a stable market environment. Base value determinations are founded in the historical trend values and the projection of value trends of the underlying assets. Lease encumbered value is based on a blended discounted cash flow analysis of the revenue streams pertaining to the assets and uses an assumed discount rate and rate of inflation. Our estimate assumes a 2% inflation rate and a blended discount rate of 4.6% across our lessees.

Our estimates are based on the value opinions for our portfolio that we have received from independent aircraft appraisers, reports by industry analysts and data providers that focus on our industry and related dynamics affecting aircraft values, and news and industry reports of similar aircraft sales. Our estimates include a valuation of the redelivery condition included in our leases as assessed by an independent appraiser. These estimates assume that our flight equipment is in good and airworthy condition, without need for repair. Although we believe our estimated values are based on reasonable assumptions and estimates, estimated value determinations are inherently subjective. In addition, aircraft values can be volatile. As a result, our estimates may not be indicative of the current or future market value, base value or lease encumbered value of our portfolio or of prices that we could achieve if we were to sell the portfolio.

Rental of flight equipment

We lease flight equipment principally under operating leases and report rental income ratably over the life of each lease. At lease inception we review all necessary criteria under ASC 840-10-25 to determine proper lease classification including the criteria set forth in ASC 840-10-25-14. Our lease contracts normally include default covenants, and the effect of a default by a lessee is generally to oblige the lessee to pay damages to the lessor to put the lessor in the position one would have been had the lessee performed under the lease in full. There are no additional payments required which would increase the minimum lease payments under ASC 840-10-25-1.

Lease agreements for which base rent is based on floating interest rates are included in minimum lease payments based on the floating interest rate existing at the inception of the lease; any increases or decreases in lease payments that result from subsequent changes in the floating interest rate are contingent rentals and are recorded as increases or decreases in lease revenue in the period of the interest rate change.

 

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Rentals received, but unearned, under the lease agreements are recorded in deferred revenue on the consolidated balance sheets until earned. In addition, if collection is not reasonably assured, we do not recognize rental income for amounts due under our lease contracts and recognize revenue for such lessees on a cash basis. In all contracts, the lessee is required to redeliver the flight equipment in a particular maintenance condition, with reference to major life-limited components of the flight equipment.

To the extent that such components are redelivered in a condition different to that outlined in the contract, there is normally an end-of-lease compensation adjustment for the difference at redelivery. Amounts received as part of these redelivery adjustments are recorded as lease rental income at lease termination.

Flight equipment maintenance

In all of our flight equipment leases, the lessees are responsible for maintenance and repairs of our flight equipment and related expenses during the term of the lease. In many operating lease and capital lease contracts, the lessee has the obligation to make a periodic payment of supplemental maintenance rent which is calculated with reference to the utilization of airframes, engines and other major life-limited components during the lease. We record as revenue all maintenance rent receipts not expected to be repaid to lessees. We estimate the total amount of maintenance reimbursements for the entire lease and only record revenue after we have received enough maintenance rent under a particular lease to cover the estimated total amount of revenue reimbursements. In these leases, upon lessee presentation of invoices evidencing the completion of qualifying maintenance on the flight equipment, we make a payment to the lessee to compensate for the cost of the maintenance, up to the maximum of the supplemental maintenance rental payments made with respect to the lease contract.

In most lease contracts not requiring the payment of supplemental maintenance rent, the lessee is required to redeliver the flight equipment in a similar maintenance condition (normal wear and tear excepted) as when accepted under the lease, with reference to major life-limited components of the flight equipment. To the extent that such components are redelivered in a different condition than at acceptance, there is an end-of-lease compensation adjustment for the difference at redelivery. We recognize receipts of end-of-lease compensation adjustments as lease revenue when received and payments of end-of-lease adjustments as leasing expenses when paid.

In addition, we may be obligated to make additional payments to the lessee for maintenance related expenses (lessor maintenance contributions or top-ups) primarily related to usage of major life-limited components occurring prior to entering into the lease.

We capitalize lessor contributions as lease incentives, amounts paid by it to lessees or other parties in connection with the lease transactions. These amounts include the actual maintenance reimbursement we pay in excess of overhaul rentals. We amortize the lease incentives as a reduction of lease revenue.

For all lease contracts, any amounts of accrued maintenance liability existing at the end of a lease are released and recognized as lease revenue at lease termination. When flight equipment is sold, the portion of the accrued maintenance liability which is not specifically assigned to the buyer is released from the balance sheet and recognized as net gain on disposal of flight equipment.

Income taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

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We recognise the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realised. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, We consider all available positive and negative evidence, including scheduled reversals of taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. The assumptions made in forecasting future income require significant judgment, and if forecasts change or the level of future income differs from the forecasts, this may significantly impact the income tax expense in future periods.

Fair value measurements

Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. We determine fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market.

Assets held for sale

Flight equipment are classified as held for sale when we commit to and commence a plan of sale that is reasonably expected to be completed within one year. Flight equipment held for sale are stated at the lesser of carrying value or fair value less estimated cost to sell. Flight equipment held for sale are not depreciated. Subsequent changes to the asset’s fair value, either increases or decreases, are recorded as adjustments to the carrying value of the flight equipment. However, any such adjustment will not exceed the original carrying value of the flight equipment held for sale.

Share based compensation

We recognise compensation cost relating to share-based payment transactions with employees in the financial statements based on the estimated grant date fair value of the awards that are probable of vesting. We use the straight line method of accounting for compensation cost on share-based payment awards that contain time vesting provisions.

Recent Accounting Pronouncements

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The new standard is to be applied prospectively but retrospective application is permitted. We will adopt the provisions of ASU 2013-11 as of January 1, 2014 and do not expect the adoption of the standard to have a material effect on its consolidated financial condition, result of operations or cash flows.

Quantitative and Qualitative Disclosures about Market Risk

Market risk represents the risk of changes in value of a financial instrument, caused by fluctuations in interest rates and foreign exchange rates. Changes in these factors could cause fluctuations in our results of operations and cash flows. We are exposed to the market risks described below.

 

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Interest Rate Risk

Interest rate risk is the exposure to loss resulting from changes in the level of interest rates and the spread between different interest rates. Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, global economic factors and other factors beyond our control. We are exposed to changes in the level of interest rates and to changes in the relationship or spread between interest rates. Our primary interest rate exposures relate to our floating rate indebtedness, which are based on interest rate indices such as LIBOR. Increases in the interest rate index would increase the cost of our unhedged floating rate debt, negatively impacting our pre-tax income. However, such increases would also increase lease revenue associated with a number of our leases, therefore positively impacting our pre-tax income.

Changes, both increases and decreases, in our cost of borrowing and lease revenue, directly impact our net income. The majority of our lease revenue is fixed over the life of our leases, and we actively seek to manage our interest rate exposure through maintaining a similar proportion of fixed interest rate exposure. However, we also have used floating-rate debt to finance a portion of our fixed rate lease acquisitions. Where fixed rate leases are financed using floating rate debt, we seek to mitigate our floating interest rate risk by entering into interest rate derivatives, as appropriate. Our floating rate debt constituted 23.8% of our total outstanding indebtedness as of March 31, 2014. Partially hedging this exposure, we have interest rate derivatives that have notional profiles of approximately 14.2% of our total indebtedness as of March 31, 2014. Furthermore, 15.2% of our leases had rentals linked with floating rate benchmarks as of such date.

The following discussion about the potential effects of changes in interest rates on our outstanding indebtedness and floating rate leases is based on a sensitivity analysis, which models the effects of hypothetical interest rate shifts on our results of operation and cash flows. This sensitivity analysis is constrained by several factors, including the necessity to conduct the analysis based on a single point in time and by the inability to include the extraordinarily complex market reactions that normally would arise from the market shifts. Although the following results of our sensitivity analysis for changes in interest rates may have some limited use as a benchmark, they should not be viewed as a forecast. This forward looking disclosure also is selective in nature and addresses only the potential cash impact on our indebtedness. It does not include a variety of other potential impacts that a change in interest rates could have on our business.

Assuming we do not hedge our exposure to interest rate fluctuations related to our outstanding floating rate debt, a hypothetical 100 basis-point increase or decrease in our variable interest rates would have increased or decreased our interest expense by $6.5 million and our lease revenue by $5.1 million, and accordingly our net cash flows, by approximately $1.4 million for the year ended December 31, 2013.

Foreign Currency Exchange Risk

Our functional currency is U.S. dollars. All of our aircraft purchase agreements are negotiated in U.S. dollars, we currently receive substantially all of our revenue in U.S. dollars and we pay most of our expenses in U.S. dollars. We currently have a limited number of leases denominated in foreign currencies, maintain part of our cash in foreign currencies, and incur some of our expenses, primarily selling, general and administrative expenses in foreign currencies, primarily the Euro. A decrease in the U.S. dollar in relation to foreign currencies increases our expenses paid in foreign currencies and an increase in the U.S dollar in relation to foreign currencies decreases our lease revenue received from foreign currency denominated leases. Because we currently receive most of our revenues in U.S. dollars and pay most of our expenses in U.S. dollars, a change in foreign exchange rates would not have a material impact on our results of operations or cash flows.

 

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THE COMMERCIAL AIRCRAFT INDUSTRY

The information and data contained in this prospectus relating to the aircraft leasing industry has been provided in a report dated June 6, 2014 by ICF SH&E, Inc., (or “ICF SH&E”), an international air transport consulting firm, relied upon as an expert. See “Experts.” ICF SH&E has advised us that this information is drawn from its database and other sources and that some information in ICF SH&E’s database is derived from estimates or subjective judgments, so the information in the databases of other aircraft data collection agencies may differ from the information in ICF SH&E’s database. The historical and projected information in this prospectus relating to the aircraft leasing industry that is not attributed to a specific source is derived from ICF SH&E’s internal analyses, estimates and subjective judgments.

Air Transport Industry Overview

Commercial aviation is a critical component of the global economy with an estimated 8.4 million people working directly in the aviation sector which, by 2026, is forecast to contribute $1 trillion to world GDP1. If considered a country, the aviation industry would rank 19th largest in the world as measured by GDP.

Demand for air transport is strongly correlated to economic activity, and has grown at a rate in excess of 1.5 times the global GDP growth rate over the past 40 years.

Historical World Traffic (RPKs) and Global GDP Growth, 1970-2014F (Indexed 1970 = 100)

 

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Source: ICAO; International Air Transport Association (“IATA”) Forecast as of June 2014; International Monetary Fund (“IMF”), World Economic Outlook, April 2014.

Global passenger traffic demand, as measured in revenue passenger kilometers (“RPKs”),2 has doubled every 15 years in the commercial jet era. Growth has been approximately 160% from 1993 to 2013 at an average annual rate of 5.2%. Meanwhile, passenger capacity, as measured in available seat kilometers (“ASKs”)3, has grown at an average annual rate of 4.2% over the same time period.

Worldwide passenger traffic demand has remained resilient, robust and consistent. RPKs have declined in absolute terms on only three occasions in modern aviation history: by 3.3% in 1991 (following the 1990 oil price

 

 

1  The Air Transport Action Group
2  One (1) RPK equals one kilometer flown by a paying passenger.
3  One (1) ASK equals one kilometer flown by a seat—whether occupied or not.

 

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shock and early 1990s’ recession), 2.1% in 2001 (following the events of September 11, 2001), and 2.4% in 2008 (following the financial crisis of 2007-2008). Traffic recovered to above pre-downturn levels within one year after the first and last decline, and within two years after 2001.

Published forecasts anticipate that, over the next 20 years, annual growth in air traffic, for both passenger and cargo, will be around 5%, resulting in a further doubling of traffic within 15 years. The Airline Monitor projects 4.9% average annual growth in passenger traffic through 2025, and 4.5% average annual growth between 2026 and 2035, for a 20-year average annual growth rate of 4.8%. The Airbus 2013 Global Market Forecast predicts that RPKs will grow at an average of 4.7% per annum between 2012 and 2032, significantly dominated by the Asia Pacific region with a 20-year CAGR of 5.5%. Boeing in its 2013 Commercial Market Outlook (“CMO”) projects 5.0% average annual RPK growth between 2013 and 2032 again dominated by total traffic CAGR of 6.3% in the Asia Pacific region.

Airline Profitability

While airlines’ capacity and traffic have been consistently growing since the 1970s, profitability has been much more sporadic for the industry as a result of the near instantaneous impacts of economic shocks and recessions.

Spurred mainly by the severe pressures of market conditions following the events of September 2001 and, more recently, the global financial crisis of 2008/2009, the traditional “legacy” airline industry has undergone a transformational change, restructuring their business models and operating structures, shedding costs and adopting profit-oriented management strategies, with a considerable level of consolidation along the way. At the same time, low cost airlines have grown with a strong focus on costs, efficiency and profit. As the global economy has recovered, the health of the airline industry has improved as has the credit profile of many airlines, a number of which have successfully completed IPOs in recent years.

Although the economic downturn of 2008/2009 drove some of the highest aggregate losses in the airline industry’s history, airlines responded rapidly to falling demand with deep cuts in capacity. These cuts, combined with a reversal in oil prices and the economic recovery which began in late 2009, resulted in a 6% improvement in yields and load factors4 nearing 80% and, by 2010, nearly all of the losses incurred in 2008/2009 had been reversed. Passenger capacity discipline has become an established business practice, evident in that capacity has grown at a lower rate than traffic in three of the last four years, and with an expectation of a similar trend in 2014. By adding capacity at a slower rate than traffic, load factors and yields have risen, driving additional revenue.

 

4  Load factor is the percentage of ASKs occupied by paying passengers.

 

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IATA Traffic and Capacity Annual Change, 2010-2014F

 

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Source: IATA Forecast, June 2014. System wide global commercial airlines: domestic and international passengers.

Consequently, airline profitability has recovered since the 2008/2009 Recession, and IATA’s 2014 forecast predicts continued improvement to a net profit of $18 billion, with airlines in all regions making profits, albeit to differing degrees.

Aircraft Demand

The demand for new aircraft is primarily driven by two key factors:

 

    Aircraft demand for growth, most applicable to emerging markets

 

    Aircraft demand for replacement, most applicable to mature markets

Historically, demand for aircraft has been driven by economic growth, market maturity, market liberalization, and the adoption of new business models. Aircraft replacement is related to the relative operating economics of old and new aircraft, technological improvements, and, to a lesser extent, the demand for conversions of passenger aircraft to freighters.

Boeing forecasts the total market for new jet aircraft to be 35,000 units from 2013 to 2032, of which 59% will be for growth. Airbus similarly forecasts that the market for new passenger aircraft with over 100 seats will total 29,000 units over the same time period, with approximately 64% for growth and 36% for replacement.

 

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Projected Commercial Aircraft Fleet Growth: OEMs 20 Year Forecasts

 

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Note: Airbus forecast commercial passenger jet aircraft above 100 seats plus freighters; Boeing forecast includes passenger and freighter jets.

Source: Airbus Global Market Forecast 2013; Boeing CMO 2013.

The size of the global commercial aircraft fleet is expected to approximately double over the next two decades. Airbus forecasts fleet growth to 36,560 total aircraft by 2032 with passenger jets greater than 100 seats representing up 97% of the twenty-year new deliveries. Boeing predicts that the world fleet of jet aircraft, including those in passenger and freighter configurations, will reach 41,240 aircraft in 2032, of which almost 90%, or 36,250, will be mainline passenger jets with more than 90 seats.

Drivers of Aircraft Demand for Growth

The world fleet is expected to grow steadily as airlines continue to develop service offerings to accommodate the world’s rapidly growing demand for air travel. Key elements that will continue to drive growth in demand for both new and used aircraft include:

 

    Continued global economic growth

 

    Strong increases in economic activity and greater travel propensity in emerging markets

 

    Number of airline operators

 

    Stimulation of traffic from low fare offerings (growth of low-cost carriers (“LCCs”))

 

    Market liberalization

Economic Growth

Economic activity in a region generally has a strong impact on the increase in demand for air service. While varying regionally, Boeing’s worldwide forecast predicts that over the next 20 years air traffic demand will continue to grow at the historical rate of over 1.5 times GDP growth, driven by economic fundamentals, long-term demographics and market liberalization.

 

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Boeing Forecast of Regional Traffic and GDP Growth Rates, 2013-2032

 

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Source: Boeing CMO, 2013 to 2032.

