S-1 1 d766443ds1.htm FORM S-1 FORM S-1
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As filed with the Securities and Exchange Commission on November 12, 2014

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Intrepid Aviation Limited

(Exact name of registrant as specified in its charter)

 

Bermuda   7359   N/A

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

c/o Intrepid Aviation Group Holdings, LLC

One Stamford Plaza

263 Tresser Boulevard

Stamford, Connecticut 06901

(203) 905-4220

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

 

 

Franklin Pray

President and Chief Executive Officer

Intrepid Aviation Group Holdings, LLC

One Stamford Plaza

263 Tresser Boulevard

Stamford, Connecticut 06901

(203) 905-4220

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

 

 

Copies to:

 

Marc D. Jaffe, Esq.

Erika L. Weinberg, Esq.

Latham & Watkins LLP

885 Third Avenue

New York, New York 10022

(212) 906-1200

 

Michael Kaplan, Esq.

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, New York 10017

(212) 450-4000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared 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, 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. ¨             

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities To Be Registered

  Proposed
Maximum
Aggregate
Offering Price(1)
  Amount of
Registration Fee(2)

Common Shares, $0.01 par value per share

  $150,000,000.00   $17,430.00

 

 

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. Includes the offering price of additional shares that the underwriters have the option to purchase.
(2) Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.

 

 

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 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 preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated                     , 2014.

             Shares

 

LOGO

Intrepid Aviation Limited

Common Shares

 

 

This is an initial public offering of common shares of Intrepid Aviation Limited

Prior to this offering, there has been no public market for the common shares. It is currently estimated that the initial public offering price per share will be between $         and $        . Intrepid intends to apply for listing of the common shares on the New York Stock Exchange under the symbol “INTR.”

We will be a “controlled company” under the corporate governance rules for NYSE listed companies, and therefore we will be permitted to, and we intend to, elect not to comply with certain NYSE corporate governance requirements. See “Management—Controlled Company.”

We are an “emerging growth company” under the federal securities laws.

 

 

Investing in our common shares involves risks. See “Risk Factors” on page 22 to read about factors you should consider before buying our common shares.

 

 

None of the Securities and Exchange Commission in the United States, the Bermuda Monetary Authority or the Registrar of Companies in Bermuda or any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discount(1)

   $         $     

Proceeds, before expenses, to us

   $         $     

 

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

To the extent that the underwriters sell more than              common shares, the underwriters have the option to purchase up to an additional              shares from Intrepid at the initial price to public less the underwriting discount.

The underwriters expect to deliver the shares against payment in New York, New York on                     , 2014.

 

Global Coordinator

Goldman, Sachs & Co.

 

Global Coordinator

BofA Merrill Lynch

  Deutsche Bank Securities
Jefferies     RBC Capital Markets
Wells Fargo Securities   Credit Agricole CIB   BNP PARIBAS

 

 

Prospectus dated                     , 2014.


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     22   

Special Note Regarding Forward-Looking Statements

     55   

Market and Industry Data

     56   

Use of Proceeds

     57   

Dividend Policy

     58   

Reorganization

     59   

Capitalization

     60   

Dilution

     62   

Selected Historical Consolidated Financial Data

     64   

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

     66   

Industry

     89   

Business

     109   

Management

     126   

Executive Compensation

     133   

Certain Relationships and Related Party Transactions

     145   

Principal Shareholders

     149   

Description of Share Capital

     150   

Description of Indebtedness

     157   

Shares Eligible for Future Sale

     170   

Bermuda Tax Considerations

     173   

Material U.S. Federal Income Tax Considerations

     174   

Underwriting

     179   

Legal Matters

     186   

Experts

     186   

Exchange Controls

     186   

Enforcement of Civil Liabilities Under United States Federal Securities Laws

     186   

Where You Can Find More Information

     187   

Index to Financial Statements

     F-1   

 

 

Neither we nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

For investors outside the United States: We have not, and the underwriters have not, 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. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the common shares and the distribution of this prospectus outside the United States.

 

 

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common shares. You should read this entire prospectus carefully, especially the “Risk Factors” section beginning on page 19 and our financial statements and the related notes appearing at the end of this prospectus, before making an investment decision.

Prior to the closing of this offering, we will complete the Reorganization Transactions described in “Reorganization” pursuant to which Intrepid Aviation Group Holdings, LLC will become a wholly-owned, indirect subsidiary of Intrepid Aviation Limited, a newly formed holding company organized under the laws of Bermuda. Unless the context otherwise requires, (i) references to “Intrepid Holdings” are to Intrepid Aviation Group Holdings, LLC, and not to any of its subsidiaries, (ii) references to “Intrepid,” “the Company,” “we,” “our” and “us” are to Intrepid Aviation Group Holdings, LLC and its consolidated subsidiaries for the periods prior to the consummation of the Reorganization Transactions, and to Intrepid Aviation Limited and its consolidated subsidiaries for the periods after consummation of the Reorganization Transactions and (iii) references to our “customers” and “lessees” are to third-party airlines to which we lease our aircraft.

Unless the context otherwise requires, (i) references to our “owned” aircraft refer to our 16 aircraft owned as of June 30, 2014; (ii) references to our “committed” aircraft refer to 17 aircraft: 11 aircraft under purchase commitments (which are subject to conditions) with Airbus and six aircraft under a non-binding letter of intent, or “LOI,” with Boeing, as of June 30, 2014 (subsequently converted into purchase commitments); and (iii) references to our “contracted” aircraft refer to 10 of our 17 committed aircraft for which we have leases, as of June 30, 2014. See “—Recent Developments” for additional information regarding our owned, committed and contracted aircraft subsequent to June 30, 2014.

Our Company

We are a global leasing company that acquires and leases passenger aircraft to a diverse group of airlines throughout the world. Our strategy is to focus on young, modern, fuel-efficient twin-engine widebody aircraft with long-term leases to well-established airlines. We intend to invest primarily in these aircraft during the first one-third of their useful life while maximizing economic returns. We believe that a substantial opportunity exists to capitalize on the high level of demand for long-haul international air travel and airlines’ preference for larger gauge aircraft. We are the only aircraft lessor primarily focused on the twin-engine widebody passenger aircraft market, which we believe is a relatively less competitive lease market segment that has substantial latent demand. Our fleet has grown from $315.8 million to $1,674.9 million in net book value in the twelve months ended June 30, 2014. We seek to enter into long-term leases, typically ranging from 10 to 12 years, at attractive returns. All of our leases are denominated in U.S. dollars and are “triple-net” operating leases, which means that the lessee is required to pay for all maintenance and overhaul, refurbishment, insurance, taxes and all other aircraft operating expenses during the lease term.

Our owned and committed portfolio includes popular twin-engine widebody passenger aircraft such as the Airbus A330-300 and Airbus A330-200, Boeing 777-300ER and Boeing 787-8 Dreamliner. As of June 30, 2014, we owned 16 aircraft with an aggregate net book value of approximately $1.7 billion, all of which were on lease. Our owned aircraft have an average age of 1.8 years and an average remaining lease term of 10.0 years, weighted by net book value. Metrics noted as “weighted by net book value” are an average resulting from the multiplication of each metric by the relative dollar

 

 

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book value of an aircraft to reflect its importance. As of June 30, 2014, we had commitments to purchase 17 new aircraft directly from Airbus and Boeing with an aggregate purchase value of $4.7 billion at current list prices subject to the satisfaction of customary closing conditions, including our ability to secure adequate financing.

Our business model is designed to generate stable and highly visible revenue, earnings and cash flows. Twin-engine widebody passenger aircraft typically attract better lease terms than narrowbody aircraft, including higher lease rates, longer lease durations, and higher lease renewal rates which drive profitability and reduce residual value risk. We believe that lessees of widebody aircraft are more likely to renew their leases at the end of term because these aircraft often form the core of their long-term fleet plan and enjoy regular configuration investments by the lessees over the term of the leases. We fund the acquisition of our aircraft primarily with long-term secured credit facilities that are either fixed rate or synthetically fixed using interest rate swaps, with maturities that generally match those of our leases to mitigate our interest rate and refinancing risk.

As of June 30, 2014, our owned and contracted aircraft have been placed with a diverse group of 13 airline customers in 11 different countries. Our customers are well-established airlines or flag carriers, some of which are majority owned by governments, and our aircraft are typically used on what we believe are key international or long-haul routes for our customers. We will continue to diversify our business by asset type, original equipment manufacturer (“OEM”), customer base and region. We will continue to focus on markets with the greatest growth in demand for air travel and twin-engine widebody aircraft, especially in Asia Pacific, Africa, the Middle East and Latin America.

 

LOGO

Source: Ascend Worldwide, data as of June 2014.

Note: Represents the routes on which our aircraft or aircraft of the same or similar models to our aircraft are flown by our customers.

 

 

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Led by our President and Chief Executive Officer, industry veteran Franklin Pray, we have an experienced and industry-recognized senior management team, which has built our growing global platform and established our market presence with OEMs, airlines and financial institutions worldwide. Our senior management team has significant experience sourcing aircraft directly from Boeing and Airbus, through sale-leaseback transactions with airline customers and through trading transactions with other lessors. For example, Mr. Pray has purchased approximately $18.0 billion at then-current list prices in aircraft from OEMs over the course of his career as a CEO. Our senior management team has access to key decision makers at over 100 airlines globally, enabling us to customize aircraft leases to meet the airlines’ specific needs, while securing attractive lease terms and returns. We have developed a robust funding model for twin-engine widebody passenger aircraft through relationships with a diverse group of global banks with significant expertise and lending capacity in aircraft finance.

Widebody Aircraft Leasing Industry Overview

Commercial aviation is a critical component of the global economy. According to the International Civil Aviation Organization (“ICAO”) and Airbus, demand for air transport is strongly correlated to economic activity, and has grown steadily at a compound annual growth rate (“CAGR”) of 5.8%, roughly 1.5 times the world gross domestic product (“GDP”) growth rate of 3.1% over the last 40 years. Global passenger traffic demand, as measured in revenue passenger kilometers (“RPKs”), which equals one kilometer flown by a paying passenger, has about doubled every 15 years since 1981 and is expected to double again within the next 15 years according to Airbus.

We believe the macro-economic drivers underpinning the overall growth in demand for new aircraft will contribute to the demand for fuel-efficient twin-engine widebody aircraft in particular by increasing demand for long-haul travel on routes for which these aircraft are best-suited. Over the past 40 years, long-haul traffic has grown at a faster pace than short-haul traffic, and the average number of long-haul seats per city pair has increased at a higher rate since 2001 than for short-haul traffic. Airlines have responded to the increasing development of long-haul routes with orders for larger aircraft according to ICF, International (“ICF” formerly SH&E Inc.). We believe these fuel-efficient, twin-engine widebody aircraft are best-suited for these long-haul routes because they operate at a lower cost per available seat mile (“CASM”) as a result of the economies of scale inherent in flying a larger aircraft. In addition, twin-engine widebody aircraft are generally configured with a larger percentage of premium seats. Over the past 10 years, the percentage of premium seats on widebody aircraft has ranged from 10 to 12 percent, while narrowbody aircraft premium seats have ranged from 5 to 6 percent.

In addition to the growth in long-haul traffic, the lack of available slots at major airports is driving airlines to increase the seating capacity, or gauge, of aircraft. The International Air Transport Association (“IATA”) estimates that approximately 289 airports are presently designated as Level 2 or Level 3 slot-constrained. Slot constraints limit airlines’ ability to grow revenue, and they force airlines to spread costs over a smaller number of flights. In response, we believe airlines will continue to demand more twin-engine widebody aircraft to reclaim CASM economics.

In conjunction with the growth of the overall global commercial aircraft fleet, the role of operating lessors has expanded significantly over the last 40 years. Since 1980, the percentage of the global active commercial aircraft fleet under operating lease has increased from less than 2% to 40% by 2014, and Boeing Capital forecasts that operating leasing will account for 50% of the in-service fleet by the end of this decade. Operating leases are an attractive financing alternative because they allow airlines to minimize capital outlay requirements and eliminate residual value risk. In addition, operating leases enhance airlines’ fleet planning flexibility, provide availability to advantageous delivery positions and access to current technology.

 

 

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Aircraft Portfolio

The following table provides details on our owned operating lease portfolio, including the remaining lease terms (for the minimum non-cancellable period which does not include contracted unexercised lease extension options) by aircraft type, as of June 30, 2014:

 

Lessee(1)

 

Acquisition
Date

 

Type

 

Classification

 

Engine

 

Remaining Lease
Term (months)

Alitalia

  09/28/2011   A330-200   Small widebody   General Electric   96

Alitalia

  09/28/2011   A330-200   Small widebody   General Electric   96

Thai Airways

  06/27/2013   B777-300ER   Medium widebody   General Electric   121

Sichuan Airlines

  07/19/2013   A330-300   Small widebody   Rolls Royce   132

Air Namibia

  09/25/2013   A330-200   Small widebody   Rolls Royce   134

Philippine Airlines

  09/27/2013   B777-300ER   Medium widebody   General Electric   92

China Airlines

  09/27/2013   A330-300   Small widebody   General Electric   123

Ethiopian Airlines

  11/07/2013   B777-300ER   Medium widebody   General Electric   112

EVA Airways

  11/13/2013   A321-200   Narrowbody   CFM   111

Air Namibia

  11/22/2013   A330-200   Small widebody   Rolls Royce   136

Skymark Airlines

  02/27/2014   A330-300   Small widebody   Rolls Royce   115

Skymark Airlines

  02/27/2014   A330-300   Small widebody   Rolls Royce   115

Asiana Airlines

  04/17/2014   A330-300   Small widebody   Pratt & Whitney   141

LOT Polish Airlines

  04/30/2014   B787-8   Small widebody   Rolls Royce   142

Sichuan Airlines

  05/23/2014   A330-300   Small widebody   Rolls Royce   142

Air France

  06/26/2014   B777-300ER   Medium widebody   General Electric   94

 

(1) Most of our existing lessees are not rated investment grade by the principal U.S. rating agencies. See “Risk Factors—Risks Related to Intrepid—Our success depends on the financial strength of our lessees, and lessee defaults, bankruptcies and other credit problems could materially adversely affect our business, financial condition or results of operations. If our lessees fail to perform as expected and we decide to restructure or reschedule our leases, the restructuring and rescheduling would likely result in less favorable lease terms.” See also “Business—Our Customers” for additional information on each lessee’s risk profile.

Commitments

As of June 30, 2014, we had commitments to purchase 17 new aircraft directly from Airbus and Boeing scheduled to be delivered between 2014 and 2018. Our total aircraft commitments as of June 30, 2014 are $4.4 billion, net of deposits already paid. We have signed leases for 10 of our committed aircraft, as shown in the chart below. We anticipate entering into a lease for the A330 aircraft that is not yet placed with a lessee during 2014, which is scheduled to be delivered in late 2015. We intend to fund our aircraft commitments through multiple sources, including debt financing from the commercial bank market, the capital markets and government-sponsored export credit guarantees and lending programs. See “—Financing Strategies” and “Risk Factors—Risks Related to Our Indebtedness—Our substantial indebtedness could adversely affect our financial condition” for additional information regarding our financing strategies and the risks associated with the incurrence of additional indebtedness.

 

 

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The following table provides details on our operating lease portfolio for our committed aircraft by aircraft type, including the lease terms where applicable (for the minimum non-cancellable period excluding contracted unexercised lease extension options), as of June 30, 2014:

 

Lessee

  Status   Delivery(1)   Type   Classification   Lease
Status
  Lease Term
(months)

Skymark Airlines

  Placed   Jul-14   A330-300   Small widebody   Signed   120

Cebu Pacific Air

  Placed   Aug-14   A330-300   Small widebody   Signed   144

Skymark Airlines

  Placed   Sep-14   A330-300   Small widebody   Signed   120

Sichuan Airlines

  Placed   Nov-14   A330-300   Small widebody   Signed   144

Skymark Airlines

  Placed   Jan-15   A330-300   Small widebody   Signed   120

Cebu Pacific Air

  Placed   Mar-15   A330-300   Small widebody   Signed   144

Skymark Airlines

  Placed   Jun-15   A330-300   Small widebody   Signed   120

Skymark Airlines

  Placed   Jul-15   A330-300   Small widebody   Signed   120

EVA Airways

  Placed   Nov-15   A330-300   Small widebody   Signed   144
  Unplaced   Nov-15   A330(2)   Small widebody    

EVA Airways

  Placed   Dec-15   A330-300   Small widebody   Signed   144
  Unplaced   Oct-16   B777-300ER   Medium widebody    
  Unplaced   Dec-16   B777-300ER   Medium widebody    
  Unplaced   Jan-17   B777-300ER   Medium widebody    
  Unplaced   Mar-17   B777-300ER   Medium widebody    
  Unplaced   Oct-17   B777-300ER   Medium widebody    
  Unplaced   Feb-18   B777-300ER   Medium widebody    

 

(1) All aircraft acquisitions are subject to the satisfaction of customary closing conditions. In addition, our ability to acquire these aircraft will be subject to our ability to secure adequate financing. There can be no assurance that we will acquire these aircraft.
(2) Our committed aircraft includes one aircraft for which the A330 model type had not been confirmed as of June 30, 2014. On September 29, 2014, we signed a non-binding LOI for the lease of that aircraft. See “—Recent Developments.”

Our Competitive Strengths

We believe that we have several key strengths that provide us with a competitive advantage:

Well-positioned in attractive, twin-engine widebody aircraft market.    We are primarily a twin-engine widebody aircraft lessor. The twin-engine widebody aircraft leasing market is attractive to us due to the strong, growing demand from airlines for widebody aircraft as well as the higher barriers to entry created by the more significant investment each aircraft requires and the greater need for strong relationships with the OEMs. The demand for widebody aircraft is growing faster than the demand for narrowbody aircraft due to several favorable drivers, including fuel efficiency, the strategic importance of core long-haul or international routes for airlines, population growth in emerging markets, increasing urbanization and the growing number of slot-constrained airports. Further, twin-engine widebody aircraft have an attractive lease profile resulting from longer-term leases, a longer economic useful life and higher lease rate factors. Given the significant investment airlines typically make on cabin accommodations and in-flight entertainment, widebody aircraft are also more likely to be re-leased by airlines at the end of an initial lease term. In addition, airlines focused on operating widebody aircraft often have better credit profiles or are flag carriers in their markets. We believe our OEM orderbook, as well as our expertise in opportunistic portfolio and sale-leaseback transactions and long-standing relationships with OEMs provide us with a competitive advantage in this attractive high growth market.

 

 

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Young, modern, fuel-efficient fleet of in-demand aircraft.    We believe that we have the youngest fleet of any major aircraft lessor given our net book value weighted average aircraft age of only 1.8 years for our owned aircraft as of June 30, 2014. We believe that young twin-engine widebody aircraft provide airlines with a fuel efficient option for servicing their long-haul or international routes since younger aircraft tend to be more fuel-efficient than older aircraft and twin-engine aircraft have a lower fuel burn than their four-engine equivalents. In addition, younger aircraft attract better lease terms, are easier to refinance and have less residual value risk. We have an attractive orderbook of factory-new committed Airbus A330-300 and Boeing 777-300ER aircraft that should allow us to maintain a low average age portfolio going forward. We believe these aircraft, in addition to the 787 Dreamliner, represent the most in-demand aircraft, with over 103 distinct operators and customers for the A330, 62 for the 787 Dreamliner, and 38 for the 777-300ER as of August 31, 2014.

Clear visibility of revenue and earnings growth.    Our business model is designed to generate highly visible revenue, earnings and cash flow growth as a consequence of our long-term leases, long-term debt and OEM orderbook. By focusing on long-term leases and long term debt, we significantly increase the visibility of our cash flow and earnings, and our committed orderbook provides greater clarity to our growth going forward. Out of our 26 owned and contracted aircraft, 24 have fixed rental rates and two have floating rental rates that adjust periodically during the lease term as interest rates fluctuate. The combined annual total contracted revenue from owned and contracted aircraft is expected to be approximately $305.4 million, which totals approximately $3.2 billion over the life of the existing leases. Our contracted OEM orderbook of twin-engine widebody passenger aircraft that we will deliver to our airline customers through 2018 provides a clear path for growth in our fleet. In addition, our access to sale-leasebacks and trading transactions enables us to provide incremental growth. For a description of risks related to annual total contracted revenue, see “Risk Factors—Risks Related to Intrepid—Our annual total contracted revenue from owned aircraft and annual total contracted revenue from owned and contracted aircraft is based on certain estimates and assumptions and actual results may differ materially from such estimated operating results.”

Experienced and industry-recognized management team with a scalable platform.    We have built a strong operating platform led by our experienced and industry-recognized management team to support our growth objectives. Our senior management team, with an average of approximately 21 years of experience in the aviation industry, has a track record of building successful aircraft leasing businesses. Our management team has deep experience in aircraft acquisition, lease structuring, aircraft financing and strategic planning, as well as strong relationships with key decision makers at airlines. Our President and Chief Executive Officer, Franklin Pray, led AWAS from 2006 to 2010 helping to create one of the industry’s top lessors with a portfolio of over 300 owned and managed aircraft. We have developed a full range of sophisticated capabilities in marketing, technical, financing, and risk and portfolio management that will support our future portfolio growth. We believe that our management team’s significant experience enables us to quickly and efficiently identify demand trends and value in the marketplace and to rapidly execute upon these opportunities.

Long-term leases to well-established airline customers.    Our focus on young, modern, fuel-efficient aircraft types allows us to enter into favorable leasing arrangements with attractive terms and lessees. All of our leases have a 10- to 12-year initial term, while new narrowbody leases are typically for six to eight years. With a net book value weighted average remaining lease term of 10.0 years on owned aircraft as of June 30, 2014, we believe that we have the longest remaining lease term of any major aircraft lessor that publicly discloses its lease terms. Widebody aircraft are typically operated by well-established airlines or flag carriers. Our customers include a diverse group of airlines, seven of which are large flag carriers and five of which have significant or full sovereign government ownership. On average, our customers have been in operation for more than 45 years. Our aircraft are generally

 

 

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operated on what we believe are key long-haul or international routes that are at the core of our customers’ operations where larger gauge aircraft are required to meet passenger demand and/or airport slot constraints. Our lessees typically invest significantly in our aircraft due to the greater level of configuration associated with widebody aircraft on long-haul routes. We believe these investments increase the likelihood that our customers will extend their leases at the end of the initial lease terms, helping to reduce our residual value risk.

Strong credit risk management culture and function.    We have developed a sophisticated, proprietary risk management function including rigorous credit analysis of our lessees to manage our risk and exposures as we evaluate transactions. Before entering into a lease, we complete an extensive review of the credit risk profile of a potential lessee, which incorporates a sovereign risk assessment for explicit or implied government support of our customers. During the term of a lease, we regularly audit both the technical status of the aircraft as well as the customer’s operating performance and financial strength. We also use additional contractual terms in our leases such as technical return conditions (including full-life financial adjustment requirements where the payment of cash maintenance reserves is not required and the lessee is responsible for payment of maintenance and repairs of our flight equipment and related expenses during the term of the lease) to protect our contracted revenue and the value of our aircraft portfolio.

Robust funding model with deep access to capital.    We have developed a robust and diversified funding profile including relationships with many leading global commercial banks, the capital markets and export credit agencies. Through the date of this filing, we have raised approximately $1.8 billion of committed secured debt financing from a globally diversified group of global and large regional banks based in Europe, Asia, North America and Africa. The Export-Import Bank of the United States provides guarantees for $92.5 million of our $1.8 billion of committed secured debt financing. We intend to use our management team’s long-standing relationships with many other leading commercial banks to further expand our banking group going forward. In addition, we have demonstrated our ability to access the United States debt capital markets with our total issuance of $515 million of senior unsecured notes. As we continue to grow our business, we intend to further diversify our funding sources to help finance our existing and future aircraft commitments.

Our Business and Growth Strategies

We intend to pursue the following strategies to grow our aircraft portfolio:

Target young, modern in-demand aircraft in the attractive widebody aircraft segment.    We plan to continue acquiring and leasing young, fuel-efficient twin-engine widebody passenger aircraft that are most in demand due to the attractive fundamentals and operating economics for these aircraft. We focus on modern and fuel-efficient aircraft that have been, and we believe will continue to be, widely used by airlines throughout the world for key international or long-haul routes. We believe the demand for these twin-engine widebody passenger aircraft will remain strong, and steady manufacturer production rates will result in a healthy supply-and-demand balance for the foreseeable future.

Capitalize on high growth widebody aircraft leasing market.    Within the global aviation industry, the market for aircraft leasing has grown at a rapid pace over the past 30 years. Overall, the proportion of aircraft owned by leasing companies has increased from less than 2% to 40% from 1980 to 2014. Currently, 46% of narrowbody aircraft and 32% of widebody aircraft are owned by lessors. Historically, growth in air traffic demand for long-haul routes on which widebody aircraft are typically flown has exceeded demand for short-haul routes, and Boeing and Airbus forecast that the trend will continue. In addition, population growth, primarily in emerging markets, and the trend towards denser

 

 

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cities are expected to exacerbate airport capacity constraints, further driving airline preference for larger gauge aircraft. As a result of the above, we believe the twin-engine widebody passenger aircraft leasing market segment in which we focus can grow more rapidly than the aircraft leasing market overall.

Strategically access a diversified and flexible mix of aircraft acquisition channels.    We intend to continue to acquire aircraft through multiple acquisition channels, providing us with flexibility to adjust to market conditions through the economic cycle. We will acquire aircraft through our OEM orderbook with Airbus and Boeing, as well as selective sale-leaseback and trading transactions with other lessors. Since our inception, we have acquired six aircraft with an aggregate purchase price of $718.4 million from trading transactions with other aircraft lessors (not including sale-leaseback transactions), representing 42% of our gross aircraft assets as of June 30, 2014. These transactions were funded through a combination of secured financings of $479.0 million and cash on hand. Such transactions include the purchase from an aircraft lessor of either single or multiple aircraft, which are already on lease, or committed for near-term delivery on lease, by such aircraft lessor and therefore typically generate cash flow more quickly than aircraft acquired through OEM forward orders.

Actively manage our aircraft portfolio to reduce risk and redeploy capital to high returning investments.    We actively manage our aircraft portfolio and seek to optimize economic returns and minimize risks by appropriately and prudently diversifying the types of aircraft we acquire and sell, while maintaining a low average fleet age. In general, our strategy is to invest in aircraft for the first one-third of their useful life, during which time we believe aircraft command attractive long-term leases and have lower aircraft residual value risk relative to older aircraft. After such time, we opportunistically look to sell aircraft in order to maintain a low average fleet age, although we also evaluate the asset type, the customer’s credit profile and the overall economic yield of each transaction to determine the appropriate time to sell any individual aircraft. We intend to redeploy capital from aircraft sales into new aircraft acquisitions with attractive returns, while maintaining a well-diversified portfolio across regions, lessees, aircraft types and OEMs. Through the implementation of our diversification strategies, including OEM orders, sale-leaseback transactions, trading transactions and sales, we believe that we are in a position to reduce our exposure to industry fluctuations over a particular period of time, economic fluctuations in a particular regional market, changes in customer preferences for particular aircraft and the credit risk posed by a particular customer.

Leverage our long-standing and deep industry relationships.    We believe that our management team’s experience in the aircraft leasing market enables us access to key decision makers at OEMs, airlines and financing sources that enable us to implement our growth strategy. Sourcing, placing and financing twin-engine widebody passenger aircraft profitably is largely dependent on relationships within the commercial aviation industry with OEMs, airline operators, other lessors and financing providers. Our management team’s industry contacts have been instrumental in our growth.

Utilize platform to manage aircraft and grow earnings through asset management opportunities.    We have developed a scalable platform for managing aircraft assets with sophisticated capabilities in acquisition, marketing, risk management, financing and technical skills that can be leveraged in a range of alternative structures with third parties. We may, from time to time, enter into strategic ventures to increase the number of aircraft that we manage, reduce our risk or source additional aircraft. We believe we have access to such opportunities due to our industry experience and our relationships.

 

 

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Financing Strategies

The successful implementation of our financing strategies is critical to the success and growth of our business. To reduce our refinancing risk, we generally attempt to enter into debt facilities to finance our aircraft with maturities that match the term of the underlying lease. We also fix the interest rates of our debt facilities when our underlying lease also has a fixed rate, thereby reducing the risk we take on interest rate fluctuations. As of June 30, 2014, 87.3% of our debt is either fixed rate or synthetically fixed using interest rate swaps (excluding our pre-delivery payment facilities relating to aircraft deposits (“PDP Facilities”). Other than our PDP Facilities, we do not have any significant debt maturities until 2019, and our average debt maturity is 8.2 years as of June 30, 2014. See “Description of Indebtedness.”

Through the date of this filing, we have funded our owned and contracted aircraft fleet through multiple sources, including: (i) approximately $500 million of equity; (ii) $515 million of senior unsecured notes due 2019; and (iii) approximately $1.8 billion of committed secured debt financing raised from a diversified group of banks, of which $92.5 million is guaranteed by the Export-Import Bank of the United States. Our bank group currently includes, among others, Apple Bank, BNP Paribas, Citigroup, Credit Agricole, Deutsche Bank AG, DVB Bank SE, Investec, KfW IPEX-Bank, Nord LB and PK AirFinance. In addition, our management team has long-standing relationships with many other leading global commercial banks and plans to further expand our banking group going forward in order to further diversify our funding sources. As of June 30, 2014, we had signed term sheets for financing the July and August 2014 A330-300 deliveries from our orderbook. We believe that our current capital structure is both efficient and flexible, which allows us to capitalize on market opportunities as they arise. As we grow our business, we envision funding our aircraft purchases, including our existing aircraft commitments, through multiple additional sources, including: (i) proceeds from this offering; (ii) cash flow from operations; and (iii) debt financing from the commercial bank market, the capital markets and government-sponsored export credit guarantees and lending programs. See “Risk Factors—Risks Related to Our Indebtedness—Our substantial indebtedness could adversely affect our financial condition” for additional information regarding the risks associated with the incurrence of additional indebtedness.

Our Leases

Most of our leases provide that the lessee’s payment obligations are absolute and unconditional under any and all circumstances. Of our 26 owned and contracted aircraft, 24 have fixed rental rates and two have floating rental rates. Lessees generally agree to lease aircraft for a minimum fixed term. All of our leases are “triple-net” operating leases, under which the lessees are required to pay for maintenance, insurance, taxes and all other aircraft operating expenses during the lease term. Lessees are required to continue to make lease payments under all circumstances, including during periods in which an aircraft is not in operation due to maintenance or grounding. Lessees typically bear financial responsibility for the initial build-out of cabins to their specific operating specifications.

The table below shows the total contracted rental payments for our owned and contracted aircraft as of June 30, 2014. See “Business—Our Leases” for more details about our leasing arrangements.

