S-1/A 1 d423903ds1a.htm AMENDMENT NO.11 TO FORM S-1 Amendment No.11 to Form S-1
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As filed with the Securities and Exchange Commission on July 31, 2017

Registration No. 333-200158

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 11

to

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)

 

 

Olaf Sachau

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.

Marcel R. Fausten, 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.

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.

 

 

 


Table of Contents

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                     , 2017.

             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 New York Stock Exchange listed companies, and therefore we will be permitted to, and we intend to, elect not to comply with certain New York Stock Exchange 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                     , 2017

 

Goldman Sachs & Co. LLC

    Deutsche Bank Securities
Jefferies     RBC Capital Markets

Credit Agricole CIB

 

 

Prospectus dated                     , 2017.


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1  

Risk Factors

     22  

Special Note Regarding Forward-Looking Statements

     58  

Market and Industry Data

     59  

Use of Proceeds

     60  

Dividend Policy

     61  

Reorganization

     62  

Capitalization

     63  

Dilution

     65  

Selected Historical Consolidated Financial Data

     67  

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

     70  

Industry

     98  

Business

     114  

Management

     131  

Executive Compensation

     140  

Certain Relationships and Related Party Transactions

     155  

Principal Shareholders

     160  

Description of Share Capital

     162  

Comparison of Shareholder Rights

     173  

Description of Indebtedness

     181  

Shares Eligible for Future Sale

     198  

Bermuda Tax Considerations

     201  

Material U.S. Federal Income Tax Considerations

     202  

Underwriting

     207  

Legal Matters

     215  

Experts

     215  

Exchange Controls

     215  

Enforcement of Civil Liabilities Under United States Federal Securities Laws

     215  

Where You Can Find More Information

     216  

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 22 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 30 aircraft owned as of March 31, 2017, including seven owned aircraft that are subject to fully executed leases with Turkish Airlines (four of which delivered on long-term lease to Turkish Airlines between December 1, 2016 and March 31, 2017, and the remaining three aircraft delivered on long-term lease subsequent to March 31, 2017); (ii) references to our “placed” aircraft refer to three new aircraft committed under a purchase agreement with Boeing as of March 31, 2017, and is comprised of one 747-8F freighter aircraft and two 777-300ER aircraft that are scheduled to be delivered on long-term lease in the second half of 2017. See “Aircraft Commitment” for additional information regarding our placed aircraft that are scheduled to deliver on long-term lease in the second half of 2017. See “—Recent Developments” for additional information regarding our owned and placed aircraft as of and subsequent to March 31, 2017.

Our Company

We are a global leasing company that acquires and leases primarily passenger aircraft to a diverse group of airlines throughout the world. We lease primarily young, modern, fuel-efficient twin-engine widebody passenger aircraft and larger narrowbody passenger aircraft. We intend to expand our fleet mix by acquiring aircraft that are currently in widespread use, are in-demand with airlines and that we expect will have long useful lives. Our strategy is to enter into long-term leases (typically with initial terms ranging from ten to twelve years for widebody passenger aircraft and six to ten years for larger narrowbody passenger aircraft) with well-established airlines, while seeking to maximize long-term earnings growth and to generate attractive returns through the economic cycle. 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 placed portfolio includes twin-engine widebody passenger aircraft, such as the Airbus A330-300, Airbus A330-200, Boeing 777-300ER and Boeing 787-8 Dreamliner, as well as the Airbus A321 narrowbody passenger aircraft and the Boeing 747-8F freighter aircraft. As of March 31, 2017, we owned 30 aircraft which had an aggregate net book value of $3.1 billion. Our owned aircraft as of March 31, 2017 have an average age of 3.1 years and our aircraft on lease have an average remaining lease term of 8.5 years (the average remaining lease term excludes three owned aircraft that are

 



 

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subject to fully executed leases with Turkish Airlines and delivered subsequent to March 31, 2017), 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 dollar book value of an aircraft to reflect its relative importance. Historically, we relied predominantly on forward-order aircraft from original equipment manufacturers (“OEMs”) to facilitate our growth. As of March 31, 2017, we had a commitment to purchase three new aircraft directly from Boeing with an aggregate purchase value of $1.1 billion at list price, subject to the satisfaction of customary closing conditions. In addition, our ability to acquire these aircraft will also depend on our ability to secure adequate financing.

Our business model is designed to generate stable and predictable revenue, earnings and cash flows. We target lessees that we believe will attract better lease terms, including higher lease rates, longer lease durations, and higher lease renewal rates which drive profitability and reduce residual value risk. 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 March 31, 2017, our owned aircraft have been placed on lease 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 portfolio by asset type, OEM, customer base and region. We will continue to focus on markets with the greatest growth in demand for air travel, especially in Asia Pacific, Africa, the Middle East and Latin America.