Emerging Markets

Global economic activity lifted in the latter part of 2013 with continued improvement expected in 2014 to 2015, but the growth rates differ considerably between emerging and mature markets. While the worldwide GDP average growth rate over the next 20 years is expected to be 3.2%, economic growth rates in many emerging markets will greatly exceed this average, led by China at 6.4%, Asia Pacific at 4.5%, Africa at 4.4%, and Latin America at 4.0% according to Boeing’s 2013 to 2032 forecast. This strong economic activity in emerging markets, linked to the rapid advance of economic and trade globalization, is anticipated to drive growth in middle class populations. According to CLSA Asia Pacific Markets5, it is estimated that there will be approximately 145 million people in the Asia Pacific region who will be considered middle class by 2015, as compared to 95 million in 2010. This expanding middle class population is expected to fuel increased spending and consumption within the region.

In mature economies, a small change in GDP per capita results in a small increase in trips per capita. However, in developing economies a small increase in GDP results in a large increase in trips per capita. The following chart illustrates the relationship between GDP and trips per capita.

 

5  Credit Lyonnais Securities Asia

 

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Propensity to Travel, Trips per Capita (Logarithmic Scale) vs. GDP per Capita (US$)

 

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Source: IATA, CIA World Factbook, World Bank; ICF SH&E.

As seen above, market penetration remains low in emerging markets with the frequency of travel rising steeply with increasing disposable income, enabled primarily by emerging LCCs. Of note is the fact that 80% of the world’s population is living in countries that currently generate only 25% of flights.

With a strong correlation between GDP per capita and propensity to travel, and with large populations in strongly growing economies, there is vast potential for increased demand for air service from emerging markets over the next two decades, which will drive and underpin fleet expansion.

Airline Operators

Since commercial jets were introduced in the early 1960s, the airline industry has undergone significant and continuous change. While a number of airlines have not survived, those that have been in existence and successfully managed these dynamics are today referred to as “legacy carriers.” Concurrently, changes in the airline industry have allowed new entrants—primarily the LCCs—to compete with the legacy carriers and in some cases to grow significantly in terms of fleet size and market share. These new entrants now account for approximately 25% of total industry capacity.

As the industry has grown, so too has the number of operators, and the market today is highly fragmented. While approximately 50% of the fleet is operated by the 44 largest airlines with fleets of 100 or more aircraft, the remaining 50% of the fleet is operated by more than 800 operators with an average fleet size of approximately 12 aircraft.

Segmentation of Worldwide Commercial Jet Fleet by Operator Size

 

Quartile

   Fleet Count      Operator Fleet Size      Operators  

1st

     5,229         1-35 Aircraft         762   

2nd

     5,078         36-99 Aircraft         87   

3rd

     5,607         100-281 Aircraft         34   

4th

     4,862         282-742 Aircraft         10   

Total

     20,776            893   

Note: Commercial jet fleets in passenger, freighter, combi, or quick change roles.

Source: Flightglobal ACAS, March 2014.

 

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A general trend observed is that, above a certain nominal fleet size, the propensity for airlines to use operating leases for their aircraft fleet solutions is inversely proportionate to aircraft fleet size. That is, while the largest carriers tend to utilize a wide range of financing sources, with less emphasis on operating leases, small and mid-size airlines tend to use operating leases more extensively. Currently, around two-thirds of the world’s passenger airlines, including many of the largest operators make some use of operating leases in their fleet mix.

Low Fares

The increasing presence of LCCs across the world has driven, and will continue to drive, aircraft demand by stimulating traffic demand with low fares. Although much of their early growth was in the United States, LCCs have become established in most world markets, particularly Europe, and are now increasingly active in the Asia Pacific region. While the LCC business model has historically focused on flying narrowbody aircraft on short-haul flights, in recent years a number of new long-haul LCCs have been established or launched either as subsidiaries of major Asia Pacific or European carriers, or as independent airlines such as Europe’s Norwegian Air Shuttle.

GDP growth and the proliferation of LCCs are expected to have a great impact on demand growth in the Asia Pacific region, leading to aircraft fleets that will surpass those in North America and Europe by 2032.

Liberalization

The aviation sector has historically been highly regulated with significant commercial interference by the various regulatory authorities and government owners. Over the past two decades, governments have gradually been liberalizing their aviation policies to be more open in line with other international industries. The proliferation of “open skies” agreements has been one of the lead indicators of such liberalization, along with government divestitures of state owned airlines and the reduction of foreign ownership restrictions. Such liberalization in air services has proved to be a key driver of recent air service growth in the Asia Pacific region as airlines there open new markets, cooperate in joint ventures, and undertake cross-border investment activities.

Drivers of Aircraft Demand for Replacement

Over the next 20 years, approximately 40% of total deliveries, or approximately 14,350 aircraft according to Boeing, is anticipated to be used as replacements for existing fleets of aging and less-efficient aircraft, primarily in developed regions. The following factors are the primary drivers of this replacement:

 

    Elevated fuel prices and emissions regulations driving replacement of older aircraft with more efficient equipment

 

    Aircraft reaching the end of their economic useful lives, driving retirement demand

 

    Freighter conversions, driving replacement demand of passenger aircraft

Fuel Prices and Emissions Regulations

Increased fuel prices and the economic effects of environmental regulations widen the operating cost differential between newer and older aircraft. Expectations that fuel prices will remain elevated and that additional regulations and taxes on carbon emissions will be put in place over the longer term are likely to accelerate the replacement of aging and inefficient fleets. Conversely, greater demand for, and the improved operating economics of, young and efficient aircraft will support their residual value retention.

 

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Evolution of Fuel Cost as a Share of Operating Expenses

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Source: IATA Financial Forecast, June 2014.

The use of new-technology aircraft can make a significant difference in total fuel consumption. Newer A320 family aircraft, for example, can burn around 30% less fuel per hour than mid-generation MD-80 aircraft on similar sector lengths, although they come with much higher ownership costs.

An additional economic consideration factored into aircraft selection decisions is the growing international movement toward regulating and reducing levels of greenhouse gas emissions. Over the longer term, these types of regulations are expected to accelerate the retirement of older, less fuel-efficient aircraft.

Retirement Demand

Demand for new aircraft to replace aging fleets is set to rise reflecting the increased rate at which aircraft are retiring, a trend that started almost 25 years ago in the early 1990s. Historically, 50% of jet aircraft have been retired at approximately 27 years of age. While only 5% of the commercial active jet fleet is currently over 27 years of age, around 25%, amounting to nearly 4,700 aircraft, will have reached that age by 2024, causing a substantial increase in the number of expected retirements, which are forecast to exceed 14,000 aircraft over the next 20 years, according to Boeing.

Freighter Conversion Demand

Boeing’s market forecast estimates that two thirds of the freighters entering the market in the next 20 years will be conversions from passenger aircraft. While the demand for freighter aircraft is currently soft, Airbus and Boeing predict 92 and 71 conversions per year over the next two decades, respectively.

Aircraft Supply

Today’s supply is the current fleet of approximately 20,7006 active commercial jet aircraft. The volume of supply will be influenced by manufacturer production rates, fleet exits through retirements and net changes in the parked fleet. Aircraft supply characteristics can be detailed as follows:

 

    There is a well-established Airbus and Boeing OEM duopoly in the narrowbody and widebody commercial passenger jet segments with generally disciplined behavior, which is expected to remain the case for at least the next ten to fifteen years. A similar duopoly dynamic exists today in the regional and small mainline jet market established by Embraer and Bombardier, although this dynamic is expected to change with new entrants before the market for larger aircraft does.

 

6  Includes active narrowbody, widebody and regional jets in passenger, freighter, combi, and quick change operational role.

 

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    Barriers to entry are extremely high, measured in terms of the time, technical and financial resources required, not only to bring new products to market, but also to establish credibility and a track record for reliability, performance and customer support. Even for established OEMs, developing new or evolved products is frequently a long-term and expensive process.

 

    Order backlogs have increased considerably, and currently equal approximately 58% of the in-service fleet.

 

    Aircraft production is increasingly reliant upon global supply chains, which are typically stable, but require strong oversight and management on the part of the primary manufacturer, and introduce political and other risks.

Current Fleet

The commercial jet fleet can be categorized by size (narrowbody, widebody, and regional jet) or by four broad generational subsets:

 

    “Old-generation”: Predominantly produced in the 1960s and 1970s. Given their high fuel, maintenance, and flight crew costs combined with a hostile regulatory environment, the relatively few active old-generation aircraft still in service can be expected to be retired in the near term. Aircraft in this category include the Boeing 727, Boeing 737-200 and the McDonnell Douglas DC-9.

 

    “Mid-generation”: Aircraft with peak production in the 1980s and early 1990s. This group, which includes the Boeing 737 Classic, Boeing 747-400, Boeing 757, Boeing 767, Airbus A300, Airbus A310, Airbus A340, McDonnell Douglas MD-11, and McDonnell Douglas MD-80, will increasingly be removed from their primary application/operators, but will continue to maintain a presence among secondary passenger operators or will be converted to freighter aircraft.

 

    “New-generation”: Current production aircraft types including the Airbus A318, A319, A320, and A321 (collectively the A320 family), Airbus A330 and the Airbus A380. Boeing’s new-generation aircraft in production include the Boeing 737-700, Boeing 737-800, and Boeing 737-900ER (collectively the 737NG family), Boeing 747-8, and the Boeing 777 series. New generation aircraft are currently available as new deliveries from the manufacturers, through the lessor channel, and in some instances from the used aircraft market. They are expected to form the core of future passenger airline fleets and help to meet demand for freighters for at least the next decade.

 

    “Next-generation”: Re-engined narrowbody aircraft such as the recently launched Airbus A320neo and Boeing 737 MAX aircraft families that are expected to offer fuel burn improvement of around 15% compared to new-generation aircraft. In addition, this category includes the Bombardier CSeries, Embraer E-Jet E2 and COMAC C919 narrowbody families and the Airbus A350 and Boeing 787 widebody families, which are all expected to offer fuel burn improvement of around 20% compared to new-generation aircraft.

 

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Next Generation Aircraft Types

 

Aircraft Type

  

Engine Type(s)

   Status    Entry into Service

Narrowbody

Airbus A320neo

  

P&W PW1100G,

CFMI LEAP-1A

   Launched    2015

Boeing 737 MAX

   CFMI LEAP-1B    Launched    2017

Bombardier CSeries

   P&W PW1500G    Launched    2015

COMAC C919

   CFMI LEAP-1C    Launched    2017

Embraer E-Jet E2

   P&W PW1700G/PW1900G    Launched    2018

Widebody

Boeing 787

  

GE GEnx-1B,

Rolls-Royce Trent 1000

   Launched    2011

Boeing 777X

   GE9X    Launched    2020

Airbus A350 XWB

   Rolls-Royce Trent XWB    Launched    2014

Source: ICF SH&E, OEM announcements.

In addition to the active fleet, aircraft are parked when undergoing transition between lessees, and when revenue generating opportunities for the aircraft are insufficient to cover the costs of operating the aircraft. Approximately 2,400 Western-built commercial jet aircraft were in storage as of March 31, 2014, and the majority of these are unlikely to re-enter operational service due to high fuel prices and the better economics of newer aircraft.

According to information from Flightglobal ACAS fleet database, the average age of the active global aircraft fleet as of March 31, 2014 is 10.8 years. As the chart below shows, however, there is considerable regional variation, with North America having the largest proportion of older aircraft and emerging market regions operating the youngest fleets.

Commercial Aircraft Fleet by Generation, Region, and Age, March 2014

 

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Note: Fleet includes narrowbody, widebody, and regional jets in commercial service. Excludes Russian-manufactured aircraft. Only includes operational roles of passenger, quick change, freighter, and combi.

Source: Flightglobal ACAS, March 2014.

 

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Though North America remains the largest region by fleet size, growth has shifted to Asia Pacific, enabling the region to reach near parity with Europe in terms of fleet size.

1996—March 2014 World Active Commercial Aircraft Fleet Growth

 

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Note: Fleet includes narrowbody, widebody and regional jets in commercial service. Only includes operational roles of passenger, quick change, freighter, and combi. Excludes aircraft with region undisclosed. Excludes Russian-manufactured aircraft.

Source: Flightglobal ACAS, March 2014.

Having grown 3.4% per annum since 1996, the worldwide commercial jet fleet comprises 20,700 aircraft in active service. New deliveries will be used to grow the current fleet level as well as to replace retiring aircraft.

Order Backlogs

The healthy state of order backlogs with the aircraft OEMs reflects the strong demand for new aircraft types by airlines and lessors. By the end of 2011, order backlog levels had returned to pre-recession 2008 levels and have continued to grow. For the full year 2013, Airbus received 1,619 gross orders while Boeing received 1,339 gross orders, taking the cumulative order backlog to an all-time high total of 11,700 units.

 

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Commercial Aircraft Order Backlog as a Percent of Active Fleet, 2001-March 2014

 

LOGO

Note: includes narrowbody, widebody, and regional jets in commercial service. Excludes Russian-manufactured aircraft. Only includes operational roles of passenger, freighter, quick change and combi.

Source: Flightglobal ACAS, March 2014.

Historically, direct orders placed by lessors have represented slightly more than 20% of the total Airbus and Boeing orders placed, with considerably higher percentages seen for some aircraft from time to time. Currently, however, only around 15% of the backlog is held by lessors, reflecting the long lead times to delivery and strong demand directly from the airlines.

Manufacturer Production

Narrowbody Aircraft

Based on current announced production rates, Boeing and Airbus have around seven years of backlog for their respective narrowbody aircraft families. While this reflects deliberate overselling to help manage cancellation risk, and while a small number of delivery dates may be available sooner to strategic customers, both manufacturers are largely sold out for the next several years.

Airbus and Boeing Current Narrowbody Backlog Analysis

 

Aircraft Family

 

Current Backlog

 

Current Backlog

Years of Production

Airbus A320/A320neo

  4,172   8.6

Boeing 737NG/MAX

  3,474   6.4

Note: Assumes ramp-up of production rates to 47 per month in 2017 for the 737 and 46 per month in 2016 for the A320.

Source: OEM Statistics, January 2014; ICF SH&E analysis.

Widebody Aircraft

While many widebody types currently have in excess of five years of backlog at announced production rates, the numbers to be delivered in the next few years will significantly increase to levels not previously experienced. Like the major narrowbody aircraft programs, there is limited near-term availability of delivery dates from the aircraft manufacturers, particularly for popular next-generation types like the Boeing 787 and Airbus A350.

 

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Airbus and Boeing Current Widebody Backlog Analysis

 

Aircraft Family

 

Current Backlog

 

Current Backlog
Years of Production

Medium Widebody

   

Airbus A330

  250   2.2

Airbus A350

  814   8.0

Boeing 767

    47   3.9

Boeing 777

  355   3.6

Boeing 787

  920   6.6

Large Widebody

   

Airbus A380

  137   4.8

Boeing 747

    49   2.7

Notes: Considers current and announced future production rate changes. All other rates from OEM announcements except A350 from The Airline Monitor.

Source: OEM Statistics and announcements as of December 2013; ICF SH&E analysis.

Risk of Manufacturer Oversupply

ICF SH&E, along with lessors and OEMs, share a common view that an unprecedented replacement cycle is under way, which will support aircraft demand well into the future, sustained by continuing high fuel prices, aging aircraft replacement needs, continued increases in demand for larger capacity narrowbodies, emerging-market long-term growth requirements and the global expansion of LCCs. The current order books are also supported by strong capital market supply and sustained, robust growth of the aircraft leasing industry.

Over the past several years, certain production increases under consideration by Airbus and Boeing were not implemented, despite high backlogs, due in part to concerns over the robustness of their supply chains. As a result, a significant level of deliberate delivery over-booking developed, which the OEMs have managed effectively and with a high level of granularity, allowing customers to move delivery positions forward and backward in time where necessary. This flexible approach to near-term delivery times, coupled with a critical period of supply discipline, aided the manufacturers in maintaining stable production even through the challenging 2008-2009 downturn.