 

     2014      2015      2016      2017      2018      2019      Thereafter(3)      Total  
     (dollars in millions)  

Owned(1)

   $ 95       $ 190       $ 190       $ 190       $ 190       $ 190       $ 855       $ 1,900   

Contracted(2)

     13         78         115         115         115         115         713         1,264   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 108       $ 268       $ 305       $ 305       $ 305       $ 305       $ 1,568       $ 3,164   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes our 16 owned aircraft as of June 30, 2014.

 

 

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(2) Includes our 10 aircraft under signed leases, as of June 30, 2014. All aircraft acquisitions are subject to the satisfaction of customary closing conditions. In addition, our ability to acquire these aircraft will be subject to our ability to secure adequate financing. There can be no assurance that we will acquire these aircraft, or that the actual monthly contractual rent provided for in any such lease will equal the expected monthly contractual rent. Lease revenue relating to contracted aircraft is dependent on delivery of the aircraft. Lease revenue for floating rate leases has been calculated using the prevailing rate as of June 30, 2014. Lease revenue for leases under which the rent has not yet been fixed are escalated to the estimated delivery month according to the escalation formulas specified in our leases and calculated using the specified reference rate. Actual revenue could vary.
(3) Through 2025 with respect to owned aircraft and through 2027 with respect to contracted aircraft.

Recent Developments

Aircraft Portfolio

On July 28, 2014, we took delivery of one Airbus A330-300 from our committed orderbook and placed it on a 10-year lease with Skymark Airlines. On August 30, 2014, we took delivery of one A330-300 from our committed orderbook and placed it on a 12-year lease with Cebu Pacific Air. In addition, on September 10, 2014, we took delivery of one Airbus A330-300 from our committed orderbook and placed it on a 10-year lease with Skymark Airlines. On September 15, 2014, we purchased one Airbus A330-300 on lease to China Airlines in a trading transaction. On September 29, 2014, we signed a non-binding LOI for the lease of the previously unplaced December 2015 delivery, which will be designated as a A330-300 and will have a 10 year lease term.

New Purchase Agreements and Purchase Term Sheets

On July 8, 2014, we converted our non-binding LOI for the purchase of six planes from Boeing to a signed a purchase agreement with Boeing for the purchase of up to 10 777-300ER aircraft, including firm purchase commitments for six aircraft, two aircraft for which we have provided a non-refundable deposit of $2.8 million and must reconfirm our purchase commitments prior to June 2015 and July 2015, respectively, and options for the purchase of an additional two aircraft prior to September 2017, with an aggregate purchase value of $3.3 billion at current list prices, subject to customary closing conditions. On July 22, 2014, we signed a term sheet with Airbus for the purchase of up to 20 Airbus A330-900s, with an aggregate purchase value of $5.5 billion at current list prices, which term sheet is not binding until definitive documentation is signed and will be subject to customary closing conditions, including board approval and the extension of the deadline to complete negotiation. Subject to entering into definitive documentation, the term sheet contemplates that the 20 aircraft will consist of firm purchase commitments for 15 aircraft and options for the purchase of an additional five aircraft. Delivery of aircraft under these two agreements is not expected to begin until 2016.

As of November 10, 2014, taking into consideration the developments listed above, our owned fleet consisted of 20 aircraft and our OEM orderbook consisted of 38 twin-engine widebody aircraft.

Financing Activity

On July 28, 2014, we drew on a $80.0 million credit facility with Deutsche Bank AG, New York Branch, to provide acquisition financing for the purchase of one Airbus A330-300 on lease to Skymark Airlines. On August 18, 2014, we issued $215 million aggregate principal amount of additional senior unsecured notes under the indenture governing the outstanding $300 million in aggregate principal amount of 6.875% senior notes due 2019 at an issue price of 102%. The notes have a stated coupon

 

 

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interest rate of 6.875% per annum payable semi-annually and will mature on February 15, 2019. On August 14, 2014, we drew on an $81.4 million credit facility with DVB Bank secured by a B777-300ER on lease to Air France that was purchased in June 2014. On August 28, 2014, we drew on a $77.0 million credit facility with KfW IPEX-Bank to provide acquisition financing for the purchase of one A330-300 on lease to Cebu Pacific Air. During October and November 2014, we drew $23.2 million under our Citi PDP facility. On November 4, 2014, we put in place a $70.0 million credit facility with Credit Agricole, secured by an A330-300 on lease to China Airlines that was acquired in September 2014. See “Description of Indebtedness.”

Our Sponsors

The Company is indirectly owned by Reservoir Capital Group, L.L.C. (“Reservoir”) and Centerbridge Partners, L.P. (“Centerbridge”), along with certain members of management. As of June 30, 2014, each of Reservoir and Centerbridge held 49.75%, respectively, of our outstanding investor interests and management held 0.50% of our outstanding investor interests. Following this offering, each of Reservoir and Centerbridge is expected to own     % of our common shares.

Reservoir was founded in 1998 and is a privately held investment firm with an opportunistic “hybrid” investment approach. Reservoir invests directly in private investments and public securities, as well as in partnership with investment teams through the creation of hedge funds and private equity funds in which the Reservoir funds are an owner. Reservoir currently has approximately $7.0 billion of assets under management as of July 2014.

Centerbridge is a private investment firm with offices in New York and London and has approximately $20 billion in capital under management as of June 30, 2014. The firm focuses on private equity and distressed investments. The firm is dedicated to partnering with world-class management teams across targeted industry sectors to help companies achieve their operating and financial objectives.

Risks Affecting Us

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

 

    general economic and financial conditions;

 

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

 

    risks inherent in investing in a single industry;

 

    the concentration of aircraft models in our portfolio;

 

    risks associated with our international operations and emerging markets;

 

    the financial condition of our lessees;

 

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

 

    increases in our borrowing costs;

 

    high fuel prices;

 

    failure to maintain sufficient insurance;

 

    failure to complete aircraft acquisitions;

 

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

 

 

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    failure to properly maintain aircraft;

 

    competition from other aircraft lessors;

 

    a limited number of customers;

 

    the limited number of aircraft and engine manufacturers;

 

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

 

    foreign currency risks;

 

    the loss of key personnel;

 

    lessee defaults and attempts to repossess aircraft;

 

    extensive regulations, including environmental laws and regulations;

 

    failure to obtain required licenses;

 

    airline reorganizations; and

 

    terrorist attacks and geopolitical conditions.

Our Corporate Reorganization

Intrepid Aviation Limited is a Bermuda exempted company incorporated with limited liability on July 29, 2014 solely for purposes of effectuating our initial public offering. Prior to the consummation of this offering, we will complete the Reorganization Transactions described in “Reorganization” pursuant to which Intrepid Aviation Group Holdings, LLC will become a wholly-owned, indirect subsidiary of Intrepid Aviation Limited. As a result, the direct or indirect owners of the interests of Intrepid Aviation Group Holdings, LLC immediately prior to the Reorganization Transactions will constitute all of the shareholders of Intrepid Aviation Limited immediately following the Reorganization Transactions and prior to the completion of this offering. Intrepid Aviation Group Holdings, LLC, is currently owned by our sponsors, Centerbridge and Reservoir, as well as certain members of our management. Investors in this offering will only receive, and this prospectus only describes the offering of, common shares of Intrepid Aviation Limited.

We have historically conducted our business through Intrepid Aviation Group Holdings, LLC and its subsidiaries, and therefore our historical financial statements present the results of operations of Intrepid Aviation Group Holdings, LLC. Following these Reorganization Transactions and this offering, our financial statements will present the results of operations of Intrepid Aviation Limited and its consolidated subsidiaries.

Intrepid Aviation Group Holdings, LLC is, and upon consummation of the Reorganization Transactions Intrepid Aviation Limited will be, a holding company with no material assets other than our ownership interests in our operating subsidiaries. See “Reorganization” for additional information regarding the Reorganization Transactions.

 

 

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Our Corporate Information

Intrepid Aviation Limited was incorporated as a Bermuda exempted company on July 29, 2014 with its registered office at Canons Court, 22 Victoria Street, Hamilton HM 12, Bermuda. Under Bermuda law, “exempted” companies are companies formed for the purpose of conducting business outside Bermuda from a principal place of business in Bermuda. As an “exempted” company, we may not, without the express authorization of the Bermuda legislature or under a license or consent granted by the Minister of Finance, participate in certain business transactions, including: (i) the acquisition or holding of land in Bermuda (except that held by way of lease or tenancy agreement which is required for its business and held for a term not exceeding 50 years, or which is used to provide accommodation or recreational facilities for its officers and employees and held with the consent of the Bermuda Minister of Finance, for a term not exceeding 21 years); (ii) the taking of mortgages on land in Bermuda to secure an amount in excess of $50,000; or (iii) the carrying on of business of any kind for which it is not licensed in Bermuda, except in certain limited circumstances such as doing business with another exempted undertaking in furtherance of its business (as the case may be) carried on outside Bermuda.

Intrepid Aviation Group Holdings, LLC was organized as a Delaware limited liability company on November 23, 2011.

Our principal executive offices are located at One Stamford Plaza, 263 Tresser Boulevard, Stamford, Connecticut 06901. Our main telephone number is 203-905-4220. Our internet website is www.intrepidaviation.com. The information contained on, or that can be accessed through, our website is not a part of this prospectus.

Implications of Being an Emerging Growth Company

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or JOBS Act, enacted in April 2012. An “emerging growth company” may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

    being permitted to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in this prospectus;

 

    not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended;

 

    reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and

 

    exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the completion of this offering. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenue exceeds $1.0 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.

 

 

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We have elected to take advantage of certain of the reduced disclosure obligations in the registration statement of which this prospectus is a part and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our shareholders may be different than you might receive from other public reporting companies in which you hold equity interests.

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

 

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The Offering

 

Common shares offered by us

            shares

 

Common shares to be outstanding after this offering

            shares (or             shares if the underwriters exercise their option to purchase additional shares in full)

 

Option to purchase additional shares

The underwriters have a 30-day option to purchase a maximum of             additional shares.

 

Use of proceeds

We expect to receive net proceeds from this offering of approximately $         , or approximately $         if the underwriters exercise their option to purchase additional shares in full, after deducting the estimated underwriting discount and estimated offering expenses payable by us.

 

  We intend to use the net proceeds from this offering to continue to purchase aircraft, currently with Boeing and Airbus, and general corporate purposes to support continued growth. See “Use of Proceeds.”

 

Risk factors

See “Risk Factors” beginning on page 22 and the other information included in this prospectus for a discussion of factors you should consider carefully before deciding to invest in our common shares.

 

Proposed New York Stock Exchange symbol

“INTR”

 

Dividend Policy

We currently intend to retain all available funds and any future earnings for use in the operation of our business, and therefore we do not currently expect to pay any cash dividends on our common shares. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon our results of operations, financial condition, capital requirements, Bermuda law and other factors that our board of directors deems relevant. In addition, our existing indebtedness restricts our ability to pay dividends, and our ability to pay dividends may also be restricted by the terms of any future credit agreement or any future debt or preferred equity securities of ours or of our subsidiaries. See “Dividend Policy.”

 

 

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The number of common shares to be outstanding after this offering is based on             common shares outstanding as of                     , 2014, after giving effect to the exchange of all outstanding interests of Intrepid Aviation Group Holdings, LLC for             common shares prior to the closing of this offering, and excludes:

 

                common shares reserved for future issuance under our 2014 Incentive Award Plan, which will become effective on the day prior to the public trading date of our common shares.

Unless otherwise indicated, all information in this prospectus reflects and assumes the following:

 

    the consummation of the Reorganization Transactions, including the issuance of             common shares to holders of interests of Intrepid Aviation Group Holdings, LLC (see “Reorganization”);

 

    the filing of the memorandum of increase of share capital and the adoption of amended bye-laws, which will occur immediately prior to the closing of this offering; and

 

    no exercise by the underwriters of their option to purchase additional common shares.

 

 

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Summary Financial and Other Data

The tables below present summary financial and operating data as of and for the periods indicated. The summary historical consolidated statements of operations data and statements of cash flow data for the years ended December 31, 2013 and 2012 and summary balance sheet data as of December 31, 2013 and 2012 have been derived from our historical audited consolidated financial statements included elsewhere in this prospectus. The summary historical balance sheet data as of December 31, 2012 has been derived from our historical audited consolidated financial statements not included in this prospectus. The summary historical condensed consolidated statements of operations data and statements of cash flow data for the six months ended June 30, 2014 and 2013 and summary balance sheet data as of June 30, 2014 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We believe that our unaudited condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and reflect all adjustments, consisting of only normal recurring adjustments, which we consider necessary for a fair presentation of our financial position and results of operations for such periods. Historical results are not necessarily indicative of the results to be expected for future periods and operating results for the six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the full year.

You should read the information below in conjunction with the consolidated financial statements and notes included elsewhere in this prospectus, as well as the sections entitled “Selected Historical Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus.

 

 

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We have elected to adopt the reduced disclosure requirements available to emerging growth companies, including only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure.

 

     Six Months Ended
June 30,
    Fiscal Year Ended
December 31,
 
     2014     2013     2013     2012  
(in thousands)    (unaudited)              

Consolidated Statements of Operations Data:

        

Revenues

        

Rental income

   $ 73,153      $ 9,448      $ 46,017      $ 20,566   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     73,153        9,448        46,017        20,566   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Selling, general and administrative expenses

     11,459        6,952        16,052        14,002   

Depreciation

     23,182        3,491        15,669        6,866   

Loss (gain) on disposal of aircraft

                          (289

Other operating expenses(1)

     2,041        1,955        3,079        301   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     36,682        12,398        34,800        20,880   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     36,471        (2,950     11,217        (314
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)(2)

        

Interest expense

     (28,553            (7,296       

Gain (loss) on derivative financial instruments

     (12,292            (431       

Other income (expense)

     (25     (258     (185     137   

Interest income

     3        2        4        26   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (40,867     (256     (7,908     163   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

     (4,396     (3,206     3,309        (151

Income tax expense

     369               571          
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (4,765   $ (3,206   $ 2,738      $ (151
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per Class(3)

        

Preferred return to Class A LLC interests

   $ 9,429      $ 3,994      $ 12,046      $   

Loss attributable to Class B LLC interests

     (14,194     (7,200     (9,308     (151

Pro forma information of Intrepid Aviation Limited(4)

        

Pro forma net (loss) income:

        

Loss before taxes

   $        $        $        $     

Pro forma income tax expense

        
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net (loss) income

   $        $        $        $     
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma earnings per share: (in dollars)

        

Basic

   $        $        $        $     

Diluted

        

Pro forma, as adjusted information of Intrepid Aviation Limited(5)

        

Pro forma, as adjusted net (loss) income:

        

Loss before taxes

   $        $        $        $     
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma, as adjusted income tax expense

        

Pro forma, as adjusted net (loss) income

   $        $        $        $     
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma, as adjusted earnings per share: (in dollars)

        

Basic

   $        $        $        $     

Diluted

        

 

 

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     As of and for the Six
Months Ended June 30,
    As of and for the Fiscal
  Year Ended December 31,  
 
     2014     2013     2012  
(in thousands, except percentages, ratios and aircraft)    (unaudited)              

Other Operating and Financial Data:

      

Total debt to members’ equity

     3.58     2.22     0.71

Total debt to total capitalization(6)

     78.2     68.9     41.5

Total debt to total assets(7)

     73.3     64.1     37.0

Annual total contracted revenue from owned aircraft(8)

   $ 190,346        N/A        N/A   

Annual total contracted revenue from owned and contracted aircraft(8)

   $ 305,394        N/A        N/A   

Adjusted net income(9)

   $ 8,321      $ 6,909        N/A   

Aircraft owned

     16        N/A        N/A   

Aircraft owned and contracted

     26        N/A        N/A   

Aircraft owned and committed

     33        N/A        N/A   

 

     As of June 30,      As of December 31,  
     2014      2013      2012  
     As Adjusted    Actual                
(in thousands)    (unaudited)                

Consolidated Balance Sheet Data:

           

Cash(10)

      $ 50,802       $ 26,608       $ 7,143   

Restricted cash(10)

        57,794         38,430         18,736   

Aircraft deposits

        321,836         382,173         247,936   

Net book value of aircraft

        1,674,929         1,045,661         159,471   

Total assets

        2,157,848         1,542,632         452,065   

Total debt

        1,580,644         989,249         167,490   

Total other long-term liabilities

        99,765         82,843         43,438   

Total liabilities

        1,716,660         1,096,457         215,639   

Total members’ equity

        441,188         446,175         236,426   

Total liabilities and members’ equity

        2,157,848         1,542,632         452,065   

 

     Six Months Ended
June 30,
    Fiscal Year Ended
December 31,
 
     2014     2013     2013     2012  
(in thousands)    (unaudited)              

Consolidated Statements of Cash Flows:

        

Net cash provided by (used in) operating activities

   $ 29,975      $ 4,421      $ 27,896      $ 5,396   

Net cash provided by (used in) investing activities

     (579,516     (320,017     (1,048,001     (172,333

Net cash provided by (used in) financing activities

     573,735        329,493        1,039,570        156,394   

 

(1) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Income Statement Items” for a description of other operating income (expense).
(2) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a description of other income (expense).
(3) For additional information on earnings (loss) per Class see note 2(t) to our consolidated financial statements for the fiscal year ended December 31, 2013 and note 14 to our condensed consolidated financial statements for the six months ended June 30, 2014, each included elsewhere in this prospectus.

 

 

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(4) Pro forma information represents the anticipated impact of retroactively reflecting the Reorganization Transactions, upon consummation, as if they were completed at the beginning of each period presented. See “Reorganization.” See also note 16 to our consolidated financial statements for the fiscal year ended December 31, 2013 and note 15 to our condensed consolidated financial statements for the six months ended June 30, 2014, each included elsewhere in this prospectus, for additional information regarding the pro forma information.
(5) Pro forma, as adjusted information gives effect to the following transactions as if they were consummated at the beginning of the referenced period: (a) the Reorganization Transactions; (b) the issuance and sale of                  common shares by us in this offering at a price equal to $                 per share, the midpoint of the price range set forth on the cover of this prospectus; and (c) the filing of the memorandum of increase of share capital and the adoption of the amended bye-laws.
(6) Total debt to total capitalization is calculated by dividing total debt by the sum of total debt and total members’ equity.
(7) Total debt to total assets is calculated by dividing total debt by total assets.
(8) Annual total contracted revenue from owned aircraft and annual total contracted revenue from owned and contracted aircraft represent our current estimate of our anticipated annualized operating results from our owned and contracted aircraft portfolio. As of June 30, 2014, we owned 16 aircraft, all of which were under lease. In addition to our 16 owned aircraft, as of June 30, 2014, we had commitments to purchase 17 aircraft from Airbus and Boeing, 10 of which were under lease. We calculate annual total contracted revenue for our 16 owned aircraft, at the monthly contractual rent pursuant to the terms of the applicable lease agreement, as of June 30, 2014, multiplied by 12. We calculate annual total contracted revenue for our 10 contracted aircraft under leases, at the expected monthly contractual rent pursuant to the terms of the lease, multiplied by 12. Lease revenue relating to contracted aircraft is dependent on the delivery of aircraft. Lease revenue for floating rate leases have been calculated using the prevailing rate as of June 30, 2014. Lease revenue for leases under which the rent has not yet been fixed are escalated to the estimated delivery month according to escalation formulas specified in our leases and calculated using the specified reference rate. All aircraft acquisitions are subject to the satisfaction of customary closing conditions, and our ability to acquire these aircraft will also be subject to our ability to secure adequate financing. There can be no assurance that we will acquire these aircraft and achieve the expected rent under the applicable leases.

For a description of risks related to annual total contracted revenue, see “Risk Factors—Risks Related to Intrepid—Our annual total contracted revenue from owned aircraft and annual total contracted revenue from owned and contracted aircraft is based on certain estimates and assumptions and actual results may differ materially from such estimated operating results.”

 

(9)

We define adjusted net income as net income (loss) before (i) stock-based compensation or other non-cash compensation expense; (ii) non-cash interest expense including, but not limited to, amortization of deferred financing costs and debt discounts, write-off of deferred financing costs and debt discounts, and extinguishment of debt; (iii) net change in unrealized appreciation (depreciation) on interest rate swaps; and (iv) other non-cash or one-time charges. Adjusted net income is a supplemental measure of our performance that is not required by, or presented in accordance with, GAAP. It is also not a measurement of our financial performance under GAAP and should not be considered as an alternative to operating profit or any other performance measures derived in accordance with GAAP nor as an alternative to cash flows from operating activities as a measure of our liquidity. We believe that adjusted net income provides meaningful information to assist investors in understanding our financial results and assessing our prospects for future performance. Management believes adjusted net income is an important indicator of our operations because it excludes items that may not be indicative of, or are unrelated to, our core

 

 

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  operating results, and provides a baseline for analyzing trends in our underlying business from period to period. Adjusted net income reflects an additional way of viewing an aspect of our operations that, when viewed with our GAAP results and the reconciliation contained below to our net income (loss), provides a more complete understanding of our business.

Adjusted net income has limitations as an analytical tool, and you should not consider it in isolation from, or a substitute for, net income (loss) or any other performance measure derived in accordance with GAAP. Some of these limitations include:

 

    adjusted net income may exclude certain non-recurring items in the future that are not reflective of our operating performance but that may impact our operating results for the applicable period; 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.

Our actual results of operations for the year ended December 31, 2014 will be significantly different from our adjusted net income for the six months ended June 30, 2014. Our actual results of operations will be affected by a number of factors, including the revenue we receive from our aircraft, our operating expenses, interest expense, the ability of our lessees to meet their obligations and unanticipated expenditures. For more information regarding risk factors that could materially adversely affect our actual results of operations, see “Risk Factors.”

In addition, our adjusted net income may be adversely affected by a new standard for lease accounting expected to be effective in the future. See “Risk Factors—Risks Related to Intrepid—A new standard for lease accounting is expected to be effective in the future, but we are unable to predict the impact of such a standard at this time.”

The following table shows the reconciliation of net income (loss) and adjusted net income:

 

     Six Months Ended
June 30,
    Fiscal Year Ended
December 31,
 
     2014     2013  

Net income (loss)

   ($ 4,765 )    $ 2,738   

As adjusted for:

    

Non-cash management compensation

     1,879        2,172   

Loss (gain) on fair value of derivatives

     7,567        (1,606

Amortization of deferred financing costs and debt discounts

     3,640        3,605   
  

 

 

   

 

 

 

Adjusted Net Income

   $ 8,321      $ 6,909   
  

 

 

   

 

 

 

 

(10) We consider cash on hand (excluding restricted cash) and deposits in banks to be cash. Restricted cash represents security deposits and aircraft maintenance reserves associated with our aircraft leases held on deposit with banks in segregated accounts. See note 2(c) to our consolidated financial statements for the fiscal year ended December 31, 2013 included elsewhere in this prospectus.

 

 

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RISK FACTORS

Investing in our common shares involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this prospectus, including our financial statements and the related notes and “Management’s Discussion and Analysis of Results of Operations and Financial Condition,” before deciding whether to invest in our common shares. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations and growth prospects. In such an event, the market price of our common shares could decline, and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.

Risks Related to Intrepid

Our business is affected by general economic and financial conditions, which could adversely affect our results of operations.

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, would have a material adverse effect on our business, financial condition or results of operations. General business and economic conditions that could affect us include, among others, interest rate fluctuations, inflation, unemployment levels, bankruptcies, demand for passenger 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 regional and local economies in which we operate.

In order to meet our existing commitments and grow our business, we will require additional capital in the future, which may not be available.

Our business is capital intensive and we will need to raise additional funds through debt or equity financings to meet commitments under our existing purchase contracts and to execute our growth strategy. As of June 30, 2014, we have 17 aircraft under purchase commitments. If we fail to meet commitments under one of our existing purchase contracts with airframe manufacturers, we may forfeit any deposit paid on that aircraft to that point. In addition, with respect to our purchase contracts with airframe and engine manufacturers, if we are in default under the relevant purchase contract, the seller would have the right to, among other things, suspend performance, reschedule the delivery date or terminate the relevant purchase contract, in each case with respect to any or all aircraft or engines, as applicable, under the relevant purchase contract. As of June 30, 2014, we have paid total deposits of approximately $321.8 million relating to 17 of these aircraft. Adequate sources of capital funding may not be available when needed, or may not be available on favorable terms. Our access to additional sources of financing will depend upon a number of factors over which we have limited control, including:

 

    general market conditions;

 

    the market’s view of the quality of our assets;

 

    our historical and expected performance;

 

    the market’s perception of our growth potential;

 

    compliance with the terms of our existing and future debt agreements;

 

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    interest rate fluctuations;

 

    our current and potential future earnings and cash distributions; and

 

    the market price of our common shares.

The financial crisis that began in the second half of 2008 resulted in significant global market volatility and disruption and a lack of liquidity. While the capital markets intermittently have shown signs of improvement, it is not clear whether the capital market and other long-term credit markets will be consistently available in sufficient volume and on acceptable terms to satisfy the future financing and refinancing needs of the aviation industry. The availability of, and pricing of, capital in the bank market and in the capital markets can be significantly impacted by global events and there is no assurance that we will be able to raise capital at any particular time to fund future growth or for other purposes.

The recent debt crisis in Europe has created uncertainty with respect to the ability of certain European Union (“EU”) countries to continue to service their sovereign debt obligations. The continued uncertainty over the outcome of the EU governments’ financial support programs and the possibility that other EU member states may experience similar financial troubles have created substantial volatility and adversely impacted financial markets. Risks related to the recent debt crisis in Europe have had, and may continue to have, a negative impact on global economic activity and the financial markets.

If funding is insufficient at any time in the future, we may be unable to acquire additional aircraft (including our contracted portfolio), take advantage of business opportunities, meet our then-existing debt or other obligations or respond to competitive pressures, any of which could materially adversely affect our business, financial condition or results of operations.

Our annual total contracted revenue from owned aircraft and annual total contracted revenue from owned and contracted aircraft are based on certain estimates and assumptions and actual results may differ materially from such estimated operating results.

Our annual total contracted revenue from owned aircraft and annual total contracted revenue from owned and contracted aircraft set forth under “Prospectus Summary—Summary Financial and Other Data” represent our best current estimate of our anticipated annualized operating results from our owned and contracted aircraft portfolio as of June 30, 2014. Our annual total contracted revenue from owned aircraft and annual total contracted revenue from owned and contracted aircraft are based on certain estimates and assumptions, some or all of which may not materialize. Unanticipated events may occur that could have a material adverse effect on the actual results achieved by us during the periods to which these estimates relate. Those assumptions include the timely delivery of contracted aircraft, our ability to secure adequate financing to pay the balance of the purchase price of contracted aircraft, the satisfaction of the conditions in our aircraft acquisition and associated lease agreements for contracted aircraft, the type of aircraft we will acquire in the future, our ability to enter certain leases at certain lease rates without instances of lessee default and lease restructuring and certain operating expenses we expect to incur. Our annual total contracted revenue from owned aircraft and annual total contracted revenue from owned and contracted aircraft are subject to material risks, uncertainties and contingencies and actual results may differ materially from such estimated operating results.

We are subject to risks inherent in investing in a single industry.

Our principal objective involves the direct investment in aircraft for the purpose of leasing such aircraft to a geographically diversified group of lessees. The level of risk of our investment objectives, which are focused primarily on operations and investments in the aircraft leasing market, could be higher and more volatile compared to certain types of persons which have a more diverse range of

 

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investments. Our business would materially suffer if the aircraft leasing industry in general, and the widebody market in particular, suffered a downturn, if our aircraft became obsolete or if use of our aircraft decreased. Additionally, our success depends on our ability to keep pace with technological advances in our industry and to meet evolving customer needs. If demand for widebody aircraft weakens due to technological change, competition, regulatory changes, or other factors, it could have a material adverse effect on our business, financial condition or results of operations.

The concentration of some aircraft models in our aircraft portfolio could materially adversely affect our business, financial condition or results of operations should any problems specific to these particular models occur.

Due to the high concentration of Airbus A330 aircraft in our fleet, our business, financial condition or results of operation may be materially adversely affected if the demand for these aircraft models declines (including if airlines move away from widebodies to narrowbodies), if they are redesigned or replaced by their manufacturer or if these aircraft models experience design or technical problems. As of June 30, 2014, we had four aircraft types in our owned aircraft portfolio and 11 aircraft manufactured by Airbus. Twenty-two of our owned and committed aircraft as of June 30, 2014 are manufactured by Airbus including 21 in the A330 family of aircraft, and 11 are manufactured by Boeing including 10 and one in the 777 and 787 Dreamliner classes, respectively. On July 22, 2014, we signed a term sheet with Airbus for the purchase of up to 20 Airbus A330-900s, which term sheet is not binding until definitive documentation is signed and will be subject to customary closing conditions, including board approval and the extension of the deadline to complete negotiation.

Should any of these aircraft types in general encounter technical or other problems, the value and lease rates of those aircraft would likely decline, and we may be unable to lease the aircraft on favorable terms, if at all. Any significant technical problems with any such aircraft models could result in the grounding of the aircraft. Acquisition of a new type of aircraft, such as the A330-900, involves a variety of risks relating to its ability to be successfully placed into service and leased, including difficulties or delays in obtaining the necessary certification from regulatory authorities and airworthiness validations, delays in meeting the agreed upon aircraft delivery schedule, and inability of the aircraft and all of its components to comply with agreed upon specifications and performance standards. In addition, the bankruptcy or shutdown of an airline operating a large fleet of such aircraft types may result in an oversupply of such aircraft being released into the market, which could reduce the value of such aircraft. The inability to lease the affected aircraft types may reduce our revenues, net income and cash flows to the extent the affected aircraft types comprise a significant percentage of our aircraft portfolio.

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 business, financial condition 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 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

 

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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 business, financial condition and results of operations.

We are subject to risks associated with our international operations.

We operate in international markets. During the six months ended June 30, 2014, 100% of our operating revenues resulted from our international operations. We expect that international operations will continue to represent a significant portion of our operations in the future. Our international operations are subject to a number of risks, including:

 

    political conditions and events, including embargoes;

 

    restrictive actions by U.S. and foreign governments, including China, Ethiopia, Italy, Japan, Namibia, the Philippines, Poland, the Republic of Korea, Taiwan and Thailand, where our lessees operate, that could limit our ability to provide services in those countries;

 

    the imposition of withholding or other taxes on foreign income, tariffs or restrictions on foreign trade and investment;

 

    adverse tax consequences;

 

    limitations on repatriation of earnings or currency exchange controls and import/export quotas;

 

    nationalization, expropriation, asset seizure, blockades and blacklisting;

 

    limitations in the availability, amount or terms of insurance coverage;

 

    loss of contract rights and inability to adequately enforce contracts;

 

    political instability, war and civil disturbances or other risks that may limit or disrupt markets, such as terrorist attacks, piracy and kidnapping;

 

    outbreaks of pandemic diseases or fear of such outbreaks;

 

    fluctuations in currency exchange rates, hard currency shortages and controls on currency exchange that affect demand for our services and our profitability;

 

    potential noncompliance with a wide variety of laws and regulations, such as the U.S. Foreign Corrupt Practices Act of 1977 (the “FCPA”), and similar non-U.S. laws and regulations, including the U.K. Bribery Act 2010 (the “UKBA”);

 

    labor strikes;

 

    changes in general economic and political conditions;

 

    adverse changes in foreign laws or regulatory requirements, including those with respect to flight operations and environmental protections;

 

    different liability standards and legal systems that may be less developed and less predictable than those in the United States;

 

    laws of countries that do not protect our intellectual property and international rights to the same extent as the laws of the United States; and

 

    difficulty in staffing and managing widespread operations.