 

LOGO

Source: Ascend Worldwide, data as of December 2016.

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 Chief Executive Officer, industry veteran Olaf Sachau, 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. 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 through relationships with a diverse group of global banks with significant expertise and lending capacity in aircraft finance.

Aircraft Leasing Industry Overview

The aviation industry 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, due to the 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 11% to 13%, while narrowbody aircraft premium seats have ranged from 4% to 7%.

Between 1996 and 2016, the number of twin engine widebody aircraft owned by lessors has grown at a 7.5% annual rate compared to an 8.8% annual rate for narrowbody aircraft. As of December 31, 2016, 48% of Airbus and Boeing narrowbody passenger aircraft and 36% of Airbus and Boeing widebody passenger aircraft were owned by lessors. 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 5% to 38% as of the first quarter of 2017, 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.

We believe that the trend toward aircraft leasing will continue as airlines are tending to concentrate on transporting passengers rather than aircraft ownership. We believe there are significant barriers to entry in the aircraft 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 aircraft lessors.

 



 

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Aircraft Portfolio

The following table provides details on our owned aircraft portfolio as of March 31, 2017:

 

Lessee(1)

 

Aircraft Type

 

Airframe Type

 

Engine Type

Air France

  777-300ER   Widebody   General Electric

Air France

  777-300ER   Widebody   General Electric

Air Namibia

  A330-200   Widebody   Rolls Royce

Air Namibia

  A330-200   Widebody   Rolls Royce

AirBridge Cargo Airlines

  747-8F   Widebody   General Electric

Alitalia

  A330-200   Widebody   General Electric

Alitalia

  A330-200   Widebody   General Electric

Cebu Pacific Air

  A330-300   Widebody   Rolls Royce

Cebu Pacific Air

  A330-300   Widebody   Rolls Royce

China Airlines

  A330-300   Widebody   General Electric

China Airlines

  A330-300   Widebody   General Electric

Ethiopian Airlines

  777-300ER   Widebody   General Electric

EVA Airways

  A321-200   Narrowbody   CFM

EVA Airways

  A330-300   Widebody   General Electric

EVA Airways

  A330-300   Widebody   General Electric

LOT Polish Airlines

  787-8   Widebody   Rolls Royce

Philippine Airlines

  777-300ER   Widebody   General Electric

Philippine Airlines

  777-300ER   Widebody   General Electric

Philippine Airlines

  777-300ER   Widebody   General Electric

Sichuan Airlines

  A330-300   Widebody   Rolls Royce

Sichuan Airlines

  A330-300   Widebody   Rolls Royce

Sichuan Airlines

  A330-300   Widebody   Rolls Royce

Thai Airways

  777-300ER   Widebody   General Electric

Turkish Airlines

  A330-300   Widebody   Rolls Royce

Turkish Airlines

  A330-300   Widebody   Rolls Royce

Turkish Airlines

  A330-300   Widebody   Rolls Royce

Turkish Airlines

  A330-300   Widebody   Rolls Royce

Turkish Airlines(2)

  A330-300   Widebody   Rolls Royce

Turkish Airlines(2)

  A330-300   Widebody   Rolls Royce

Turkish Airlines(2)

  A330-300   Widebody   Rolls Royce

 

(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.
(2) These three owned aircraft delivered on long-term lease to Turkish Airlines subsequent to March 31, 2017. See “—Recent Developments” for additional information regarding these leases with Turkish Airlines.

 



 

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Aircraft Commitment

As of March 31, 2017, we had a commitment to purchase three new aircraft from Boeing. These three aircraft are scheduled to be delivered in the second half of 2017. See the table below for additional information regarding our aircraft commitment as of March 31, 2017. Our aircraft commitment as of March 31, 2017 was $1.1 billion at list price, subject to the satisfaction of customary closing conditions. In addition, our ability to acquire these aircraft will also depend on our ability to secure adequate financing. We intend to fund our aircraft commitment through multiple sources, including debt financing from the commercial bank market, the capital markets, government-sponsored export credit guarantees and lending programs and capital commitments from Reservoir. However, after the consummation of this offering, we do not anticipate receiving any additional capital contributions from our Sponsors. 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.