Real technological, fuel efficiency and operating cost advantages are conferred by the narrowbody Airbus A320neo and Boeing 737 MAX families and with a backlog of seven to eight years in place, there seems little risk in continuing to manufacture at the announced rates, absent a major industry downturn. New widebody types slated for production such as the A350 XWB and Boeing 787 family aircraft also present a real step change in technology and operating cost advantage over rapidly proliferating point to point long haul city pairs, with the further appeal of standardization and ease of reconfiguration improving market liquidity and reducing residual value risk.

Additionally, a significant number of aircraft are reaching the end of their economic useful lives, bolstering demand for new replacements, which Boeing expects to account for 40% of deliveries over the next 20 years. Continuing high oil prices, low interest rates and abundant liquidity all help to support the current level of aircraft orders. Given the benefits deriving from new technology and the continued over-booking strategy followed by the OEMs, the order books are believed to be capable of absorbing the impact of some increase in interest rates and reduced availability of capital, should they occur in the future.

Aircraft Financing and Leasing Markets

Few airlines have the free cash available to finance acquisitions of new aircraft on their own, and so seek financing in the form of commercial bank debt, export credit guaranteed loans or notes, and capital markets structures such as enhanced equipment trust certificates. As an alternative to providing equity capital, airlines finance aircraft use operating leases from third-party lessors.

 

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The operating lessors, in turn, frequently fund their business and assets with commercial bank debt, secured and unsecured notes or bonds in the capital markets, asset backed securitizations and even export credit-supported instruments.

Aircraft Operating Leases

An alternative to airlines providing the equity to finance aircraft is for aircraft leasing companies to provide such capital. In an aircraft operating lease, the lessor retains ownership of the aircraft and, at the end of the lease term, the lessee returns the aircraft to the lessor such that there is no residual value interest, or exposure, for the lessee.

Operating lessors typically source their aircraft through three primary channels:

 

    direct orders placed with the manufacturer

 

    sale-leaseback transactions with airlines

 

    purchases of used assets from other lessors or investors

Over the course of what is generally recognized as a 25 year economic life, an aircraft will be placed on lease multiple times, with the lessor retaining the residual value risk throughout or until the aircraft is retired or sold.

Operating leasing is an attractive instrument for an airline for a variety of reasons, including low capital outlay requirements, enhanced fleet planning flexibility, access to superior technology, advantageous delivery date availability, and the elimination of residual value risk.

Aircraft lessors play an important intermediary role that also benefits the OEMs as the sector is a significant direct buyer of new aircraft and provides a stable customer base. Commanding a sizeable position in the order books of both Airbus and Boeing—and to a lesser extent Embraer and Bombardier—lessors provide important insights for the OEMs in terms of future demand and related order book structure and act as an additional distribution network for the OEMs. In addition, the larger lessors establish aircraft component, interior, and engine standards that influence the industry and result in a more liquid trading market for these “standard” aircraft.

Operating Lease Penetration

Since its beginning over 40 years ago, the aircraft operating lease industry has evolved to become a highly sophisticated and major segment of the commercial aviation landscape.

 

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Since 1980, the percentage of the global active commercial aircraft fleet under operating lease has increased from less than 2% to nearly 41% in 2014, representing an average annual growth rate for the leasing sector of approximately 14%, compared to overall fleet growth of 3.7% over the same period. Boeing Capital forecasts that operating leasing will account for 50% of the in service fleet by the end of this decade, as shown in the chart below.

Evolution of Operating Lease Penetration by Fleet Size, 1970-2020F

 

LOGO

Source: Boeing.

Around 50% of the world’s in-service narrowbody fleet now on operating lease, driven by asset liquidity, volume demand and start-up/low-cost carrier preference for these aircraft. In addition, many lessors have historically preferred narrowbody aircraft due to their larger fleet sizes and operator bases, lower transition costs between lessees, and the relative ease in financing and leasing narrowbody aircraft. The Boeing 737-800 and Airbus A320-200, with 52% and 55% of their respective fleets under operating lease, are aircraft that represent the high demand of narrowbody aircraft by operating lessors.

Although overall widebody leasing penetration is lower than for narrowbodies, selected current and new-generation widebody aircraft also enjoy high operating lessor penetration. These aircraft are characterized by relatively high liquidity levels and are popular with operators. For example, 45% of the in-service Airbus A330 family fleet was subject to operating lease as of December 20137 and operating lease penetration for the Boeing 777 is also healthy at just over 25%. The backlogs for the next-generation Airbus A350XWB and Boeing 787 aircraft families suggests high liquidity and, in conjunction with designs intended to reduce transition costs between lessees, such aircraft will be attractive to aircraft operating lessors and airlines alike.

 

7  operating lease penetration statistics as per Flightglobal Ascend fleet database.

 

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Operating Lease Industry—Competitive Landscape

The table below shows the fleet statistics for the largest 20 operating lessors ranked by the current market value of their owned and managed fleets, including orders, as reported by Flightglobal Ascend’s fleet database at March 31, 2014. According to this analysis, the current and committed owned and managed portfolios of the largest 20 lessors have an aggregate current market value of more than $250 billion.

Top 20 Lessors Ranked by the Value of their Owned and Managed Fleet and Commitments, March 2014

 

          Current
Age1
     Fleet Units      Fleet Value, USD billions2  
    

Lessor

      Current      Commitments      Total      Current      Commitments      Total  
1    AerCap Holdings N.V. (including International Lease Finance Corporation)      8.3         1,309         330         1,639       $ 31.6       $ 21.6       $ 53.3   
2    GE Capital Aviation Services      7.3         1,677         282         1,959       $ 31.7       $ 15.3       $ 46.9   
3    Air Lease Corporation      3.8         202         300         502       $ 6.8       $ 22.8       $ 29.6   
4    CIT Aerospace      6.0         275         136         411       $ 7.1       $ 8.9       $ 16.0   
5    BOC Aviation      3.4         232         105         337       $ 9.1       $ 4.8       $ 13.9   
6    BBAM Aircraft Leasing & Management      5.8         431         4         435       $ 11.8       $ 0.4       $ 12.3   
7    Aviation Capital Group      5.4         264         129         393       $ 5.9       $ 6.1       $ 12.0   
8    SMBC Aviation Capital      5.1         367         42         409       $ 9.8       $ 1.8       $ 11.6   
9    ICBC Leasing      3.4         128         118         246       $ 4.8       $ 5.1       $ 9.9   
10    Avolon      2.7         115         87         202       $ 4.6       $ 4.5       $ 9.1   
11    AWAS      5.2         288         27         315       $ 7.8       $ 1.3       $ 9.1   
12    ALAFCO      5.1         52         125         177       $ 1.6       $ 7.4       $ 9.0   
13    Rostechnologii Group                      131         131               $ 5.5       $ 5.5   
14    CDB Leasing      3.8         116         30         146       $ 4.5       $ 0.9       $ 5.4   
15    Amedeo      1.0         4         20         24       $ 0.7       $ 4.1       $ 4.8   
16    Jackson Square      2.7         102         3         105       $ 4.2       $ 0.1       $ 4.3   
17    Aircastle      9.2         159                 159       $ 4.2               $ 4.2   
18    VEB-Leasing JSC      4.6         63         54         117       $ 2.1       $ 1.8       $ 3.9   
19    Ilyushin Finance Company                      102         102               $ 3.9       $ 3.9   
20    Doric      4.7         35                 35       $ 3.6               $ 3.6   

Note: Values for future year deliveries at 2014 level.

1  Value-weighted average age of current fleet.
2  Generic half life current market value per Ascend.

Source: Ascend, March 2014; Avolon (company information for Avolon fleet); ICF SH&E analysis.

A number of new entrants to the Top 20 are based in emerging markets, including China and Russia, signaling a growing globalization of the operating lease market.

There is strong evidence from previous industry cycles of a high correlation between the age, technology and demand profiles of aircraft types and their liquidity and residual value retention, which is also reflected in the ability to place aircraft on attractive leases and in the context of aircraft sales and trading activity. Young, technically advanced types that are widely operated and in high demand with airlines benefit from robust market liquidity and strong value retention, with less cyclical variation than older, out-of-production aircraft. For several key lessors, these factors and considerations underpin their individual investment models and provide comfort to more risk-averse investors who may prefer higher liquidity, value retention and marketability over higher yields.

A portfolio of assets that meet the above criteria can be termed “Tier 1 assets” and typically comprise new- or next-generation, Western-manufactured aircraft with superior market and technical characteristics, and which are considered unconcentrated among lessees or expected to be unconcentrated among lessees for future aircraft

 

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programs, in both cases taking account of the engine model. Tier 1 assets are typified by the new generation Airbus A320-200, Boeing 737-800 and Boeing 777-300ER aircraft and next-generation narrowbody A320neo, Boeing 737 MAX 8, and widebody Boeing 787-9 and Airbus A350-900 aircraft.

The following chart demonstrates the value proportion of Tier 1 assets for the “Top 10” lessors by owned and managed fleet and commitments.

“Tier 1” Proportion of Owned Fleet and Commitments of Top 10 Lessors, March 2014

 

LOGO

Note: “Tier 1” assets defined by ICF SH&E to include Airbus A319-100, Airbus A320-200 (CFM56-5B/V2500-A5), Airbus A321-200, Airbus A319neo, Airbus A320neo, Airbus A321neo, Airbus A330-200, Airbus A330-300 (Trent 700), Airbus A350-900, Airbus A350-1000, Boeing 737-800, Boeing 737 MAX, Boeing 777-200ER (GE), Boeing 777-300ER, Boeing 777-8X, Boeing 777-9X, Boeing 787, Embraer E-190, E-190/195 E2, and ATR 42/72-500/600 passenger aircraft.

AerCap includes ILFC.

Source: Ascend, March 2014; Avolon (company information for Avolon fleet); ICF SH&E analysis.

Aircraft Values and Lease Rates

Aircraft generally depreciate over time as they age and experience the wear and tear of operation. Eventually, an aircraft will reach the end of its useful life (historically in the order of 25 years unless extended by cargo conversion) and will retain a marginal value that represents the worth of its various components—primarily the engines—and airframe material.

From an economic standpoint, the value of the aircraft should be equal to the net present value of the operating profit that the asset can generate over its economic life. However in practice, the value of an aircraft to the operator is influenced by many factors that ultimately determine the purchase price and/or lease rate the carrier is willing to pay, including:

 

    Revenue-generating capacity (passenger and freight payload, range)

 

    Operating economics (fuel burn, maintenance costs, landing and handling costs, flight and cabin crew costs, insurance, etc.)

 

    Financing costs and residual value retention

 

    Spot-market supply and demand (the number of same-model and competing aircraft available, industry growth and capacity profile, etc.)

 

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Young, modern, fuel-efficient production aircraft types typically have higher value retention characteristics and face lower market volatility than older, less efficient models. Throughout the industry cycle, aircraft market values—the price for which an airplane may be sold for given the market conditions in effect at the time, which may or may not be in balance—rise above and fall below aircraft base values which are the appraiser’s opinion of the underlying economic value of an asset in an open, unrestricted, and stable market environment with a reasonable balance of supply and demand, assuming full consideration of its highest and best use.

Given the relatively more liquid market of operating leasing (compared to aircraft trading), market lease rates generally represent market-clearing prices that reflect current supply and demand, and are therefore closely correlated to global economic conditions. However, because aircraft operating leases are usually contracted at fixed monthly lease rates for many years, aircraft lessors are frequently insulated from short-term swings in market lease rates throughout the industry cycle.

In general, over the last 15 years young and popular single aisle aircraft with broad market acceptance, large in-service fleets and order backlogs have performed well with respect to value retention in spite of the challenges that the industry has faced during this period.

Values for new current technology aircraft have generally been stable, although some volatility was experienced during the challenging periods after September 11, 2001 and during the recession, while used aircraft of 5-10 years in age—still considered young—exhibited higher levels of volatility.

Equally, market values for modern twin-aisle aircraft have performed reasonably well over the past fifteen years, although newer aircraft again have generally performed better than older models of the same type.

Absent deterioration in economic growth or other exogenous events, and subject to changes in interest rates and fuel prices, stabilization and/or improvement in many new-generation aircraft values and lease rates are expected over the next several years.

The Aircraft Value Cycle

In addition to aircraft market and technical performance characteristics, aircraft values and their retention over time are also influenced by external macroeconomic forces and unforeseen events. Over the past 40 years, the aviation industry has proved particularly susceptible to changes in world economic activity and exogenous shocks such as war, high fuel costs, terrorism and other events such as SARS. The recurring and pronounced cyclicality relative to other industry endeavors and its volatility have come to be known as the aircraft value cycle where air traffic, airline profits, aircraft orders, aircraft deliveries and other specific industry factors evolve in a cyclic and familiar process over time—typically 7 to 10 years.

 

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Aircraft Value Cycle and Airline Profitability: 1995—2014F

 

LOGO

Source: IATA; ICF SH&E.

Successful lessors must not only identify and acquire aircraft which make good investments but must also, crucially, determine the optimum timing of investment and disposal of assets to enhance economic returns and the risk profile of the enterprise, while generating attractive returns throughout the cycle from peak to trough and beyond.

A useful metric, particularly for in-production aircraft, when deciding at what point to invest and divest in the aviation cycle is the current market value to base value ratio. The following exhibit illustrates the current market value relationship over time relative to base value for comparatively young five-year old Airbus A320-200 and Boeing 737-800, both popular and liquid narrowbody aircraft. Volatility is comparatively low relative to older, out-of-production, or widebody aircraft.

 

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Aircraft Current Market Value / Base Value Ratio

 

LOGO

Source: ICF SH&E.

The above chart demonstrates that there are inflection points in the aviation cycle, such as the low points in 2003 and 2010, when skilled lessors and investors with an understanding of likely aircraft value performance through the various cycle phases can acquire well-priced assets at a pre-determined and appropriate acquisition price and manage them through the cycle into recovery with upside available over time.

Indicators of improving market conditions include, inter alia, improving current market values rising above base values, airline load factor increases, improving economic conditions (particularly in emerging markets), upwards trends in IATA airline profit forecasts and improvement in international freight traffic.

Many of these indicators are trending upward, suggesting continued improvement of aircraft values, particularly for Tier 1 assets, both in-production and next generation as identified earlier, which have generally retained value well in a period of sustained demand, increasing airline profitability, high fuel costs, abundant financial liquidity and low interest rates. ICF SH&E expects further improvement over the next few years and, for the most liquid Tier 1 assets, current market values are expected to rise above base values during this period.

 

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BUSINESS

Our Company

Avolon is a leading global aircraft leasing company focused on acquiring, managing and selling commercial aircraft. We were launched in May 2010 by an experienced team of aircraft leasing and financing professionals. Our strategy is to build and maintain a portfolio of young, modern, fuel-efficient commercial aircraft while seeking to maximize long-term earnings growth and generate attractive risk-adjusted returns through the aviation industry cycle. Since our founding, we have built an Owned Portfolio of aircraft totaling over $4,388.5 million in Aggregate Net Book Value as of March 31, 2014. Our Owned, Managed and Committed Portfolio of 202 aircraft made us the tenth largest aircraft lessor by current market value as of March 31, 2014, according to ICF SH&E. The average age of our Owned and Managed Portfolio, weighted by current market value, was the lowest of the ten largest operating lessors as identified by ICF SH&E. The average age of our Owned Portfolio, weighted by net book value, was 2.46 years as of March 31, 2014. For the year ended December 31, 2013 and the three months ended March 31, 2014, we reported total revenues of $449.8 million and $135.8 million, respectively, and net income of $112.8 million and $36.4 million, respectively.

As of March 31, 2014, our Owned, Managed and Committed Portfolio consisted of 202 aircraft, including 105 owned, 10 managed and 87 committed aircraft. Our Owned Portfolio consists primarily of narrowbody aircraft, including the Airbus A320 family and the Boeing 737-800, and select widebody aircraft, including the Airbus A330, the Boeing 777 and the Boeing 787. Our Committed Portfolio includes 44 next generation Airbus A320neo, Boeing 737 MAX and Boeing 787 family of aircraft, which are designed to deliver new levels of operating efficiency and are expected to be in high demand. As of March 31, 2014, the average lease term remaining on the leases in our Owned Portfolio, weighted by the net book value of the aircraft, was 6.9 years.