If we are unable to adequately address these risks, we could lose our ability to operate in certain international markets and our business, financial condition or results of operations could be materially adversely affected. We are particularly dependent on conditions in Asia as many of our lessees are based in Asia.

The U.S. Departments of Justice, Commerce, Treasury and other agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against companies for violations

 

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of export controls, the FCPA, and other federal statutes, sanctions and regulations, including those established by the Office of Foreign Assets Control (“OFAC”) and, increasingly, similar or more restrictive foreign laws, rules and regulations. By virtue of these laws and regulations, and under laws and regulations in other jurisdictions, we may be obliged to limit our business activities, we may incur costs for compliance programs and we may be subject to enforcement actions or penalties for noncompliance. In recent years, U.S. and foreign governments have increased their oversight and enforcement activities with respect to these laws and we expect the relevant agencies to continue to increase these activities. A violation of these laws, sanctions or regulations could materially adversely affect our business, financial condition or results of operations.

We have compliance policies in place for our employees with respect to FCPA, OFAC, UKBA and similar laws, but there can be no assurance that our employees, consultants or agents will not engage in conduct for which we may be held responsible. Violations of the FCPA, OFAC, UKBA and other laws, sanctions or regulations may result in severe criminal or civil penalties, and we may be subject to other liabilities, which could materially adversely affect our business, financial condition or results of operations.

We are indirectly subject to many of the economic and political risks associated with emerging markets, which could materially adversely affect our business, financial condition or results of operations.

A significant number of our aircraft are leased to airlines operating in emerging market countries, including China, Ethiopia, Namibia, the Philippines, the Republic of Korea, Taiwan and Thailand. We also may lease aircraft to airlines in other emerging market countries in the future.

Emerging market countries have less developed economies that are more vulnerable to economic and political problems and may experience significant fluctuations in gross domestic product, interest rates and currency exchange rates, as well as civil disturbances, government instability, nationalization and expropriation of private assets and the imposition of taxes or other charges by government authorities. The occurrence of any of these events in markets served by our lessees and the resulting economic instability that may arise could adversely affect the value of our ownership interest in aircraft subject to lease in such countries, or the ability of our lessees, which operate in these markets to meet their lease obligations. As a result, lessees which operate in emerging market countries may be more likely to default on leases than lessees that operate in developed countries. In addition, legal systems in emerging market countries may be less developed, which could make it more difficult for us to enforce our legal rights in such countries. Our business, financial condition or results of operations may be materially adversely affected.

Our success depends on the financial strength of our lessees, and lessee defaults, bankruptcies and other credit problems could materially adversely affect our business, financial condition or results of operations. If our lessees fail to perform as expected and we decide to restructure or reschedule our leases, the restructuring and rescheduling would likely result in less favorable lease terms.

Our success depends in part upon the financial strength of the lessees with whom we contract, our ability to assess the credit risk of our lessees and the ability of such lessees to perform their contractual obligations under the relevant lease agreements. The ability of each lessee to perform its obligations under the relevant lease agreement will depend primarily on the lessee’s financial condition and cash flow, which may be affected by factors beyond our control, including:

 

    passenger air travel rates;

 

    passenger air travel demand;

 

    airport access;

 

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    competition from other aircraft lessors;

 

    political, economic and social conditions in the jurisdictions where our lessees are located, and in the markets they serve;

 

    increases in operating costs, including labor costs, the price and availability of jet fuel, maintenance costs, the price and availability of aircraft spare parts and components and volatility of oil prices;

 

    availability and cost of financing;

 

    fare levels;

 

    labor conditions;

 

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

 

    aircraft accidents;

 

    insurance costs and coverage;

 

    trade and economic sanctions and other restrictions imposed by the U.S. and other governments;

 

    litigation;

 

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

 

    environmental laws and regulations, including, but not limited to, restrictions on carbon emissions.

Generally, airlines with high financial leverage are more likely than airlines with stronger balance sheets to seek operating leases. As a result, most of our existing lessees are not rated investment grade by the principal U.S. rating agencies and may suffer liquidity problems, and, at any point in time, may experience lease payment difficulties or be significantly in arrears in their obligations under our leases. Some lessees encountering financial difficulties may seek a reduction in their lease rates or other concessions, such as a decrease in their contribution toward maintenance obligations. Downturns in the aviation industry could greatly exacerbate the weakened financial condition and liquidity problems of some of our lessees and further increase the risk of delayed, missed or reduced rental payments.

While we take into consideration a lessee’s financial condition and risk in structuring and pricing our leases, we may not correctly assess the credit risk of each lessee or charge lease rates which correctly reflect the related risks and our lessees may not be able to continue to meet their financial and other obligations under our leases in the future. A delayed, missed or reduced rental payment from a lessee decreases our revenues and cash flow. Our default levels may increase over time if economic conditions deteriorate.

It is likely that restructurings and/or repossessions with some of our lessees will occur in the future. The terms and conditions of possible lease restructurings or reschedulings may result in a reduction of lease revenue, or other concessions, such as a decrease in the lessee’s contribution toward maintenance obligations, and such reductions or concessions could have a material adverse effect on our business, financial condition or results of operations. If any request for payment restructuring or rescheduling is made and granted, reduced or deferred rental payments may be payable over all or some part of the remaining term of the lease, although the terms of any revised payment schedules may be unfavorable and such payments may not be made. Further, if we, in the exercise of our remedies under a lease, repossess an aircraft, we may not be able to re-lease the aircraft promptly or at favorable rates. If repossessions occur we will incur significant cost and expenses which are unlikely to be recouped.

 

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The probability that a lessee could default may increase if economic conditions deteriorate. In the event that a lessee defaults under a lease, any security deposit we hold may not be sufficient to cover the lessee’s outstanding or unpaid lease obligations and required maintenance and transition expenses. If lessees of a significant number of our aircraft defaulted on their leases, our business, financial condition or results of operations would be materially adversely affected.

In addition, one of our lessees, Skymark Airlines, is currently involved in a dispute with Airbus over the cancellation of its order for six A380 aircraft. Airbus is seeking a payment from Skymark Airlines as a result of the cancellation and Skymark Airlines has publicly stated that such payment could impact its ability to continue as a going concern. As of November 10, 2014, we have four owned aircraft and three additional contracted aircraft under leases with Skymark Airlines, representing a substantial portion of our owned and committed aircraft. To the extent Skymark Airlines encounters financial difficulties, whether as a result of penalties payable to Airbus or otherwise, the ability of the airline to continue to pay its contracted lease rates under existing leases for our owned aircraft, and to commence paying the contract lease rates under leases for our contracted aircraft, which are scheduled to commence in 2014 and 2015, could be materially adversely affected.

Our business model depends on the continual leasing and re-leasing of our aircraft, and we may not be able to do so on favorable terms.

Our business model depends on the continual leasing and re-leasing of our aircraft in order to generate sufficient revenues to finance our growth and operations, pay our debt service obligations and generate positive cash flows from operations. We cannot assure you that we will be able to enter into profitable leases upon the acquisition of the aircraft we purchase in the future or the aircraft we have agreed to purchase but which are not under leases. Furthermore, our leases may terminate prior to their scheduled expiration as a result of a breach by the lessee of the terms of the lease agreement or a bankruptcy of a lessee, resulting in the need to re-lease such aircraft earlier than the lease’s scheduled expiration.

Our ability to lease and re-lease our aircraft will depend on general market and competitive conditions at the time the initial leases are entered into and the existing leases expire or earlier terminate. Our ability to lease or re-lease the aircraft on favorable terms or without significant off-lease time and costs could be adversely affected by depressed conditions in the airline and aircraft industries, lessee and end-user bankruptcies, the effects of terrorism and war, the sale of other aircraft by financial institutions and various other general market and competitive conditions and factors which are outside of our control. Other factors that may affect our ability to realize upon the investment in our aircraft and that may increase the likelihood of impairment charges, include, among others, additional environmental laws and regulations, customer preferences and other factors that may effectively shorten the useful life of older aircraft. If we are not able to lease or re-lease the aircraft on favorable terms or at all, there may be a material adverse effect on our business, financial condition and results of operations.

An unexpected increase in our borrowing costs would negatively affect our financial condition, cash flow and results of operations.

We finance many of the aircraft in our fleet through a combination of short- and long-term debt financings. As these debt financings mature, we may have to refinance these existing commitments by entering into new financings, which could result in higher borrowing costs, or repay them by using cash on hand or cash from the sale of our assets. Moreover, an increase in interest rates under the various debt financing facilities we have in place would have a negative effect on our earnings and could make our aircraft leasing contracts unprofitable.

 

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Some of our debt financings bear interest at a floating rate, such that our interest expense would vary with changes in the applicable reference rate. As a result, our inability to sufficiently protect ourselves from changes in our cost of borrowing, as reflected in our composite interest rate, may have a direct, negative impact on our net income. Our lease rental stream is generally fixed over the life of our leases, whereas we have used floating-rate debt to finance a portion of our aircraft acquisitions. However, all of our floating rate debt not fixed by a corresponding interest rate swap is secured by an aircraft or the subject of a floating rate lease thereby offsetting some or all of the financial impact. As of June 30, 2014, we had $271.5 million in floating-rate debt not fixed by a corresponding interest rate swap. If interest rates increase, we would be obligated to make higher interest payments to our lenders. If we incur significant fixed-rate debt in the future, increased interest rates prevailing in the market at the time of the incurrence of such debt would also increase our interest expense. If our composite interest rate were to increase by 1.0%, we would expect to incur additional interest expense on our existing indebtedness as of June 30, 2014, of approximately $2.7 million (excluding the effect of capitalized interest) on an annualized basis, which would negatively affect our financial condition, cash flow and results of operations.

The interest rates that we obtain on our debt financings have several components, including credit spreads, swap spreads, duration, and new issue premiums. These are all incremental to the underlying risk-free rates, as applicable. Volatility in our perceived risk of default or in a market sector’s risk of default will negatively impact our cost of funds.

High fuel prices can adversely affect the profitability of the airline industry and our lessees’ ability to meet their lease payment obligations to us.

Fuel costs represent a major expense to airlines, and fuel prices fluctuate widely depending primarily on international market conditions, geopolitical and environmental events, regulatory changes including those related to greenhouse gas emissions and currency exchange rates. Fuel prices continue to have a significant impact on airline profitability. Due to the competitive nature of the airline industry, airlines may not be able to pass on increases in fuel prices to their customers by increasing fares. If they pass on the higher costs, it may materially adversely affect demand for air travel, which would reduce revenues to our customers. In addition, airlines may not be able to manage this risk by appropriately hedging their exposure to fuel price fluctuations. Although fuel prices have been relatively stable, they have stabilized at prices significantly higher than historical averages. If fuel prices increase further, our lessees may incur higher costs or experience reduced revenues. Consequently, these conditions may:

 

    increase the cost of travel and decrease the demand for aircraft travel;

 

    affect our lessees’ ability to make rental and other lease payments;

 

    result in lease restructurings and aircraft and engine repossessions;

 

    increase our costs of servicing and marketing aircraft; and

 

    impair our ability to re-lease the aircraft and other aviation assets or re-lease or otherwise dispose of the assets on a timely basis at favorable rates.

Factors such as natural disasters can significantly affect fuel availability and prices. Also the perception of a structural shortage in oil supplies that resulted in the 2008 oil price boom, resulting in fuel prices increasing to historical highs before declining substantially as a result of the 2008-09 global recession, poses a substantial risk to the airline industry. A return to 2008 historically high fuel prices that are not hedged appropriately could have a material adverse effect on airlines’ profitability and consequently, may materially adversely affect our lessees’ ability to make rental and other lease payments, result in lease restructurings and/or aircraft repossessions. Any of these events could materially adversely affect our business, financial condition or results of operations.

 

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Our aircraft may not at all times be adequately insured either as a result of lessees’ failing to maintain sufficient insurance during the course of a lease or insurers not being willing to cover certain risks.

Hazards, such as aircraft accidents, collisions and fires are inherent in providing aircraft services and can cause personal injury and loss of life, severe damage to, and destruction of property, and equipment and suspension of operations. Our lessees attempt to protect themselves against potential losses through safety management systems and insurance coverage. However, insurance coverage is subject to deductibles and maximum coverage amounts. In addition, neither we nor our lessees carry insurance against all types of losses. We cannot ensure that the existing insurance coverage of our lessees will be sufficient to protect against all losses, that they will be able to maintain their existing insurance coverage in the future or that the premiums will not increase substantially.

We do not directly control the operation of any of our owned or committed aircraft. Nevertheless, because we hold title, directly or indirectly, to our aircraft, we could be sued and held strictly liable for losses resulting from the operation of our aircraft, or be held liable for those losses on other legal theories in certain jurisdictions around the world, or claims may be made against us as the owner of an aircraft requiring us to expend resources in our defense. As such, we may be exposed to potentially significant losses in the event that any of our aircraft is lost or subject to an accident or other disaster and significant costs related to claims, repairs or replacement of a damaged aircraft and its temporary or permanent loss from service are incurred. Such accidents or incidents may also create a negative public perception of the operations of the relevant lessee.

We require our lessees to obtain specified levels of insurance and indemnify us for, and insure us against, liabilities arising out of their 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. We also require our lessees to maintain public liability, property damage and hull all risks and hull war risks insurance on the aircraft at agreed-upon levels. Some lessees may fail to maintain adequate insurance coverage during a lease term, which, although in contravention of the lease terms, would necessitate our taking some corrective action, such as terminating the lease or securing insurance for the aircraft, either of which could adversely affect our financial results.

In addition, there are certain risks or liabilities that our lessees may face, for which insurers may be unwilling to provide coverage or the cost to obtain such coverage may be prohibitively expensive. For example, following the terrorist attacks of September 11, 2001, non-government aviation insurers significantly reduced the amount of insurance coverage available for claims resulting from acts of terrorism, war, dirty bombs, bio-hazardous materials, electromagnetic pulsing or similar events. At the same time, aviation insurers significantly increased the premiums for third-party war risk and terrorism liability insurance and coverage in general. As a result, the amount of third-party war risk and terrorism liability insurance that is commercially available at any time may be below the amount stipulated in our leases. Accordingly, although we anticipate that our lessees’ insurance or other coverage will be sufficient to cover most claims that could or will be asserted against us arising from the operation of our aircraft by our lessees, such insurance may not cover all claims. Inadequate insurance coverage or default by lessees in fulfilling their indemnification or insurance obligations, or the lack of available insurance or substantial increases in future premiums, could reduce the proceeds that would be received by us in the event that we are sued and are required to make payments to claimants, which could have a material adverse effect on our business, financial condition or results of operations.

 

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There can be no assurance that we will complete the acquisition of any of the aircraft for which we have binding purchase commitments, which will impact the leases we have entered into for such aircraft, and we may experience delays in locating and securing attractive alternative investments or leasing opportunities.

As of June 30, 2014, we had 17 committed twin-engine widebody passenger aircraft consisting of 11 aircraft under purchase commitments with Airbus and six aircraft under a non-binding LOI with Boeing. On July 8, 2014, we converted our non-binding LOI for the purchase of six planes from Boeing to a signed purchase agreement with Boeing for the purchase of up to ten 777-300ER aircraft with an aggregate purchase value of $3.3 billion at current list prices, subject to customary closing conditions. In addition, on July 22, 2014, we signed a term sheet with Airbus for the purchase of up to 20 Airbus A330-900s, with an aggregate purchase value of $5.5 billion at current list prices, which term sheet is not binding until definitive documentation is signed and will be subject to customary closing conditions, including board approval and the extension of the deadline to complete negotiation. Delivery of aircraft under our purchase agreement with Boeing and our term sheet with Airbus is not expected to begin until 2016. We cannot assure you that we will acquire all of these aircraft because the acquisitions are subject to a variety of factors, such as, in the case of Airbus entering into definitive documentation with respect to our non-binding term sheet, or in each case the satisfaction of certain closing conditions, or because we are unable to maintain our financing sources or find new sources of financing. If we fail to meet commitments under one of our existing purchase contracts with airframe manufacturers, we may forfeit any deposit paid on that aircraft to that point. In addition, with respect to our purchase contracts with airframe and engine manufacturers, if we are in default under the relevant purchase contract, the seller would have the right to, among other things, suspend performance, reschedule the delivery date or terminate the relevant purchase contract, in each case with respect to any or all aircraft or engines, as applicable, under the relevant purchase contract. As of June 30, 2014, we have paid total deposits of approximately $321.8 million relating to 17 of these aircraft.

In addition, as of June 30, 2014, we had entered into binding contracts, with operators to lease 10 of our 17 committed aircraft. We currently hold security deposits for all of the binding contracts, either in the form of cash or a letter of credit. The performance of these leases is subject to a number of conditions, including, but not limited to, the satisfactory construction and testing of each new aircraft, the lessee’s ability to obtain pre-delivery authorizations and any necessary governmental and corporate licenses, consents, filings and approvals, and the lack of a casualty occurrence with respect to each aircraft. Under certain circumstances, we may incur unreasonable delays or other costs for failures to timely deliver aircraft. If, as described above, we do not complete the acquisition of the aircraft to be subject to such leases, then we will not be able to generate revenue under the relevant leases. The leasing of our remaining aircraft for which we have purchase commitments or non-binding term sheets (including the aircraft under the purchase agreement with Boeing and the non-binding term sheet with Airbus that we entered into in July) will depend on, among other things, in the case of Airbus, entering into definitive documentation, and in each case our ability to negotiate mutually satisfactory acquisition and leasing terms with the relevant lessees, to enter into binding purchase and sale agreements and lease agreements with lessees and, in some cases, to obtain financing for the acquisitions. Even if we do enter into binding purchase and sale agreements, we cannot assure you that the closing conditions under those agreements will be satisfied and that we will close on the acquisitions.

If we do not complete the purchase and lease transactions of any of the aircraft for which we have binding purchase commitments or non-binding LOIs or that we are otherwise reviewing within our anticipated time frame or at all, we may experience delays in locating and securing attractive alternative investments or leasing opportunities and will not achieve projected revenue or net income.

 

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Factors that increase the risk of decline in aircraft value and achievable lease rates could have a material adverse effect on our business, financial condition, results of operation or growth prospects and on our ability to meet our obligations.

In addition to factors linked to the aviation industry generally discussed elsewhere in this “Risk Factors” section, other factors that may affect the value and achievable lease rates of our aircraft and other aviation assets include:

 

    the particular maintenance, damage and operating history of the airframes and engines;

 

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

 

    whether an aircraft or other aviation asset is subject to a lease and, if so, whether the lease terms are favorable to the lessor;

 

    grounding orders or other regulatory action that could prevent or limit utilization of our aircraft;

 

    the age of the aircraft and other aviation assets;

 

    airworthiness directives and manufacturers’ service bulletins;

 

    aircraft noise and emission standards;

 

    any tax, customs, regulatory and other legal requirements that must be satisfied when an aircraft is purchased, sold or re-leased;

 

    manufacturer support and availability of spare parts;

 

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

 

    decreases in the creditworthiness of lessees.

Any decrease in the values and achievable lease rates for commercial aircraft or other aviation assets that may result from the above factors or other unanticipated factors may have a material adverse effect on our business, financial condition, results of operation or growth prospects and our ability to meet our obligations.

Our aircraft require routine maintenance, and if they are not properly maintained, their value may decline and we may not be able to lease or re-lease such aircraft at favorable rates, which would materially adversely affect our business, financial condition, results of operation or growth prospects.

We may be exposed to increased maintenance costs for our aircraft associated with a lessee’s failure to properly maintain the aircraft. If an aircraft is not properly maintained, its market value may decline, which would result in lower revenues from its lease or sale. Our lessees are primarily responsible for aircraft maintenance and compliance with all end-user and governmental requirements applicable to the lessee and the aircraft, including operational, maintenance, government agency oversight, registration requirements and airworthiness directives. Our ability to determine the condition of an aircraft or whether the lessees are properly maintaining the aircraft will be limited to periodic inspections that we perform or that are performed on our behalf by third-party service providers or aircraft inspectors.

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, 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 re-leasing or sale.

 

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Even if we are entitled to receive maintenance payments, these payments may not cover the entire expense of the scheduled maintenance they are intended to fund. In addition, maintenance payments typically cover only certain scheduled maintenance requirements and do not cover all required maintenance and all scheduled maintenance; however, any shortfall may be covered by the security deposit which we would also hold and could be applied against such additional repair cost. Furthermore, lessees may not meet their maintenance payment obligations or perform required scheduled maintenance. Certain of our leases also provide for full-life financial adjustments or redelivery of the aircraft to the extent that the aircraft is delivered in a different condition compared to the time of delivery (normal wear and tear excepted). Any failure by our lessees to meet their obligations to perform required scheduled maintenance, or any shortfall in any full-life financial adjustment, or our inability to maintain our aircraft could have a material adverse effect on our business, financial condition or results of operations. In addition, if any of our aircraft are not under a lease, we would be required to bear the entire cost of maintaining that aircraft and performing any required airworthiness directives, which could have a material adverse effect on our business, financial condition or results of operations.

We operate in a highly competitive lease market for investment opportunities in aircraft and other aviation assets.

The leasing and remarketing of commercial passenger aircraft is highly competitive. We compete with other aircraft leasing companies, including, among others, AerCap Holdings N.V. Air Lease Corporation, Aircastle Limited, Avolon Holdings Limited, AWAS Aviation Capital Limited, Bank of China Aviation, CDB Leasing, CIT Aerospace, FLY Leasing Limited and GE Commercial Aviation Services Limited (GECAS). We also may encounter competition from other entities that selectively compete with us, including:

 

    financial institutions (including those seeking to dispose of repossessed aircraft at distressed prices);

 

    aircraft manufacturers;

 

    special purpose vehicles formed for the purpose of acquiring, leasing, financing and selling aircraft;

 

    public and private partnerships, investors and funds, including private equity and hedge funds;

 

    aircraft brokers; and

 

    airlines.

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 have significantly greater operating and financial resources than we have. In addition, some competing aircraft lessors have a lower overall cost of capital and may provide financial services, maintenance services or other inducements to potential lessees that we cannot provide.

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. As a result, if we fail to compete successfully on these factors, our business, financial condition or results of operation may be adversely affected.

We lease our aircraft to a limited number of customers.

As of June 30, 2014, our owned and contracted portfolio included 26 leases with 13 customers. Three of our lessees accounted for approximately 36% of our aircraft currently in service, based on net

 

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book value. Additionally, of these customers, six individually represented more than 10% of our consolidated revenues for the six months ended June 30, 2014: Air Namibia (17%); Alitalia (13%); Skymark Airlines (12%); Ethiopian Airlines (11%); Philippine Airlines (11%); and Sichuan Airlines (10%). Moreover, four customers individually represented more than 10% of our consolidated revenues for the year ended December 31, 2013: Alitalia (41%); Sichuan Airlines (12%); Thai Airways (15%); and Air Namibia (11%). In addition, we have placed nine of our ten contracted aircraft with only three airlines: Skymark Airlines (5); Cebu Pacific Air (2); and EVA Airways (2). For the year ended December 31, 2012, Alitalia, represented 91% of our consolidated revenues. Additionally, since June 30, 2014, we have delivered two of the five contracted Skymark Airlines aircraft. The fact that the lease agreements related to a significant percentage of our portfolio have been entered into with a small pool of lessees, most of which operate in emerging markets, increases the risk that an insolvency of a lessee might require a significant proportion of our aircraft to be remarketed. Failure to re-lease and/or sell a significant proportion of our aircraft repossessed from insolvent lessees on favorable terms or at all following such an insolvency or insolvencies would have a material adverse effect on our business, financial condition or results of operations.

There are a limited number of aircraft and engine manufacturers and the failure of any manufacturer to meet its aircraft and engine delivery obligations to us could materially adversely affect our business, financial condition or results of operations.

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

 

    missed or late delivery of aircraft and engines ordered by us and an inability to meet our contractual obligations to our customers, 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;

 

    a market environment with too many aircraft and engines available, creating downward pressure on demand for the aircraft and engines in our fleet and reduced market lease rates and sale prices;

 

    poor customer support from the manufacturers of aircraft, engines and components 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 remarket or sell some of the aircraft and engines in our portfolio.

In the past both Boeing and Airbus have experienced delays in meeting deadlines when bringing new aircraft to market. As a recent example, in January 2013, the FAA announced an emergency airworthiness directive that required all U.S. Boeing 787 Dreamliner operators to temporarily cease operations of Boeing 787 Dreamliners to address the potential battery fire risk, and regulatory bodies in

 

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other jurisdictions followed suit. Although the FAA approved Boeing’s battery improvements and the aircraft were permitted to return to service in April 2013, an investigation focusing on the design and certification requirements of the battery system being conducted by the National Transportation Safety Board, or NTSB, continues. This event or other engineering, technical or other problems at the manufacturers that supply us, could have an adverse effect on our business.

Moreover, our purchase agreements with Boeing and Airbus and the leases we have signed with our customers for future lease commitments are all subject to cancellation clauses related to delays in delivery dates, and our ability to recover costs and expenses resulting from any such delay from the manufacturer may be limited by the terms of those purchase agreements. In addition, certain of our PDP Facilities include limits on delays in the delivery date of the related aircraft, and as a result we may be required to either obtain consent from the relevant lenders or refinance the relevant PDP Facility in connection with a manufacturer delay. Any manufacturer delays for aircraft that we have committed to lease could strain our relations with our customers, and cancellation of such leases by the lessees could have a material adverse effect on our business, financial condition or results of operations.

A new standard for lease accounting is expected to be effective 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.

 

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    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 and there is no estimated date of issuance of the standard nor a proposed effective date. Currently, management is unable to assess what impact the adoption of the new finalized lease standard would have on the airline industry’s leasing arrangements or on our consolidated financial statements.

Under the current proposal, sale leaseback accounting will be more difficult to achieve and more sale leasebacks will be treated as financings by lessees, which may lead to fewer sale leaseback transactions by airlines.

From time to time, the aircraft industry may experience periods of oversupply during which lease rates and aircraft values may decline, and any future oversupply could materially adversely affect our business, financial condition or results of operations.

In the past, the business of leasing, financing and selling aircraft has experienced prolonged periods of equipment shortages and oversupply of aircraft. The oversupply of a specific type of aircraft typically depresses the lease rates for, and the value of, that type of aircraft. An increase in the global supply of aircraft without a commensurate increase in demand may have a material adverse effect on lease renewal rates and the value of our assets. The supply and demand for aircraft may be materially adversely affected by various cyclical and non-cyclical factors that are outside of our control, including:

 

    passenger air travel demand;

 

    increased supply due to the sale of aircraft portfolios;

 

    fuel costs and general economic conditions;

 

    geopolitical events, including war, prolonged armed conflict and acts of terrorism, including increased screening as a result thereof;

 

    outbreaks of communicable diseases and natural disasters;

 

    governmental regulation;

 

    interest rates;

 

    foreign exchange rates;

 

    the cost and availability of credit;

 

    airline restructurings and bankruptcies;

 

    cancellations of orders for aircraft;

 

    delays in delivery by manufacturers;

 

    manufacturer production levels and technological innovation;

 

    climate change initiatives, technological change, aircraft noise and emissions and other environmental laws and regulations, aircraft age limits and other factors leading to retirement and obsolescence of aircraft models;

 

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

 

    accuracy of estimates relating to future supply and demand made by manufacturers and lessees;

 

    retirement and obsolescence of aircraft models;

 

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    increases in production rates from manufacturers;

 

    new-entrant manufacturers producing additional aircraft models, or existing manufacturers producing newly engined aircraft models or new aircraft models, in competition with existing 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.

These factors could produce sharp and prolonged decreases in aircraft lease rates and values and have a material adverse effect on our ability to lease or re-lease our aircraft and on our ability to sell such aircraft or aircraft parts at acceptable prices.

We are exposed to foreign currency risks, which may materially adversely affect us our business, financial condition or results of operations.

Our financial statements are presented in U.S. dollars and all of our lease agreements are denominated in U.S. dollars. Because certain of our expenses are incurred in Euros and Singapore Dollars, we are exposed to exchange rate and currency risks. In preparing our financial statements, we must convert all non-U.S. dollar financial results to U.S. dollars at varying rates of exchange. This may ultimately result in a currency gain or loss at the end of each fiscal period, the outcome of which we cannot predict. Furthermore, we may sometimes be required to make capital expenditures, or payments on debt, from revenues earned in other currencies. To the extent that the currency of our revenues weakens relative to the currency of our expenses, we are exposed to exchange rate losses.

Where appropriate, we will attempt to hedge our exposure to losses from fluctuations in exchange rates, but such hedges may not be effective and the impact of ineffective hedges impact our results of operations in each period in which the hedge is in existence. Losses from changes in the value of the Euro and Singapore Dollar relative to the U.S. dollar could materially affect our business, financial condition or results of operations.

We had net losses in the past and we may experience net losses in the future.

We had net income (loss) of $(4.8) million, $2.7 million and $(0.2) million for the six months ended June 30, 2014 and the years ended December 31, 2013 and 2012, respectively. We may have net losses in the future, and we cannot assure you that we will achieve profitability in future periods.

We may not have the ability to attract or retain skilled employees and key executives and the death, incapacity or departure of key officers could harm our business and negatively affect our financial condition and results of operations.

We believe our senior management team’s reputation, significant experience 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 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

 

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for qualified employees from other companies in our industry. A failure to employ, or a loss of, a sufficient number of skilled employees or a loss of key executive officers could have a material adverse effect on our business, financial condition or results of operations. Our future success will depend, to a significant extent, upon the continued service of our senior management personnel, particularly Mr. Pray, our President and Chief Executive Officer, and our other senior officers, each of whose services are critical to the success of our business strategies. The employment agreements with Messrs. Pray and certain other key executives are scheduled to expire in April 2015. If we were to lose the services of any of the members of our senior management team, it could negatively affect our financial condition and results of operations.

We may incur significant costs in the event of aircraft repossession after a lessee default.

If, following a lessee default, we are unable to agree upon acceptable terms for a lease restructuring, we would then generally have the contractual right to repossess the aircraft and to exercise other remedies. However, upon repossession of an aircraft, we may not necessarily be able to export or deregister and profitably redeploy the aircraft, or exportation, deregistration or deployment may be difficult due to legal constraints in the jurisdiction in which the aircraft is registered or located at the time of repossession. We may also incur significant costs in retrieving or recreating an aircraft’s records required for registration and obtaining a certificate of airworthiness for the aircraft or engine. In addition, repossession, re-registration and flight and export permissions after a lessee default typically result in greater costs than those incurred when an aircraft is returned on a scheduled expiration of the lease agreement. These costs include legal expenses that could be significant, particularly if repossession is not consensual and facilitated by the lessee or if the lessee is contesting the proceedings or is in bankruptcy.