The following table provides details on our aircraft commitments as of March 31, 2017:

 

Lessee(1)

  Scheduled
Year of
Delivery
  Aircraft
Type
  Classification    Status

AirBridgeCargo Airlines

  2017   747-8F   Freighter    Placed(2)

Philippine Airlines

  2017   777-300ER   Passenger    Placed(3)

Philippine Airlines

  2017   777-300ER   Passenger    Placed(3)

 

(1) All aircraft acquisitions are subject to the satisfaction of customary closing conditions. In addition, our ability to acquire these aircraft will also depend on our ability to secure adequate financing. There can be no assurance that we will acquire these aircraft or secure adequate financing.
(2) As part of our remaining commitment to purchase three new aircraft from Boeing, we will acquire one new 747-8F freighter aircraft to be delivered in September 2017 on long-term lease with AirBridgeCargo Airlines.
(3) In March 2017, we executed an agreement with Philippine Airlines for the long-term lease of two new 777-300ER aircraft, representing the placement of the remaining two 777-300ER aircraft under our purchase agreement with Boeing. The two 777-300ER aircraft are scheduled for delivery to Philippine Airlines in December 2017.

Our Competitive Strengths

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

Young, modern, fuel-efficient fleet of in-demand aircraft.    Our owned aircraft have an average age of 3.1 years (weighted by net book value) as of March 31, 2017, which we believe gives us the youngest fleet of any major aircraft lessor. We believe that new twin-engine aircraft provide airlines with a fuel efficient option for servicing their 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 carry less residual value risk. We have an orderbook of factory-new committed aircraft that should allow us to maintain a low average age portfolio.

Clear visibility of revenue and earnings.    Our business model is designed to generate predictable revenue, earnings and cash flow growth as a consequence of our long-term leases, match-funded debt and OEM orderbook. By focusing on long-term leases and match-funded debt, we

 



 

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significantly increase the visibility of our cash flow and earnings. Out of our 30 owned aircraft, 28 have fixed rental rates and two have floating rental rates. The combined annual total contracted revenue from owned and placed aircraft as of March 31, 2017 is expected to be approximately $2.9 billion over the life of the existing leases. 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 placed aircraft is based on certain estimates and assumptions and actual results may differ materially from such estimated operating results.”

Strong base and positioned in twin-engine widebody aircraft market.    We are primarily, but not exclusively, a twin-engine widebody aircraft lessor. There are higher barriers to entry in the twin-engine widebody aircraft leasing market created by the more significant investment each aircraft requires and the greater need for strong relationships with the OEMs. We believe that twin-engine widebody aircraft have an attractive lease profile resulting from longer-term leases, a longer economic useful life and generally higher lease rate factors. Given the significant investment airlines typically make in 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, provides us with a competitive advantage in this market.

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 more than 20 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. We have developed a full range of sophisticated capabilities in marketing, technical asset management, financing, and risk and portfolio management that will support our future 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. Typically, our leases have initial terms ranging from ten to twelve years for widebody passenger aircraft and six to ten years for larger narrowbody passenger aircraft. Our owned aircraft have an average remaining lease term of 8.5 years (weighted by net book value) as of March 31, 2017, (excluding three owned aircraft that are subject to fully executed leases with Turkish Airlines and delivered subsequent to March 31, 2017), which we believe is the longest remaining lease term of any major aircraft lessor that publicly discloses its lease terms. Our customers include a diverse group of airlines, nine of which are large flag carriers and eight of which have significant or full sovereign government ownership. Our aircraft are generally 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.

 



 

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Strong credit risk management culture and function.    We have developed a sophisticated, proprietary risk management function 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 review 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 enhance the value of our aircraft portfolio. In addition, all of our leases require lessees to pay cash security deposits or post letters of credit that are generally the equivalent of two to three months of lease rent, which provide us with additional security in the event of a lessee default. These deposits would help mitigate lost revenue we may incur while remarketing the aircraft to a new operator in the event of a lessee default.

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. As of March 31, 2017, we have $2.0 billion of secured debt financing outstanding, provided by 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 one of our secured debt facilities. We intend to use our management team’s long-standing relationships with many other leading commercial banks to further expand our banking group in the future. In addition, we have demonstrated our ability to access the United States debt capital markets with our total issuance of $515 million of 6.875% senior unsecured notes due February 15, 2019 (the “2019 Notes”) and $120 million of 8.250% senior unsecured notes due July 15, 2017 (which were repaid at maturity) (the “2017 Notes”). See “—Recent Developments” for additional information regarding the maturity and repayment of the 2017 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 Growth Strategies

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

Resilient business model in the high growth passenger aircraft leasing market. Within the global aviation industry, the market for aircraft leasing has grown at a rapid pace over the past 40 years. Overall, the proportion of aircraft owned by leasing companies has increased from less than 5% to 38% from 1980 to the first quarter of 2017. As of December 31, 2016, 48% of Airbus and Boeing narrowbody passenger aircraft and 36% of Airbus and Boeing widebody passenger aircraft were owned by lessors. We believe the passenger aircraft leasing market segment in which we primarily focus will continue to provide growth opportunities.