We are a global business, headquartered in Dublin, Ireland, with offices in China, Dubai, Singapore and the United States. Our global presence provides local access to airline customers and capital providers in key geographic regions, particularly emerging and high growth markets such as China, South East Asia, the Middle East and Latin America. As of March 31, 2014, our customer base comprised 46 airlines in 27 countries.

We lease our aircraft pursuant to net operating leases that require the lessee to pay for maintenance, insurance, taxes and all other aircraft operating expenses during the lease term. As lessor, we receive the investment benefits from, and assume the residual risk of, the aircraft. We select aircraft that we believe will retain a high residual value and will be less susceptible to asset impairment risk. Our leases are payable in U.S. dollars, with lease rates predetermined for the term of the lease, providing a high level of predictability to revenues. We also provide fleet management services to other aircraft investors.

Our business model allows for flexibility to adjust to market conditions and to balance and manage risk. Our business model is designed to deliver attractive risk adjusted returns by enabling a diversified multi-channel approach to aircraft acquisitions that mitigates pricing, technology and financing risk associated with reliance on a single acquisition channel. We use multiple aircraft acquisition channels to grow our business, thereby reducing dependence on large scale, long-dated capital commitments associated with direct orders from OEMs. Our portfolio consists of aircraft acquired through sale-leaseback transactions, aircraft ordered directly from OEMs and aircraft purchased from other lessors. We believe our deep industry relationships enable us to source transactions that are not broadly available. By changing the emphasis between the sale-leaseback, direct order and portfolio acquisition channels, we seek to accelerate growth and optimize value at different points in time during the aviation industry cycle.

We maintain relationships with aircraft investors globally and seek to sell assets to proactively manage our portfolio in response to market conditions. Aircraft sales facilitate management of portfolio concentrations, provide ongoing liquidity of the portfolio, enable us to monetize value in our aircraft, help maintain visibility and momentum with our customers and are an effective tool for managing both asset residual value and lease

 

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remarketing risk. From our inception in May 2010 through March 31, 2014, we have realized net gain on disposal of flight equipment of $59.1 million from the sale of 18 aircraft, and the net gain arising from the insured total loss of one aircraft. We also recorded management fee revenue of $1.0 million arising from the sale of two aircraft prior to delivery.

To manage risks associated with our business, we have developed a comprehensive risk management platform that uses proprietary analytical systems and credit scoring processes. These systems, tools and models, combined with formal risk committees, inform our decision-making process. We seek to mitigate asset, credit and liability risks associated with owning and leasing aircraft through:

 

    diversification across geographies, airline business models and customers;

 

    a select investment focus on young, modern, fuel-efficient and marketable aircraft types;

 

    management of the timing of lease and debt maturities;

 

    management of funding to minimize exposure to interest rate risk, spread debt maturities and match funding to new aircraft commitments; and

 

    adoption of a comprehensive risk management framework.

The combination of young, modern aircraft and robust risk management has contributed to a 100% fleet utilization and no unscheduled lease terminations, credit losses or asset impairments since our inception.

Our highly experienced executive leadership team is led by our Chief Executive Officer, Dómhnal Slattery, formerly the founding Chief Executive Officer of RBS AC, now known as SMBC Aviation Capital and one of the largest aircraft lessors in the industry. Our President and Chief Commercial Officer is John Higgins, formerly Chief Commercial Officer of RBS AC; our Chief Financial Officer is Andy Cronin, formerly Senior Vice President Investor Markets at RBS AC; our Head of Strategy is Dick Forsberg, formerly Head of Portfolio Strategy at RBS AC; and our Chief Operating Officer and Head of Risk is Tom Ashe, formerly Head of Europe, the Middle East and Africa at RBS AC. This executive leadership team has on average over 23 years of experience in the aircraft leasing industry, covering several industry cycles, and deep and long-standing customer, lender, investor and OEM relationships. Our team seeks to provide thought leadership in the sector through materials such as white papers, discussion documents and webinars, an approach which is embedded in our core business activity. The team is supported by our Board of Directors, led by our Non-Executive Chairman, Denis Nayden, who was formerly Chairman and Chief Executive Officer of GE Capital Corporation and held several roles during his tenure, including oversight of GE Capital Aviation Services.

Operations to Date

Owned, Managed and Committed Portfolio

Our Owned, Managed and Committed Portfolio consists of 202 young, modern, fuel-efficient aircraft, with lease arrangements with 46 airlines in 27 countries. Our Owned Portfolio of 105 aircraft includes 96 narrowbody and nine widebody aircraft, with our average age, weighted by net book value, of 2.46 years. In addition to our Owned Portfolio, we manage eight aircraft on behalf of other aircraft investors and ACP, our joint venture with Wells Fargo & Company, manages two aircraft. These aircraft include Airbus A319, Airbus A320, Boeing 737-800 and Boeing 777-200F models operated by four airlines.

As of March 31, 2014, we had committed to acquire a total of 87 aircraft at an estimated aggregate purchase price of approximately $4,871.3 million, with scheduled delivery dates through 2021. Our Committed Portfolio includes 55 aircraft ordered directly from Airbus and Boeing and 32 aircraft to be acquired under sale-leaseback contracts with airlines and from other lessors. Our Committed Portfolio includes 44 next generation aircraft, consisting of the Boeing 737 MAX, Airbus A320neo and Boeing 787 aircraft. We have entered into leases or letters of intent with respect to all new aircraft scheduled for delivery through the first quarter of 2016, with a weighted average lease term of 10.2 years, based on acquisition price.

 

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As of March 31, 2014, our Owned, Managed and Committed Portfolio consisted of the following aircraft:

Owned, Managed and Committed Portfolio

 

Aircraft type

   Owned
Portfolio
     Managed
Portfolio
     Committed
Portfolio
     Total
Portfolio
 

Boeing 737-800

     38         1         24         63   

Airbus A320ceo

     46         1         10         57   

Boeing 737 MAX

                     20         20   

Airbus A320neo

                     20         20   

Airbus A330-200/300

     5                 4         9   

Airbus A319ceo

     4         4                 8   

Airbus A321ceo

     2                 4         6   

Embraer 190

     6                         6   

Boeing 787-8/9

     1                 4         5   

Boeing 777-300ER

     3                 1         4   

Boeing 777F

             4                 4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     105         10         87         202   

The following table sets forth the scheduled delivery dates for our Committed Portfolio as of March 31, 2014:

Committed Portfolio Delivery Schedule

 

Aircraft Type

   2014      2015      2016      2017      2018      2019      2020      2021      Total  

Boeing 737-800

     16         7         1                                                 24   

Airbus A320ceo

     6         4                                                         10   

Boeing 737-8 MAX

                                     2         4         2         2         10   

Boeing 737-9 MAX

                                                     5         5         10   

Airbus A320neo

                                     4         8         8                 20   

Airbus A321ceo

     4                                                                 4   

Airbus A330-200/300

     4                                                                 4   

Boeing 787-9

     1         2         1                                                 4   

Boeing 777-300ER

     1                                                                 1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     32         13         2                 6         12         15         7         87   

 

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Our Lessees

As of March 31, 2014, the ten largest airline lessees in our Owned Portfolio accounted for 57% of our Aggregate Net Book Value, with the three largest, American Airlines, LATAM and IndiGo, representing 10%, 8% and 7%, respectively. The following chart shows, for each of the top ten lessees, the percentage of our Owned Portfolio as of March 31, 2014 by Aggregate Net Book Value.

 

LOGO

The table below shows the distribution of lease revenue by location of each airline’s principal place of business for the periods presented:

 

     Years Ended December 31,     Three Months
Ended March 31,

2014
 
     2011     2012     2013    

Asia Pacific

     25     28     26     27

Europe, Middle East & Africa

     52        47        40        38   

Americas

     23        25        34        35   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

Our Business and Growth Strategies

Our objective is to build and maintain a portfolio of young, modern and fuel-efficient commercial aircraft while seeking to maximize long-term earnings growth and generate attractive risk-adjusted returns through the aviation industry cycle. In order to achieve our business objectives, we pursue the following strategies:

Focus on robust fleet growth through investment in young, modern, fuel-efficient aircraft.

Our investment strategy is focused on acquiring young, modern, fuel-efficient aircraft that we believe will remain in strong demand. As airlines face continuing high fuel prices, environmental regulation and an aging asset base, we believe that demand for modern, fuel-efficient aircraft will increase. According to forecasts by Boeing Capital, over 50% of the world’s aircraft will be under operating leases by 2020 compared to nearly 41% in 2014. We believe the robust order backlogs of next-generation aircraft at Boeing and Airbus, combined with these favorable industry dynamics, present a significant growth opportunity for Avolon. We also believe young, modern, fuel-efficient aircraft will have strong long-term value retention characteristics and lower re-marketing risks and will enable us to generate stable cash flows over the long term. In addition, we believe that maintaining a young, modern fleet will help minimize asset impairment risks.

Leverage multiple aircraft procurement channels to optimize growth and performance through the aviation industry cycle.

We intend to continue to utilize multiple procurement channels to source aircraft, including sale-leaseback transactions with airlines, direct orders with Airbus, Boeing and other OEMs, and portfolio acquisitions from

 

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other lessors to selectively build our portfolio. We believe that the utilization of multiple aircraft procurement channels will provide us the flexibility to enhance our portfolio and performance through the cycle as each channel can be calibrated to react to, and increase opportunity from, prevailing market conditions.

Sale-Leaseback

Sale-leaseback transactions accounted for 110, or approximately 52%, of the total number of aircraft that we have committed to acquire since inception as of March 31, 2014. Under this transaction structure, we commit to acquire either new aircraft that an airline has ordered directly from the OEM, or aircraft already in service, and lease the aircraft to the airline. The sale-leaseback channel helps us to manage risk as we have clear visibility of the counterparty and lease terms, with no placement risk. This channel also provides us with flexibility to manage cycle risk and be responsive to market opportunities and conditions. Sale-leaseback transactions are generally completed within 9 to 18 months from the date on which the contract is signed to the scheduled delivery of the aircraft.

Direct Orders from Manufacturers

Since our inception, we have committed to acquire a total of 70 narrowbody aircraft directly from Airbus and Boeing, representing 33% of the total number of aircraft that we have committed to acquire as of March 31, 2014. Our orders include 20 Airbus A320neo and 20 Boeing 737 MAX family aircraft, which are scheduled for delivery between 2018 and 2021. These orders are strategically important as they give us access to highly sought-after, next generation, fuel-efficient aircraft. We anticipate strong leasing demand from airlines due to the attractiveness of these aircraft and their limited availability. We believe these delivery positions are attractively timed and have the potential to generate significant franchise value for Avolon. Direct order acquisitions typically require significantly longer lead times than sale-leaseback transactions, generally ranging from four to eight years from the time of order to the scheduled delivery of the aircraft, and require us to make pre-delivery payments.

Portfolio Acquisitions

Since our inception, we have committed to the acquisition of 33 aircraft from other lessors and investors, representing 15% of the total number of aircraft that we have committed to acquire as of March 31, 2014. Such transactions typically include multiple aircraft and multiple airlines and, as such, the transactions are more diversified than single sale-leaseback opportunities. Moreover, because the aircraft are already on lease or committed for near-term delivery on lease, such transactions typically generate cash flow more quickly than aircraft acquired through new sale-leaseback or direct order channels.

Actively sell aircraft through the aviation cycle.

The principle of active aircraft sales is central to our portfolio strategy. Aircraft sales facilitate management of portfolio concentrations, provide ongoing liquidity of the portfolio, enable us to monetize value in our aircraft, help us maintain visibility and momentum with our customers and are a tool for effectively managing both asset residual value and lease remarketing risk. We have a dedicated team of experienced professionals focused on aircraft sales across channels, including asset backed securitizations and other structured portfolio sales. Aircraft sales can also be a source of fee income from associated asset management opportunities, while allowing us to recycle and redeploy capital to fund further growth. The buyers of our aircraft include airlines, financial investors and other aircraft leasing companies. From our inception in May 2010 through March 31, 2014, we have realized net gain on disposal of flight equipment of $59.1 million from the sale of 18 aircraft and the net gain arising from the insured total loss of one aircraft. We also recorded management fee revenue of $1.0 million arising from the sale of two aircraft prior to delivery.

 

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Utilize our deep, long-standing and valuable industry relationships.

We believe our team’s broad industry experience and expertise enables us to leverage relationships globally to drive our growth and performance. We have active relationships with over 150 airlines globally, which helps us place new aircraft, re-market end of lease aircraft and source transactions to grow our fleet through multiple acquisition channels. We believe our market knowledge enables us to source transactions that are not broadly available. We are actively involved with consultative bodies, events and forums that have been formed by the aircraft and major engine OEMs to engage with the industry on the development and design of new products. Our membership of these groups provides us with multiple opportunities to share opinions and seek to influence OEM development and design activity to align with customer requirements and drive future growth. These include:

 

    Boeing 737 MAX Service Ready Team—a working group focused on preventing current deficiencies on Boeing 737NG from transferring across to the Boeing 737 MAX;

 

    Airbus A350XWB Customer Forum—a combined lessor and airline working group engaged in the preparation of the Airbus A350 family aircraft for service entry;

 

    Embraer E-Jets G2 Lessor Consultation—a consultation process with a small group of lessors to provide input prior to final high-level design freeze;

 

    Boeing 737 Leasing Companies Advisory Board—a lessor consultation group providing input to Boeing 737 Program Management to guide the development of the Boeing 737NG and Boeing 737 MAX; and

 

    Boeing Widebody Customer Working Group—a lessor and airline consultation group providing customer guidance on the development of Boeing widebody aircraft products with current focus on the Boeing 777-8/9X.

Leverage platform to expand asset management activity.

We have a scalable platform that includes technical, marketing, risk management and other capabilities critical to managing a fleet of leased aircraft. Providing asset management services provides us contracted fee income. Avolon currently manages eight aircraft on behalf of other aircraft investors, and ACP, our joint venture with Wells Fargo & Company, manages two aircraft. We believe that the strengths of our platform, combined with our team’s experience, make us a credible provider of third-party asset management services to investors, whether in the context of investors purchasing aircraft from Avolon or independently originated opportunities.

Our Competitive Strengths

We believe the following strengths assist us in executing our business and growth strategies and underpin our ability to generate future earnings growth.

Scaled and efficient business with growth visibility.

Since our launch in 2010, we have grown the size of our Owned, Managed and Committed Portfolio to 202 young, modern and fuel-efficient narrowbody and widebody aircraft, making us the tenth largest aircraft lessor by current market value as of March 31, 2014 according to ICF SH&E. We believe that the scale of our portfolio size provides diversification to protect against risks associated with owning and leasing aircraft, facilitates sales activity and provides economies of scale. We have 52 employees working in five offices globally that service our 46 airline customers located in 27 countries. We believe our platform has extensive capabilities in key commercial, technical, risk management and financial functions and is designed to be efficient and fully scalable to accommodate future growth. We believe rigorous internal processes and controls and a transparent culture underpin our platform.

We believe our size, scale, capitalization and industry contacts will enable us to capitalize on the opportunities afforded by the growing aircraft leasing industry. Our Owned Portfolio, with an Aggregate Net

 

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Book Value of $4,388.5 million as of March 31, 2014, is leased to airlines under long-term leases, of which the average lease term remaining, weighted by the net book value of the aircraft, was 6.9 years as of such date, providing considerable predictability to our revenues. Additionally, we have a Committed Portfolio of 87 aircraft, of which 47 are scheduled for delivery through June 2016. We have entered into leases or letters of intent with respect to all new aircraft scheduled for delivery through the first quarter of 2016, with an average lease term of 10.2 years, weighted by acquisition price, providing growth and cash flow visibility. Further, our team maintains relationships with over 150 airlines globally and actively sources sale-leaseback and portfolio acquisition opportunities, many of which we believe are not broadly available.

Young, modern, fuel-efficient aircraft fleet.

Our Owned Portfolio consists of young, modern and fuel-efficient aircraft. As of March 31, 2014, the average age of our Owned Portfolio, weighted by net book value, was 2.46 years. Younger, modern aircraft are more desirable than older aircraft to many lessees because of their fuel efficiency, lower maintenance costs and longer remaining useful lives. We believe that our aircraft are in high demand among our airline customers and are readily deployable to markets throughout the world, demonstrated by the 100% utilization rate we have achieved for our aircraft since our launch in May 2010. We use a rigorous, proprietary asset selection process to identify and target what we believe to be the most liquid, in-demand aircraft types. We seek to acquire aircraft with high liquidity characteristics because we believe these aircraft have high residual value retention and are less likely to be exposed to asset impairment risk. We believe that our fleet of young, modern and fuel efficient aircraft will enable us to generate stable cash flows over the long term.