We may also incur substantial maintenance, refurbishment, repair or other operating costs that a defaulting lessee has failed to pay and that are necessary to re-lease or sell. Such costs, which can be substantial, include:

 

    repair and maintenance costs payable to maintenance providers;

 

    the costs of casualty, liability, war and political risk insurance and the liability costs or losses when insurance coverage has not been or cannot be obtained as required or is insufficient in amount or scope;

 

    the costs of exporting, importing, storing, or operating an aircraft; airport taxes; customs duties; air navigation charges; landing fees; and similar governmental or quasi-governmental impositions; and

 

    penalties and costs associated with the failure of lessees to keep an aircraft registered under all appropriate local requirements or obtain required governmental licenses, consents and approvals.

Delays resulting from repossession proceedings would also increase the period of time during which an aircraft does not generate rental revenue. Certain of our lessees are owned in whole or in part by government-related entities, which could complicate our efforts to repossess the relevant aircraft. Accordingly, we may be delayed in, or prevented from, enforcing certain of our rights under a lease and in re-leasing or selling the affected aircraft. Any of these circumstances could have a material adverse effect on our business, financial condition or 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. Such termination may require a mandatory prepayment of the debt in respect of the aircraft if the aircraft is not sold or re-leased after certain remarketing periods.

 

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If our lessees fail to appropriately discharge aircraft liens, we may be obliged to pay the debts secured by aircraft liens, which could materially adversely affect our business, financial condition or results of operations.

In the normal course of business, liens that secure the payment of airport fees and taxes, custom duties, air navigation charges, landing charges, crew wages, repairer’s charges, salvage or other charges may, depending on the jurisdiction in question, attach to aircraft that we have leased. Aircraft may also be subject to mechanics liens as a result of routine maintenance performed by third parties on behalf of our lessees. Such liens may secure substantial sums; in certain jurisdictions and for certain types of liens (particularly fleet liens), the sums secured may exceed the value of the particular aircraft to which such liens have attached. Although the obligation to pay the amounts secured by such liens is the responsibility of the lessees, if they fail to fulfill their obligations, liens may attach to the aircraft leased from us. In some jurisdictions, such liens may give the holder thereof the right to detain or, in limited cases, sell or cause the forfeiture of the aircraft. Until they are discharged, the liens described above could impair our ability to repossess, re-lease or resell our affected aircraft. We cannot assure you that our lessees will comply with their obligations under the leases to discharge liens arising during the terms of the leases. If they do not, we may, in some cases, find it necessary to pay the claims secured by such liens in order to repossess the aircraft, which could adversely affect our business, financial condition and results of operations.

Our operations are subject to extensive regulations which may increase our costs.

The aviation industry is regulated by various laws and regulations in the jurisdictions in which our lessees operate. The scope of such regulation includes infrastructure and operational issues relating to aircraft, maintenance and spare parts as well as safety and security requirements. We cannot fully anticipate all future changes to laws and regulations to which we and our lessees are subject and the possible impact of all such changes.

Aircraft are subject to regulations imposed by aviation authorities regarding aircraft maintenance and airworthiness. Laws affecting the airworthiness of aircraft generally are designed to ensure that all aircraft and related equipment are continuously maintained in proper condition to enable safe operation of the aircraft. Aircraft manufacturers also may issue their own recommendations. 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.

Each lessee generally is responsible for complying with airworthiness directives with respect to its aircraft and is required to maintain the aircraft’s airworthiness. To the extent that a lessee fails to comply with airworthiness directives required to maintain its certificate of airworthiness or other manufacturer requirements in respect of an aircraft or if the aircraft is not currently subject to a lease, we may have to bear the cost of such compliance. In limited circumstances, we have agreed to share with certain of our lessees the cost of obligations under airworthiness directives (or similar requirements).

In addition to these expenditures, significant new requirements with respect to noise standards, emission standards and other aspects of our aircraft or their operation could cause our costs to increase and 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 the aircraft are registered, possibly as part of the airworthiness requirements, but also by other jurisdictions where the aircraft operate. In addition, most countries’ aviation laws require aircraft to be maintained under an approved maintenance program having defined procedures and intervals for inspection, maintenance and repair. To the extent that our aircraft are off-lease or a lessee defaults in effecting such compliance, we are required to comply with such requirements at our expense.

 

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We and our customers are subject to various environmental laws and regulations that may have a material adverse effect on our business, financial condition or results of operations.

Governmental regulations regarding aircraft and engine noise and emissions levels apply based on where the relevant airframe is registered, and where the aircraft is operated. For example, jurisdictions throughout the world have adopted noise regulations which require all aircraft to comply with noise level standards. In addition, the United States and the International Civil Aviation Organization (“ICAO”) have adopted a more stringent set of standards for noise levels which apply to engines manufactured or certified beginning in 2006.

In addition to more stringent noise restrictions, the United States, the EU and other jurisdictions have imposed or are beginning to impose more stringent limits on air emissions, including emissions of nitrogen oxide, carbon monoxide and carbon dioxide from engines. Our current engines, as well as any new engines we purchase, could be subject to existing or new emissions limitations or taxes or fees payable on our emissions. For example, the EU issued a directive in November 2008 to include aviation within the scope of its greenhouse gas emissions trading scheme, thereby requiring that all flights arriving, departing or flying within any EU country, beginning on January 1, 2012, comply with the scheme and surrender allowances for emissions, regardless of the age of the engine used in the aircraft. However, the EU’s directive is on hold through 2016 for flights operating fully or partly outside the EU in light of the ICAO’s effort to introduce a global program to reduce greenhouse gas emissions from aircraft.

This is an area of law that is rapidly changing and as of yet remains specific to certain jurisdictions. Over time, it is possible that governments will adopt additional regulatory requirements and/or market-based policies that are intended to reduce energy usage, emissions, and noise levels from aircraft. Such initiatives may be based on concerns regarding climate change, energy security, public health, local impacts, or other factors, and may also impact the global market for certain aircraft and cause behavioral shifts that result in decreased demand for air travel. These concerns could also result in greater limitations on the operation of our fleet, particularly aircraft equipped with less fuel-efficient engines. While we do not know at this time whether new emission control or other environmental laws or regulations will be passed, and if passed, what impact such laws or regulations might have on our business, any future emissions limitations or other environmental laws or regulations could materially adversely affect our business, financial condition or results of operations.

Failure to obtain certain required licenses, consents and approvals could materially adversely affect our ability to re-lease or sell aircraft, which would materially adversely affect our business, financial condition or results of operations.

Aircraft leases often require specific licenses, consents or approvals. These include consents from governmental or regulatory authorities for certain payments under the leases and for the import, re-export or deregistration of the aircraft. Subsequent changes in applicable law or administrative practice may increase or otherwise modify these requirements. In addition, governmental consent, once given, might be withdrawn. Furthermore, consents needed in connection with future re-leasing 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 materially adversely affect our business, financial condition or 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 certain airlines have gone into liquidation. Any further bankruptcies, liquidations, consolidations or reorganizations may result in aircraft becoming available

 

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for lease or purchase at reduced lease values or acquisition prices, and may 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 release such aircraft in a timely manner on commercially reasonable terms, our results of operations and financial condition, cash flow would be materially adversely affected.

If the effects of terrorist attacks and geopolitical conditions continue to materially adversely affect the financial condition of the airlines, our lessees might not be able to meet their lease payment obligations, which would adversely affect our business, financial condition or results of operations.

As a result of the September 11, 2001 terrorist attacks in the United States and subsequent terrorist attacks abroad, notably in the Middle East, Southeast Asia and Europe, increased security restrictions were implemented on air travel, costs for aircraft insurance and security measures have increased, passenger demand for air travel decreased and operators have faced and continue to face increased difficulties in acquiring war risk and other insurance at reasonable costs. In addition, war or armed hostilities, or the fear of such events could further exacerbate many of the problems experienced as a result of terrorist attacks. Uncertainty regarding the situation in Ukraine, Iraq, Syria, the Israeli / Palestinian conflict, tension over the nuclear programs of Iran and North Korea, and recent political instability in North Africa and the Middle East may lead to further instability in these regions. Future terrorist attacks, war or armed hostilities, or the fear of such events, could further adversely affect the aviation industry and may have an adverse effect on the financial condition and liquidity of our lessees, aircraft values and rental rates, and may lead to lease restructurings or repossessions, all of which could adversely affect our financial results.

Concerns about terrorist attacks and adverse geopolitical events could also result in:

 

    higher costs to the airlines due to the increased security measures;

 

    decreased passenger demand and revenue due to the inconvenience of additional security measures;

 

    uncertainty of the price and availability of jet fuel and the cost and practicability of obtaining fuel hedges under current market conditions;

 

    higher financing costs and difficulty in raising the desired amount of proceeds on favorable terms, if at all;

 

    significantly higher costs of aviation insurance coverage for future claims caused by acts of war, terrorism, sabotage, hijacking and other similar perils, and the extent to which such insurance has been or will continue to be available;

 

    inability 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

 

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

Future terrorist attacks, acts of war or armed hostilities may cause certain aviation insurance to become available only at significantly increased premiums, which may only provide reduced amounts of coverage that are insufficient to comply with the levels of insurance coverage currently required by aircraft lenders and lessors or by applicable government regulations, or to not be available at all.

Although the Aircraft Transportation Safety and System Stabilization Act adopted in the United States on September 22, 2001 and similar programs instituted by the governments of other countries provide for limited government coverage under government programs for specified types of aviation insurance, these programs may not continue and governments may not pay under these programs in a timely fashion.

Future terrorist attacks, acts of war or armed hostilities are likely to cause our lessees to incur higher costs and to generate lower revenues, which could result in a material adverse effect on their financial condition and liquidity. Consequently, these conditions may affect their ability to make rental and other lease payments to us 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 repossessions, may increase our cost of re-leasing or selling the aircraft and may impair our ability to re-lease or otherwise dispose of them on a timely basis at favorable rates or on favorable terms, if at all, and may reduce the proceeds received for our aircraft upon any sale. These results could materially adversely affect our business, financial condition or results of operations.

The effects of epidemic diseases and natural disasters, such as extreme weather conditions, floods, earthquakes and volcano eruptions may materially adversely affect the airline industry in the future, which might cause our lessees to not be able to meet their lease payment obligations to us, which would materially adversely affect our business, financial condition or results of operations.

The outbreak of epidemic diseases, such as SARS, H1N1 and Ebola, could materially and adversely affect passenger demand for air travel. Similarly 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. These consequences could result in our lessees’ inability to satisfy their lease payment obligations to us, which in turn would materially adversely affect our business, financial condition or 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 materially adversely affect our ability to sell certain of our aircraft or re-lease other aircraft at favorable rates.

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

 

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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.

We are subject to tax and other legal compliance risks.

Our future effective tax rates could be adversely affected by changes in tax laws, both domestically and internationally. From time to time, the Irish government, U.S. Congress and other governments consider legislation that could increase our effective tax rates. We cannot determine whether, or in what form, legislation will ultimately be enacted or what the impact of any such legislation would be on our profitability. If these or other changes to tax laws are enacted, our profitability could be negatively impacted.

Our future effective tax rates could also be adversely affected by changes in the valuation of our deferred tax assets and liabilities, changes in the mix of earnings in countries with differing statutory tax rates, the ultimate repatriation of earnings from foreign subsidiaries to the United States, or changes in tax treaties, regulations, accounting principles or interpretations thereof in one or more countries in which we operate. In addition, we are subject to the potential examination of our income tax returns by the Irish Revenue Commissioners, the U.S. Internal Revenue Service (“IRS”) and other tax authorities where we file tax returns. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for taxes. There can be no assurance that such examinations will not have a material adverse effect on our business, financial condition and results of operations.

There is a risk that we could be treated as a U.S. domestic corporation for U.S. federal income tax purposes, which could result in a significantly greater U.S. federal income tax liability and adverse tax consequences to non-U.S. investors in the shares.

Section 7874 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), generally provides that a corporation organized outside the United States that acquires, directly or indirectly, pursuant to a plan or series of related transactions, substantially all of the assets of a partnership organized in the United States will be treated as a domestic corporation for U.S. federal income tax purposes if partners of the acquired partnership, by reason of owning interests in the acquired partnership, own at least 80% of (either the voting power or the value of) the stock of the acquiring corporation after the acquisition. If Section 7874 were to apply to us as a result of the Reorganization Transactions, then, among other things, we, as the acquiring corporation, would be subject to U.S. federal income tax on our worldwide taxable income as if we were a domestic corporation. In addition, non-U.S. investors would generally become subject to 30% U.S. federal withholding tax on any dividends on the shares and/or 30% withholding in connection with the U.S. Foreign Account Tax Compliance Act (“FATCA”) on any dividends on, and gross proceeds from the sale or other disposition of, the shares. In light of the fact that over 40% of the interests in Intrepid Holdings have been held by Centerbridge through a Luxembourg corporation from the time Centerbridge first invested in Intrepid Holdings and will remain held by such corporation (as our subsidiary), we believe that the applicable 80% ownership threshold will not be met. Accordingly, we further believe, and intend to take the position that, we are not subject to Section 7874 as a result of the Reorganization Transactions. However, there can be no assurance that the IRS will agree with this conclusion, and we have not sought a ruling from the IRS on this issue. Furthermore, there have been proposals to expand the scope of U.S. corporate tax residence and there could be prospective or retroactive changes to Section 7874 that could result in us being treated as a domestic corporation.

 

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We may be classified as a passive foreign investment company (“PFIC”), which could result in adverse U.S. federal income tax consequences to U.S. investors in the shares.

Based on our expected operations, composition of assets, market capitalization (which will fluctuate from time to time) and an active leasing exception in the applicable Treasury Regulations, we do not expect that we will be classified as a PFIC for the current taxable year or for the foreseeable future. However, the active leasing exception requires, in part, that our leasing subsidiaries through their own employees located in a foreign country perform substantial activities in connection with their leasing activities. Although there is no definitive guidance addressing the meaning of substantial activities of this sort, we believe the term should include activities of the nature and degree conducted by Intrepid Aviation Management Ireland Limited, such as the marketing and lease negotiations, portfolio management, finance, and legal and accounting activities that are performed by its employees located in Ireland. Whether our leasing subsidiaries will qualify for this exception for any given year, however, is uncertain. In addition, the determination of whether we are a PFIC is made annually, after the close of the relevant taxable year. In light of the uncertainty regarding our expectations and the application of the active leasing exception, it is possible that we could be classified as a PFIC for the current taxable year or in any future taxable year. If we were a PFIC for any year during which a U.S. investor holds shares, certain adverse U.S. federal income tax consequences could apply to such U.S. investor. See “Material U.S. Federal Income Tax Considerations — U.S. Holders — Passive Foreign Investment Company.”

We may have to pay U.S. federal income tax on U.S.-source gross international aircraft income, which would reduce our net income and cash flows.

Under applicable income tax treaties and Section 883 of the Code, a foreign corporation will be subject to U.S. federal income taxation on its U.S.-source international aircraft income, unless it meets certain requirements for an exemption. Although we do not currently expect to realize a significant amount of U.S.-source international aircraft income, this may change in the future. In such case, if we and our subsidiaries did not qualify for any exemptions, 50% of the gross international aircraft income attributable to transportation beginning or ending, but not both beginning and ending, in the United States would be subject to a 4% tax without allowance for deductions.

We may become subject to taxes in Bermuda after March 31, 2035, which may have a material adverse effect on our financial condition.

The Minister of Finance of Bermuda, under the Exempted Undertaking Tax Protection Act 1966, as amended, has exempted us and our Bermuda-domiciled subsidiaries from all local income, withholding and capital gains taxes until March 31, 2035. At the present time, none of these taxes are levied in Bermuda. We cannot assure you that we will not be subject to any Bermuda tax after March 31, 2035.

We may become subject to income or other taxes in the jurisdictions in which our aircraft operate, where our lessees are located or where we perform certain services which would materially adversely affect our business.

Most of our non-U.S. subsidiaries are subject to the income tax laws of Ireland based on their residency for tax purposes. In addition, they may be subject to income or other taxes in other jurisdictions by reason of their activities and operations or those of our service providers, where our aircraft operate or where the lessees of our aircraft (or others in possession of our aircraft) are located. We generally require our lessees to indemnify us for any taxes arising from aircraft operations. However, if such taxes are imposed, our leases may become less profitable for our lessees, resulting in their termination or non-renewal, or our lessees may fail to indemnify us or otherwise default under the lease. The imposition of taxes by these other jurisdictions could materially adversely affect our business.

 

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The tax liabilities of our Irish-resident subsidiaries would be higher than what we would expect if any such companies were considered not to be carrying on a trade in Ireland for the purposes of Irish law, or do not meet the qualifying conditions to be taxed in accordance with the Section 110 regime, whichever is relevant.

Most of our non-U.S. subsidiaries are subject to Irish corporation tax on income based on the fact that they are managed and controlled in Ireland. Under Irish tax law, net trading income is taxed at the rate of 12.5%, non-trading income is taxed at the rate of 25% and capital gains are taxed at the rate of 33%.

Furthermore, it is anticipated that some of our Irish-resident subsidiaries will successfully elect to be taxed in Ireland in accordance with Section 110 of the Taxes Consolidation Act 1997 (the “Section 110 regime”). A company must satisfy a number of qualifying conditions to be taxed in accordance with the Section 110 regime. These include requirements that the company be tax resident in Ireland, invest only in qualifying assets (including aircraft and leases) and only enter into transactions (with certain exceptions relating to the payments of interest) by way of bargains made at arm’s length. In calculating their taxable profits in accordance with the Section 110 regime, our Irish-resident subsidiaries should, in addition to general operating expenses, be entitled to deduct tax depreciation and profit participating interest payments provided certain conditions are met. A special 25% corporation tax rate applies to companies taxable in accordance with the Section 110 regime. There can be no assurance that our Irish-resident subsidiaries will continue to meet the qualifying conditions to be taxed in accordance with the Section 110 regime and to obtain deductions for tax depreciation and profit participating interest as it depends on the particular facts and circumstances in each case. If any of those subsidiaries fail to continue to meet the qualifying conditions to be taxed in accordance with the Section 110 regime and to obtain deductions for tax depreciation and profit participating interest then they could be subject to additional Irish tax liabilities, which could have a material adverse effect on our business, financial condition or results of operations.

Risks Related to Our Indebtedness

Our substantial indebtedness could adversely affect our financial condition.

We have a significant amount of indebtedness. As of June 30, 2014, after giving effect to this offering and the use of proceeds therefrom, our total debt was approximately $1,580.6 million.

Subject to the limits contained in our existing debt instruments, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. Due to the capital intensive nature of our business and our growth strategy, we expect that we will incur additional indebtedness in the future. If we do so, the risks related to our high level of debt could intensify. Specifically, our high level of debt could adversely affect our financial condition by, for example:

 

    making it more difficult for us to satisfy our obligations with respect to our existing debt;

 

    limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements;

 

    requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes;

 

    increasing our vulnerability to general adverse economic and industry conditions;

 

    exposing us to the risk of increased interest rates as certain of our borrowings may be at variable rates of interest in the future;

 

    limiting our flexibility in planning for and reacting to changes in the industry in which we compete;

 

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    placing us at a disadvantage compared to other, less leveraged competitors; and

 

    increasing our cost of borrowing.

In addition, the agreements governing our existing indebtedness contain restrictive covenants that will limit our ability to engage in activities that may be in our long-term best interest, including our ability to incur or guarantee additional indebtedness. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all our debt.

We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or refinance our debt obligations, depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness, including the notes. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations.

We are dependent upon dividends from our subsidiaries to meet our financial obligations.

We are a holding company and our principal assets are the equity interests we hold in our subsidiaries, which own, either directly or indirectly through their subsidiaries, the aircraft in our portfolio. As a result, we depend on dividends and other payments from our subsidiaries to generate the funds necessary to meet our financial obligations. Our existing subsidiaries are legally distinct from us and may be significantly restricted from paying dividends or otherwise making funds available to us pursuant to the agreements governing their financing arrangements. If we are unable to comply with the financial and other covenants contained in these agreements, then the amounts outstanding under these debt facilities may become immediately due and payable, cash generated by aircraft financed through these facilities may be unavailable to us and/or we may be unable to draw additional amounts under these facilities. The events that could cause some of our subsidiaries to be noncompliant under their loan agreements, such as a lessee default, may be beyond our control, but they nevertheless could have a substantial adverse impact on the amount of our cash flow available to fund working capital, make capital expenditures and satisfy other cash needs. For a description of the operating and financial restrictions in our debt facilities, see “Description of Indebtedness.” In addition, their ability to make payments to us will also depend on their earnings, business, tax considerations and legal restrictions.

Despite our current level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks to our financial condition described above.

We and our subsidiaries may be able to incur significant additional indebtedness in the future. In addition, as of June 30, 2014, we have committed to purchase 17 aircraft which will be delivered between 2014 and 2018. In order to complete the acquisitions of these aircraft, we must secure financing for such aircraft, which will result in the incurrence of additional indebtedness in the future.

 

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Although the instruments governing our existing indebtedness contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also will not prevent us from incurring obligations that do not constitute indebtedness. If we incur new debt, the related risks that we now face could intensify.

The terms of our indebtedness may restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.

The instruments governing our indebtedness contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to:

 

    incur or guarantee additional indebtedness and issue disqualified stock or preferred stock;

 

    pay dividends on or repurchase certain equity interests or prepay subordinated indebtedness;

 

    enter into transactions with affiliates;

 

    sell, transfer or otherwise dispose of certain assets;

 

    alter our lines of business; or

 

    consolidate, merge, sell or otherwise dispose of substantially all of our assets.

We may also incur additional debt in the future that has similar or additional restrictions on us. A breach of any such covenants or restrictions could result in an event of default under one or more instruments governing our existing or future indebtedness. Such default may allow the creditors to accelerate such indebtedness and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. As a result of these restrictions, we may be:

 

    limited in how we conduct our business;

 

    unable to raise additional debt or equity financing to operate during general economic or business downturns; or

 

    unable to compete effectively or to take advantage of new business opportunities.

These restrictions may affect our ability to grow in accordance with our strategy. In addition, our financial results, our substantial indebtedness and our credit ratings could adversely affect the availability and terms of our financing.

Risks Related to Our Common Shares and this Offering

We are controlled by investment funds managed by Reservoir and Centerbridge, whose interests in our business may be different from yours.

After giving effect to the Reorganization Transactions and the sale of common shares in this offering, and assuming the common shares are offered at $        per share (the midpoint of the estimated price range set forth on the cover of this prospectus), Reservoir will own approximately         million shares, or     %, of our outstanding common shares and Centerbridge will own approximately         million shares, or     %, of our outstanding common shares. Reservoir and Centerbridge will, for the foreseeable future, have significant influence over our reporting and corporate management and affairs, and will be able to control virtually all matters requiring shareholder approval. Reservoir and Centerbridge are able to, subject to applicable law and the voting arrangements with management described in “Certain Relationships and Related Party Transactions—Stockholders Agreement,” designate a majority of the members of our board of directors and control actions to be taken by us and our board of directors,

 

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including amendments to our memorandum of association and bye-laws and approval of significant corporate transactions, including mergers and sales of substantially all of our assets. The directors so elected will have the authority, subject to the terms of our indebtedness and our rules and regulations, to issue additional shares, implement stock repurchase programs, declare dividends and make other decisions.

It is possible that the interests of Reservoir and Centerbridge may in some circumstances conflict with our interests and the interests of our other shareholders, including you. In addition, this concentration of ownership may delay, deter or prevent acts that would be favored by our other shareholders, such as a change of control transaction that would result in the payment of a premium to our other shareholders and ultimately might affect the market price of our common shares.

Reservoir and Centerbridge 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.

Reservoir and Centerbridge have other business activities in addition to their ownership of us. Reservoir and Centerbridge 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 Reservoir or Centerbridge 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 Reservoir or Centerbridge 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.

We are a “controlled company” within the meaning of the New York Stock Exchange listing requirements and as a result, will qualify for and intend to rely on exemptions from certain corporate governance requirements. You will not have the same protection afforded to shareholders of companies that are subject to such corporate governance requirements.

Because of the aggregate voting power held by certain affiliates of Reservoir and Centerbridge and certain members of management, we are considered a “controlled company” for the purposes of the New York Stock Exchange listing requirements. As such, we are exempt from the corporate governance requirements that our board of directors, our compensation committee and our nominating and corporate governance committee meet the standard of independence established by those corporate governance requirements. The independence standards are intended to ensure that directors who meet the independence standard are free of any conflicting interest that could influence their actions as directors.

Following this offering, we intend to utilize these exemptions afforded to a “controlled company.” Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the New York Stock Exchange.

If you purchase common shares in this offering, you will suffer immediate dilution of your investment.

The initial public offering price of our common shares will be substantially higher than the net tangible book value per share of our common shares. Therefore, if you purchase common shares in this offering, you will pay a price per share that substantially exceeds our net tangible book value per

 

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share after this offering. To the extent shares subsequently are issued under outstanding options, you will incur further dilution. Based on an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of $         per share, representing the difference between our pro forma net tangible book value per share, after giving effect to this offering, and the assumed initial public offering price. In addition, purchasers of common shares in this offering will have contributed approximately     % of the aggregate price paid by all purchasers of our shares, but will own only approximately     % of our common shares outstanding after this offering.

An active trading market for our common shares 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. Although we intend to apply to have our common shares listed on the New York Stock Exchange, an active trading market for our common shares may never develop or be sustained following this offering. If an active market for our common shares does not develop, it may be difficult for you to sell shares you purchase in this offering without depressing the market price for the shares or at all.

The price of our common shares may be volatile and fluctuate substantially, which could result in substantial losses for purchasers of our common shares in this offering.

Our share price is likely to be volatile. The stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, you may not be able to sell your common shares at or above the initial public offering price. The market price for our common shares may be influenced by many factors, including:

 

    actual or anticipated fluctuations in our financial condition and operating results;

 

    actual or anticipated changes in our growth rate relative to our competitors;

 

    competition from existing products or new products that may emerge;

 

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

 

    developments or disputes concerning patent applications, issued patents or other proprietary rights;

 

    the recruitment or departure of key personnel;

 

    failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public;

 

    actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;

 

    variations in our financial results or those of companies that are perceived to be similar to us;

 

    general economic, industry and market conditions; and

 

    the other factors described in this “Risk Factors” section.

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common shares. We intend to use the net proceeds from this offering to

 

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continue to purchase aircraft currently with Boeing and Airbus, and general corporate purposes to support continued growth. However, our use of these proceeds may differ substantially from our current plans. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business and cause the price of our common shares to decline. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

You may be diluted by the future issuance of additional common shares in connection with our incentive plans, acquisitions or otherwise.

After this offering we will have approximately         million authorized but unissued common shares. Our memorandum of association and Bye-laws, to become effective upon the closing of this offering, authorize us to issue these common shares and options, warrants and rights to purchase common shares for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. We have reserved shares for issuance under our 2014 Incentive Award Plan, including             . See “Executive Compensation—2014 Incentive Award Plan.” Any common shares that we issue, including under our 2014 Incentive Award Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by the investors who purchase common shares in this offering.

A significant portion of our total outstanding shares are eligible to be sold into the market in the near future, which could cause the market price of our common shares to drop significantly, even if our business is doing well.

Sales of a substantial number of common shares in the public market, or the perception in the market that the holders of a large number of shares intend to sell common shares, could reduce the market price of our common shares. After giving effect to the Reorganization Transactions and the sale of common shares in this offering, we will have outstanding         common shares based on the investor interests of Intrepid Aviation Group Holdings, LLC outstanding as of                     , 2014. This includes the common shares that we are selling in this offering, which may be resold in the public market immediately without restriction, unless purchased by our affiliates or existing shareholders. The remaining         common shares are currently restricted as a result of securities laws or lock-up agreements but will become eligible to be sold at various times after this offering.

Moreover, after this offering, holders of an aggregate of common shares will have rights, subject to specified conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other shareholders. We also intend to register all common shares that we may issue under our equity compensation plans. Once we register these common shares, they can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates and the lock-up agreements described in the “Underwriting” section of this prospectus.

We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our common shares less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and may remain an emerging growth company for up to five years. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:

 

    being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;

 

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    not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;

 

    not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

 

    reduced disclosure obligations regarding executive compensation; and

 

    exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

We have taken advantage of reduced reporting burdens in this prospectus. In particular, in this prospectus, we have provided only two years of audited financial statements and have not included all of the executive compensation related information that would be required if we were not an emerging growth company. We cannot predict whether investors will find our common shares less attractive if we rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and our share price may be reduced or more volatile. In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of these accounting standards until they would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives and corporate governance practices.

As a public company, and particularly after we are no longer an emerging growth company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the New York Stock Exchange and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, which in turn could make it more difficult for us to attract and retain qualified members of our board of directors.

We are evaluating these rules and regulations, and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

We are not currently required to comply with the rules of the Securities and Exchange Commission implementing Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, and therefore are not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a publicly traded company, we will be required to

 

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comply with the Securities and Exchange Commission’s rules implementing Section 302 and 404 of the Sarbanes-Oxley Act of 2002, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. Though we will be required to disclose changes made in our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. Additionally, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over financial reporting is effective as required by Section 404. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. As a result, the market price of our common shares could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

If we fail to effectively manage our growth, our future business results could be harmed and our managerial and operational resources may be strained.

In connection with the audit of our consolidated financial statements for the fiscal year ended December 31, 2013, management concluded that certain controls over financial reporting did not operate as designed, which resulted in a material weakness in the areas of accounting for debt arrangements, interest expense and interest rate swaps. The Company did not properly identify, value and record derivative financial instruments or features entered into in connection with financing transactions that may require separate accounting in the consolidated financial statements.

The Company is actively engaged in the development and implementation of the following remediation plan to address such material weakness:

 

    enhanced accounting policies over debt, and derivatives and hedging;

 

    implementation of processes to improve overall efficiency and accuracy of accounting for debt arrangements, interest rate swaps and hedge accounting;

 

    assignment of dedicated and experienced technical resources at the Company with the responsibility of strengthening corporate oversight over financial reporting and enhancing controls associated with complex accounting matters; and

 

    hiring additional qualified personnel and continue to evaluate the adequacy of our accounting personnel staffing level.

This remediation plan is intended to ensure that the key controls over the financial reporting oversight process are operating effectively and are sustainable.

In addition, once we are a public company, our management and other personnel will need to devote a substantial amount of time to compliance initiatives applicable to public companies, including compliance with Section 404 and the evaluation of the effectiveness of our internal controls over

 

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financial reporting within the prescribed timeframe. We currently have limited accounting personnel and we have begun the process of evaluating the adequacy of our accounting personnel staffing level and other matters related to our internal controls over financial reporting. We may discover additional deficiencies in existing systems and controls that we may not be able to remediate in an efficient or timely manner, which could cause investors to lose confidence in our financial information or cause the market price of our common shares to decline.