Highly experienced and proven management team with deep aviation and financial institution experience.

Our executive leadership team has on average over 23 years of experience in the aircraft leasing industry covering several industry cycles, and deep, long-standing customer, lender, investor and OEM relationships. This team has demonstrated its competency in the aircraft leasing industry by being instrumental in building RBS AC into one of the largest aircraft lessors in the industry, as well as founding our company and growing our portfolio into one of the ten largest in the industry by current market value in only four years. This team is supported by an additional 11 senior executives with an average of over 14 years of industry experience. Together, this combined team of executives, with an average age of 44, has extensive expertise in aircraft leasing, acquisitions, technical management, financing and risk management. We believe management’s deep industry relationships over an extended period allow us to source transactions that are not broadly available.

Sophisticated, rigorous and proactive risk management systems, tools and models.

Our business model is underpinned by a methodical approach to risk management that uses proprietary analytical tools and a rigorous corporate governance structure to manage asset, credit and liability risks closely and proactively. This framework has been developed and refined by the management team since our inception. Our analytical tools include models for asset and customer risk management. Our asset risk management model uses a quantitative matrix to benchmark aircraft asset types in terms of their investment suitability and relative liquidity, with the objective of reducing asset impairment and lease re-marketing risk. Our customer risk management model uses a system of quantitative and qualitative factors to monitor credit quality and extends to over 110 airlines. We have not incurred any asset impairment charges since our founding nor have we had to terminate any aircraft leases prior to their scheduled expiration. We believe we have a conservative approach to liability risk management and we use a variety of forecasting methods and reporting frameworks to manage our liquidity risks. These risk management tools are used in conjunction with our formal risk management reporting structure, consisting of three executive risk committees, the portfolio risk committee, the capital risk committee and the business modeling committee, each of which reports to the risk management committee of our Board. The implementation of our risk management framework supports our objective to grow in a controlled fashion in a dynamic business environment.

 

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Stable funding base and access to diverse sources of capital.

Our capital and financing structure has helped to establish Avolon as a leading aircraft lessor and a business of scale. Our growth has been financed by equity contributions from our Sponsors together with debt financing from a range of banks and financial institutions. As of March 31, 2014, we had total outstanding indebtedness of approximately $3,650.2 million consisting of term debt facilities, ECA and EXIM backed facilities, an asset-backed securitization and pre-delivery payment, second lien and warehouse facility debt. As of March 31, 2014, we had an additional $891.9 million of undrawn debt facilities, consisting of $741.9 million of committed secured debt and $150.0 million of unsecured revolving credit facilities. This inaugural aircraft securitization was financed by way of private placements, with Avolon retaining the residual equity. The volume, quality and mix of our committed assets and financings, combined with our overall market presence, have created a substantial capital base, which we believe is capable of supporting further portfolio growth.

Prominent and strategic thought leadership.

We believe that one of the essential elements of an experienced and growth-focused aircraft leasing business is to have considered and empirically defensible views on key trends in the aviation industry. We believe we have positioned ourselves to take a prominent and influential role in analyzing industry matters. We have communicated our thought leadership through issuing industry white papers, hosting webinars, attending and speaking at major global industry conferences, contributing articles to prominent industry publications and presenting to banks and financial institutions on topics such as risk management. We are represented on a number of industry bodies, including the International Society of Transport Aircraft Trading (at Board level) and the Aviation Working Group. Our approach to thought leadership is embedded in our core business activity. We believe our insight into global aviation trends helps to inform our investment and sales decisions, our allocation of capital between procurement channels and our overall risk management processes.

Financing Strategy

The successful implementation of our financing strategy is a critical component of the success and growth of our business. The overall objective of our financing strategy is to provide the capital required to continue to grow our business through arrangements that provide us with maximum flexibility and a low cost of capital and that minimize risks relating to changes in market conditions.

We intend to fund our business with future earnings and cash flow from operations, existing debt facilities and potential future debt financing from multiple sources, which may include term debt facilities, ECA and EXIM backed facilities, unsecured revolving facilities, securitization debt and pre-delivery payment, second lien and warehouse facility debt as well as other debt capital markets products. We actively manage our debt maturity profile and interest rate exposure by generally seeking long-term, fixed rate debt facilities, which we believe best matches the characteristics of our assets. We seek to identify markets and products with favorable and flexible terms as well as to maximize the diversification of funding solutions and to reduce our reliance on any one market or financial institution.

As of March 31, 2014, we had committed financing from a total of 27 financial institutions (excluding holders of our publicly issued debt), with total outstanding indebtedness of $3,650.2 million. This outstanding indebtedness comprised $2,221.1 million of recourse and non-recourse term facilities, including accrued interest and capital lease obligations, $582.8 million of ECA and EXIM backed facilities, $618.1 million of securitization indebtedness and $228.2 million in the aggregate of pre-delivery payment and warehouse facility debt. As of March 31, 2014 interest accrued of $12.2 million was outstanding. In addition, as of March 31, 2014, we had $891.9 million of undrawn debt facilities, consisting of $741.9 million of committed secured debt and $150.0 million of unsecured revolving credit facilities. As of March 31, 2014, the weighted average interest rate of our outstanding indebtedness was 4.3% and the weighted average remaining maturity was 4.6 years. Floating rate debt accounted for approximately 23.8% of our total outstanding indebtedness as of such date. Partially hedging this exposure, we have interest rate derivatives that have notional profiles of approximately 14.2% of our total indebtedness as of March 31, 2014. Furthermore, 15.2% of our leases had rentals linked with floating rate benchmarks as of such date.

 

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Risk Management Model

Our business model is underpinned by a methodical approach to risk management that uses proprietary analytical tools and a rigorous corporate governance structure to proactively manage asset, credit and liability risks. Our risk management framework applies rigor and focus to three key elements of the business—our assets, our lessee credit quality and our liabilities—drawn together through the committee structures. We believe continual emphasis on risk seeks to reduce asset impairment and lease re-marketing risk. We have not incurred any asset impairment charges since our founding.

We have implemented a formal risk management reporting structure consisting of three key executive risk committees which meet regularly to provide rigorous analysis and oversight to the Company’s activities. These committees will report to the risk management committee and the Board. The responsibilities of the internal committees are as follows:

 

    The Portfolio Risk Committee monitors counterparty credit risk, portfolio risk factors, adherence to capital allocation targets, maintenance exposures and lease expiry profiles. It also sets and reviews portfolio plans and monitors acquisition and disposal strategies. The committee is chaired by the Head of Risk.

 

    The Capital Risk Committee recommends liability and hedging strategies and reviews risk in the committed aircraft pipeline, capacity requirements, availability and cost of financing and capital markets activity. The committee is chaired by the Chief Financial Officer.

 

    The Business Modeling Committee reviews and approves the development of, and any subsequent modifications to, the core planning and analysis tools used by the business. The committee is chaired by the Head of Risk.

We have developed and use proprietary systems and processes based on our management’s decades of experience. Our analytical tools include models for asset and customer risk management. Our asset risk management model uses a quantitative matrix to benchmark aircraft asset types to evaluate their investment suitability and relative liquidity. Our customer risk management model uses a system of quantitative and qualitative factors to monitor credit quality and covers over 110 airlines.

Assets

Our portfolio is managed within the context of a long-term plan, which is set and reviewed by the portfolio risk committee. The committee sets out target portfolio metrics for asset types, geographic regions and lessee business models and regularly reviews our portfolio growth trajectory with the objective of remaining within target concentration guidelines. We also use proprietary models to enhance our decision-making in this area, including:

 

    Relative Liquidity Model: used to apply a consistent and systematic assessment of the investment characteristics and value drivers of each aircraft type. This model provides an investment rating for each aircraft type based on several factors including the number of aircraft in service, the number of operators, stage of production lifecycle, operating economics and technology. The ratings are forward looking and are tracked over time to ensure consistency and to identify trends, allowing us to take proactive decisions to manage portfolio risk.

 

    World Fleet Forecast: this forecast covers all Western-built passenger jets and is used to predict the number of each aircraft type expected to be in service over a 20 year horizon. The forecast takes into account expected production rates, entry into service of new aircraft types, global GDP forecasts, deliveries, fleet retirements and freighter conversions to arrive at estimates of future supply, demand and levels of capacity. The output from this model is used to shape our long-term thinking on fleet and model developments and is also an input to the Relative Liquidity Model.

 

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Airline Credits

We adopt a qualitative and quantitative approach in evaluating the creditworthiness of our airline counterparties. Detailed financial analysis is at the center of the assessment, but substantial additional weight is given to the airline’s fleet and network, competitive and market position, franchise, operating economics, management capabilities and their capital expenditure, funding and hedging positions. We have developed a comprehensive Airline Rating Model that allows for each airline to be scored on a consistent basis, taking account of these financial and non-financial criteria.

A Credit Analyst is assigned to each of our airline counterparties, based on regional and/or sector groupings to allow that analyst to develop a deep understanding of the broader environment in which the airline operates. Over and above the airline credit assessment, we also consider country and jurisdictional risk issues, including tax and repossession risks, supported by local legal opinions.

Airline credit is not only analyzed and opined on in advance of a specific transaction, but also subsequently monitored and reviewed on a regular basis throughout the lease term to ensure that our view of the counterparty remains current. The review interval is determined by the airline’s credit quality. The requirement for regular aircraft inspection and technical audits of airlines is also determined as part of our ongoing credit review. Early warning of potential problems allows timely and appropriate action to be taken to protect our investment, which is implemented and managed through a formal “Watch” process.

Liabilities

We aim to mitigate our non-industry related liabilities to the maximum extent practical and, where economically feasible, we match the interest rate profiles of our financing to those of our leases. We believe that our ability to raise debt benefits from our liabilities risk rigor. Three structural features underpin this rigor:

 

    Duration management: We seek to spread our debt repayment schedules wherever possible. We have no term debt balloon maturities until 2016, and have a balanced loan profile with a weighted average remaining debt maturity of 4.6 years.

 

    Interest rate risk management: Our objective is to minimize our exposure to interest rate risk. We have a number of floating rate leases where rentals adjust by reference to LIBOR, as well as a number of leases with fixed rentals. Wherever possible, we seek to match fixed funding for fixed rate leases and floating funding for floating rate leases. Where this is not possible, we typically hedge our position using interest rate derivatives. Fixed rate leases are adjusted at delivery of the aircraft to the then-prevailing fixed rate. Some hedging exposure arises from the mismatch between longer lease terms and shorter term funding. Of the 105 aircraft delivered at March 31, 2014, 89 aircraft are on fixed rate leases and 16 aircraft are on floating rate leases.

 

    Mismatch risk management: We continually manage our pipeline of deliveries and available financings to ensure that we have committed financing, liquidity and equity for all near-term deliveries. This process is actively managed by the Capital Risk Committee.

Competition

The aircraft leasing industry is highly competitive. We compete in leasing, re-leasing, purchasing and selling our aircraft with other aircraft leasing companies, including AerCap Holdings N.V. (including International Lease Finance Corporation), GE Capital Aviation Services, Air Lease Corporation, CIT Aerospace, BOC Aviation, BBAM Aircraft Leasing & Management, Aviation Capital Group, SMBC Aviation Capital and ICBC Leasing. We also may encounter competition from other entities that selectively compete with us, including:

 

    airlines;

 

    aircraft manufacturers;

 

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    financial institutions (including those seeking to dispose of repossessed aircraft at distressed prices);

 

    aircraft brokers;

 

    special purpose vehicles formed for the purpose of acquiring, leasing and selling aircraft; and

 

    public and private partnerships, investors and funds, including private equity and hedge funds.

The market for sale-leaseback transactions has become increasingly competitive in recent years. Competition for a leasing transaction is based principally upon lease rates, delivery dates, lease terms, reputation, management expertise, aircraft condition, specifications and configuration and the availability of the types of aircraft necessary to meet the needs of the customer. We also compete with other lessors for aircraft financing commitments, which can impact our ability to compete for a leasing transaction. Competition in the purchase and sale of used aircraft is based principally on the availability of used aircraft, price, the terms of the lease to which an aircraft is subject and the creditworthiness of the lessee. Some of our competitors have significantly greater operating and financial resources than we have. In addition, some competing aircraft lessors have a lower overall cost of capital, which may allow them to offer better lease terms. However, we believe we compete favorably due to our strong industry relationships, the attractiveness of our fleet and our rigorous and proactive risk management policies.

Insurance

Our lessees are required under our leases to bear responsibility, through an operational indemnity subject to customary exclusions, and to carry insurance for any liabilities arising out of the operation of our aircraft or engines, including any liabilities for death or injury to persons and damage to property that ordinarily would attach to the operator of the aircraft. In addition, our lessees are required to carry other types of insurance that are customary in the air transportation industry, including hull all risks insurance for both the aircraft and each engine whether or not installed on our aircraft, hull war risks insurance covering risks such as hijacking, terrorism, confiscation, expropriation, nationalization and seizure (in each case at a value stipulated in the relevant lease which typically exceeds the net book value by 10%, subject to adjustment in certain circumstances) and aircraft spares insurance and aircraft third party liability insurance (including war risks), in each case subject to customary deductibles. We are named as an additional insured on liability insurance policies carried by our lessees, and we and/or our lenders are designated as a loss payee in the event of a total loss of the aircraft or engine, as well as numerous other insurance provisions customary in aircraft leasing. We monitor the compliance by our lessees with the insurance provisions of our leases by securing Certificates of Insurance from the lessees’ insurance brokers.

In addition to the coverage maintained by our lessees, we maintain contingent liability insurance and contingent hull insurance with respect to our aircraft. Such contingent insurance is intended to provide coverage in the event that the insurance maintained by any of our lessees should not be available for our benefit as required pursuant to the terms of the lease. Consistent with industry practice, our insurance policies are subject to commercially reasonable deductibles, conditions and exclusions.

We cannot assure you that we are insured against all risks, that lessees will at all times comply with their obligations to maintain insurance, that any particular claim will be paid, or that we will be able to maintain our current levels of insurance coverage at commercially reasonable rates in the future.

Employees

We had 52 full-time employees as of March 31, 2014 and 51, 44 and 30 employees as of December 31, 2013, 2012 and 2011, respectively. None of our employees is covered by a collective bargaining agreement, and we believe that we maintain good employee relations.

 

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Facilities

Our headquarters are located at The Oval, Building 1, Shelbourne Road, Ballsbridge, Dublin 4, Ireland. We occupy space under a lease which expires in 2036. As of March 31, 2014, we occupied approximately 9,720 square feet of office space. Additionally, we have offices in China, Dubai, Singapore and the United States.

Regulation

While the air transportation industry is highly regulated, since we do not operate aircraft we are generally not directly subject to most of these regulations. Our lessees, however, are subject to extensive regulation under the laws of the jurisdictions in which they are registered and in which they operate. These regulations, among other things, govern the registration, operation and maintenance of our aircraft. Most of our aircraft are registered in the jurisdiction in which the lessee of the aircraft is certified as an air operator. Our aircraft are subject to the airworthiness and other standards imposed by our lessees’ jurisdictions of operation. Laws affecting the airworthiness of aviation assets are generally designed to ensure that all aircraft and related equipment are continuously maintained in proper condition to enable safe operation of the aircraft. Most countries’ aviation laws require aircraft to be maintained under an approved maintenance program having defined procedures and intervals for inspection, maintenance and repair.

We are required to register, and have registered, the aircraft which we acquire and lease to U.S. carriers and to a number of foreign carriers where, by agreement, the aircraft are to be registered in the United States, with the FAA, or in other countries, with such countries’ aviation authorities as applicable. Each aircraft registered to fly must have a Certificate of Airworthiness, which is a certificate demonstrating the aircraft’s compliance with applicable government rules and regulations and that the aircraft is considered airworthy, or a ferry flight permit, which is an authorization to operate an aircraft on a specific route. Our lessees are obligated to maintain the Certificates of Airworthiness for the aircraft they lease and, to our knowledge, all of our lessees have complied with this requirement. When an aircraft is not on lease, we will be required to maintain the certificate or obtain a certificate in a new jurisdiction.