If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our common shares, our share price and trading volume could decline.

The trading market for our common shares will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not currently have, and may never obtain, research coverage by securities and industry analysts. If no or few securities or industry analysts commence coverage of us, the trading price for our common shares would be negatively impacted. In the event we obtain securities or industry analyst coverage, if any of the analysts who cover us issue an adverse or misleading opinion regarding us, our business model, our intellectual property or our share performance, or if our operating results fail to meet the expectations of analysts, our share price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline.

The memorandum of association and bye-laws, as well as Bermuda law contain provisions that could discourage acquisition bids or merger proposals, which may adversely affect the market price of our common shares.

Our bye-laws authorize our board of directors to issue preferred shares without shareholder approval. If our board of directors elects to issue preferred shares, it could be more difficult for a third party to acquire us. In addition, some provisions of our bye-laws could make it more difficult for a third party to acquire control of Intrepid, even if the change of control would be beneficial to our common shareholders, including provisions which:

 

    limit the removal and replacement of directors;

 

    limit the ability of shareholders to increase the number of directors;

 

    establish preemptive rights; and

 

    establish advance notice and certain information requirements for nominations for election to our board of directors.

As a result of these provisions, shareholders may be limited in their ability to obtain a premium for their shares. See “Description of Share Capital” for a discussion of these provisions.

You may have difficulty enforcing in Bermuda courts judgments of United States courts against us.

We are organized pursuant to the laws of Bermuda. In addition, it is anticipated that some or all of our directors and officers will reside outside the United States, and all or a substantial portion of our assets and their assets are or may be located in jurisdictions outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon those persons or us or to recover against them or us on judgments of United States courts, including judgments predicated upon civil liability provisions of the United States federal securities laws.

 

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We have been advised that there is no treaty in force between the United States and Bermuda providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters. As a result, whether a United States judgment would be enforceable in Bermuda against us or our directors and officers depends on whether the U.S. court that entered the judgment is recognized by the Bermuda court as having jurisdiction over us or our directors and officers, as determined by reference to Bermuda conflict of law rules. A judgment debt from a U.S. court that is final and for a sum certain based on U.S. federal securities laws will not be enforceable in Bermuda unless the judgment debtor had submitted to the jurisdiction of the U.S. court, and the issue of submission and jurisdiction is a matter of Bermuda (not U.S.) law.

In addition, and irrespective of jurisdictional issues, the Bermuda courts will not enforce a U.S. federal securities law that is either penal or contrary to Bermuda public policy. We have been advised that an action brought pursuant to a public or penal law, the purpose of which is the enforcement of a sanction, power or right at the instance of the state in its sovereign capacity, will not be entertained by a Bermuda court. Certain remedies available under the laws of U.S. jurisdictions, including certain remedies under U.S. federal securities laws, would not be available under Bermuda law or enforceable in a Bermuda court, as they would be contrary to Bermuda public policy. Further, no claim may be brought in Bermuda against us or our directors and officers in the first instance for violation of U.S. federal securities laws because these laws have no extraterritorial jurisdiction under Bermuda law and do not have force of law in Bermuda. A Bermuda court may, however, impose civil liability on us or our directors and officers if the facts alleged in a complaint constitute or give rise to a cause of action under Bermuda law.

Our shareholders may have more difficulty protecting their interests than shareholders of a U.S. corporation.

The rights of shareholders under Bermuda law are not as extensive as the rights of shareholders under legislation or judicial precedent in many U.S. jurisdictions. Class actions and derivative actions are generally not available to shareholders under Bermuda law. However, Bermuda courts ordinarily would be expected to follow English case law precedent, which would permit a shareholder to commence an action in the name of a company to remedy a wrong done to a company where the act complained of is alleged to be beyond the corporate power of a company, is illegal or would result in the violation of that company’s memorandum of association or bye-laws. Furthermore, consideration would be given by a Bermuda court to acts that are alleged to constitute a fraud against the minority shareholders or where an act requires the approval of a greater percentage of our shareholders than actually approved it. The winning party in such an action generally would be able to recover a portion of attorneys’ fees incurred in connection with such action.

There are regulatory limitations on the ownership and transfer of our common shares.

Common shares may be offered or sold in Bermuda only in compliance with the provisions of the Companies Act and the Bermuda Investment Business Act 2003, which regulates the sale of securities in Bermuda. In addition, the Bermuda Monetary Authority must approve all issues and transfers of shares of a Bermuda exempted company. However, the Bermuda Monetary Authority has, pursuant to its statement of June 1, 2005, given its general permission under the Exchange Control Act 1972 (and related regulations) for the issue and free transfer of our common shares to and among persons who are non-residents of Bermuda for exchange control purposes as long as the shares are listed on an appointed stock exchange, which includes the New York Stock Exchange. This general permission would cease to apply if we were to cease to be listed on the New York Stock Exchange.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements that are intended to enhance the reader’s ability to assess our future financial and business performance. These statements are based on the beliefs and assumptions of our management and are subject to risks and uncertainties. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Generally, statements that are not about historical facts, including statements concerning our possible or assumed future actions or results of operations are forward-looking statements. Forward-looking statements include, but are not limited to, statements that represent our beliefs, expectations or estimates concerning future operations, strategies, financial results or performance, prospects, financings, acquisitions, expenditures or other developments and anticipated trends and competition in the markets in which we operate. In particular, under “Prospectus Summary—Summary Financial and Other Data,” we present certain estimates regarding our annual total contracted revenue from owned aircraft and our annual total contracted revenue from owned and contracted aircraft. These statements may be preceded by, followed by or include the words “believes,” “estimates,” “expects,” “projects,” “forecasts,” “may,” “will,” “should,” “would,” “could,” “seeks,” “plans,” “scheduled,” “assumes,” “predicts,” “contemplates,” “continue,” “anticipates” or “intends” or, in each case, their negative, or other variations and similar expressions.

Forward-looking statements are not guarantees of performance. You should not put undue reliance on these statements which speak only as of this date hereof. You should understand that the following important factors, in addition to those discussed in “Risk Factors” and elsewhere in this prospectus, could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements:

 

    our inability to obtain financing on favorable terms, if required, to complete the acquisition of sufficient aircraft as currently contemplated or to fund the operations and growth of our business;

 

    the economic condition of the global airline industry;

 

    decreases in the overall demand for commercial aircraft leasing;

 

    impaired financial condition and liquidity of our lessees;

 

    the ability of our lessees and potential lessees to make operating lease payments to us;

 

    our inability to make acquisitions of, or to lease or re-lease, aircraft on favorable or expected terms;

 

    our ability to successfully negotiate aircraft purchases, sales and leases, to collect outstanding amounts due and to repossess aircraft under defaulted leases, and to control costs and expenses;

 

    competitive pressures within the industry;

 

    regulatory changes affecting commercial aircraft operators, aircraft maintenance, engine standards, accounting standards and taxes;

 

    potential epidemic diseases, natural disasters and similar events and the amount of our insurance coverage, if any, relating thereto; and

 

    the other risks identified in this prospectus including, without limitation, those under the sections titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.”

 

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The risks described in “Risk Factors” are not exhaustive. Other sections of this prospectus describe additional factors that could adversely affect our business, financial condition or results of operations. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. In addition, as described under “Market and Industry Data,” the forward-looking statements contained herein regarding market size and changes in markets are subject to various estimations and uncertainties. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. Forward-looking statements speak only as of the date they were made, and, except to the extent required by law, we undertake no obligation to update or to review any forward-looking statement because of new information, future events or other factors. Forward-looking statements involve risks and uncertainties and are not guarantees of future performance. As a result of the risks and uncertainties described above, the forward-looking statements discussed in this prospectus might not occur and our future results and our performance may differ materially from those expressed in these forward-looking statements due to, but not limited to, the factors mentioned above. Because of these uncertainties, you should not place undue reliance on these forward-looking statements when making an investment decision. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.

MARKET AND INDUSTRY DATA

This prospectus contains estimates and projections regarding market and industry data that were obtained from our own internal estimates and research, as well as third-party sources such as market research, consultant surveys, publicly available information and industry publications and surveys. Although we believe that these third-party sources are reliable, we do not guarantee the accuracy or completeness of this information, and neither we nor the underwriters have independently verified this information. Similarly, internal company estimates and research, including estimates of future performance, while believed by us to be reliable, have not been verified by any independent sources, and are subject to change based on various factors, including those discussed under the heading “Risk Factors” in this prospectus. Additionally, estimates of future performance reflect various assumptions made by us that may or may not prove accurate, as well as the exercise of a substantial degree of judgment by management as to the scope and presentation of such information. No representations or warranties are made as to the accuracy of such statements or estimates of anticipated performance. Actual results achieved during projection periods may differ substantially from those projected.

 

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USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of             common shares in this offering will be approximately $        million (or $        million if the underwriters exercise in full their option to purchase additional shares), assuming an initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase (decrease) in the assumed initial public offering price of $        per share would increase (decrease) the net proceeds to us from this offering by approximately $        million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1.0 million in the number of shares we are offering would increase (decrease) the net proceeds to us from this offering, after deducting the estimated underwriting discount and estimated offering expenses payable by us, by approximately $        million, assuming the assumed initial public offering price stays the same.

We intend to use the net proceeds from this offering to continue to purchase aircraft, currently with Boeing and Airbus, and general corporate purposes to support continued growth.

Our expected use of net proceeds from this offering represents our current intentions based upon our present plans and business condition. As of the date of this prospectus, we cannot predict with complete certainty all of the particular uses for the net proceeds to be received upon the completion of this offering or the actual amounts that we will spend on the uses set forth above. We may find it necessary or advisable to use the net proceeds for other purposes. Accordingly, our management will have broad discretion in the application of the net proceeds, and investors will be relying on the judgment of our management regarding the application of the proceeds from this offering.

 

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DIVIDEND POLICY

We intend to retain future earnings, if any, to finance the operation and expansion of our business and do not anticipate paying any cash dividends on our common shares in the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board of directors after considering our financial condition, results of operations, capital requirements, business prospects and other factors the board of directors deems relevant. In addition, our existing indebtedness restricts our ability to pay dividends, and our ability to pay dividends may also be restricted by the terms of any future credit agreement or any future debt or preferred equity securities of ours or of our subsidiaries. See “Description of Indebtedness.” In addition, pursuant to Bermuda law, a company may not declare or pay dividends if there are reasonable grounds for believing that (i) the company is, or would after the payment be, unable to pay its liabilities as they become due, or (ii) that the realizable value of its assets would thereby be less than its liabilities. Under our bye-laws, each common share is entitled to dividends if, as and when dividends are declared by our board of directors, subject to any preferred dividend right of the holders of any preference shares.

 

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REORGANIZATION

Intrepid Aviation Limited is a Bermuda exempted company incorporated with limited liability on July 29, 2014 solely for purposes of effectuating our initial public offering. Currently, Intrepid Aviation Limited has a nominal issued share capital and has engaged in operations and activities incidental to its formation, the Reorganization Transactions and the initial public offering of our common shares. Intrepid Aviation Limited will have only nominal assets and no liabilities prior to the Reorganization Transactions.

Intrepid Aviation Group Holdings, LLC was organized as a Delaware limited liability company on November 23, 2011. All investor interests of Intrepid Holdings outstanding immediately prior to the the completion of this offering will be transferred, directly or indirectly, to Intrepid Aviation Limited in exchange for shares of Intrepid Aviation Limited. Accordingly, Intrepid Aviation Limited intends to enter into a share exchange agreement with the direct or indirect interest holders of Intrepid Holdings pursuant to which each interest holder will transfer, directly or indirectly, all of its outstanding investor interests of Intrepid Holdings to Intrepid Aviation Limited in exchange for the issuance by Intrepid Aviation Limited of an aggregate of             of its common shares prior to consummation of this offering. Upon the transfer of Intrepid Holdings’ investor interests, directly or indirectly, to Intrepid Aviation Limited, and the corresponding issue of common shares to the investor interest holders by Intrepid Aviation Limited, Intrepid Aviation Group Holdings, LLC will become an indirect, wholly-owned subsidiary of Intrepid Aviation Limited. In this prospectus, we refer to these transactions as the “Reorganization Transactions.”

The number of common shares of Intrepid Aviation Limited to be issued to the direct or indirect interest holders of Intrepid Holdings in the Reorganization Transactions will be determined in accordance with the provisions of the Second Amended and Restated Limited Liability Company Agreement (the “LLC Agreement”), dated February 19, 2013, and as amended on August 1, 2013, among Reservoir Intrepid Investors, LLC, CB-INA Acquisition, LLC, Franklin Pray, Volker Fabian, John Shavinsky, Brian Rynott, Thomas Schmid and Olaf Sachau and the Company.

The effectiveness of the Reorganization Transactions is a condition to the consummation of this offering.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2014, as follows:

 

    on an actual basis;

 

    on a pro forma basis to reflect (1) the exchange of all outstanding investor interests of Intrepid Holdings for             common shares of Intrepid Aviation Limited prior to consummation of this offering and (2) the filing of our memorandum of increase of share capital prior to the closing of this offering; and

 

    on a pro forma as adjusted basis to give further effect to our issuance and sale of             common shares in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Our capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this information in conjunction with our financial statements and the related notes appearing at the end of this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other financial information contained in this prospectus.

 

     As of June 30, 2014  
     Actual     Pro Forma      Pro Forma As
Adjusted
 
(in thousands, except unit and share numbers)          (unaudited)      (unaudited)  

Unrestricted Cash

   $ 50,802      $                    $     

Restricted Cash

     57,794        
  

 

 

   

 

 

    

 

 

 

Total debt:

       

Secured credit facilities, net

     1,280,644        

Senior unsecured notes

     300,000        

Members’ equity:

       

Investor interests, actual

     484,209                  

Capital contributions receivable

     (1,356               

Accumulated deficit

     (41,665     
  

 

 

   

 

 

    

 

 

 

Total members’ equity (deficit)

   $ 441,188                  
  

 

 

   

 

 

    

 

 

 

Shareholders’ equity:

       

Common shares, par value $         per share. No shares authorized, issued or outstanding, actual;             shares authorized,             shares issued and outstanding, pro forma; and             shares authorized,             shares issued and outstanding, pro forma as adjusted

            

Additional paid in capital

            

Total shareholders’ equity (deficit)

            
  

 

 

   

 

 

    

 

 

 

Total capitalization

   $ 2,021,832      $         $                
  

 

 

   

 

 

    

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, additional paid in

 

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capital, total shareholders’ equity (deficit) and total capitalization by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares offered by us at the assumed initial public offering price per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, additional paid in capital, total shareholders’ equity (deficit) and total capitalization by approximately $         million, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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DILUTION

If you invest in our common shares in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the pro forma as adjusted net tangible book value per common share after this offering.

Our pro forma net tangible book value as of June 30, 2014 was $         million, or $         per common share. Pro forma net tangible book value per share represents net tangible book value, divided by the number of common shares outstanding as of June 30, 2014, after giving effect to the exchange of all outstanding investor interests of Intrepid Aviation Group Holdings, LLC for common shares of Intrepid Aviation Limited in the Reorganization Transactions, but not reflecting this offering.

After giving further effect to the sale of             common shares in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2014 would have been approximately $         million, or approximately $        per share. This amount represents an immediate increase in pro forma as adjusted net tangible book value of $         per share to our existing shareholders and an immediate dilution of approximately $         per share to new investors in this offering. We determine dilution by subtracting the pro forma as adjusted net tangible book value per share after this offering from the amount of cash that a new investor paid per common share. The following table illustrates this dilution:

 

Assumed initial public offering price per share

      $                

Pro forma net tangible book value per share as of June 30, 2014, after giving effect to the Reorganization Transactions

     

Increase per share attributable to new investors

     

Pro forma as adjusted net tangible book value per share as of June 30, 2014, after giving effect to this offering

     
     

 

 

 

Dilution per share to new investors in this offering

      $     
     

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted net tangible book value per share after this offering by approximately $        , and the dilution per share to new investors by approximately $        , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1.0 million shares in the number of shares offered by us would increase (decrease) our pro forma as adjusted net tangible book value per share after this offering by approximately $         per share and decrease (increase) the dilution to new investors by approximately $         per share, assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and the estimated offering expenses payable by us.

If the underwriters exercise their option to purchase additional common shares in full, the pro forma as adjusted net tangible book value after this offering would be $         per share, and the dilution per share to new investors would be $         per share, in each case assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus.

 

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The following table summarizes on the pro forma as adjusted basis described above, as of June 30, 2014, the differences between the number of shares purchased from us, the total consideration paid to us in cash and the average price per share that existing shareholders and new investors paid. The calculation below is based on an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

    Shares Purchased     Total Consideration     Average Price
Per Share
 
   

Number

   Percent     Amount      Percent    

Existing shareholders

           $                          $                

New investors

           
 

 

  

 

 

   

 

 

    

 

 

   

Total

       100        100  
 

 

  

 

 

   

 

 

    

 

 

   

The foregoing tables and calculations exclude             common shares reserved for future issuance under our 2014 Incentive Award Plan.

If the underwriters exercise their option to purchase additional common shares in full:

 

    the percentage of common shares held by existing shareholders would decrease to approximately     % of the total number of common shares outstanding after this offering; and

 

    the number of shares held by new investors would increase to         , or approximately     % of the total number of common shares outstanding after this offering.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The tables below present selected financial data as of and for the periods indicated. You should read the information below in conjunction with the consolidated financial statements and notes included elsewhere in this prospectus, as well as the sections entitled “Summary Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus.

The selected historical consolidated statements of operations data and statements of cash flow data for the years ended December 31, 2013 and 2012 and selected balance sheet data as of December 31, 2013 and 2012 have been derived from our historical audited consolidated financial statements included elsewhere in this prospectus. The selected historical consolidated statements of operations data and statements of cash flow data for the six months ended June 30, 2014 and 2013 and selected balance sheet data as of June 30, 2014 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We believe that our unaudited condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and reflect all adjustments, consisting of only normal recurring adjustments, which we consider necessary for a fair presentation of our financial position and results of operations for such periods. Historical results are not necessarily indicative of the results to be expected for future periods and operating results for the six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the full year.

We have elected to adopt the reduced disclosure requirements available to emerging growth companies, including only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure.

 

     Six Months Ended
June 30,
    Fiscal Year Ended
December 31,
 
     2014     2013     2013      2012  
(in thousands)    (unaudited)               

Consolidated Statements of Operations Data:

         

Revenues

         

Rental income

   $ 73,153      $ 9,448      $ 46,017       $ 20,566   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total revenue

     73,153        9,448        46,017         20,566   
  

 

 

   

 

 

   

 

 

    

 

 

 

Operating expenses:

         

Selling, general and administrative expenses

     11,459        6,952        16,052         14,002   

Depreciation

     23,182        3,491        15,669         6,866   

Loss (gain) on disposal of aircraft

                      (289

Other operating expenses(1)

     2,041        1,955        3,079         301   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total operating expenses

     36,682        12,398        34,800         20,880   
  

 

 

   

 

 

   

 

 

    

 

 

 

Operating income (loss)

     36,471        (2,950     11,217         (314
  

 

 

   

 

 

   

 

 

    

 

 

 

Other income (expense)(2)

         

Interest expense

     (28,553            (7,296        

Gain (loss) on derivative financial instruments

     (12,292            (431        

Other income (expense)

     (25     (258     (185      137   

Interest income

     3        2        4         26   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total other income (expense)

     (40,867     (256     (7,908      163   
  

 

 

   

 

 

   

 

 

    

 

 

 

Income (loss) before taxes

     (4,396     (3,206     3,309         (151

Income tax expense

     369               571           
  

 

 

   

 

 

   

 

 

    

 

 

 

Net (loss) income

   $ (4,765   $ (3,206   $ 2,738       $ (151
  

 

 

   

 

 

   

 

 

    

 

 

 

Earnings (loss) per Class(3)

         

Preferred return to Class A LLC interests

   $ 9,429      $ 3,994      $ 12,046       $   

Loss attributable to Class B LLC interests

     (14,194     (7,200     (9,306      (151

 

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     As of
June 30,

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

Consolidated Balance Sheet Data:

        

Cash(4)

   $ 50,802       $ 26,608       $ 7,143   

Restricted cash(4)

     57,794         38,430         18,736   

Aircraft deposits

     321,836         382,173         247,936   

Net book value of aircraft

     1,674,929         1,045,661         159,471   

Total assets

     2,157,848         1,542,632         452,065   

Total debt

     1,580,644         989,249         167,490   

Total other long-term liabilities

     99,765         82,843         43,438   

Total liabilities

     1,716,660         1,096,457         215,639   

Total members’ equity

     441,188         446,175         236,426   

Total liabilities and members’ equity

     2,157,848         1,542,632         452,065   

 

     Six Months Ended
June 30,
    Fiscal Year Ended
December 31,
 
     2014     2013     2013     2012  
(in thousands)    (unaudited)              

Consolidated Statements of Cash Flows:

        

Net cash provided by (used in) operating activities

   $ 29,975      $ 4,421      $ 27,896      $ 5,396   

Net cash provided by (used in) investing activities

     (579,516     (320,017     (1,048,001     (172,333

Net cash provided by (used in) financing activities

     573,735        329,493        1,039,570        156,394   

 

(1) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Income Statement Items” for a description of other operating expenses.
(2) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations” for a description of other income (expense).
(3) For additional information on earnings (loss) per Class see note 2(t) to our consolidated financial statements for the fiscal year ended December 31, 2013 and note 14 to our condensed consolidated financial statements for the six months ended June 30, 2014, each included elsewhere in this prospectus.
(4) We consider cash on hand (excluding restricted cash) and deposits in banks to be cash. Restricted cash represents security deposits and aircraft maintenance reserves associated with our aircraft leases held on deposit with banks in segregated accounts. See note 2(c) to our consolidated financial statements for the fiscal year ended December 31, 2013 included elsewhere in this prospectus.

 

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

The consolidated financial statements and the related notes thereto included elsewhere in this prospectus, which are the subject of the following discussion and analysis, are those of Intrepid Aviation Group Holdings, LLC and its consolidated subsidiaries as of and for the interim periods ended June 30, 2014 and 2013 and as of and for the years ended December 31, 2013 and 2012.

Our fiscal year ends on December 31 of each year and our fiscal quarters end on March 31, June 30 and September 30 of each year. We have included in this prospectus financial information for the fiscal quarters ended June 30, 2014 and 2013 as well as information for the fiscal years ended December 31, 2013 and 2012.

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes thereto included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this prospectus, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Tabular dollars are presented in thousands, except where noted.

Overview

We are a global leasing company that acquires and leases passenger aircraft to a diverse group of airlines throughout the world. Our strategy is to focus on young, modern, fuel-efficient twin-engine widebody aircraft with long-term leases to well-established airlines. We intend to invest primarily in these aircraft during the first one-third of their useful life while maximizing economic returns. We believe that a substantial opportunity exists to capitalize on the high level of demand for long-haul international air travel and airlines’ preference for larger gauge aircraft. We are the only aircraft lessor primarily focused on the twin-engine widebody passenger aircraft market, which we believe is a relatively less competitive lease market segment that has substantial latent demand. Our fleet has grown from $315.8 million to $1,674.9 million in net book value in the twelve months ended June 30, 2014. We seek to enter into long-term leases, typically ranging from 10 to 12 years, at attractive returns. All of our leases are denominated in U.S. dollars and are “triple-net” operating leases, which means that the lessee is required to pay for all maintenance and overhaul, refurbishment, insurance, taxes and all other aircraft operating expenses during the lease term.

Our owned and committed portfolio includes popular twin-engine widebody passenger aircraft such as the Airbus A330-300 and Airbus A330-200, Boeing 777-300ER and Boeing 787-8 Dreamliner. As of June 30, 2014, we owned 16 aircraft with an aggregate net book value of approximately $1.7 billion, all of which were on lease. Our owned aircraft have an average age of 1.8 years and an average remaining lease term of 10.0 years, weighted by net book value. As of June 30, 2014, we had commitments to purchase new aircraft directly from Airbus and Boeing with an aggregate purchase value of $4.7 billion at current list prices.

Our business model is designed to generate stable and highly visible revenue, earnings and cash flows. Twin-engine widebody passenger aircraft typically attract better lease terms than narrowbody aircraft, including higher lease rates, longer lease durations, and higher lease renewal rates which

 

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drive profitability and reduce residual value risk. We believe that lessees of widebody aircraft are more likely to renew their leases at the end of term because these aircraft often form the core of their long-term fleet plan and enjoy regular configuration investments by the lessees over the term of the leases. We fund the acquisition of our aircraft primarily with long-term secured credit facilities structured as fixed rate, with maturities that generally match those of our leases to mitigate our interest rate and refinancing risk.

As of June 30, 2014, our owned and contracted aircraft have been placed with a diverse group of 13 airline customers in 11 different countries. Our customers are well-established airlines or flag carriers, some of which are majority owned by governments, and our aircraft are typically used on what we believe are key international or long-haul routes for our customers. We will continue to diversify our business by asset type, OEM, customer base and region. We will continue to focus on markets with the greatest growth in demand for air travel and twin-engine widebody aircraft, especially in Asia Pacific, Africa, the Middle East and Latin America.

Reorganization Transactions

We have historically conducted our business through Intrepid Aviation Group, LLC, a private limited liability company, incorporated on August 16, 2006. On November 23, 2011, Intrepid Aviation Group Holdings, LLC was organized as a Delaware limited liability company to be the holding company parent to, and succeed to the operations of, Intrepid Aviation Group, LLC. The former unit holders of Intrepid Aviation Group, LLC became the unit holders of Intrepid Aviation Group Holdings, LLC and Intrepid Aviation Group, LLC became a wholly-owned subsidiary of Intrepid Aviation Group Holdings, LLC. This transaction was accounted for as a transaction among entities under common control and the assets, liabilities, revenues and expenses of Intrepid Aviation Group, LLC were carried over to and combined with Intrepid Aviation Group Holdings, LLC at historical cost.

Prior to the reorganization transactions described above, we conducted our business through Intrepid Aviation Group, LLC and its subsidiaries. Unless otherwise specifically stated, the historical financial information presented in this prospectus is presented for Intrepid Aviation Group Holdings, LLC and its consolidated subsidiaries.

On February 19, 2013, we closed on an additional equity raise transaction from our sponsors and management increasing our equity capital commitments. During this transaction, Centerbridge and Reservoir and members of management entered into the LLC Agreement, which among other things, created one class of investor interests with different liquidation rights. The new interests created were collectively termed as Class A interests, Class B interests, Class C interests and Class D interests.

The Class D interests were awarded to members of management and were similar to the previous management units which constitute “profits interests” within the meaning of Internal Revenue Code Revenue Procedures 93-27 and 2001-43. Management’s vesting schedule in the newly issued Class D interests mirror the vesting schedule in the previously issued management units.

In connection with that transaction, Intrepid Aviation Management, LLC and its wholly-owned subsidiary, Intrepid Aviation Asia, were contributed to Intrepid Holdings. Both entities are now 100% indirectly wholly-owned subsidiaries of Intrepid Holdings. The merger was accounted for as a transfer of net assets between entities under common control.

Prior to the consummation of this offering, we will complete the Reorganization Transactions, pursuant to which each existing interest holder of Intrepid Holdings will transfer, directly, or indirectly, all of its interest in Intrepid Holdings to Intrepid Aviation Limited, resulting in Intrepid Holdings becoming a wholly-owned indirect subsidiary of Intrepid Aviation Limited. The Reorganization Transactions will be accounted for as Intrepid Aviation Limited succeeding to the business and activities of Intrepid Aviation

 

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Group Holdings, LLC for financial reporting purposes. Following the Reorganization Transactions, the historical financial statements of Intrepid Aviation Limited will be retrospectively adjusted to include the historical financial results of Intrepid Holdings for all periods presented.

Market and Industry Trends

Our revenues are principally derived from operating leases of our aircraft with scheduled (non-charter) airlines. As of June 30, 2014, we derived 100% of our revenues from airlines domiciled outside the United States and we anticipate that a significant portion of our revenues in the future will be generated from foreign lessees. The airline industry is cyclical, economically sensitive and highly competitive. Airlines and related companies are affected by, among other things, fuel price volatility and fuel shortages, political and economic instability, natural disasters, terrorist activities, changes in national policy, competitive pressures, labor actions, pilot shortages, insurance costs, recessions, health concerns and other political or economic events adversely affecting world or regional trading markets. Our airline customers’ ability to react to, and cope with, the volatile competitive environment in which they operate, as well as our own competitive environment, will affect our revenues and income.

Our Fleet

Key portfolio metrics of our fleet are as follows:

 

     June 30,      December 31,  
     2014      2013  
     (unaudited)         

Number of owned aircraft

     16         10   

Weighted average fleet age(1)

     1.8         1.5   

Weighted average remaining lease term(1)

     10.0         10.2   

Aggregate net book value

   $ 1,674,929       $ 1,045,661   

 

(1) Weighted-average fleet age and remaining lease term calculated based on net book value.

The net book value (“NBV”) of our aircraft on lease based on the geographic location of our customers as of June 30, 2014 and December 31, 2013 is as follows:

 

     June 30, 2014     December 31, 2013  

Region

   Number
of
Aircraft
     NBV of
Aircraft on
Lease
     % of
Total
    Number
of
Aircraft
     NBV of
Aircraft on
Lease
     % of
Total
 
     (unaudited)        

Asia

     9       $ 936,594         56     5       $ 536,055         51

Europe

     4         387,939         23     2         153,109         15

Africa

     3         350,396         21     3         356,497         34
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

     16       $ 1,674,929         100     10       $ 1,045,661         100
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Lease Terms

Most of our leases provide that the lessee’s payment obligations are absolute and unconditional under any and all circumstances. Of our 26 contracted aircraft, 24 have fixed rental rates and two have floating rental rates. Lessees generally agree to lease the aircraft for a fixed term, although in some cases the lessees have lease extension options. Lessees are generally required to make payment without deduction of any amounts that we may owe the lessee. Most of our leases also require lessees

 

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to gross up lease payments where they are subject to withholdings and other taxes. We also use contractual terms in these leases, including security deposits, maintenance reserves, return conditions, payment of rent in advance and other mechanisms to protect the contracted revenue and the value of our portfolio. The lessee is required to continue to make lease payments under all circumstances, including during periods in which the aircraft is not in operation due to maintenance or grounding.

Financial Highlights

The key highlights for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 were:

 

    Purchased 13 additional aircraft during 2013 and 2014, to bring our total owned aircraft to 16 at June 30, 2014, compared to three at June 30, 2013. The additional 13 aircraft generated $57.1 million of revenue.

 

    Generated revenue of $73.2 million and $9.4 million for the six months ended June 30, 2014 and 2013, respectively.

 

    Depreciation expense in relation to the additional 13 purchased aircraft was $17.2 million.

 

    Recognized net loss of $(4.8) million and $(3.2) million for the six months ended June 30, 2014 and 2013, respectively.

 

    Entered into agreements for additional debt of $1,037.3 million in connection with the purchase of 12 of the 13 additional aircraft noted above.

 

    Issued senior unsecured notes of $300 million aggregate principal amount.

The key highlights for the fiscal year ended December 31, 2013 compared to the fiscal year ended December 31, 2012 were:

 

    Purchased eight additional aircraft, to bring our total owned aircraft to ten at December 31, 2013, compared to two at December 31, 2012. The additional eight aircraft generated $27.3 million of revenue.

 

    Generated revenue of $46.0 million and $20.6 million for the fiscal years ended December 31, 2013 and 2012, respectively.

 

    Depreciation expense in relation to the additional eight purchased aircraft was $9.3 million.

 

    Recognized net income (loss) of $2.7 million and $(0.2) million for the fiscal years ended December 31, 2013 and 2012, respectively.

 

    Entered into agreements for additional debt of $735.3 million in connection with the purchase of the eight additional aircraft noted above.

Factors Affecting our Results of Operations

Our results of operations are affected by a number of factors, primarily:

 

    the number, type and age of the aircraft we own;

 

    market conditions in the airline industry;

 

    the demand for our aircraft and the resulting lease rates we are able to obtain for our aircraft;

 

    the availability and cost of debt capital to fund purchases of aircraft and related assets;

 

    the purchase price we pay for our aircraft; and

 

    the ability of our lessees to comply with the terms of their lease.

 

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Segments

We operate in one segment as we manage our business and analyze and report our results of operations on the basis of one operating segment— purchasing and leasing of commercial aircraft.

Key Income Statement Items

Rental Income

Rental income consists of lease rental income derived from leasing commercial widebody passenger aircraft to various commercial airlines around the world. We record lease rental income on a straight line basis over the life of the lease as it is earned under the provisions of U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). Monthly lease rentals are typically paid in advance, and a security deposit is typically maintained during the term of the lease. Rentals received, but unearned, under our leases are recorded as deferred revenue.

Our rental income has increased over the periods discussed below primarily as a result of the expansion of our fleet over time. We expect our revenue to continue to increase in connection with our acquisition and leasing of additional commercial widebody passenger aircraft.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of payroll costs and other compensation (including non-cash management incentive compensation), as well as to a lesser extent, the travel, accommodation and entertainment expenses of our team and fees for legal, insurance, facilities costs and related expenses and other professional services.

As our business continues to expand, we have hired additional personnel to support our increased activity, resulting in higher payroll costs. Our travel, accommodation and entertainment expenses of our team and fees for legal and other professional services have also increased in relation to our day-to-day activities. We have also been a private company and have not been required to file reports with the SEC. Once we are a public company, our management and other personnel will need to devote a substantial amount of time to compliance initiatives applicable to public companies. We currently have limited accounting personnel and we have begun the process of evaluating the adequacy of our accounting personnel staffing level and other matters related to our internal controls over financial reporting. This will likely cause an incremental growth increase to our selling, general and administrative expenses in the future, including additional incentive compensation expense.

Depreciation

Depreciation consists primarily of depreciation on our aircraft and related equipment calculated on a straight line basis over the estimated useful life of the asset. The estimated useful lives of all of our aircraft are 25 years from the date of manufacture, and the aircraft depreciate to an estimated salvage value. The estimated useful lives of our aircraft are reviewed annually or when a triggering event has occurred. Estimated salvage values are generally determined to be approximately 15% of original cost for the aircraft.

As is the case with our rental income, our depreciation expenses have also increased as a result of the expansion of our fleet and we similarly expect these expenses to continue to increase in connection with our acquisition of additional aircraft.

Interest Expense

Our Interest expense comprises interest expense on borrowings and amortization of debt issuance costs. We expect interest expense to continue to increase in connection with our acquisition and leasing of additional passenger aircraft.

 

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Gains (Losses) on Derivative Financial Instruments

Gains (losses) on derivative financial instruments consist primarily of the changes in fair values of interest rate swap contracts. The Company utilizes interest rate swap contracts to economically hedge its variable interest rate exposure on certain of its borrowings. Under the swap transactions, the Company makes fixed payments and receives floating rate payments to convert the floating rate borrowings to fixed rate obligations to better match the fixed rate cash flows from the leasing of aircraft

Taxes

Intrepid Aviation Group Holdings, LLC was formed as a limited liability company. For U.S. federal and state income tax purposes, any taxable profit or loss has been passed through to, and reported in the income tax returns of the unit holders and no domestic income tax provision has been recorded. As a result of the Reorganization Transactions, direct or indirect owners of the interests of Intrepid Aviation Group Holdings, LLC will become shareholders of Intrepid Aviation Limited.

Other Operating Expenses

Other operating expenses consist primarily of the creation and ongoing maintenance for the legal structuring of our aircraft owning entities. This includes accounting, legal and professional fees. As is the case with our rental income and depreciation, our other operating expenses have also increased as a result of the expansion of our fleet and we similarly expect these expenses to continue to increase in connection with our acquisition of additional aircraft.

Results of Operations

Consolidated Statements of Operations for the Six Months Ended June 30, 2014 and 2013

 

     Six Months Ended June 30,  
     2014     2013     Change     % Change  
     (unaudited)              

Revenues:

        

Rental income

   $ 73,153      $ 9,448      $ 63,705        F   

Operating expenses:

        

Selling, general and administrative

     11,459        6,952        4,507        64.8

Depreciation

     23,182        3,491        19,691        F   

Other operating expenses

     2,041        1,955        86        4.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     36,682        12,398        24,284        F   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     36,471        (2,950     39,421        F   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Interest expense

     (28,553            (28,553     (100 )% 

Gains (losses) on derivative financial instruments

     (12,292            (12,292     (100 )% 

Other income (expense)

     (25     (258     233        90.3

Interest income

     3        2        1        50.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (40,867     (256     (40,611     U   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

     (4,396     (3,206     (1,190     (37.1 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     369               369        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (4,765   $ (3,206   $ (1,559     (48.6 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

F = Favorable

U = Unfavorable

 

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Our financial results are impacted by the timing and size of acquisitions and dispositions of aircraft we complete. As of June 30, 2014 and 2013, we had 16 and three aircraft in our portfolio, respectively, which were all on lease to customers. In the six months ended June 30, 2014, we purchased and delivered six aircraft and sold no aircraft. As of June 30, 2014, our owned aircraft were on lease to 13 customers in 11 countries.

Rental Income

Rental income was $73.2 million and $9.4 million for the six months ended June 30, 2014 and 2013, respectively, an increase of $63.7 million, attributable to the continued expansion of our fleet through the purchase of 13 additional aircraft in 2013 and 2014.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $11.5 million and $7.0 million for the six months ended June 30, 2014 and 2013, respectively, an increase of $4.5 million, or 64.8%, primarily attributable to the continued increase in headcount and the build-out of operations at our Stamford, Connecticut headquarters, our management operations in Dublin, Ireland and our marketing and commercial operations in Singapore. While selling, general and administrative expenses increased in absolute dollar amounts, such expenses decreased as a percentage of total revenues to 15.7% from 73.6% due to the continued expansion of our fleet.

Depreciation

Depreciation was $23.2 million and $3.5 million for the six months ended June 30, 2014 and 2013, respectively, an increase of $19.7 million, attributable to the purchase of 13 additional aircraft in 2013 and 2014.

Interest Expense

Interest expense was $28.6 million for the six months ended June 30, 2014, primarily attributable to the purchase of 12 additional aircraft in 2013 and 2014 that were financed with third-party debt and the issuance of the senior unsecured notes. There was no interest expense for the six months ended June 30, 2013, as it was capitalized into other assets.

Gains (Losses) on Derivative Financial Instruments

Losses on derivative financial instruments were $12.3 million for the six months ended June 30, 2014, primarily attributable to the changes in the fair value of interest rate swaps. There were no gains (losses) on derivative financial instruments for the six months ended June 30, 2013 as we entered into the interest rate swaps after June 30, 2013.

Other Income (Expense)

Other income (expense) was an insignificant amount for both the six months ended June 30, 2014 and 2013 and is primarily composed of foreign exchange gains and losses that are incurred on our non-U.S. dollar denominated activities.

Income Tax Expense

Income tax expense was $0.4 million and $0 for the six months ended June 30, 2014 and 2013, respectively, an increase of $0.4 million. The effective tax rate was (8.4)% and 0% for the six months ended June 30, 2014 and 2013, respectively. The change was primarily due to the inclusion of a taxable U.S. corporation (Intrepid Aviation, Inc.) in the financial statement group in 2013.

 

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The total income tax expense for the six months ended June 30, 2014 differed from the amount computed in accordance with the statutory U.S. federal income tax rate due to (i) the effect of non-taxable entities within the consolidated financial statement group and (ii) the effect of differences between the pre-tax book income at the U.S. statutory tax rate and the local statutory tax rates in the foreign jurisdictions.

See note 8 of the condensed consolidated financial statements as of June 30, 2014 included in this prospectus for additional information regarding the difference between our effective tax rate and the statutory rate.

Net Loss

Net loss was $(4.8) million and $(3.2) million for the six months ended June 30, 2014 and 2013, respectively, a increase of $1.6 million, primarily as a result of the discussion above.

Consolidated Statements of Operations for the Years Ended December 31, 2013 and 2012:

 

     Fiscal Year Ended December 31,  
     2013     2012     Change     % Change  

Revenues:

        

Rental income

   $ 46,017      $ 20,566      $ 25,451        F   

Operating expenses:

        

Selling, general and administrative

     16,052        14,002        2,050        14.6

Depreciation

     15,669        6,866        8,803        F   

(Gain) loss on disposal of aircraft

            (289     289        100

Other operating expenses

     3,079        301        2,778        F   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     34,800        20,880        13,920        66.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     11,217        (314     11,531        F   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other (expense) income:

        

Interest expense

     (7,296            (7,296     N/A   

Gains (losses) on derivative financial instruments

     (431            (431     N/A   

Other (expense) income

     (185     137        (322     U   

Interest income

     4        26        (22     (84.6 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other (expense) income

     (7,908     163        (8,071     U   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

     3,309        (151     3,460        F   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     571               571        N/A   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 2,738      $ (151   $ 2,889        F   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

F = Favorable

U = Unfavorable

Our financial results are impacted by the timing and size of acquisitions and dispositions of aircraft we complete. As of December 31, 2013 and 2012, we had ten and two aircraft in our portfolio, respectively, all of which were on lease to customers. As of December 31, 2013, our owned aircraft were on lease to eight customers in seven countries.

Rental Income

Rental income increased by $25.5 million to $46.0 million for the year ended December 31, 2013, primarily attributable to the continued expansion of our fleet through the purchase of eight additional

 

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aircraft in 2013. The additional eight aircraft contributed $27.3 million of revenue for the fiscal year 2013. The increase was partially offset by the lack of rental income in 2013 relating to two aircraft that were sold in May 2012, which contributed $1.8 million of revenue in 2012.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $16.1 million and $14.0 million for the years ended December 31, 2013 and 2012, respectively, an increase of $2.1 million, or 14.6%, primarily attributable to the continued increase in headcount and the build-out of operations at our Stamford, Connecticut headquarters, our management operations in Dublin, Ireland and marketing and commercial operations in Singapore. While selling, general and administrative expenses increased in absolute dollar amounts, such expenses decreased as a percentage of total revenues to 34.9% from 68.1% due to the continued expansion of our fleet.

Depreciation

Depreciation was $15.7 million and $6.9 million for the years ended December 31, 2013 and 2012, respectively, an increase of $8.8 million, primarily due to the expansion of our fleet through purchase of eight additional aircraft in 2013. The additional aircraft contributed $9.3 million to depreciation for the fiscal year 2013. The increase was partially offset by the lack of depreciation expense in 2013 related to two aircraft that were sold in May 2012, which contributed $1.1 million of depreciation expenses in 2012.

(Gain) Loss on Disposal of Aircraft

There was no gain or loss on disposal of aircraft for the years ended December 31, 2013 compared to a gain of $0.3 million for the year ended December 31, 2012 due to the disposal of two aircraft in 2012.

Other Operating Expenses

Other operating expenses were $3.1 million and $0.3 million for the years ended December 31, 2013 and 2012, respectively, an increase of $2.8 million, primarily attributable to the continued expansion of our fleet through the purchase of eight additional aircraft in 2013. The increase was partially offset by expenses related to the sale of two aircraft in 2012.

Interest Expense

Interest expense was $7.3 million for the year ended December 31, 2013 compared to none for the year ended December 31, 2012. The increase in interest expense was primarily attributable to the purchase of eight aircraft in 2013 that were financed with third-party debt.

Gains (Losses) on Derivative Financial Instruments

Losses on derivative financial instruments were $0.4 million for the year ended December 31, 2013, primarily attributable to the changes in the fair value of interest rate swaps. There were no gains (losses) on derivative financial instruments for the year ended December 31, 2012 as we entered into the interest rate swaps in 2013.

Other Income

Other income (expense) was $(0.2) million and $0.1 million for the year ended December 31, 2013 and 2012, respectively, a decline of $0.3 million. The other income primarily comprises of foreign exchange gains and losses that we incur on our non-U.S. dollar denominated activities. In 2013, Euro-denominated purchasing activity related to equipment for our forward order aircraft which resulted in an increase in foreign exchange losses.

 

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Income Tax Expense

Income tax expense was $0.6 million and $0 for the years ended December 31, 2013 and 2012, respectively, an increase of $0.6 million primarily due to the inclusion of a taxable U.S. corporation (Intrepid Aviation, Inc.) in the financial statement group in 2013. The effective tax rate was 17.3% and 0% for the fiscal years ended December 31, 2013 and 2012, respectively. The change was primarily due to the inclusion of a taxable U.S. corporation (Intrepid Aviation, Inc.) in the financial statement group in 2013.

The total income tax expense for the fiscal year ended December 31, 2013 differed from the amount computed in accordance with the statutory U.S. federal income tax rate due to (i) the effect of non-taxable entities within the consolidated financial statement group, (ii) the effect of differences between the pre-tax book income at the U.S. statutory tax rate and the local statutory tax rates in the foreign jurisdictions and (iii) valuation allowances established against certain deferred tax assets associated with non-U.S. loss carryforwards.

See note 8 of the consolidated financial statements as of December 31, 2013 included in this prospectus for additional information regarding the difference between our effective tax rate and the statutory rate.

Net Income (Loss)

As a result of the foregoing, we had net income (loss) of $2.7 million and $(0.2) million for the years ended December 31, 2013 and 2012, respectively, an increase of $2.9 million.

Liquidity and Capital Resources

We finance the acquisition of our aircraft with committed capital from our sponsors, available cash balances, internally generated funds from our aircraft owning subsidiaries, including cash flow provided by operations, additional senior secured financing and debt financings.

We borrow funds to purchase new and used aircraft, make aircraft deposits on new aircraft purchase commitments and to pay down and refinance maturing debt obligations. We are dependent upon dividends and other payments from our subsidiaries to generate the funds necessary to meet our financial obligations, to pay our selling, general and administrative expenses, and to grow our fleet. Our existing subsidiaries use funds generated from aircraft rents to pay their operating expenses and to meet their debt service requirements. See “Risk Factors—Risks Related to Our Indebtedness —We are dependent upon dividends from our subsidiaries to meet our financial obligations.”

In addition, in February 2013, we closed on an additional equity capital commitment from our sponsors and management, increasing our current equity capital commitments to approximately $650 million. As of December 31, 2013, approximately $280.0 million of total capital has been contributed to the business. Following this offering, no other commitments will remain from any party. See “Certain Relationships and Related Party Transactions—Limited Liability Company Agreement”.

During the six months ended June 30, 2014, we purchased six aircraft which were financed with $425 million in debt (excluding PDP Facilities).

 

     June 30,      December 31,  
     2014      2013      2012  
     (unaudited)         

Unrestricted cash

   $ 50,802       $ 26,608       $ 7,143   

Undrawn secured PDP Facilities

     46,156                   
  

 

 

    

 

 

    

 

 

 

Available liquidity

   $ 96,958       $ 26,608       $ 7,143   
  

 

 

    

 

 

    

 

 

 

Restricted cash

   $ 57,794       $ 38,430       $ 18,736   

 

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In addition to investment in our fleet, our short-term liquidity needs include working capital for operations and debt service. We currently intend to retain all available funds and any future earnings for use in the operation of our business, and therefore we do not currently expect to pay any cash dividends to our shareholder. We may use cash on hand in the future for, among other things, aircraft acquisitions, joint ventures and buybacks of loans and securities.

We believe that our available liquidity, consisting of unrestricted cash balances of $50.8 million as of June 30, 2014, combined with internally generated funds from our aircraft owning subsidiaries, including cash flow provided by operators, will be sufficient to satisfy our operating requirements for the next 12 months. In addition to our available liquidity, we intend to fund our unfunded commitments under our existing purchase contracts, which totaled $1,461.3 million as of June 30, 2014, with undrawn secured PDP facilities, secured debt financing from leading commercial banks, and proceeds of this offering and the capital markets. Our access to additional sources of financing and our ability to refinance amounts outstanding under our secured borrowings or to fund acquisitions will depend on a number of factors over which we have limited control, which include general market conditions, the market’s view of the quality of our assets, historical and expected performance, the market’s perception of our growth potential, compliance with the terms of our debt agreements, interest rate fluctuations, and our current and potential future earnings and cash distributions. See “Risk Factors—Risks Related to Intrepid—In order to meet our existing commitments and grow our business, we will require additional capital in the future, which may not be available.”

Cash Flows

The following table sets forth a summary of our cash flows for the periods indicated:

 

     Six Months Ended
June 30,
    Fiscal Year Ended
December 31,
 
     2014     2013     2013     2012  
     (unaudited)        

Consolidated Statements of Cash Flows:

        

Net cash provided by (used in) operating activities

   $ 29,975      $ 4,421      $ 27,896      $ 5,396   

Net cash provided by (used in) investing activities

     (579,516     (320,017     (1,048,001     (172,333

Net cash provided by (used in) financing activities

     573,735        329,493        1,039,570        156,394   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash

     24,194        13,897        19,465        (10,543

Cash at beginning of period

     26,608        7,143        7,143        17,686   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash at end of period

   $ 50,802      $ 21,040      $ 26,608      $ 7,143   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows for the Six Months Ended June 30, 2014 and 2013

Net cash provided by operating activities for the six months ended June 30, 2014 and 2013 was $30.0 million and $4.4 million, respectively. The increase of $25.6 million was primarily attributable to an increase in cash generated from our operations due to the continued expansion of our fleet through the purchase of aircraft.

Net cash used in investing activities for the six months ended June 30, 2014 and 2013 was $579.5 million and $320.0 million, respectively. The increase of $259.5 million was primarily attributable to aircraft purchases in connection with our continued fleet expansion.

 

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Net cash provided by financing activities for the six months ended June 30, 2014 and 2013 was $573.7 million and $329.5 million, respectively. The increase of $244.2 million was primarily attributable to increased financing requirements associated with the aircraft purchases in 2014 and the issuance of $300 million senior unsecured notes.

Cash Flows for the Years Ended December 31, 2013 and 2012

Net cash provided by operating activities for the years ended December 31, 2013 and 2012 was $27.9 million and $5.4 million, respectively. The increase of $22.5 million was primarily attributable to an increase in cash generated from our operations due to the continued expansion of our fleet through the purchase of aircraft.

Net cash used in investing activities for the twelve months ended December 31, 2013 and 2012 was $1,048.0 million and $172.3 million, respectively. The increase of $875.7 million was primarily attributable to aircraft purchases in connection with our continued fleet expansion.

Net cash provided by financing activities for the twelve months ended December 31, 2013 and 2012 was $1,039.6 million and $156.4 million, respectively. The increase of $883.2 million was primarily attributable to increased financing requirements associated with the aircraft purchases in 2013.

Indebtedness

The table below sets forth the details of our existing long-term debt and secured obligations as of June 30, 2014, and December 31, 2013 and 2012.

 

     June 30,     December 31,  
     (unaudited)              
     2014     2013     2012  

Full recourse PDP Facilities

   $ 78,342      $ 176,417      $ 57,800   

Secured term loans

     1,221,271        826,134        109,690   

Senior unsecured notes

     300,000                 
  

 

 

   

 

 

   

 

 

 

Total debt

     1,559,613        1,002,551        167,490   

Less upfront fees on PDP Facilities and secured term loans

     (18,969     (13,302       
  

 

 

   

 

 

   

 

 

 

Net debt

     1,580,644        989,249        167,490   

Less current maturities of secured term loans

     (80,567     (52,435     (8,055

Less current maturities of PDP Facilities

     (78,342     (164,619     (41,522
  

 

 

   

 

 

   

 

 

 

Long-term debt, net of current maturities

     1,421,735        772,195        117,913   
  

 

 

   

 

 

   

 

 

 

Number of aircraft pledged as collateral

     15        10        2   

Net book value of aircraft pledged as collateral

   $ 1,554,469      $ 1,045,661      $ 159,471   

Full Recourse PDP Facilities

PDP Facilities are used in funding pre-delivery payments for aircraft we have ordered and are secured by the assignment of our right under the related purchase agreements to purchase the aircraft which are subject to the financing. The total commitment value of these facilities was $124.5 million and $176.4 million as of June 30, 2014 and December 31, 2013, respectively, of which $78.3 million and $176.4 million was drawn as of June 30, 2014 and December 31, 2013, respectively. Tranches of the PDP Facilities bear interest at floating rates based on 1-month LIBOR plus margins ranging from 3.0% to 4.0%. Our current PDP Facilities have been utilized to finance payments relating to four aircraft as of June 30, 2014 and nine aircraft as of December 31, 2013, respectively.

 

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Secured Term Loans

We fund aircraft purchases through a combination of senior and subordinated term financings secured by the aircraft. Of the total secured term loans, $825.8 million and $673.4 million is considered non-recourse as of June 30, 2014 and December 31, 2013, respectively. As of June 30, 2014, we had 15 aircraft financed by 17 lenders, compared to ten aircraft financed by nine lenders as of December 31, 2013. Each of these loans contains provisions that require the payment of principal and interest throughout the term of the loan. The interest rates on the fixed-rate senior loans are based on fixed rates between 2.80% and 6.15% and the floating-rate senior loans are based on 1-month and 3-month LIBOR plus a margin between 2.75% and 3.65%. The interest rates on the fixed-rate subordinated loans are based on fixed rates between 7.80% and 11.12% and the floating-rate subordinated loans are based on 3-month LIBOR plus a margin between 4.75% and 5.25%.

Senior Unsecured Notes

On January 29, 2014, Intrepid Holdings and Intrepid Finance Co. issued $300 million aggregate principal amount of 6.875% senior notes due 2019. In addition, on August 18, 2014, Intrepid Holdings and Intrepid Finance Co. issued an additional $215 million in principal amount of senior unsecured notes under the indenture governing the outstanding $300 million in aggregate principal amount of 6.875% senior notes due 2019 at an issue price of 102%. The senior unsecured notes have a stated coupon interest rate of 6.875% per annum payable semi-annually and will mature on February 15, 2019. The Company intends to use the net proceeds for general corporate purposes, including the purchase of aircraft, both from current forward orders and from future growth.

The table below sets forth the details of our future payments due under our existing indebtedness as of June 30, 2014 for fiscal years ended:

 

     Remainder of
2014
     2015      2016      2017      2018      Thereafter      Total  

Full recourse PDP Facilities

   $ 54,710       $ 23,632       $       $       $       $       $ 78,342   

Secured term loans

     39,359         82,909         87,279         92,009         96,935         822,781         1,221,271   

Senior unsecured notes

                                             300,000         300,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 94,069       $ 106,540       $ 87,279       $ 92,009       $ 96,935       $ 1,122,781       $ 1,599,613   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Several of our credit facilities contain covenants and events of default that, among other things, restricts our ability to modify the established cost structure of aircraft purchases and limits our ability to borrow or become liable for additional debt. As of June 30, 2014 and December 31, 2013, respectively, we were in compliance with all covenants related to its credit facilities.

For a further description of the terms of our existing indebtedness, see “Description of Indebtedness.”

 

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Capitalized Interest

We capitalize interest incurred to finance aircraft deposits made pursuant to the Airbus A330 forward order. As of June 30, 2014, and December 31, 2013, interest costs incurred and capitalized were as follows:

 

     June 30,     December 31,  
     2014     2013     2013     2012  
     (unaudited)              

Interest on Borrowings

   $ 36,992      $ 5,869      $ 22,803      $ 6,508   

Less Capitalized Interest

     (8,439     (5,869     (15,507     (6,508
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense

   $ 28,553      $      $ 7,296      $   
  

 

 

   

 

 

   

 

 

   

 

 

 

For the six months ended June 30, 2014 and fiscal year ended December 31, 2013, cash coupon interest paid on our PDP Facilities and our long term debt facilities was $23.5 million and $16.9 million, respectively. In addition, we capitalized $8.4 million and $15.5 million as of June 30, 2014 and December 31, 2013, respectively, of interest related to the financing of our aircraft deposits for our Airbus A330 forward order. As our aircraft deliver, capitalized interest becomes part of the aircraft book value and is depreciated over the useful life of the asset.

Off-Balance Sheet Arrangements

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. We do not have any off-balance sheet arrangements or relationships with entities that are not consolidated into or disclosed on our financial statements that have or are reasonably likely to have a material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations

As of December 31, 2013, we had contractual obligations related to our Airbus forward order in future years. The obligations relate to the purchase of aircraft airframes, aircraft engines and related equipment. The following chart details the contractual obligations, including obligations, related to our Airbus forward order in future years:

 

    2014     2015     2016     2017     2018     Thereafter     Total  

Total purchase commitments(1)

  $ 1,964,800      $ 1,719,200      $      $      $      $      $ 3,684,000   

Aircraft deposits paid to date

    246,893        135,280                                    382,173   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Remaining commitments on aircraft purchases

    1,717,907        1,583,920                                    3,301,827   

Principal repayments

    217,583        66,368        58,075        61,258        64,598        534,669        1,002,551   

Interest payments(2)

    50,703        70,139        67,109        63,609        59,835        118,515        429,910   

Other obligations(3)

    384        522        535        453                      1,894   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total contractual obligations

  $ 1,986,577      $ 1,720,949      $ 125,719      $ 125,320      $ 124,433      $ 653,184      $ 4,736,182   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Includes our 15 remaining committed aircraft under purchase commitments and our one aircraft under a contract for a sale and leaseback transaction as of December 31, 2013. Estimated

 

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  purchase prices for committed orders shown inclusive of the estimated impact from escalation clauses and subject to change. All aircraft acquisitions are included at purchase list price and are subject to the satisfaction of customary closing conditions. In addition, our ability to finance the acquisition of these aircraft will be subject to our ability to secure adequate financing. There can be no assurance that we will acquire these aircraft at these estimated purchase prices, or at all.
(2) Estimates for interest payments on floating rate debt are based on LIBOR plus the applicable margins current as of December 31, 2013. We have entered into interest rate swap agreements, which synthetically fix a significant portion of our floating rate debt. Actual payments could vary.
(3) The amount listed above for operating leases pertain primarily to building leases for our offices in Stamford, Connecticut and Los Angeles, California. There are no commitments for minimum rentals subsequent to December 31, 2017.

Subsequent to December 31, 2013, we entered into the following contractual obligations:

 

    On January 29, 2014, Intrepid Holdings and Intrepid Finance Co. issued $300 million in aggregate principal amount of 6.875% senior notes due 2019. In addition, on August 18, 2014, Intrepid Holdings and Intrepid Finance Co. issued an additional $215 million in aggregate principal amount of senior unsecured notes under the indenture governing the outstanding $300 million in aggregate principal amount of 6.875% senior notes due 2019 at an issue price of 102%. The notes have a stated coupon interest rate of 6.875% per annum payable semi-annually and will mature on February 15, 2019. We intend to use the proceeds for general corporate purposes, including the purchase of aircraft, both for current forward orders and future growth. For a further details of our future payments due under our existing indebtedness as of June 30, 2014, see “—Indebtedness,” and subsequent to June 30, 2014, see “Business—Recent Developments.”

 

    For the six months ended June 30, 2014, we took delivery of four Airbus A330-300 from our committed orderbook, one Boeing 787-8 Dreamliner from a sale and leaseback transaction and one Boeing 777-300ER from a trading transaction. The aircraft are on long-term leases with various airlines. The purchases were funded with a combination of cash on hand and secured term loans of $425 million. Subsequent to June 30, 2014, we took delivery of three Airbus A330-300 from our committed orderbook and placed two on a 10-year lease with Skymark Airlines and one on a 12-year lease with Cebu Pacific Air. The purchases were funded with a combination of cash on hand and secured term loans of $157.0 million.

 

    On June 14 2014, we signed a non-binding LOI with Boeing for the purchase of six aircraft. Subsequently, on July 8, 2014, we converted such non-binding LOI to a signed a purchase agreement with Boeing for the purchase of up to 10 777-300ER aircraft with an aggregate purchase value of $3.3 billion at current list prices, subject to customary closing conditions. In addition, on July 22, 2014, we signed a term sheet with Airbus for the purchase of up to 20 Airbus A330-900s, with an aggregate purchase value of $5.5 billion at current list prices, which term sheet is not binding until definitive documentation is signed and will be subject to customary closing conditions, including board approval and the extension of the deadline to complete negotiation. Delivery of aircraft under these two agreements is not expected to begin until 2016. On August 28, 2014, we entered into a purchase agreement to acquire one Airbus A330-300 on lease to China Airlines in a trading transaction.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported

 

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amounts of revenue and expenses during the reporting period. 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.

All intercompany transactions by and among Intrepid Aviation Group Holding, LLC and its subsidiaries have been eliminated in consolidation.

Rental of Aircraft

We lease aircraft to third parties principally under operating lease agreements. Our operating lease rentals are recognized on a straight-line basis over the life of the lease. At lease inception we review all necessary criteria to determine proper lease classification.

Lease agreements for which base rent is based on floating interest rates are included in minimum lease payments based on a zero reference rate; 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.

All of our customer leases are triple net. Under triple-net leases, the customer is typically responsible for the payment of all operating expenses including maintenance, taxes and insurance. Under the triple-net lease arrangements for many of our leases, we periodically collect maintenance reserve payments in a restricted cash account based on the passage of time or usage of the aircraft measured by hours flown or cycles operated. We use the restricted cash in the maintenance reserve to fund claims submitted by the lessee for expenses incurred for certain major maintenance, up to a maximum amount that is typically determined based on maintenance reserves paid by the lessee. All maintenance reserves are recorded as liabilities until refunded for qualifying maintenance expenditures or until they become non-refundable at the end of the lease term. For our leases that do not require maintenance reserves, there is typically a full-life adjustment at redelivery of the aircraft to the extent that the aircraft is delivered in a different maintenance condition compared to the time of delivery (normal wear and tear excepted). See “—Aircraft Maintenance.”