Significant new requirements with respect to noise, emissions, (including greenhouse requirements), fuel efficiency and other aspects of our aircraft or their operation could cause the value of our aircraft portfolio to decrease. Other governmental regulations relating to noise and emissions levels may be imposed not only by the jurisdictions in which our aircraft are registered, possibly as part of the airworthiness requirements, but also in other jurisdictions where our aircraft operate. Any and all of the foregoing regulations could limit the economic life of our aircraft and engines, reduce their value, limit our ability to lease or sell the non-compliant aircraft and engines or, if engine modifications are permitted, require us to make significant additional investments in our aircraft and engines to make them compliant. Moreover, our lessees’ compliance with current or future legislation, regulations, taxes or duties could result in higher costs and lead to higher ticket prices, which in turn could result in lower demand for travel. This could affect our lessees’ ability to make rental and other lease payments and could reduce the value we receive for our aircraft upon any disposition, which would have a material adverse effect on our financial condition, cash flow and results of operations.

In addition, under our leases, we may be required in some instances to obtain specific licenses, consents or approvals for different aspects of the leases. These required items include consents from governmental or regulatory authorities for certain payments under the leases and for the import, re-export or deregistration of the aircraft.

Legal Proceedings

From time to time, we may be involved in litigation and claims incidental to the conduct of our business in the ordinary course. Our industry is also subject to scrutiny by government regulators, which could result in enforcement proceedings or litigation related to regulatory compliance matters. We are not presently a party to any enforcement proceedings, litigation related to regulatory compliance matters, or any other type of litigation matters. We maintain insurance policies in amounts and with the coverage and deductibles we believe are adequate, based on the nature and risks of our business, historical experience and industry standards.

 

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MANAGEMENT

Executive Officers and Directors

Set forth below are the names, ages and positions of our directors and executive officers upon completion of this offering.

 

Name

   Age     

Position with the Company

Executive Officers:

     

Dómhnal Slattery

     47       Chief Executive Officer and Director

John Higgins

     46       President, Chief Commercial Officer and Director

Andy Cronin

     35       Chief Financial Officer

Tom Ashe

     45       Chief Operating Officer & Head of Risk

Ed Riley

     42       General Counsel

Dick Forsberg

     60       Head of Strategy

Non-Employee Director Nominees:

     

Denis J. Nayden

     60       Chairman Nominee

Caspar Berendsen

     39       Director Nominee

Maxim Crewe

     33       Director Nominee

Douglas M. Kaden

     42       Director Nominee

Peter Rutland

     35       Director Nominee

Kamil Salame

     45       Director Nominee

The following are biographical summaries, including experience, of those individuals who serve as our executive officers:

Dómhnal Slattery has served as our Chief Executive Officer since our inception. Previously, Mr. Slattery served as the Managing Partner of Claret Capital Limited from 2006 through 2009. Mr. Slattery was the founding Chief Executive of RBS AC from 2001 through 2004 and went on to become the Managing Director of the Structured Asset Finance business for the Royal Bank of Scotland plc. He continued to serve as a non-executive director of RBS AC until 2008. In 1994 Mr. Slattery established his own aircraft advisory and investment banking services company, International Aviation Management Group, which was acquired by RBS in 2001. Mr. Slattery began his aviation career in 1989 at Guinness Peat Aviation (“GPA”).

John Higgins has served as our President and Chief Commercial Officer since our inception. Previously Mr. Higgins served as the Chief Commercial Officer at RBS AC from 2007 until 2010. Mr. Higgins also served as the Head of Origination for Europe, Middle East, Africa and Asia Pacific at RBS AC. Before joining RBS AC Mr. Higgins served in various roles within the aircraft leasing and finance industry at PricewaterhouseCoopers and GE Capital Aviation Services.

Andy Cronin has served as our Chief Financial Officer since our inception. Mr. Cronin previously served in various roles of increasing responsibility at RBS AC from 2004 to 2010, where his most recent title was Senior Vice President Investor Markets. Prior to RBS AC, Mr. Cronin held a number of commercial and operational roles at FLS Aerospace Ltd.

Tom Ashe has served as our Chief Operating Officer since our inception and as our Head of Risk since 2012. Previously Mr. Ashe served as the Head of Origination for Europe, Middle East and Africa from 2007 through 2010 at RBS AC. Mr. Ashe joined RBS AC in 2002 as a Senior Vice President in the Europe, Middle East and Africa origination team. Prior to joining RBS AC, Mr. Ashe held various roles at AerFi Group plc with responsibility for financial planning, originating aircraft and engine trading opportunities.

Ed Riley has served as our General Counsel since our inception. Mr. Riley previously served as Senior Vice President, Commercial Negotiation at RBS AC from 2007 to 2010. Prior to joining RBS AC Mr. Riley served as Senior Legal Counsel with Airbus S.A.S. Mr. Riley began his career at Clifford Chance LLP.

 

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Dick Forsberg has served as our Head of Strategy since our inception and also served as our Head of Risk from 2010 until 2012. Previously Mr. Forsberg served as a founding executive at RBS AC and most recently served as Head of Portfolio Strategy from 2001 to 2010. Prior to joining RBS AC, Mr. Forsberg served in various roles at GE Capital Aviation Services, GPA and International Aviation Management Group.

The following are biographical summaries, including experience, of those individuals who will serve on our Board upon completion of this offering:

Denis Nayden is currently a managing partner of Oak Hill Capital Management, LLC, a private equity firm. Prior to 2003, Mr. Nayden was Chairman and Chief Executive Officer of GE Capital Corporation, from 2000 to 2002, and had a 27-year tenure at the General Electric Company. During his tenure, Mr. Nayden held several roles, including oversight of GE Capital Aviation Services. Mr. Nayden currently serves on the Board of Directors of Accretive Health, Inc. and previously served on the Boards of Directors of RSC Holdings, Inc. and Genpact Limited.

Caspar Berendsen is currently a partner at Cinven Partners LLP, a position that he has held since 2012. Mr. Berendsen previously worked at Cinven Limited as a principal from 2003 through 2008 and as partner from 2008 through 2012. Prior to joining Cinven Limited, Mr. Berendsen held various roles at JPMorgan Chase & Co. In addition to being a director of Avolon, Mr. Berendsen is also a director of Guardian Holdings Europe Limited, Heidelberger Lebenversicherung AG and has previously been a director of Partnership Assurance Group plc, Ziggo N.V. and Maxeda Retail Group B.V.

Maxim Crewe is currently a principal at Cinven Partners LLP, a position that he has held since 2012. Mr. Crewe previously worked at Cinven Limited as an associate from 2006 through 2008 and as a principal from 2008 through 2012. Prior to joining Cinven Limited, Mr. Crewe held various roles at Citigroup Inc. In addition to being a director at Avolon, Mr. Crewe is a director of Partnership Assurance Group plc and has previously been a director of Guardian Holdings Europe Limited.

Douglas M. Kaden is currently a partner at Oak Hill Capital Management, LLC, a private equity firm. Prior to joining Oak Hill in 1997, Mr. Kaden worked at James D. Wolfensohn, Inc., a mergers and acquisitions advisory firm. Mr. Kaden previously served on the Boards of Directors of RSC Holdings, Inc. and Genpact Limited.

Peter Rutland is currently a senior managing director at CVC Capital Partners and a member of CVC Capital Partners’ Financial Institutions Group. Mr. Rutland joined CVC Capital Partners in 2007, having previously worked for Advent International since 2002. Prior to working at Advent, Mr. Rutland worked for The Goldman Sachs Group, Inc. in its Investment Banking Division.

Kamil Salame is currently a partner at CVC Capital Partners and North America Head of CVC Capital Partners’ Financial Institutions Group. Mr. Salame joined CVC Capital Partners in 2009 having previously worked for DLJ Merchant Banking Partners where he served as a partner and member of the Management Committee. Prior to joining DLJ Merchant Banking Partners, Mr Salame worked in DLJ’s Leveraged Finance Group and DLJ’s Real Estate Capital Partners.

Board Composition

Our business and affairs are managed under the direction of our Board. Upon completion of this offering, we expect that our Board will consist of 11 members consisting of, in accordance with the relationship agreement that we expect to enter into with our Sponsors on or prior to completion of this offering, two members to be appointed by each of Cinven, CVC and Oak Hill; two members of management, initially Messrs. Slattery and Higgins; and three independent directors within the meaning of             rules and Rule 10A-3 of the Exchange Act, for the purpose of audit committee membership. We expect that, of the three independent directors, one will be elected prior to listing, an additional independent director will be added within 90 days of listing and the third will be added within one year following such listing. Our initial independent director will be a person who is a financial expert within the meaning of the applicable rules of the SEC and             .

 

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Our memorandum and articles of association, which will be in effect upon the consummation of this offering, will provide that, unless otherwise determined by an ordinary resolution of our shareholders, our board of directors will consist of a number of directors not less than one and not more than 15. Subject to any other special rights applicable to the shareholders, including pursuant to the relationship agreement, any vacancies on our board of directors may be filled by the affirmative vote of a majority of the directors present and voting at the meeting of our board of directors.

Director Independence

In general, under              rules, foreign private issuers, as defined under the Exchange Act, are permitted to follow home country corporate governance practices instead of the corporate governance requirements of             . A foreign private issuer making its initial public offering or first U.S. listing on             that follows home country corporate governance practices must disclose in its registration statement or on its website each requirement that it does not follow and must describe the home country practices it follows in lieu of such requirements. We intend to rely on this exemption by following Cayman Islands corporate governance practices, which do not require director independence.

Accordingly, we will not have a majority of “independent directors” on our Board nor will we have a nomination and corporate governance committee composed entirely of “independent directors” as defined under the rules of             . Further, compensation for our executives and selection of our director nominees will not be determined by a majority of “independent directors” or by a remuneration committee that is composed entirely of independent directors as defined under the rules of             . However, we intend to comply with the audit committee requirements of the SEC and             , which require that our audit committee have at least one independent member upon the listing of our common shares on             , a majority of independent members within 90 days of listing and all independent members within one year of listing.

If at any time we cease to be a “foreign private issuer” under the rules of             , and no other exemptions apply, or if we otherwise so elect, our Board will take all action necessary to comply with              corporate governance rules, including appointing a majority of independent directors to the Board and establishing certain committees composed entirely of independent directors, subject to a permitted “phase-in” period.

Due to our intent to follow our home country corporate governance practice, our shareholders will not have the same protections afforded to shareholders of companies that are subject to all              corporate governance requirements, including the benefits of independent directors.

Board Leadership Structure

Denis Nayden will serve as Chairman of our Board. We support separating the position of Chief Executive Officer and Chairman to allow our Chief Executive Officer to focus on our day-to-day business, while allowing the Chairman to lead our Board in its fundamental role of providing advice to, and oversight of, management. Our Board recognizes the time, effort and energy that the Chief Executive Officer is required to devote to his position in the current business environment, as well as the commitment required to serve as our Chairman, particularly as our Board’s oversight responsibilities continue to grow. Our Board also believes that this structure ensures a greater role for the non-management directors in the oversight of the Company and active participation of the independent directors in setting agendas and establishing priorities and procedures for the work of our Board.

While our memorandum and articles of association, which will be in effect upon the consummation of this offering, will not require that our Chairman and Chief Executive Officer positions be separate, our Board believes that having separate positions and having a non-employee director serve as Chairman is the appropriate leadership structure for us at this time and demonstrates our commitment to good corporate governance.

Family Relationships

There is no family relationship between any director and any executive officer.

 

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Committees of our Board

Upon the consummation of this offering, our Board will have established an audit committee, a remuneration committee, a nomination and corporate governance committee and a risk management committee. In addition, the Board has previously established three executive risk committees that will report to the Board’s risk management committee following this offering. See “Business—Risk Management Model.” The composition and responsibilities of each committee are described below. Members will serve on these committees until their resignation or until otherwise determined by our Board. In the future, our Board may establish other committees, as it deems appropriate, to assist with its responsibilities.

Audit Committee

Our audit committee will have responsibility for, among other things:

 

    selecting and hiring our independent registered public accounting firm and approving the audit and non-audit services to be performed by our independent registered public accounting firm;

 

    evaluating the qualifications, performance and independence of our independent registered public accounting firm;

 

    monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters;

 

    reviewing the adequacy and effectiveness of our internal control policies and procedures;

 

    discussing the scope and results of the audit with the independent registered public accounting firm and reviewing with management and the independent registered public accounting firm our interim and year-end operating results; and

 

    approving related party transactions.

Upon the consummation of this offering, the audit committee will be chaired by              and will also include             .

The SEC and              rules require us to have one independent audit committee member upon the listing of our common shares, a majority of independent audit committee members within 90 days of the date of such listing and all independent audit committee members within one year of the date of such listing. Our Board has affirmatively determined that              meet the definition of “independent directors” under applicable SEC and              rules. In addition, our Board has determined that              qualifies as an “audit committee financial expert,” as such term is defined in the rules and regulations of the SEC.

Our Board has adopted a written charter for our audit committee, which will be available on our website upon the consummation of this offering.

Remuneration Committee

Our remuneration committee will be responsible for, among other things, determining the levels of remuneration for each of the Chief Executive Officer, Chief Commercial Officer, Chief Financial Officer, Chief Operating Officer and the Chairman of our Board; recommending and monitoring the remuneration of members of senior management; and generating an annual remuneration report to be approved by the members of the Company at our annual general meeting. Upon the consummation of this offering, the remuneration committee will be chaired by              and will also include             .

Nomination and Corporate Governance Committee

Our nomination and corporate governance committee will be responsible for, among other things, assisting our Board in determining the composition and make up of our Board; periodically reviewing our Board’s structure and identifying potential candidates to be appointed as directors, as the need may arise; determining the

 

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succession plans for the Chairman and Chief Executive Officer; and establishing an overseeing our board self-assessment policies and procedures. Upon completion of this offering, the nomination and corporate governance committee will be chaired by              and will also include             .

Risk Management Committee

Our risk management committee will be responsible for overseeing our three executive risk committees: the portfolio risk committee, capital risk committee and business modeling committee. These executive risk committees are responsible for, among other things, monitoring counterparty credit risk, portfolio risk factors, adherence to capital allocation targets, maintenance exposures and lease expiry profiles; recommending liability and hedging strategies to our Board; reviewing committed pipeline risk, capacity requirements, availability and cost of financing and capital markets activity; overseeing rating agency relationships; reviewing and approving the development of, and any subsequent modifications to, the core planning and analysis tools used by the business; and reviewing the thresholds of transactions for which the investment committee and the treasury and financing committee have responsibility. See “Business—Risk Management Model” for further discussion of our executive risk committees. Upon completion of this offering, the risk management committee will be chaired by              and will also include             .

Management Committees

Upon the consummation of this offering, our Board will have also established an executive committee, an investment committee and a treasury and financing committee, each consisting of members of our management.

Executive Committee

Our executive committee will be responsible for our operational management and the implementation of company strategy as determined by the Board from time to time. It will be chaired by our Chief Executive Officer and will also include members of our senior management. Upon the consummation of this offering, the members of our executive committee will be             .

Investment Committee

Our investment committee will have authority and will be responsible for transactions relating to the acquisition, disposal and leasing of aircraft and financial assets that are valued up to $250 million per transaction, subject to aggregate account limits with specified counterparties. It will be chaired by our Chief Executive Officer and will also include members of the executive committee. Upon the consummation of this offering, the members of our investment committee will be             .

Treasury and Financing Committee

Our treasury and financing committee will have authority and will be responsible for committing debt funding and hedging not exceeding $500 million per transaction. It will be chaired by our Chief Financial Officer and will also include members of the executive committee. Upon the consummation of this offering, the members of our treasury and financing committee will be             .

Duties of Directors and Conflicts of Interest

Under Cayman Islands law, our directors have a duty of loyalty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association. In certain limited circumstances, a shareholder has the right to seek damages if a duty owed by our directors is breached.

 

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Pursuant to our memorandum and articles of association, a director who is in any way interested in a contract or transaction with the Company will declare the nature of his interest at a meeting of the Board. A director may vote in respect of any such contract or transaction notwithstanding that he may be interested therein and if he does so his vote will be counted and he may be counted in the quorum at any meeting of the Board at which any such contract or transaction shall come before the meeting for consideration.

Corporate Opportunities

Our largest shareholders, affiliates of our Sponsors, are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Corporate opportunities may therefore arise in the area of potential acquisitions of competitive businesses that may be attractive to us as well as to our shareholders. Our shareholders have the right to, and have no duty to abstain from exercising such right to, engage or invest in the same or similar businesses as us, do business with any of our customers, partners or vendors, or employ or otherwise engage any of our officers, directors or employees. If our shareholders or any of their officers, directors or employees acquire knowledge of a potential transaction that could be a corporate opportunity, they have no duty to offer such corporate opportunity to us, our shareholders or our affiliates. As a result, none of our Sponsors will be required to offer us any transaction opportunity of which they become aware and could take such opportunity for themselves or offer it to other companies in which they have an investment.

Indemnification

We have customary directors’ and officers’ indemnity insurance in place for our directors and executive officers. Prior to the completion of this offering, we intend to enter into indemnification agreements with each of our directors and executive officers. The indemnification agreements will provide the executive officers and directors with contractual rights to indemnification, expense advancement and reimbursement, subject to certain exceptions contained in those agreements. See “Certain Relationships and Related Party Transactions.”

Remuneration

Executive Officers

For the year ended December 31, 2013, we paid an aggregate of approximately $7.0 million in cash compensation to our executive officers and made contributions to defined contribution pension plans equal to a certain percentage of each such officer’s salary. As of December 31, 2013, no pension, retirement or similar benefits had been set aside or accrued for our executive officers.

Directors

We have not historically paid directors’ fees to the members of our Board. However, our Sponsors have been party to monitoring agreements pursuant to which they were paid fees and reimbursed for certain expenses. These monitoring agreements will be terminated in connection with this offering. Following this offering, we intend to pay our non-employee directors (other than directors affiliated with CVC) annual compensation of $         for their services on our Board. In addition, we expect to reimburse these directors for reasonable expenses incurred in attending meetings of the Board or any of its committees. We expect to enter into a new monitoring agreement with CVC Capital Partners pursuant to which we will pay them certain fees and reimburse certain expenses. We expect these amounts will equal the fees and reimbursements paid to our non-employee directors. See “Certain Relationships and Related Party Transactions” for additional information regarding the monitoring agreements.

Management Equity Plan

We intend to adopt the Management Equity Plan in connection with this offering. The Management Equity Plan will authorize us to grant options, restricted shares or other awards to our employees, directors and consultants. Common shares representing up to     % of our issued and outstanding common shares (calculated on

 

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a fully diluted basis) may be issued pursuant to awards under the Management Equity Plan. Awards will be made pursuant to agreements and may be subject to vesting and other restrictions as determined by the Board or the remuneration committee.

Employment Agreements

We have entered into service agreements with each of our executive officers. Under these agreements, either we or the executive officer may terminate his or her employment at any time upon three months prior written notice. We may terminate any such executive officer’s employment for cause at any time, without prior notice or remuneration, for certain acts of the officer, including, but not limited to, failure to perform agreed duties, acts of material malfeasance, breach of his or her obligations under the agreement, conviction of an offence, or bankruptcy of such officer. If we terminate our chief executive officer’s employment other than for cause, he is entitled to receive a termination payment. The employment agreements also contain customary confidentiality provisions and non-competition and non-solicitation provisions for a period of up to three months following termination.

 

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PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information as of                     , 2014 regarding the ownership of common shares of: (a) each person who is known by us to be the beneficial owner of more than five percent of the issued and outstanding common shares; (b) each selling shareholder; (c) each of our directors; (d) each executive officer named herein and (e) all of our executive officers and directors as a group, in each case after giving effect to the Share Exchange.

Certain selling shareholders may be deemed to be “underwriters” as defined in the Securities Act. Any profits realized by such selling shareholders may be deemed to be underwriting commissions. Each of the selling shareholders listed below has voting and dispositive power with respect to the common shares to be offered for resale by such selling shareholder, and, except as noted below, none of such selling shareholders are broker-dealers or an affiliate of a broker-dealer.

Percentage of beneficial ownership is based on              common shares issued and outstanding as of                     , 2014 and gives effect to the Share Exchange.

The number of common shares of Avolon Holdings to be issued to the holders of the various share classes of Avolon S.à r.l. in the Share Exchange will vary depending upon the initial public offering price. Accordingly, the relative ownership among our existing shareholders will differ depending upon such price. The information in the table below assumes an initial public offering price of $        , the midpoint of the price range on the cover of this prospectus. At the low end of the price range on the cover of this prospectus, immediately after the Share Exchange and prior to the sale of common shares in this offering, our Sponsors would beneficially own     % of our outstanding common shares, officers and directors would beneficially own     %, and the remainder would be beneficially owned by other investors, including the Trustee. At the high-end of the price range on the cover of this prospectus, those percentages would be     %,     % and     %, respectively, for our Sponsors, officers and directors, and other investors, The total number of common shares in issue and outstanding would remain unchanged.

Beneficial ownership of our common shares is determined in accordance with the rules of the SEC, and generally includes voting power or investment power with respect to securities held and also includes options to purchase common shares currently exercisable or exercisable within 60 days after                     , 2014. Unless otherwise indicated, the address of each executive officer and director is c/o Avolon Holdings Limited, The Oval, Building 1, Shelbourne Road, Ballsbridge Dublin 4, Ireland.

 

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    Common
shares beneficially owned
before this offering
  Common shares
offered(1)
  Common
shares beneficially owned
after this offering(2)
  Common
shares beneficially owned
after this offering
assuming full  exercise
of the over-allotment option

Name and Address
of Beneficial Owner

  Number of
common
shares
  Percentage of
common
shares
  Number of
common
shares
  Percentage of
common
shares
  Number of
common
shares
  Percentage of
common
shares
  Number of
common
shares
  Percentage of
common
shares

Principal and Selling Shareholders:

               

Cinven(3)

               

CVC(4)

               

Oak Hill(5)

               

Oak Hill Advisors(6)

               

Vigorous(7)

               

Directors, Director Nominees and Executive Officers :

               

Dómhnal Slattery(8)

               

John Higgins(8)

               

Andy Cronin(8)

               

Tom Ashe(8)

               

Ed Riley(8)

               

Dick Forsberg(8)

               

Denis Nayden

               

Caspar Berendsen

               

Maxim Crewe

               

Douglas M. Kaden

               

Peter Rutland

               

Kamil Salame

               

All directors and executive officers as a group (12 persons)

               

 

* Represents beneficial ownership of less than 1% of our issued and outstanding common shares.
(1) If the underwriters exercise their option to purchase additional common shares, the additional common shares sold by the selling shareholders will be allocated as follows:              by Cinven,              by CVC,              by Oak Hill and              by Vigorous.
(2) Beneficial ownership does not include any common shares that may be purchased in this offering. See “Underwriting.”
(3) Fourth Cinven (Railpen 2011) Co-Investment Limited Partnership (“Railpen 2011”) holds              common shares. Railpen 2011 is managed and controlled by Cinven Limited. The board of directors of Cinven Limited has the sole right to make decisions regarding the voting and disposition of the common shares held by Railpen 2011. The members of the board of directors of Cinven Limited are Robin Hall, Brian Linden, William Scott, Richard Hills, Hayley Tanguy and Rupert Dorey.

Idamante S.à r.l. (“Idamante”) holds              common shares. The Limited Partnerships comprising the Fourth Cinven Fund ultimately own more than 98.8% of Idamante. The Fourth Cinven Fund is managed and controlled by Cinven Limited. The board of directors of Cinven Limited has the sole right to make decisions regarding the voting and disposition of the common shares held by the Fourth Cinven Fund and is therefore the controlling entity of Idamante.

The principal business address for Cinven Limited is Tudor House, Le Bordage, St. Peter Port, Guernsey GY1 3PP.

(4) AAIL Holdings S.à r.l. (“Luxco”) holds              common shares. The members of the Board of Directors of Luxco are Emanuela Brero, Manuel Mouget and Peter Rutland. Such Board has the sole right to make decisions regarding the voting and disposition of the common shares held by Luxco. Luxco is wholly owned by CVC European Equity Partners V (A) L.P., CVC European Equity Partners V (B) L.P., CVC European Equity Partners V (C) L.P., CVC European Equity Partners V (D) L.P. and CVC European Equity Partners V (E) L.P. (together, the “Partnerships”). The sole general partner of the Partnerships is CVC European Equity V Limited. The members of the Board of Directors of CVC European Equity V Limited are John Cosnett, Mark Grizzelle, Carl Hansen, Steven Koltes and Rupert Walker. Such Board has the sole right to make decisions regarding the voting and disposition of the common shares in Luxco held by the Partnerships.

The principal business address for CVC European Equity Limited is 22-24 Seale Street, St. Helier, Jersey, JE2 3QG Channel Islands.

(5) Avolon Holding Corporation (Luxembourg) I S.à r.l. (“Luxco I”) holds              common shares in Avolon Nominees Limited (“Nominee”). The Class A Manager of Luxco I is Kevin G. Levy and the Class B Manager of Luxco I is Benoit Bauduin. Luxco I is wholly-owned by Oak Hill Capital Partners III, L.P. (“OHCP III”). The sole general partner of OHCP III is OHCP GenPar III, L.P. (“OHCP GenPar III”). The sole general partner of OHCP GenPar III is OHCP MGP Partners III, L.P. (“OHCP MGP Partners III”). The sole general partner of OHCP MGP Partners III is OHCP MGP III, Ltd. (“OHCP MGP III”). The members of the Board of Directors of OHCP MGP III are J. Taylor Crandall, Steven B. Gruber, and Denis J. Nayden. Such Board, by majority vote, makes decisions regarding the voting and disposition of the common shares in the Nominee held by Luxco I.

Avolon Holding Corporation (Luxembourg) II S.à r.l. (“Luxco II”) holds              common shares in Nominee. The Class A Manager of Luxco II is Kevin G. Levy and the Class B Manager of Luxco II is Benoit Bauduin. OHCP III owns more than a majority of the ownership interests in Luxco II. Accordingly, the Board of Directors of OHCP MGP III by majority vote, makes decisions regarding the voting and disposition of the common shares in the Nominee held by Luxco II.

Avolon Holding Corporation (Luxembourg) III S.à r.l. (“Luxco III”) holds              common shares in Nominee. The Class A Manager of Luxco III is Kevin G. Levy and the Class B Manager of Luxco III is Benoit Bauduin. Luxco III is wholly-owned by OHCP III AAL COI, L.P. (“OH COI”). OHCP GenPar III is the sole general partner of OH COI. OHCP MGP Partners III is the sole general partner of OHCP GenPar III. OHCP MGP III is the sole general partner of OHCP MGP Partners III. The Board of Directors of OHCP III, by majority vote, makes decisions regarding the voting and disposition of the common shares in the Nominee held by Luxco III.

 

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The principal business address for all of the Oak Hill entities is 201 Main Street, Suite 1018, Fort Worth, Texas 76102.

(6) Oak Hill Advisors, L.P. holds                  common shares. Oak Hill Advisors, L.P. is the investment advisor for each of Potomac Bonds LLC, OHA Structured Products Master Fund, L.P., OHA Structured Products Master Fund B, L.P., OHA Strategic Credit Master Fund II, L.P., OHA Strategic Credit Master Fund, L.P., and Future Fund Board of Guardians (collectively, the “Oak Hill Funds”). Glenn August and Robert Okun have dispositive power and investment control over the shares beneficially owned by each of the Oak Hill Funds. The mailing address for each of the Oak Hill Funds is 1114 Avenue of the Americas, 27th Floor, New York, NY 10036.
(7)              common shares are held directly by Vigorous Investment Pte Ltd (“Vigorous”), a Singapore incorporated private limited company. Vigorous shares the power to vote and the power to dispose of the shares with GIC Special Investments Pte Ltd (“GIC SI Pte Ltd”) and GIC Private Limited (“GIC”), both of which are private limited companies incorporated in Singapore. GIC SI Pte Ltd is wholly owned by GIC and is the private equity investment arm of GIC. GIC is wholly owned by the Government of Singapore, and was set up with the sole purpose of managing Singapore’s foreign reserves. The principal business address for all of the GIC entities is 168 Robinson Road, #37-01 Capital Tower, Singapore 068912.
(8) Each of Dómhnal Slattery, John Higgins, Andy Cronin, Tom Ashe, Ed Riley and Dick Forsberg owns his common shares through a separate Delaware limited partnership that is beneficially owned by such executive officer.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Share Exchange

Avolon Holdings intends to enter into a share exchange agreement with the shareholders of Avolon S.à r.l. pursuant to which each shareholder will transfer all of its outstanding shares of Avolon S.à r.l. to Avolon Holdings in exchange for the issuance by Avolon Holdings of an aggregate of              of its common shares, assuming a public offering price of $         (the midpoint of the price range set forth on the cover of this prospectus). See “Our Corporate Reorganization” for additional information.

Relationship Agreement

We intend to enter into a relationship agreement with our Sponsors on or prior to consummation of this offering. We expect the relationship agreement will provide Cinven, CVC and Oak Hill with the right to nominate two members each for election to our Board and will provide the Sponsors with additional rights, including information and access rights and registration rights. Our existing investment and shareholders deed will be terminated upon consummation of this offering.

Servicing Agreements

We have entered into servicing agreements with various affiliates of Oak Hill Capital Management LLC, pursuant to which we provide fleet management services in respect of four aircraft. We received $0.8 million, $0.7 million and $0.3 million in fees under these agreements for the years ended December 31, 2013, 2012 and 2011, respectively, and $0.2 million for the three months ended March 31, 2014.

We have entered into agreements with ACP pursuant to which we have agreed to contribute personnel and other administrative resources to ACP. We received $0.07 million in fees under these agreements for the year ended December 31, 2013, respectively, and $0.04 million for the three months ended March 31, 2014.

We have entered into a servicing agreement with an entity associated with Oak Hill Advisors, L.P. pursuant to which we provide fleet management services in respect of one aircraft. We received $0.5 million in fees under this agreement for the year ended December 31, 2013, and $15,000 for the three months ended March 31, 2014.

Monitoring Agreement

We have entered into monitoring agreements with affiliates of each of our Sponsors (the “Affiliates”). Pursuant to the monitoring agreements, the Affiliates provide certain ongoing monitoring, consulting and management advisory services to the Company, and the Company pays each such Affiliate an annual fee. We paid the Affiliates aggregate fees of $0.9 million, $1.2 million and $1.0 million for the years ended December 31, 2013, 2012 and 2011, respectively, and $0.4 million for the three months ended March 31, 2014. These monitoring agreements will terminate upon consummation of this offering.

Upon consummation of this offering, we intend to enter into a new monitoring agreement with CVC Capital Partners pursuant to which CVC Capital Partners will provide us with certain monitoring, consulting and management advisory services. We expect to pay an annual fee of $         during the term of the agreement, which terminates on             .

Share Repurchase

On June 5, 2014 we repurchased shares of Avolon S.à r.l. from our chief executive officer for an aggregate purchase price of approximately $5.6 million.

 

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Employee Loans

In 2010, in connection with our formation, we issued a loan to our chief executive officer. Amounts outstanding under the loan were $10.3 million as of December 31, 2013 and $10.6 million as of March 31, 2014. The loan was repaid in full in accordance with its terms on June 5, 2014. We funded $9.4 million of this loan using a back to back loan facility (the “Back to Back Facility”) provided by an affiliate of one of our Sponsors. The Back to Back Facility was limited recourse to us and was terminated on June 5, 2014, following the repayment of the loan.