Aircraft

Purchased aircraft held for lease, are stated at cost less accumulated depreciation and are being depreciated using the straight-line method over the estimated useful lives. Estimated useful lives of the currently owned aircraft are 25 years from the date of manufacture. Estimated residual values are generally determined to be approximately 15% of original cost for the aircraft.

We capitalized interest related to pre-delivery payments made in respect of aircraft on forward order. The amount of interest capitalized is the amount of interest costs which could have been avoided in the absence of such payments for the related assets. The capitalized interest is based on the weighted average of the rates applicable to all borrowings of the Company and is recorded as an increase to the cost of an aircraft.

In accounting for aircraft, we make estimates about the expected useful lives, the fair value of attached leases, acquired maintenance liabilities and the estimated residual values. Changes in the assumption of useful lives or residual values for aircraft could have a significant impact on our results of operations and financial condition. In making these assumptions, we rely upon actual industry experience with the same or similar aircraft types and our anticipated utilization of the aircraft. As part of our due diligence review of each aircraft we purchase through trading activities, we evaluate attached leases to determine whether they are at, above or below market. Our evaluation considers the fair value of other assets and liabilities assumed, if any, in the trading transaction. If we determine

 

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the lease to be above or below market, we recognize a separate lease asset or liability for the contract and amortize it over the remaining lease term. In addition, we prepare an estimate of the expected maintenance payments and any excess costs which may become payable by us, taking into consideration the then-current maintenance status of the aircraft and the relevant provisions of any existing lease. The maintenance reserve or full-life lease adjustment on redelivery is designed to protect us from any liability with respect to maintenance costs, subject to certain limited exceptions.

Aircraft Maintenance

In all of our aircraft leases, the lessee has to return the aircraft at full-life conditions at the end of the lease term, i.e., the lessee is responsible for maintenance and repairs of our flight equipment and related expenses during the term of the lease. In many operating lease contracts, the lessee has the obligation to make a periodic payment to a cash maintenance reserve, which we collect based on passage of time or usage of the aircraft measured by hours flown or cycles operated. Such reserve funding is maintained by the Company in restricted cash accounts and used on an as-needed basis to fund required maintenance on the associated aircraft. In these leases, we will make a payment to the lessee to compensate the lessee for the maintenance cost incurred, up to the maximum of the amount of aircraft maintenance reserves made by the lessee during the lease term, net of previous reimbursements. Nonrefundable maintenance reserves are recognized as additional rental income when they are forfeited by the lessee at the end of the lease. In the future, we may incur repair and maintenance expenses for off-lease aircraft.

In most lease contracts not requiring the payment of cash maintenance reserves, the lessee is still required to re-deliver the aircraft at full-life return conditions, i.e., 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 aircraft. To the extent that such components are redelivered in a different condition than at acceptance, there is a full-life financial adjustment for the difference at redelivery. We recognize receipts of full-life financial adjustment as additional rental income when received and payments of full-life financial adjustment as leasing expense.

For all lease contracts, any amounts of accrued maintenance liability existing at the end of a lease are released and recognized as rental income at lease termination. When an aircraft 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 part of the net gain on disposal of aircraft.

Since our inception we have not recognized any revenue in relation to cash maintenance reserves and full-life financial adjustment. We expect revenue and expense, if any, in relation to full-life return conditions of aircraft to occur once we are nearing the regular end of our first operating leases.

Impairment of Aircraft

Management evaluates the need to perform an impairment test whenever facts or circumstances indicate a potential impairment has occurred. Indicators may include, but are not limited to, a significant change in lease terms or other significant lease restructuring, a significant decrease in market price of aircraft, a significant change in market conditions, a significant decline in air traffic, and a significant reduction in the useful life of aircraft. An assessment is performed on an aircraft by aircraft basis whenever events or changes in circumstances indicate that the carrying amount of an aircraft may not be recoverable. The review for recoverability has a level of subjectivity and requires the use of our judgement in the assessment of the estimated future cash flows associated with the use of an aircraft and its eventual disposition. Recoverability of an aircraft’s carrying amount is measured by comparing the carrying amount of the aircraft to future undiscounted net cash flows expected to be generated by the aircraft. The undiscounted cash flows consist of cash flows from currently contracted leases, future

 

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projected lease rates and estimated residual or scrap values for each aircraft. We develop assumptions used in the recoverability analysis based on our knowledge of active lease contracts, current and future expectations of the global demand for a particular aircraft type, and historical experience in the aircraft leasing market and aviation industry, as well as information received from third-party industry sources. In the event that an aircraft does not meet the recoverability test, the aircraft will be recorded at fair value. Fair value is determined through various valuations techniques, including discounted cash flow models and third-party independent appraisals, as considered necessary.

There was no impairment loss on aircraft for the six months ended June 30, 2014 and 2013, respectively, and for the years ended December 31, 2013 and 2012, respectively.

Fair Value Measurement

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.

We measure the fair value of interest rate derivative assets and liabilities on a recurring basis. Our valuation model for interest rate derivatives classified in level 2 maximizes the use of observable inputs, including contractual terms, interest rate curves, cash rates and futures rates and minimizes the use of unobservable inputs, including an assessment of the risk of non-performance by the interest rate derivative counterparty in valuing derivative assets, an evaluation of our credit risk in valuing derivative liabilities and an assessment of market risk in valuing the derivative asset or liability. We use our interest rate derivative counterparty’s valuation of our interest rate derivatives to validate our models. Our interest rate derivatives are sensitive to market changes in LIBOR.

Assets subject to fair value measurements include aircraft. We record aircraft at fair value when we determine the carrying value may not be recoverable. Fair value measurements for aircraft impaired are based on an income approach that uses Level 3 inputs, which include our assumptions and appraisal data as to an aircraft’s useful life, future lease cash flows as well as a residual value based on expectations of market participants.

Profits Interests

To compensate and incentivize our employees, we grant share-based compensation awards to certain key employees. These awards of equity are intended to constitute “profits interest” within the meaning of the Internal Revenue Code Revenue Procedures 93-27 and 2001-43. The profits interests are comprised of exit-based and time-based interests. Exit-based interests vest upon qualifying transactions listed in our LLC Agreement relating to an IPO or a sale of the business. Time-based interests vest in accordance with capital contributions made to us by our members. The following table lays out the vesting schedule:

 

     Percentage
vested
 

Date of capital call

       

First anniversary

     33

Second anniversary

     66

Third anniversary

     100

 

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The profits interests are accounted for as liabilities because of features that allow us to repurchase vested awards after vesting but before the recipient has been exposed to the risks and rewards of ownership if the recipient terminates their relationship with us. We have elected to account for our liability classified profits interests at their intrinsic value each period. The intrinsic value of the profits interests has been determined by estimating the payout that would be made to the holders of the award if we were liquidated or sold for our fair value. Therefore, share-based compensation expenses were $0 for the six months ended June 30, 2014 and the year ended December 31, 2013, respectively. As of June 30, 2014 and December 31, 2013 all awards are subject to forfeiture upon termination of employment and are therefore considered unvested for accounting purposes.

As a private company, we had elected to measure our profits interests using the intrinsic value method in accordance with ASC Topic 718, Compensation-Stock Compensation. Upon filing of the registration statement of which this prospectus forms a part, we are considered a public company for the purposes of financial accounting for share-based payment, and as a result, the profits interests must be measured at fair value. A change in the valuation technique is a change in accounting estimate for purposes of applying ASC Topic 250, Accounting Changes and Error Corrections, and shall be applied prospectively to the profits interests. Therefore, we will measure the profits interests using the fair value method from the date of filing of the registration statement.

Derivative Financial Instruments

In the normal course of business we utilize derivative instruments to manage our exposure to interest rate risks. Interest rate swaps are used to minimize exposures to interest rate movement on our underlying debt obligations.

All interest rate derivatives are recognized as assets or liabilities on the consolidated balance sheets at fair value, with unrealized appreciation and depreciation from changes in fair values being recorded as a component of interest expense in the consolidated statements of operations. We determine fair value for our interest rate derivatives by using contractual cash flows and observable inputs comprising (as applicable) yield curves and credit spreads. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Company itself and that of the counterparty as required.

As of June 30, 2014, December 31, 2013 and 2012, and for the periods then ended, we did not apply hedge accounting to any of our derivative instruments.

Income Taxes

We use the asset and liability method of accounting for income taxes. 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 carryforwards. Deferred tax assets and liabilities are measured using enacted tax laws and 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 taxes of a change in the tax rates is recognized in income in the period that includes the enactment date.

Deferred tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. The Company evaluates deferred tax assets on an annual basis to determine if valuation allowances are required by considering available evidence. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We will be evaluating deferred tax assets on a quarterly basis upon effectiveness of the registration statement of which this prospectus forms a part.

 

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We recognize the effect of income tax positions only if sustaining those positions is more likely than not. Changes in recognition or measurement are reflected in the period in which a change in judgment occurs. We record interest and penalties related to unrecognized tax benefits in income tax expense. As of June 30, 2014, we did not have any unrecognized tax benefits.

Intrepid Aviation Group Holdings, LLC was formed as a limited liability company. For U.S. federal and state income tax purposes, any taxable profit or loss is passed through to, and reported in the income tax returns of the unit holders and no domestic income tax provision has been recorded. We also own several domestic and foreign subsidiaries. Most of our domestic subsidiaries and several of our foreign subsidiaries are classified as disregarded entities and the related activity is reported in the tax returns of Intrepid Aviation Group Holdings, LLC. However, one of our domestic subsidiaries is a corporation subject to U.S. federal and state income taxes. In addition, our foreign subsidiaries are subject to non U.S. income taxes in their respective jurisdictions but are not expected to have significant income tax liabilities in such jurisdictions. Deferred tax liabilities related to accelerated depreciation are substantially offset by deferred tax assets related to tax loss carry-forwards and other timing differences. Therefore, the accompanying consolidated financial statements do not include a significant provision for non-U.S. income tax.

Recently Issued Accounting Pronouncements

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. The FASB and the IASB continue to deliberate on the proposed accounting standard and there is no estimated date of issuance of the standard nor a proposed effective date. Currently, management is unable to assess what impact the adoption of the new finalized lease standard would have on the airline industry’s leasing arrangements or on our consolidated financial statements.

Under the current proposal, sale leaseback accounting will be more difficult to achieve and more sale leasebacks will be treated as financings by lessees, which may lead to fewer sale leaseback transactions by airlines.

Public Company Costs

We expect that we will incur incremental general and administrative (“G&A”) expenses as a result of this offering. Specifically, we will incur certain expenses related to being a publicly traded company, including costs associated with SEC reporting requirements, tax return preparation, independent auditor fees, investor relations activities, Sarbanes-Oxley compliance, registrar and transfer agent fees, director and officer liability insurance expense and additional director compensation.

Jumpstart Our Business Startups Act of 2012

The JOBS Act permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public

 

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companies. We are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

Management’s Use of Non-GAAP Measures of Consolidated Net Income, Consolidated Adjusted EBITDA and Consolidated Interest Expense

We present non-GAAP Measures of Consolidated Net Income, Consolidated Adjusted EBITDA and Consolidated Interest Expense, each as defined in the indenture governing our senior unsecured notes, as supplemental measures of our performance and ability to service debt. This data is derived from our consolidated financial information but not presented in our consolidated financial statements prepared in accordance with U.S. GAAP.

Our presentation of Consolidated Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these types of adjustments. Consolidated Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with U.S. GAAP or as an alternative to cash flow from operating activities as a measure of our liquidity. Non-GAAP measures of Consolidated Net Income, Consolidated Adjusted EBITDA and Consolidated Interest Expense have limitations as analytical tools and should not be viewed in isolation or as substitutes for U.S. GAAP measures of earnings. Some of these limitations are as follows:

 

    these measures do not reflect changes in, or cash requirement for, our working capital needs;

 

    these measures do not reflect our interest burden, or the cash requirements necessary to service interest or principal payments on our debt;

 

    these measures do not reflect our income tax expense or the cash requirement to pay our taxes;

 

    these measures do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;

 

    although depreciation is a non-cash charge, the assets being depreciated and amortized will often require replacement in the future, and these measures do not reflect any cash requirements for such replacements; and

 

    other companies may calculate these measures differently so they may not be comparable.

Non-GAAP Consolidated Net Income and Consolidated Adjusted EBITDA

Our non-GAAP measure of Consolidated Net Income is defined in the indenture governing the senior unsecured notes as net income (loss) plus, to the extent recognized in net income, gain (loss) on disposal of aircraft, gain (loss) on foreign exchange and amortization of debt discounts.

Consolidated Adjusted EBITDA is defined in the indenture governing the senior unsecured notes as the non-GAAP measure of Consolidated Net Income described above plus, to the extent deducted in determining Consolidated Net Income, depreciation, amortization, interest expense, income taxes, stock-based compensation expense, any other non-cash or non-recurring losses or charges of the Company and its consolidated subsidiaries and (1) any costs incurred pursuant to the LLC Agreement, (2) any fees, charges or other expenses made or incurred in connection with any non-ordinary course investment, equity offering (including an initial public offering), asset sale, asset acquisition, recapitalization or incurrence of indebtedness permitted to be incurred by the indenture governing the senior unsecured notes (whether or not successful), including such fees, expenses or charges related to the offering of the senior unsecured notes and any credit facilities, (3) the amount of any restructuring charge, including any one-time costs incurred in connection with acquisitions after January 29, 2014, (4) the amount of management, monitoring, consulting and advisory fees (including termination fees) and related expenses

 

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paid or accrued in such period to the extent otherwise permitted under the indenture governing the senior unsecured notes, (5) any loss from the early extinguishment of indebtedness arising from the application of purchase accounting or hedging obligations or other derivative instruments, (6) any impairment charge or asset write-off pursuant to ASC 350 Intangibles—Goodwill and Other and ASC 360 Property, Plant, and Equipment and the amortization of intangibles arising pursuant to ASC 805 Business Combinations and (7) any non-cash compensation expense recorded from grants of stock appreciation or similar rights, stock options or other rights to officers, directors or employees.

The table below shows the reconciliation of net income (loss) under U.S. GAAP to the non-GAAP measure of Consolidated Net Income and Consolidated Adjusted EBITDA as defined in the indenture governing the senior unsecured notes for the six months ended June 30, 2014 and for the year ended December 31, 2013:

 

     Six Months
Ended
June 30,
    Fiscal Year
Ended December 31,
 
     2014     2013  
     (unaudited)  

Net income (loss)

   $ (4,765   $ 2,738   

Adjustments:

    

Loss on foreign exchange

     24        169   

Loss (gain) on fair value of derivatives

     7,567        (1,606

Amortization of debt discounts for indebtedness issued prior to senior unsecured notes

     842        561   
  

 

 

   

 

 

 

Non-GAAP Consolidated Net Income

   $ 3,668      $ 1,862   
  

 

 

   

 

 

 

Adjustments:

    

Depreciation

     23,182        15,669   

Interest expense, net of amortization of debt discounts for indebtedness issued prior to senior unsecured notes

     27,711        6,735   

Income tax expense

     369        571   

Non-cash management compensation

     1,879        2,172   
  

 

 

   

 

 

 

Consolidated Adjusted EBITDA

   $ 56,809      $ 27,009   
  

 

 

   

 

 

 

Non-GAAP Consolidated Interest Expense

Our non-GAAP measure of Consolidated Interest Expense as defined in the indenture governing the senior unsecured notes represents, for any period, consolidated interest expense as calculated in accordance with GAAP, excluding all debt discounts and expense amortized or required to be amortized in the determination of our non-GAAP measure of Consolidated Net Income for such period. The table below shows the reconciliation of interest expense under U.S. GAAP to our non-GAAP measure of Consolidated Interest Expense as defined in the indenture governing our senior unsecured notes to Consolidated Interest Expense for the six months ended June 30, 2014 and for the year ended December 31, 2013:

 

     Six Months
Ended

June 30
    Fiscal Year
Ended December 31,
 
     2014     2013  
     (unaudited)  

Interest expense

   $ 28,553      $ 7,296   

Less amortization of debt discounts for indebtedness issued prior to senior unsecured notes

     (842     (561
  

 

 

   

 

 

 

Non-GAAP Consolidated Interest Expense

   $ 27,711      $ 6,735   
  

 

 

   

 

 

 

 

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Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Exchange Risk

We receive all of our revenue in U.S. dollars, and we pay substantially all of our expenses in U.S. dollars. However, we incur some of our expenses in other currencies, primarily the Euro and the Singapore dollar, and are subject to some foreign currency exchange risk.

The portion of our business conducted in other currencies could increase in the future, which could expand our exposure to losses arising from currency fluctuations. Because we currently receive all of our revenue in U.S. dollars and pay substantially all of our expenses in U.S. dollars, a change in foreign exchange rates would not have a material impact on our results of operations.

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 due to many factors, including U.S. monetary and tax policies, U.S. and international economic factors and other factors beyond our control. Four of our long-term third-party debt instruments have floating interest rates. We are exposed to changes in the level of interest rates and to changes in the relationship or spread between interest rates for our floating rate debt. Our floating rate debt will require payments based on a variable interest rate index such as LIBOR. Therefore, increases in interest rates may reduce our net income by increasing the cost of our debt without any corresponding proportional increase in rents or cash flow from our leases (unless the leases are also floating rate). However, we seek to mitigate our floating interest rate risk on long-term debt by entering into fixed pay interest rate derivatives, as appropriate. Additionally, substantially all of our debt under our PDP Facilities is short-term. Therefore, we believe any change in LIBOR rates will not have a material impact on our results of operations.

We fund the acquisition of our aircraft primarily with a combination of long-term fixed rate secured credit facilities or long-term variable rate secured credit facilities with corresponding interest rate swaps. The terms of these facilities generally match the length of our leases to mitigate our interest rate and refinancing risk. As of June 30, 2014, exclusive of our PDP Facilities, 87.3% of our debt is either fixed rate or synthetically fixed using interest rate swaps and the weighted average remaining term of our debt was 8.2 years and, we had $271.5 million in floating rate debt not fixed by a corresponding interest rate swap. If our composite interest rate were to increase by 1%, we would expect to incur additional interest expense on our existing indebtedness as of June 30, 2014, of approximately $2.7 million (excluding the effect of capitalized interest) on an annualized basis, which would negatively affect our financial condition, cash flow and results of operations.

Liquidity Risk

Liquidity risk arises from the general funding needs of our activities and in the management of our assets and liabilities.

Counterparty Credit Risk

Credit risk relates to the risk of loss resulting from non-performance or non-payment by counterparties pursuant to the terms of their contractual obligations. We monitor and manage credit risk through credit policies. Risks surrounding counterparty performance and credit could ultimately impact the amount and timing of expected cash flows. We seek to mitigate counterparty risk by having a diversified portfolio of counterparties.

 

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INDUSTRY

Air Transportation Industry

Commercial aviation is a critical component of the global economy, supporting an estimated 58.1 million jobs globally and contributing $2.4 trillion to the global economy, according to AVITAS. In 2013, 3.1 billion passengers flew on more than 25,000 commercial aircraft. According to ICAO and Airbus, demand for air transport is strongly correlated to economic activity, and has grown steadily at a CAGR of 5.8% per year, roughly 1.5 times the world GDP growth rate of 3.1% over the past 40 years. Global passenger traffic demand, as measured in revenue RPKs, which equals one kilometer flown by a paying passenger, has about doubled every 15 years since 1981 and is expected to double again in the next 15 years according to Airbus. Many factors have contributed to air transport’s more rapid growth rate than that of global GDP, including: (i) expanding urban populations, (ii) the development of an emerging markets middle class with discretionary income, (iii) greater globalization and cross-border economic activity and (iv) the rise of low cost carriers. We believe the consistency of these trends over a long period of time support the stable growth profile of the industry going forward.

Worldwide passenger traffic demand has generally also proved robust and resilient to exogenous shocks. RPKs have declined in absolute terms on only three occasions in modern aviation history, by 3.3% in 1991 (following the 1990 oil price shock, early 1990s recession and the first Gulf war), 2.1% in 2001 (following the events of September 11, 2001 and the recession that followed), and 2.4% in 2008 (following the global financial crisis of 2007-2008). Traffic recovered to above pre-downturn levels within one year after the 1990 and 2007-2008 declines and within two years after the 2001 downturn.

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 2014 Global Market Forecast (“GMF”) predicts that RPKs will grow at an average of 4.7% per annum between 2013 and 2033. Boeing in its 2014 Current Market Outlook (“CMO”) projects 5.0% average annual RPK growth between 2013 and 2033. The chart below shows the historical and forecasted growth in air travel as measured in trillions of RPKs compared to the historical growth in indexed real GDP from 1973 to 2033.

Air Travel a Strong Growth Market

 

LOGO

Source: Airbus Global Market Forecast 2014 - 2033.

 

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Aircraft Demand Forecast

According to Airbus, the global commercial aircraft fleet (defined as passenger jets with more than 100 seats and freighter aircraft) is expected to approximately double in size from 2014 to 2033, growing to 37,500 aircraft. Airbus forecasts that the supply of new commercial aircraft will total approximately 31,400 units during this period, approximately 10,000 of which will replace in-service aircraft and 12,400 of which represent incremental growth. The advent of efficient, new-technology widebody aircraft, which are unique in their combination of payload, range, operating capabilities and the ability to fly long-haul missions economically, is also accelerating the retirement of older, less fuel-efficient aircraft. Increased fuel prices and the growing international movement toward regulating and reducing levels of greenhouse gas emissions widen the operating cost differential between newer and older aircraft because the use of new technology aircraft can make a significant difference in total fuel consumption and carbon emissions.

Projected Commercial Aircraft Fleet Growth: OEMs 20 Year Forecasts

 

LOGO

Source: Airbus Global Market Forecast 2014; Boeing Current Market Outlook 2014.

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

 

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According to ICF, the most popular models of small and medium widebody aircraft currently in production include the Boeing 777, Boeing 787 Dreamliner, Airbus A330, and, imminently, the Airbus A350. While small and medium widebody aircraft represent 14% of the 2013 in-service fleet excluding regional jets and turboprops, they represent 23% of the future order book by aircraft count as of December 31, 2013 according to Flightglobal Ascend, which would represent a significantly greater percentage by value or cost. Boeing forecasts that $2.3 trillion of the $5.2 trillion demand for new aircraft over the next 20 years is expected to be in small and medium widebody models, representing 44% of the value of global airplane deliveries over this period. Boeing forecasts growth in small and medium widebody fleets between 2013 and 2033 of 133% each, respectively, representing faster fleet growth than other aircraft categories or commercial passenger aircraft overall as shown in the forecasts in the charts below.

Boeing Forecast by Type

 

           New Deliveries  
     2013      2033      % Change     Aircraft      $ billions  

Large widebody

     740         790         7     620       $ 240   

Medium widebody

     1,580         3,680         133     3,460         1,160   

Small widebody

     2,390         5,570         133     4,520         1,140   

Single aisle

     13,580         29,500         117     25,680         2,560   

Regional jets

     2,620         2,640         1     2,490         100   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

     20,910         42,180         102     36,770       $ 5,200   

Source: Boeing Current Market Outlook.

Note: Small widebody aircraft include aircraft with two aisles and 230 to 340 seats in a two class configuration or 200 to 300 seats in a three class configuration; medium widebody aircraft include aircraft with two aisles and 340 to 450 seats in a two class configuration or 300 to 400 seats in a three class configuration; large widebody aircraft have more than 400 seats in a three class configuration.

Boeing and Airbus expect the majority of the demand for these widebody models to come from emerging markets, in particular, the Asia Pacific and Middle East regions in which we focus. The following table shows Boeing’s delivery forecast from 2013 to 2033 broken down by size category and by region.

Boeing Delivery Forecast Between 2013 and 2033 by Region (2013 dollars in billions)

 

     Regional
jets
     Single-
aisle
     Small
widebody
     Medium
widebody
     Large
widebody
     Total  

Asia Pacific

   $ 10       $ 960       $ 490       $ 480       $ 80       $ 2,020   

Europe

     10         600         220         190         20         1,040   

North America

     60         490         140         170         10         870   

Latin America

     10         230         90         10         0         340   

Middle East

     1         130         120         270         120         640   

C.I.S.

     10         80         30         20         10         150   

Africa

     2         70         50         20         0         140   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

World

   $ 100       $ 2,560       $ 1,140       $ 1,160       $ 240       $ 5,200   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Source: Boeing 2014 Current Market Outlook.

Aircraft Demand Drivers

The demand for both widebody and narrowbody aircraft is driven by (i) the growth in demand for new aircraft, representing growth in the overall market, and (ii) demand to replace the supply of retiring aircraft that have reached the end of their useful life.

 

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Growth in Demand for New Aircraft: Underlying Air Traffic Macro-Economic Drivers

Many factors have contributed to the growth of air transport at rates faster than global GDP, including expanding urban populations, the rise of an emerging markets middle class with income available for discretionary spending on air travel, greater globalization and cross-border economic activity and the liberalization of air transportation that has permitted the rise of low cost carriers.

According to the United Nations, Department of Economic and Social Affairs (“DESA”), the world’s population is expected to grow to 8.1 billion people in 2025, marked by strong and rapid urbanization and middle-class growth in emerging markets, particularly in Asia. In 2032, it is expected that approximately 61% of the world population will live in a city compared to approximately 52% in 2012. DESA anticipates the number of cities will increase between 2012 and 2025 by more than 50%, with 96 cities of over five million inhabitants, together representing 23% of the urban population, up from 18% in 2012.

Based on a study published by the OECD (The Emerging Middle Class in Developing Countries—Working Paper No. 285), the global middle-class is expected to grow by approximately 59% between 2013 and 2023 and by approximately 128% between 2013 and 2033. Most of the growth is expected to come from emerging economies, which will grow by approximately 97% between 2013 and 2023 and by approximately 215% by 2033. The charts below show (i) the historical and forecast shift in the share of world GDP between developing, emerging and advanced economies from 1992 to 2032 and (ii) the forecasted growth of the global middle class from 2013 to 2033.

 

Emerging Economies % of World GDP

 

  

Global Middle Class(1) (Millions of People)

 

LOGO

   LOGO
Source: IHS Global Insight, Airbus.   

Source: Kharas and Gertz (OECD), Airbus.

(1)    Households with daily expenditures between $10 and $100 per person (at PPP).

Emerging market populations have historically had relatively less discretionary income to spend on air travel and, as a result, fewer aircraft per million people than developed countries. The low aircraft penetration in emerging markets, such as Brazil, Russia, India and China, represents a significant opportunity as these emerging markets approach penetration levels closer to mature markets like North America and Europe. Accordingly, Airbus forecasts that RPKs in the Middle East, Latin America and Asia Pacific will grow at CAGRs of 7.1%, 5.4% and 5.7%, respectively through 2033. By 2033, the Asia Pacific region is expected to have nearly twice the level of airline traffic of North America. The following tables highlight (i) the low aircraft penetration in emerging markets by showing the number of aircraft per million people by region and (ii) compares the growth in air traffic as measured in RPKs by region.

 

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Aircraft per Million People

 

  

Growth in Air Traffic by Region

 

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Source:Ascend.

  

Source:Airbus Global Market Forecast.

(1)    CIS represents Commonwealth of Independent States.

The relationship between air travel demand and GDP per capita is logarithmic. 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. Once an economy reaches an inflection point, the demand for air travel typically increases very rapidly. Market penetration remains low in many emerging markets, but the frequency of travel is expected to rise sharply as disposable income increases. Currently, 80% of the world’s population lives in countries that generate only 25% of flights.

The following chart illustrates the relationship between GDP and trips per capita by country.

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

 

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Source: Airbus Global Market Forecast.

 

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

Demand to Replace the Retiring Aircraft: Replenishing an Aging Fleet with Fuel Efficient Aircraft

The advent of efficient, new-technology widebody aircraft, which are unique in their combination of payload, range, operating capabilities and ability to fly long-haul missions economically are expected to increase the retirement of older less fuel efficient aircraft. Airlines typically look to order larger aircraft in extended periods of high fuel costs to reduce seat mile costs. Increased fuel prices and the growing international movement toward regulating and reducing levels of greenhouse gas emissions widen the operating cost differential between newer and older aircraft as the use of new technology aircraft can make a significant difference in total fuel consumption and carbon emissions. 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 should support their residual value retention. Currently, the jet fuel spot price has remained elevated for several years, and the volatility in prices has declined, bolstering longer term expectations of the price of jet fuel that contribute to fleet planning decisions. The charts below compare (i) the evolution of fuel costs as a share of operating expenses; and (ii) the jet fuel spot price trend overtime, including the one and two standard deviation movements in the spot price.

 

Evolution of Fuel Cost as a

Share of Operating Expenses

 

  

Jet Fuel Spot Price Overtime

 

LOGO    LOGO
Source: EIA and IATA forecast, June 2014.    Source: EIA.

As airframe and engine technologies and operational capabilities continue to improve, twin-engine widebody aircraft are increasingly supplanting their four-engine equivalents due to their lower fuel burn and maintenance costs and exceptional reliability. When it first entered service in 1970, the Boeing 747 was unmatched in terms of payload and range capability, and for many years was the dominant widebody aircraft on long-haul, dense routes. However as newer, more-capable large twin-engine widebody aircraft have entered service over the past 15 years, they have taken increasing market share from four-engine widebody aircraft such as the Boeing 747 and Airbus A340 with their relatively superior operating economics.

 

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According to AVITAS, the average age of the Boeing 747 fleet of 335 aircraft is 20 years old, and the average age of the Airbus 340 fleet of 300 aircraft is 13 years old. The tables below show (i) the age distribution of the global fleet today; and (ii) the number and proportion of the global fleet that is over 20 years old over time:

 

Age Distribution of Global Fleet

 

  

Fleet Over 20 Years Old Over Time

 

LOGO    LOGO
Source: Ascend Flightglobal.    Source: Ascend Flightglobal.

As four engine widebody aircraft are being retired, demand for new generation and next generation aircraft has increased to fill the replacement need. We believe that trend will accelerate going forward.

Demand for Widebody Aircraft

We believe the macro-economic drivers underpinning the overall growth in demand for new aircraft will contribute to the demand for fuel-efficient twin-engine widebody aircraft in particular by increasing demand for long-haul travel on routes for which these aircraft are best-suited.

 

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Impact of Long-Haul Travel on Demand

Since 1990, long-haul traffic has grown at a faster pace than short-haul traffic. From 1990 to 2012, long-haul traffic, as measured in offered available seats, grew at a 4.2% average annual rate compared to a 2.9% average annual rate for short-haul traffic. The chart below shows the historical growth in long-haul as compared to short-haul travel, as measured in available seat kilometers (“ASKs”) and indexed from 1990 to 2012.

Long-Haul vs. Short-Haul Capacity Growth (ASK as Indexed)

 

LOGO

 

 

Source: Airbus Global Market Forecast.

Note: Long-haul traffic includes flights with distances larger than 2,000nm; excludes domestic traffic.