Indemnification of Officers and Directors

We will enter into an indemnification agreement with each of our directors and executive officers to supplement the indemnification protection available under our memorandum and articles of association and Cayman Islands law. These indemnification agreements will generally provide that we will indemnify the parties thereto to the fullest extent permitted by law. Such indemnification shall include, without limitation, indemnity in third party proceedings and indemnity in derivative actions. No indemnification shall be made for any claim, issue or matter as to which an indemnitee has been adjudged by a court of competent jurisdiction, after the exhaustion of all appeals therefrom, to be liable to Avolon, unless and only to the extent that any court in which such proceeding is brought or other court of competent jurisdiction determines upon application that, in view of all the circumstances of the case, the indemnitee is fairly and reasonably entitled to indemnity for such amounts as the court shall deem proper. The agreements will also provide for, under certain circumstances, indemnification of expenses of successful parties, and indemnification for expenses as a witness. The agreements will further provide that if the indemnification provided for in the agreement is unavailable and may not be paid to an indemnitee for any reason other than statutory or common law limitations set forth in applicable law, then in respect of any threatened, pending or completed proceeding in which Avolon is jointly liable with the indemnitee (or would be if joined in such action, suit, arbitration, proceeding, inquiry or investigation), Avolon shall contribute to the amount of expenses or liabilities of any type whatsoever actually and reasonably incurred and paid or payable by the indemnitee in such proportion as is appropriate to reflect relative benefits and relative fault, as further described in the agreement.

 

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DESCRIPTION OF SHARE CAPITAL

The following description of our share capital is based on our memorandum and articles of association to be in effect upon completion of this offering. Our authorized share capital consists of          common shares, each with a par value of $0.001 per share and          preference shares, each with a par value of $0.001 per share. As of                     , 2014, we had          common shares issued and outstanding, after giving effect to the Share Exchange.

We are a Cayman Islands exempted company incorporated with limited liability and our affairs are governed by our memorandum and articles of association, the Companies Law and the common law of the Cayman Islands. The following are summaries of material provisions of our memorandum and articles of association and the Companies Law insofar as they relate to the material terms of our common shares. Complete copies of our memorandum and articles of association will be filed as an exhibit to the registration statement of which this prospectus forms a part.

Common Shares

General. All the issued and outstanding common shares are fully paid and non-assessable. Certificates representing the common shares are issued in registered form. The common shares are issued when registered in the register of shareholders of Avolon. The common shares are not entitled to any sinking fund or pre-emptive or redemption rights. Our shareholders may freely hold and vote their shares.

Register of Members. Under Cayman Islands law, we must keep a register of members and there should be entered therein:

 

    the names and addresses of the members, a statement of the shares held by each member, and of the amount paid or agreed to be considered as paid, on the shares of each member;

 

    the date on which the name of any person was entered on the register as a member; and

 

    the date on which any person ceased to be a member.

Under Cayman Islands law, the register of members of our company is prima facie evidence of the matters which the Companies Law directs or authorizes to be inserted therein (i.e. the register of members will raise a presumption of fact on the matters referred to above unless rebutted) and a member registered in the register of members is deemed as a matter of Cayman Islands law to have legal title to the shares as set against its name in the register of members. Upon the completion of this offering, the register of members will be immediately updated to record and give effect to the issue of shares by us. Once our register of members has been updated, the members recorded in the register of members will be deemed to have legal title to the shares set against their name.

If the name of any person is incorrectly entered in or omitted from our register of members, or if there is any default or unnecessary delay in entering on the register the fact of any person having ceased to be a member of our company, the person or member aggrieved (or any member of our company or our company itself) may apply to the Grand Court of the Cayman Islands for an order that the register be rectified, and the Court may either refuse such application or it may, if satisfied of the justice of the case, make an order for the rectification of the register.

Exempted Company. We are an exempted company incorporated with limited liability under the Companies Law. The Companies Law distinguishes between ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company are generally the same as for an ordinary resident company, except for certain exemptions and privileges under the Companies Law, including those listed below:

 

    an exempted company is not required to file an annual return containing the details of its shareholders with the Cayman Islands Registrar of Companies;

 

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    an exempted company’s register of members is not required to be open to inspection;

 

    an exempted company is not required to hold an annual general meeting;

 

    an exempted company may, in certain circumstances, issue no par value shares;

 

    an exempted company may obtain an undertaking from the Governor in Cabinet of the Cayman Islands against the imposition of any future taxation (such undertakings are usually given for 20 years in the first instance);

 

    an exempted company may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands;

 

    an exempted company may register as an exempted limited duration company;

 

    an exempted company may register as a segregated portfolio company, and

 

    an exempted company may apply to be registered as a special economic zone company.

“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on that shareholder’s shares in the company (except in exceptional circumstances, such as involving fraud, the establishment of an agency relationship or an illegal or improper purpose or other circumstances in which a court may be prepared to pierce or lift the corporate veil). Upon the closing of this offering, we will be subject to reporting and other informational requirements of the Exchange Act, as applicable to foreign private issuers.

Voting Rights. Each common share is entitled to one vote on all matters upon which the common shares are entitled to vote, including the election of directors. Voting at any meeting of shareholders is by a poll. Our articles of association do not provide for actions by written consent of shareholders.

The required quorum for a meeting of our shareholders consists of a number of shareholders present in person or by proxy and entitled to vote that represents the holders of not less than a majority of our issued voting share capital. We will hold an annual general meeting of shareholders at such time and place as the Board may determine. In addition, the Board may convene a general meeting of shareholders at any time upon five days’ notice. Further, general meetings (other than the annual general meeting) may also be convened upon written requisition of shareholders holding in aggregate 30% or more of issued voting share capital, which requisition must state the objects for the general meeting.

Subject to the quorum requirements referred to in the paragraph above, any ordinary resolution to be made by the shareholders requires the affirmative vote of a simple majority of the votes attaching to the shares cast in a general meeting of the Company, while a special resolution requires the affirmative vote of 66 2/3% of the votes cast attaching to the shares. A special resolution is required for matters such as a change of name, amending our memorandum and articles of association and placing us into voluntary liquidation. Holders of common shares, which are currently the only shares carrying the right to vote at our general meetings, have the power, among other things, to elect directors, ratify the appointment of auditors and make changes in the amount of our authorized share capital.

Dividends. The holders of our common shares are entitled to receive such dividends as may be declared by our Board. Dividends may be paid only out of profits, which include net earnings and retained earnings undistributed in prior years, and out of share premium, a concept analogous to paid-in surplus in the United States, subject to a statutory solvency test.

Liquidation. If we are to be liquidated, the liquidator may, with the approval of the shareholders, divide among the shareholders in cash or in kind the whole or any part of our assets, may determine how such division shall be carried out as between the shareholders or different classes of shareholders, and may vest the whole or

 

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any part of such assets in trustees upon such trusts for the benefit of the shareholders as the liquidator, with the approval of the shareholders, sees fit, provided that a shareholder shall not be compelled to accept any shares or other assets which would subject the shareholder to liability.

Miscellaneous. Share certificates registered in the names of two or more persons are deliverable to any one of them named in the share register, and if two or more such persons tender a vote, the vote of the person whose name first appears in the share register will be accepted to the exclusion of any other.

Anti-Takeover Provisions

General. Our memorandum and articles of association have provisions that could have an anti-takeover effect. These provisions are intended to enhance the ability of the Board to deal with unsolicited takeover attempts by increasing the likelihood of continuity and stability in the composition of the Board. These provisions could have the effect of discouraging transactions that may involve an actual or threatened change of control of Avolon. See “Risk Factor—Certain provisions of Cayman Islands law and our organizational documents could delay or prevent an otherwise beneficial takeover or takeover attempt of us.”

Number of Directors. The memorandum and articles of association provide that the Board will consist of not less than one director nor more than fifteen directors, the exact number to be set from time to time by a majority of the whole Board. Unless otherwise determined by an ordinary resolution of the shareholders, the Board has the authority to determine the number of directors and could delay any shareholder from obtaining majority representation on the Board by enlarging the Board and filling the new vacancies with its own nominees until a general meeting at which directors are to be appointed.

Advance Notice Provisions. The memorandum and articles of association establish an advance notice procedure that must be followed by shareholders if they wish to nominate candidates for election as directors at an annual or extraordinary general meeting of shareholders or to submit a proposal for consideration at a general or extraordinary meeting of shareholders. The articles provide generally that, if a shareholder desires to nominate a candidate for election as a director at an annual general meeting or to submit a proposal for consideration at a general meeting of shareholders (including an annual general meeting), a shareholder must give us notice not earlier than the 120th day prior to such general meeting and not later than the 90th day prior to such general meeting or the 10th day following the day on which public announcement is first made of the date of the general meeting, whichever is later.

Action Only by General Meeting and not by Written Consent. Subject to the terms of any other class of shares in issue, any action required or permitted to be taken by the holders of common shares must be taken at a duly called annual or extraordinary general meeting of shareholders and not by written consent of the holders of the common shares. General meetings may be called by the Board or, with respect to an extraordinary general meeting, upon written requisition of shareholders holding in aggregate, 30% or more of issued voting capital, which requisition must state the objects for the general meeting.

Undesignated Preference Shares. Pursuant to our memorandum and articles of association, our Board has the authority, without further action by the shareholders, to issue up to          preference shares in one or more series and to fix the designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights of the common shares. Our Board, without shareholder approval, may issue preference shares with voting, conversion or other rights that could adversely affect the voting power and other rights of holders of our common shares. Subject to the directors’ duties to act for a proper purpose, in good faith and in our best interest, preference shares can be issued quickly with terms calculated to delay or prevent a change in control of us or make removal of management more difficult. Additionally, the issuance of preference shares may have the effect of decreasing the market price of the common shares, and may adversely affect the voting and other rights of the holders of common shares. No preference shares have been issued and we have no present plans to issue any preference shares.

 

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Restrictions on Business Combinations. As a Cayman Islands company, Avolon is not subject to Section 203 of the Delaware General Corporation Law, which restricts business combinations with interested shareholders. However, our memorandum and articles of association contain provisions that largely mirror the intention of Section 203 and generally prohibit “business combinations” between Avolon and an “interested shareholder.” Specifically, “business combinations” between an “interested shareholder” and Avolon are prohibited for a period of three years after the time the interested shareholder acquired its shares, unless:

 

    the business combination or the transaction resulting in the person becoming an interested shareholder is approved by the Board prior to the date the interested shareholder acquired Avolon’s shares;

 

    the interested shareholder acquired at least 85% of Avolon’s shares in the transaction in which it became an interested shareholder; or

 

    the business combination is approved by a majority of the Board and by the affirmative vote of disinterested shareholders holding at least two-thirds of the shares generally entitled to vote.

For purposes of this provision, (i) “business combinations” is defined broadly to include mergers, consolidations of majority owned subsidiaries, sales or other dispositions of assets having an aggregate value in excess of 10% of the consolidated assets of Avolon, and most transactions that would increase the interested shareholder’s proportionate share ownership in Avolon, and (ii) “interested shareholder” is defined as a person who, together with any affiliates and/or associates of that person, beneficially owns, directly or indirectly, 15% or more of the issued voting shares of Avolon. Our Sponsors and their affiliates are not deemed to be interested shareholders for these purposes.

Differences in Corporate Law

The Companies Law is modelled after that of England but does not follow recent United Kingdom statutory enactments and differs from laws applicable to U.S. corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated in the United States and their shareholders. The following summaries are necessarily subject to the complete text of our memorandum and articles of association and the indemnification agreements referred to below and are qualified in their entirety by reference thereto.

Mergers and similar arrangements

The Cayman Islands have provisions under the Companies Law to facilitate mergers and consolidations between Cayman Islands companies and between Cayman Islands companies and non-Cayman Islands companies. These provisions, contained within Part XVI of the Companies Law, are broadly similar to the merger provisions as provided for under Delaware Law.

There are however a number of important differences that could impede a takeover. First, the threshold for approval of the merger plan by shareholders is higher. The threshold is a special resolution of the shareholders (being 66 2/3% of those present in person or by proxy and voting) together with such other authorization, if any, as may be specified in the memorandum and articles of association.

Additionally, the consent of each holder of a fixed or floating security interest (in essence a documented security interest as opposed to one arising by operation of law) is required to be obtained unless the Grand Court of the Cayman Islands waives such requirement.

The merger provisions contained within Part XVI of the Companies Law do contain shareholder appraisal rights similar to those provided for under Delaware law. Such rights are limited to a merger under Part XVI and do not apply to schemes of arrangement as discussed below.

 

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The Companies Law also contains separate statutory provisions that provide for the merger, reconstruction and amalgamation of companies. These are commonly referred to in the Cayman Islands as “schemes of arrangement.”

The procedural and legal requirements necessary to consummate these transactions are more rigorous and take longer to complete than the procedures typically required to consummate a merger in the United States. Under Cayman Islands law and practice, a scheme of arrangement in relation to a solvent Cayman Islands company must be approved at a shareholders’ meeting by a majority of each class of the company’s shareholders who are present and voting (either in person or by proxy) at such meeting. The shares voted in favor of the scheme of arrangement must also represent at least 75% of the value of each relevant class of the company’s shareholders present and voting at the meeting. The convening of these meetings and the terms of the amalgamation must also be sanctioned by the Grand Court of the Cayman Islands. Although there is no requirement to seek the consent of the creditors of the parties involved in the scheme of arrangement, the Grand Court typically seeks to ensure that the creditors have consented to the transfer of their liabilities to the surviving entity or that the scheme of arrangement does not otherwise materially adversely affect creditors’ interests. Furthermore, the court will only approve a scheme of arrangement if it is satisfied that, among other factors:

 

    the statutory provisions as to majority vote have been complied with;

 

    the shareholders were fairly and adequately represented by those who attended the meeting and the classes for such meeting were properly delineated;

 

    the scheme of arrangement is such as a businessman would reasonably approve; and

 

    the scheme of arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law.

If the scheme of arrangement is approved, the dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of U.S. corporations, providing rights to receive payment in cash for the judicially determined value of the shares.

In addition, if an offer by a third party to purchase shares in us has been approved by the holders of at least 90% of our issued and outstanding shares (not including such a third party) pursuant to an offer within a four-month period of making such an offer, the purchaser may, during the two months following expiration of the four-month period, require the holders of the remaining shares to transfer their shares on the same terms on which the purchaser acquired the first 90% of our issued and outstanding shares. An objection can be made to the Grand Court of the Cayman Islands, but this is unlikely to succeed unless there is evidence of fraud, bad faith, collusion or inequitable treatment of the shareholders.

Shareholders’ suits

A shareholder can bring a suit personally where its individual rights have been, or are about to be, infringed. Where an action is brought to redress any loss or damage suffered by us, we would be the proper plaintiff, and a shareholder could not ordinarily maintain an action on our behalf, except where it was permitted by the courts of the Cayman Islands to proceed with a derivative action. Our Cayman Islands counsel, Maples and Calder, is not aware of any reported decisions in relation to a derivative action brought in a Cayman Islands court. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands, a shareholder may be permitted to bring a claim derivatively on the Company’s behalf, where:

 

    a company is acting or proposing to act illegally or outside the scope of its corporate authority;

 

    the act complained of, although not acting outside the scope of its corporate authority, could be effected only if authorized by more than a simple majority vote; or

 

    those who control the company are perpetrating a “fraud on the minority.”

 

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Fiduciary duties of directors

Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has two components, the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to shareholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director must act in a manner he or she reasonably believes to be in the best interests of the corporation. A director must not use his or her corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interests of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, the director must prove the procedural fairness of the transaction and that the transaction was of fair value to the corporation.

As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company and therefore it is considered that he owes the following duties to the company: a duty to act bona fide in the best interests of the company; a duty not to make a profit out of his position as director (unless the company permits him to do so); a duty to exercise his powers for the purposes for which they are conferred; and a duty not to put himself in a position where the interests of the company conflict with his personal interest or his duty to a third party. A director of a Cayman Islands company owes to the company a duty to act with skill and care. It was previously considered that a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. However, English and Commonwealth courts have moved toward also imposing an objective standard, such that the duty of skill and care is to be determined by reference to the skill, care and diligence that would be displayed by a reasonable director in those circumstances. The authorities imposing this dual standard are likely to be followed in the Cayman Islands.

Under our memorandum and articles of association, directors who are in any way, whether directly or indirectly, interested in a contract or proposed contract with the Company must declare the nature of their interest at a meeting of the Board. Following such declaration, a director may vote in respect of any contract or proposed contract notwithstanding his interest, provided that, in exercising any such vote, such director’s duties remain as described above.

Variation of rights of shares

Under Delaware corporate law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise.

Under Cayman Islands law and our memorandum and articles of association, if our share c