Due partly to airline mergers, the number of airlines operating long-haul routes has declined since 2005, resulting in an increase in ASKs per long-haul airline of 50% between 2002 and 2012 according to Airbus. We believe the trend towards relatively fewer airlines has made these routes more profitable for the airlines that operate them. While the number of seats offered per city pair has declined for short-haul flights, the average number of seats offered per long-haul city pair has risen steadily as larger aircraft are flown on the same routes. We believe the increasing number of seats offered per city pair demonstrates the trend, particularly since 2001, towards larger aircraft to meet long-haul demand rather than a proliferation of more routes serviced with smaller aircraft as with short-haul traffic. The chart below shows the rise in the average number of seats offered by city pair for long-haul as compared to short-haul travel from 1972 to 2012.

 

LOGO

 

Source: Airbus Global Market Forecast.

Note: Long-haul traffic includes flights with distances larger than 2,000nm; excludes domestic traffic.

According to ICF, the rise in an urban middle class with income available for discretionary expenditures is expected to continue to drive relatively greater demand for long-haul travel between

 

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major urban centers. According to Airbus, in 2013, out of approximately 850 cities handling long-haul passengers in their airport(s), only 42 cities handled more than 10,000 long-haul passengers per day (“a mega city”), most located in the northern hemisphere. Approximately 51% of the total world-wide long-haul traffic was between mega cities, and approximately 94% of world-wide long-haul traffic involved a mega city at origin or destination. By 2033, Airbus forecasts that the number of mega cities will grow to 91, with particularly rapid growth in South America and Africa. Approximately 75% of long-haul travel is expected to be between these mega cities and approximately 99% of long-haul traffic will involve a mega city at origin or destination. As a result of the growth in the major urban centers for international travel, Airbus forecasts that long-haul traffic will increase from approximately 0.8 million to approximately 2.2 million passengers per day.

Airlines have responded to the increasing development of long-haul routes with orders for larger aircraft according to ICF. We believe these fuel-efficient, twin-engine widebody aircraft are best-suited for these long-haul routes because they operate at a lower CASM as a result of the economies of scale inherent in flying a larger aircraft.

Recently established LCCs focusing on the longhaul market have also added to the demand for widebody aircraft, particularly 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 are launching as subsidiaries of major Asia Pacific or European carriers, such as Singapore Airlines’ Scoot, Qantas Group’s JetStar or Lufthansa’s WINGS.

Impact of Airport Slot Constraints on Demand

Airlines have also sought to increase the seating capacity, or gauge, of aircraft in part to cope with the lack of available slots at major airports. Slot constraints limit airlines’ ability to grow revenue, and they force airlines to spread costs over a smaller number of flights. In response, we believe airlines will continue to demand more twin-engine widebody aircraft to reclaim CASM economics. IATA estimates that approximately 289 airports are presently designated as Level 2 or Level 3 slot-constrained, adding impetus to both short-haul and long-haul average aircraft capacity and thus seats per departure over time. Level 2 airports are designated as those with the potential for congestion, and level 3 airports are slot controlled and allocated by airport or government authority. The charts below show (i) slot constrained airports by region and (ii) seats per departure and average stage length.

 

IATA Slot Constrained Airports

Count by region

 

  

Seats per Departure and Avg. Stage Length

 

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Source: IATA.   

Source: IATA, OAG as of June 2014.

Note: Includes turboprop, regional jet, narrowbody and widebody aircraft.

 

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Aircraft slot constraints, and the rising demand for long-haul travel have combined to increase the average number of seats per departure and the average stage length over the last decade. In each flight, airlines are transporting more passengers further, which requires larger capacity aircraft with the capability to fly longer ranges. The map below shows global airports, indicating slot constraints and total seats flown.

 

LOGO

Source: OAG as of June 2014.

Note: Size of circle corresponds to total 2014 number of seats flown.

Widebody Aircraft Supply

According to ICF, aircraft supply characteristics are as follows:

 

    There is a well-established Airbus and Boeing original equipment manufacturer (OEM) duopoly in both 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.

 

    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.

 

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Commercial Aircraft Order Backlog as a Percent of Active Fleet from 2001 to March 2014

 

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Source: ICF Analysis, March 2014.

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.

The commercial jet fleet can be categorized by size, namely widebody, narrowbody, and regional jet aircraft.

 

    Widebody: Widebody aircraft (also called “twin-aisle” aircraft) are large aircraft with two passenger aisles on one or two cabin floors and a typical capacity of 200 to 600 passengers. This type of aircraft is used for the commercial transport of passengers and cargo. Widebody aircraft are further categorized according to relative size, typically small, medium and large or very large according to their two, three or four class cabin configuration. Boeing defines small widebody aircraft as seating between 200 to 340 passengers while medium widebody aircraft are defined as seating between 340 to 400 passengers. Large three-to-four class aircraft are defined as seating in excess of 400 seats.

 

    Narrowbody: Narrowbody aircraft (also called “single-aisle” aircraft) typically have a single floor fuselage cabin with a normal capacity of 100 to 200 passengers.

 

    Regional Jet: Regional jet aircraft are large single-aisle short-haul regional aircraft powered typically by two turbofan engines with a typical capacity of 50-100 passengers.

The widebody commercial jet fleet can also be categorized by three broad generational classes (excluding “old-generation” aircraft predominately produced in the 1960s and 1970s):

 

    “Mid-generation”: Aircraft with peak production in the 1980s and early 1990s. Widebody aircraft in this group include the four engine Boeing 747-400 and Airbus A340 and the two engine Boeing 767, Airbus A300, Airbus A310, and three-engine McDonnell Douglas MD-11. These aircraft will increasingly be removed from their primary application/operators but will continue to maintain a presence among secondary/tertiary passenger operators or will be converted to freighter aircraft in limited numbers.

 

    “New-generation”: Current production widebody aircraft types include the Airbus A330 and the Airbus A380. Boeing’s new-generation aircraft in production include the four engine Boeing 747-8 and the two engine 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.

 

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    “Next-generation”: Re-engined aircraft such as the recently launched Airbus A330neo and Boeing 777X aircraft families that are expected to offer fuel burn improvements of around 15% on a per seat basis compared to new-generation aircraft. In addition, this category includes the Airbus A350 and Boeing 787 Dreamliner, which are all expected to offer fuel burn improvement of as much as 20% compared to new-generation aircraft.

Moderate levels of new deliveries and order backlogs have increased the market appetite for new twin engine widebody aircraft. Delivery positions for Boeing 787 Dreamliner and Airbus A350 aircraft are unavailable until 2021, shifting additional demand onto new model Boeing 777 and Airbus A330 aircraft. AVITAS believes that given the historically low availability of twin engine widebody aircraft, competition between the secondary market and new aircraft deliveries will be limited. The Boeing 777 and Airbus A330 families have the largest operator bases and largest backlogs in terms of aircraft orders of the widebody aircraft types currently in production. The table below provides an overview of the main widebody aircraft types, including those currently in-production and those anticipated to come into production.

Airbus and Boeing Current Widebody Aircraft Overview(1)(2)

 

LOGO

Source: OEM Statistics and announcements as of December 2013; ICF Analysis.

  (1) The number of seats and range of aircraft represent typical two class configuration. The Airbus A380 and Boeing 747 are in typical three-class configuration.
  (2) Considers current and announced future production rate changes. All other rates from OEM announcements except Airbus A350 from The Airline Monitor.

Widebody Aircraft Market

Widebody Aircraft Are Generally More Profitable for Airlines

In general, we believe widebody aircraft are more profitable for airlines to operate compared to narrowbody aircraft due to economies of scale and fuel efficiencies from higher seat capacity, a higher percentage of premium seats for a given aircraft, and the generally lower competition from LCCs on long-haul routes. The CASM for a narrowbody aircraft is higher than that for an equivalent technology widebody aircraft due to the inherent economies of scale in flying a larger aircraft. Over the past 10 years, the percentage of premium seats on widebody aircraft has ranged from 11.4 to 13.3 percent while narrowbody aircraft premium seats have ranged from 3.5 to 7.2 percent. Also, on the long-haul routes in which widebody aircraft are often used due to their greater range, LCCs have not historically been prevalent competitors to the well-established, flagship airlines. Because there is typically less competition on these routes, we believe airlines are able to maintain better relative seat economics compared to the more competitive short-haul routes on which narrowbody aircraft are more commonly used.

 

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Percentage of Premium Seats by Aircraft Type

 

LOGO

Source: OAG as of June 2014.

Leases on Widebody Aircraft Have Higher Renewal Rates

Airlines typically invest significantly in long-haul aircraft with a high percentage of premium seats to configure those aircraft to their individual brand and specifications. Due to the investment placed into the aircraft, airlines are more likely to renew a lease for a widebody aircraft than to renew a lease for a narrowbody aircraft. When an airline renews an aircraft lease, there is typically no downtime and a higher renewal rate than might typically be obtained when an aircraft is remarketed. The chart below compares the percentage of narrowbody and widebody aircraft that are on lease with the original lessee for different aircraft ages.

Percentage of Aircraft on Lease with the Original Lessee

 

LOGO

Source: Flightglobal ACAS—June 2014.

Note: Only passenger, freighter, combi, and QC aircraft that entered service after 1990 and have since changed operators.

 

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Widebody Aircraft Leasing Industry

Market Overview

In conjunction with the growth of the overall global commercial aircraft fleet, the role of operating lessors has expanded significantly over the last 40 years. Since 1980, the percentage of the global active commercial aircraft fleet under operating lease has increased from less than 2% to 40% by 2014, and Boeing Capital forecasts that operating leasing will account for 50% of the in service fleet by the end of this decade. Operating leases are an attractive financing alternative because they allow airlines to minimize capital outlay requirements and eliminate residual value risk. In addition, operating leases enhance airlines’ fleet planning flexibility, provide availability to advantageous delivery positions and access to current technology.

Aircraft lessors play an important intermediary role that also benefits the OEMs as lessors are a significant direct buyer of new aircraft and provide a stable customer base for the OEMs. Commanding a sizeable position in the order books of both Airbus and Boeing, 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, lessors establish aircraft component, interior, and engine standards that influence the industry and result in a more liquid trading market for these “standard” aircraft.

From 1980 to 2013, the rate of lessor ownership of twin-engine widebody aircraft has increased from 6 percent to 32 percent. Despite the growth in the twin engine widebody market, the rate of lessor ownership of twin engine widebody aircraft has grown less rapidly than for narrowbody aircraft. Between 2000 and 2013, the number of twin engine widebody aircraft owned by lessors has grown at a 6.8% annual rate compared to an 8.4% annual rate for narrowbody aircraft.

Today, there are still few, if any, other lessors focused primarily on widebody aircraft due in part to higher capital requirements, resulting in what we believe is a less competitive market and creating opportunities for lessors that focus on widebodies. Narrowbody aircraft have approximately a 46% rate of lessor ownership as compared to approximately 32% for twin engine widebody aircraft. AVITAS believes that the trend toward aircraft leasing will continue as airlines are tending to concentrate on transporting passengers rather than aircraft ownership. The charts below compare the growth and lessor ownership of aircraft overall as well as widebody and twin engine widebody aircraft.

 

Narrowbody In-Service Aircraft(1)    Twin Engine Widebody In-Service Aircraft(2)

 

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LOGO

 

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Source: Ascend Flightglobal.

Note: Includes only Boeing and Airbus passenger aircraft as of December 31, 2013.

(1)       Narrowbody aircraft includes Boeing 707, 717, 727, 737, 757 and Airbus A320 family.

(2)       Twin engine widebody aircraft includes Boeing 767, 777, 787 Dreamliner, Airbus A300, A310, A330 and A350.

 

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We believe there are significant barriers to entry in the widebody leasing market including: large purchase prices, significant required pre-delivery payments, limited delivery slots due to long OEM backlogs, and airlines’ preference to work with experienced widebody lessors.

 

    According to ICF, the higher purchase price of widebody aircraft relative to narrowbody aircraft has, in part, caused the widebody aircraft leasing sector to be less competitive than the narrowbody sector historically. The purchase price for widebody aircraft often exceeds $100 million per aircraft as compared to $40 million for a current generation narrowbody.

 

    Prior to delivery, OEMs often require significant pre-delivery payments to be made at points well in advance of an aircraft’s delivery. We believe that many lessors have not participated in the widebody leasing market due to the size and duration of this capital commitment.

 

    Both Boeing and Airbus have significant backlogs for deliveries of new widebody aircraft, which limits the ability of potential new competitors to source the aircraft to enter the widebody leasing market. As of June 30, 2014, Boeing and Airbus had a backlog of over 2,000 small and medium widebody aircraft. OEMs have less ability to ramp up production of widebody aircraft relative to narrowbody aircraft, leaving potential new market entrants with fewer opportunities to secure a forward order of widebody aircraft.

 

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Widebody aircraft are predominately operated by well-established airlines, who typically prefer to work with lessors that have experience acquiring and leasing widebody aircraft, limiting the ability of new lessors to enter the widebody leasing market. We are the only aircraft lessor primarily focused on twin-engine passenger widebody aircraft, whereas other major aircraft lessors focus on narrowbody aircraft as their core asset class. We believe our focus on modern, in-production twin-engine widebody aircraft provides us with a competitive advantage in this rapidly growing and attractive market segment. We believe that leasing twin engine widebody aircraft has several distinct advantages over leasing narrowbody aircraft, including: (i) lessees of stronger credit quality, (ii) higher lease rates and longer lease terms resulting from less market competition, (iii) a greater propensity for lease extensions and renewals due to airlines’ tendency to invest significantly in the configuration of the aircraft, (iv) more stable OEM production and (v) better long-term growth potential due to expected long-haul traffic growth and airlines’ demand for larger aircraft. We believe our focus on a relatively more attractive asset type will benefit our company as our assets retain greater demand with better return characteristics over the long term. The table below outlines our views regarding the advantages in leasing widebody aircraft relative to more narrowbody aircraft in today’s market.

 

    

Narrowbodies

  

Twin Engine Widebodies

Aircraft Types

Competition

   Boeing 757, Airbus A320 family, Boeing B737 family. Highly competitive market    Boeing 777, Boeing 787 Dreamliner, Airbus A350, Airbus A330. Less competition from other lessors, which typically focus on narrowbody aircraft

Lessee Profile

   Includes greater proportion of start-up low cost carriers and regional airlines (with 69.6% in operation more than 20 years)    Typically flag carriers and well-established airlines that operate long-haul international routes (with 89.2% in operation more than 20 years)
Aircraft Importance to Lessee    Short-haul routes that are sometimes less core to route network or profitable    Typically operate on long-haul routes that are important to maintain; aircraft are key to the lessee’s fleet

Operating Costs

   Fewer seats drives higher CASM    With capacity in excess of 250 seats widebodies have lower CASM

Lease Rates

   Typically lower than widebody lease rates    Typically higher than narrowbody lease rates

Lease Terms

   Medium term leases averaging between six and eight years    Longer initial lease terms are common, ranging between 10 and 12 years

Renewal Rates

   Lease renewals less frequent due to significant spot market capacity    Typically higher renewal rates with original lessees

New Technology

   Airbus A320neo and Boeing 737 MAX re-engining programs will replace current engine option aircraft    Airbus A330 and Boeing 777 aircraft currently have a stable place in the market

The life cycle of an aircraft creates an approximately 25-year investment horizon characterized by varying risks and rewards over time. This dynamism allows the leasing market to be segmented as different lessors look to meet varying strategic objectives by finding market niches and areas of competitive advantage. Some lessors focus almost entirely on acquisition of new equipment directly from the manufacturers and frequently sell their assets after five to seven years or less. Others focus primarily on purchasing used equipment at depreciated levels and targeting those customers whose operation does not require newer-generation aircraft. Another segment of the operating leasing community purchases new or used aircraft (with or without leases attached, or via sale- leasebacks) and manages them throughout the aircraft life cycle.

 

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Of the major aircraft leasing companies, relatively few focus primarily on widebody aircraft. While many aircraft leasing companies invest in widebody aircraft, we believe almost all do so to a significantly lesser extent than narrowbody aircraft. According to ICF, we are the eighth largest aircraft leasing company for widebody aircraft as of June 30, 2014 based on the current market value of our owned and committed aircraft portfolio. The table below shows the top 20 lessors ranked by the value of their owned and managed widebody fleet.

Top 20 Lessors Ranked by the Value of their Owned and Managed Widebody Fleet, June 2014

 

               Current Fleet     Ordered     Total  
Rank    Lessor   Age(1)     Units     Value     Units     Value     Units     Value  

1

   AerCap     8.6        314        $13.1        95        $12.2        409        $25.3   

2

   Air Lease Corporation     4.1        32        $2.2        89        $13.3        121        $15.5   

3

   GECAS     7.7        182        $8.3        30        $4.7        212        $13.0   

4

   CIT     5.4        41        $1.9        45        $5.8        86        $7.7   

5

   BBAM     3.6        54        $4.1        4        $0.4        58        $4.5   

6

   Amedeo     0.0        0        $0.0        20        $4.1        20        $4.1   

7

   BOC Aviation     3.5        41        $3.6        0        $0.0        41        $3.6   

8

   Intrepid(2)     1.8        15        $1.5        17        $2.0        32        $3.6   

9

   Doric     4.6        27        $3.4        0        $0.0        27        $3.4   

10

   ALAFCO     3.2        5        $0.3        20        $2.8        25        $3.1   

11

   Aircastle     7.7        62        $2.8        0        $0.0        62        $2.8   

12

   Avolon     2.8        13        $1.3        10        $1.2        23        $2.5   

13

   DAE Capital     4.4        23        $2.0        3        $0.5        26        $2.4   

14

   AWAS     7.8        50        $1.9        2        $0.3        52        $2.2   

15

   CDB Leasing     4.2        29        $2.0        0        $0.0        29        $2.0   

16

   VEB-Leasing JSC     4.1        28        $1.7        0        $0.0        28        $1.7   

17

   ICBC     4.5        21        $1.7        0        $0.0        21        $1.7   

18

   Guggenheim     5.5        31        $1.6        0        $0.0        31        $1.6   

19

   Novus Aviation     2.9        16        $1.3        0        $0.0        16        $1.3   

20

   Jackson Square     2.4        10        $1.2        0        $0.0        10        $1.2   

Source: Ascend, June 2014 (fleet data except Intrepid), Company management (Intrepid fleet data) and ICF (value and analysis).

Note: Values for future year deliveries at 2014 level. Values for delivered aircraft at expected value (full life for new aircraft, transitioning to half-life for used aircraft).

(1) Value-weighted average age of current widebody fleet.
(2) Current Fleet excludes one Airbus A321-200 aircraft on lease to EVA Airways, and Ordered excludes two Boeing 777-300ER aircraft that are subject to reconfirmation as described under “Prospectus Summary—Recent Developments.”

 

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Publicly traded lessors and lessors with financial information in the public domain include AerCap Holdings N.V., Aircastle Limited, Air Lease Corporation, Avolon Holdings Limited and Fly Leasing Limited. We believe that young widebody aircraft command longer lease terms and higher lease rates than narrowbody aircraft or older aircraft. The table below compares the fleets of these leasing companies based on their average age, the proportion that are composed of widebody aircraft, their remaining lease term, annual basic lease rent as percentage of average aircraft gross book value (“Annual Yield”) and total contracted rents as a percentage of net book value.

 

     As of June 30, 2014  
     Public     Weighted
Average
Age
     Annual
Yield(1)
    Weighted
Average
Remaining
Lease Term
    Widebodies
% of Total
Owned by
Count
    Total
Contracted
Rent/ Net
Book Value
 

Intrepid

     No        1.8         11.1 %(2)      10.0        93.8     113.4

Avolon

     No        2.4         10.0 %(3)      6.8        9.5     73.6

Air Lease

     Yes        3.6         10.6     7.2        15.0     81.5 %(4) 

AerCap

     Yes        7.6         NM        5.5        22.0     66.1 %(4) 

Fly Leasing

     Yes        8.7         10.3     4.3        6.8     43.3 %(4) 

Aircastle

     Yes        8.6         10.6     4.9        39.2 %(5)      58.0

 

(1) Annual Yield shown as basic lease rent, excluding overhaul rent, for the twelve months ended June 30, 2014 over average gross book value of aircraft from June 30, 2013 to June 30, 2014.
(2) Due to the rapid growth of Intrepid’s platform, Annual Yield shown as annual total contracted revenue over end of period gross book value at June 30, 2014.
(3) Annualized lease revenue divided by average gross book value from December 31, 2013 to June 30, 2014.
(4) As of December 31, 2013.
(5) Includes categories of widebodies and freighters.

Among the publicly traded lessors and lessors that report their financial information publicly, those with younger aircraft and higher widebody concentrations tend to have longer lease terms and higher lease rates. Among this group, Intrepid is the only lessor that primarily focuses on widebodies, has the youngest fleet, the longest lease terms and the highest lease rates as a percentage of gross book value. Due to its long lease terms and higher lease rates, Intrepid is also the only leasing company that has more contracted revenue than the net book value of its assets.

Adding impetus to the growing widebody leasing market are the increasing liquidity and remarketing opportunities, with more operators flying widebody aircraft than at any time over the last 40 years. With respect to market liquidity, we believe these aircraft represent the most in-demand aircraft, with over 101 distinct operators and customers for the A330 and 41 for the 777-300ER as of July 30, 2014. Given the history and relative liquidity of the secondary market for these aircraft, lessors have become more comfortable in reconfigurations of these model types.

More recently, the OEMs have consulted with financiers, lessors and airlines on new widebody designs to achieve higher commonality, standardization and more economic reconfiguration costs. New widebody types slated for production such as the Airbus A350 XWB and Boeing 787 Dreamliner family aircraft have the appeal of increased standardization and ease of reconfiguration. Specific areas of standardization pursued by the OEMs include limiting the number of engine options, cabin interior and seating options, and operating weight options, leading to increased market liquidity and reduced reconfiguration costs at lease end. According to ICF, increased new aircraft standardization and improved market liquidity for Airbus A330, Airbus A350, Boeing 777 and Boeing 787 Dreamliner aircraft is expected to reduce residual value risk and make the widebody leasing market increasingly attractive. According to ICF, it is likely that the share of the worldwide widebody aircraft fleet on operating lease will increase over time as airlines focus on transporting passengers rather than on aircraft ownership.

 

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Aircraft Leasing Market Cycle

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 residual value that represents the worth of its various components, primarily the engines, airframe material, and certain aircraft parts, which has historically been approximately 15% of the original equipment cost.

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, many factors influence the value of an aircraft to the operator and ultimately determine the purchase price or lease rate the carrier is willing to pay. Young, efficient 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 an airplane may be sold for given the market conditions in effect at the time) rise above and fall below aircraft base values (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).

 

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The index compares average aircraft values for all aircraft types and vintages over time relative to their trend line. The trend line indicates the intrinsic value of an aircraft in a balanced market where supply and demand are equal to the base value for the aircraft composite. The percentage scale on the chart reflects the forecast of values as a percentage relative to the trend line value (which is indicated as 100%).

According to AVITAS, on a composite basis, aircraft values continued to decline through the end of 2012 as Boeing and Airbus expanded production. Based on the value index, current market values are approximately 10% below base values. AVITAS believes that Boeing and Airbus will continue to

 

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increase production in the near term, and passenger traffic will also continue to increase, which AVITAS expects to result in a healthier balance between supply and demand for aircraft during the course of 2014 thereby leading to rising composite aircraft values relative to base values. AVITAS expects that overall aircraft values will return to, and exceed, the base value in 2015 and continue to rise through 2016 and 2017. Since the value index is a composite of all passenger aircraft, certain aircraft, such as younger, more fuel-efficient types and models, may outperform the index.

Given the relatively more liquid market of operating leasing (compared to aircraft trading), aircraft operating lease rates generally represent market-clearing prices that reflect current supply and demand. Lease rates depend on the aircraft type, aircraft age, aircraft specification, type of lease, interest rates, tax liabilities, lease term, value of the aircraft at lease inception, the forecasted residual value of the aircraft at lease termination, and the credit quality of the lessee. Although lease rates are closely correlated to global economic conditions, rates for a particular constant-age aircraft generally hold relatively steady in nominal terms for an extended period. Also, 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. However, lease rates, expressed in dollar terms, that are contracted when current market values exceed base values are likely to be higher than lease rates contracted when base values exceed current market values, and vice versa.

 

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BUSINESS

Overview

We are a global leasing company that acquires and leases passenger aircraft to a diverse group of airlines throughout the world. Our strategy is to focus on young, modern, fuel-efficient twin-engine widebody aircraft with long-term leases to well-established airlines. We intend to invest primarily in these aircraft during the first one-third of their useful life while maximizing economic returns. We believe that a substantial opportunity exists to capitalize on the high level of demand for long-haul international air travel and airlines’ preference for larger gauge aircraft. We are the only aircraft lessor primarily focused on the twin-engine widebody passenger aircraft market, which we believe is a relatively less competitive lease market segment that has substantial latent demand. Our fleet has grown from $315.8 million to $1,674.9 million in net book value in the twelve months ended June 30, 2014. We seek to enter into long-term leases, typically ranging from 10 to 12 years, at attractive returns. All of our leases are denominated in U.S. dollars and are “triple-net” operating leases, which means that the lessee is required to pay for all maintenance and overhaul, refurbishment, insurance, taxes and all other aircraft operating expenses during the lease term.

We follow a diversified approach to aircraft acquisitions designed to retain flexibility during changing market conditions. We acquire aircraft from our committed orderbook with original equipment manufacturers (“OEMs”) such as Airbus and Boeing, from airlines through sale-leaseback transactions and from other lessors through trading transactions. Since our inception, we have acquired six aircraft with an aggregate purchase price of $718.4 million from trading transactions with other aircraft lessors (not including sale-leaseback transactions), representing 42% of our gross aircraft assets as of June 30, 2014. These transactions were funded through a combination of secured financings of $479.0 million and cash on hand. Such transactions include the purchase from an aircraft lessor of either single or multiple aircraft, which are already on lease or committed for near-term delivery on lease, by such aircraft lessor and therefore typically generate cash flow more quickly than aircraft acquired through OEM forward orders. We evaluate opportunities within each of these acquisition channels so that we will not be dependent on any single channel to maximize our ability to deploy our capital on acquired aircraft with attractive returns. By remaining flexible between acquisition channels, we believe we are well-positioned to be opportunistic in finding transactions that drive growth at attractive financial returns at different points in the aviation cycle. Our senior management team has extensive and long-standing industry relationships that we believe enable us to identify, evaluate and close on aircraft acquisition opportunities that are attractive and not broadly available in the market.

Our owned and committed portfolio includes popular twin-engine widebody passenger aircraft such as the Airbus A330-300 and Airbus A330-200, Boeing 777-300ER and Boeing 787-8 Dreamliner. As of June 30, 2014, we owned 16 aircraft with an aggregate net book value of approximately $1.7 billion, all of which were on lease. Our owned aircraft have an average age of 1.8 years and an average remaining lease term of 10.0 years, weighted by net book value. As of June 30, 2014, we had commitments to purchase 17 new aircraft directly from Airbus and Boeing with an aggregate purchase value of $4.7 billion at current list prices subject to the satisfaction of customary closing conditions, including our ability to secure adequate financing.

Our business model is designed to generate stable and highly visible revenue, earnings and cash flows. Twin-engine widebody passenger aircraft typically attract better lease terms than narrowbody aircraft, including higher lease rates, longer lease durations, and higher lease renewal rates which drive profitability and reduce residual value risk. We believe that lessees of widebody aircraft are more likely to renew their leases at the end of term because these aircraft often form the core of their long-term fleet plan and enjoy regular configuration investments by the lessees over the term of the leases. We fund the acquisition of our aircraft primarily with long-term secured credit facilities that are either fixed rate or synthetically fixed using interest rate swaps, with maturities that generally match those of

 

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our leases to mitigate our interest rate and refinancing risk. As of June 30, 2014, exclusive of our PDP Facilities, 87.3% of our debt is either fixed rate or synthetically fixed using interest rate swaps and the weighted average remaining term of our debt was 8.2 years.

As of June 30, 2014, our owned and contracted aircraft have been placed with a diverse group of 13 airline customers in 11 different countries. Our customers are well-established airlines or flag carriers, some of which are majority owned by governments, and our aircraft are typically used on what we believe are key international or long-haul routes for our customers. Our customers include Air France, Air Namibia, Alitalia, Asiana Airlines, Cebu Pacific Air, China Airlines, Ethiopian Airlines, EVA Airways, LOT Polish Airlines, Philippine Airlines, Sichuan Airlines, Skymark Airlines and Thai Airways International. We will continue to diversify our business by asset type, OEM, customer base and region. We will continue to focus on markets with the greatest growth in demand for air travel and twin-engine widebody aircraft, especially in Asia Pacific, Africa, the Middle East and Latin America.

 

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Source: Ascend Worldwide, data as of June 2014.

Note: Represents the routes on which our aircraft or aircraft of the same or similar models to our aircraft are flown by our customers.

Led by our President and Chief Executive Officer, industry veteran Franklin Pray, we have an experienced and industry-recognized senior management team, which has built our growing global platform and established our market presence with OEMs, airlines and financial institutions worldwide. Our senior management team has significant experience sourcing aircraft directly from Boeing and Airbus, through sale-leaseback transactions with airline customers and through trading transactions with other lessors. For example, Mr. Pray has purchased approximately $18.0 billion at then-current list prices in aircraft from OEMs over the course of his career as a CEO. Our senior management team has access to key decision makers at over 100 airlines globally, enabling us to customize aircraft leases to meet the airlines’ specific needs while securing attractive lease terms and returns. We have developed a robust funding model for twin-engine widebody passenger aircraft through relationships with a diverse group of global banks with significant expertise and lending capacity in aircraft finance.

 

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Our Competitive Strengths

We believe that we are well positioned in an attractive segment of the aircraft leasing market as a high growth platform focused on young twin-engine widebody passenger aircraft. We have several key strengths that provide us with a competitive advantage in our chosen market:

Well-positioned in attractive, twin-engine widebody aircraft market.    We are primarily a twin-engine widebody aircraft lessor. We focus on twin-engine widebody passenger aircraft as we believe it is an attractive market with substantial competitive advantages. The twin-engine widebody aircraft leasing market is attractive to us due to the strong, growing demand from airlines for widebody aircraft as well as the higher barriers to entry created by the more significant investment each aircraft requires and the greater need for strong relationships with the OEMs. The demand for widebody aircraft is growing faster than the demand for narrowbody aircraft due to several favorable drivers, including fuel efficiency, the strategic importance of core long-haul or international routes for airlines, population growth in emerging markets, increasing urbanization and the growing number of slot-constrained airports. Further, twin-engine widebody aircraft have an attractive lease profile resulting from longer-term leases a longer economic useful life and higher lease rate factors. Given the significant investment airlines typically make on cabin accommodations and in-flight entertainment, widebody aircraft are also more likely to be re-leased by airlines at the end of an initial lease term. In addition, airlines focused on operating widebody aircraft often have better credit profiles or are flag carriers in their markets. We believe our OEM orderbook, as well as our expertise in opportunistic portfolio and sale-leaseback transactions and long-standing relationships with OEMs provide us with a competitive advantage in this attractive high growth market.