Target young, modern, fuel-efficient passenger aircraft. We plan to continue acquiring and leasing the young, fuel-efficient passenger aircraft that are most in demand with airline operators, and intend to broaden our portfolio to include a more diversified mix of narrowbody and widebody passenger aircraft, including the Boeing 737-800, Boeing 737-900ER, Boeing 737 Max family, Boeing 777-300ER, Boeing 787 Dreamliner, Airbus A320 family, Airbus A330 and Airbus A350 aircraft, due to the fundamentals for these aircraft in the market and their operating economics. We focus on modern and fuel-efficient passenger aircraft that have been, and we believe will continue to be, widely used by airlines throughout the world. We believe the demand for these young, modern, twin-engine passenger aircraft will remain strong for the foreseeable future.

 



 

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

Well Positioned to Apply Focused Criteria for Growth. Building on our initial success in establishing a scalable platform with our Airbus A330 order, and our subsequent expansion into other passenger aircraft types, we intend to follow a manageable growth plan targeting specific aircraft types. We believe that we will have opportunities for continued growth through: (i) selective sale-leaseback transactions directly with our existing airline customers and other airlines; (ii) trading purchase transactions with other lessors; and (iii) acquiring aircraft through a forward order book with the OEMs. We continue to seek opportunities where the economics are favorable.

Lower Operating Costs. We strive to reduce or control the primary expenses involved in running a full-service aircraft leasing platform. We operate with a focus on achieving low selling, general and administrative expenses at every level of our cost structure. In addition, we continually look to improve the productivity of our lean, highly productive work force. We have entered into agreements on competitive terms with third-party contractors for certain services that we believe can be more efficiently provided by third parties. We have created a company-wide business culture that is keenly focused on maintaining our lean, highly productive ethos.

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 finance our aircraft with facilities 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 March 31, 2017, 87.6% of our debt is either fixed rate or synthetically fixed using interest rate swaps, and 8% of our debt is floating rate and relates to lease agreements with floating rate cash flows. Our weighted average debt maturity is 4.9 years as of March 31, 2017. See “Description of Indebtedness.”

As of March 31, 2017, we had funded our owned aircraft fleet through multiple sources, including: (i) approximately $595 million of equity; (ii) $120 million of the 2017 Notes (which were repaid at maturity in July 2017); (iii) $515 million of the 2019 Notes; and (iv) $2.0 billion of outstanding secured debt financing raised from a diversified group of banks, of which one facility is guaranteed by the Export-Import Bank of the United States. Our bank group currently includes, among others, Apple Bank, BNP Paribas, Cathay United Bank, Citigroup, Credit Agricole Corporate and Investment Bank, Credit Industriel et Commercial, Deutsche Bank AG, DVB Bank SE, Investec, KfW IPEX-Bank, Nord LB and PK AirFinance. Our management team has long-standing relationships with many other leading global commercial banks and plans to further expand our banking group in the future in order to further diversify our funding sources. 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 through multiple additional sources, including: (i) proceeds from this offering; (ii) cash flow from operations; (iii) private and public equity sources; and (iv) debt financing from the commercial bank market, the capital markets and government-sponsored export

 



 

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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. Out of our 30 owned aircraft as of March 31, 2017, 28 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.

The table below shows the total contracted rental payments by calendar year for our owned and placed aircraft as of March 31, 2017. See “Business—Our Leases” for more details about our leasing arrangements.

 

     2017(3)      2018      2019      2020      2021      Thereafter      Total  
     (dollars in millions)  

Owned(1)

   $ 235      $ 314      $ 314      $ 303      $ 299      $ 883      $ 2,348  

Owned and/or Placed(2)

     19        65        65        65        65        291        570  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 254      $ 379      $ 379      $ 368      $ 364      $ 1,174      $ 2,918  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents 27 of our 30 owned aircraft on lease as of March 31, 2017 (excludes three owned aircraft with fully executed leases with Turkish Airlines). Lease revenue for floating rate leases has been calculated using the prevailing rate as of March 31, 2017.
(2) Includes (i) three owned aircraft that have fully executed leases with Turkish Airlines, which delivered to Turkish Airlines subsequent to March 31, 2017, (ii) one placed Boeing 747-8F freighter aircraft that is to be delivered in September 2017 on long-term lease with AirBridgeCargo Airlines, and (iii) two placed Boeing 777-300ER aircraft that are to be delivered in December 2017 on long-term leases with Philippine Airlines. All aircraft acquisitions are subject to the satisfaction of customary closing conditions. In addition, our ability to acquire the placed aircraft will depend on 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 placed aircraft is dependent on delivery of the aircraft. 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) Remaining nine months of 2017.

Recent Developments

Erste Bank Secured Credit Facility

In July 2017, we entered into an amendment with Erste Bank regarding one of our existing secured credit agreements. The credit agreement amendment, among other terms, extended the maturity date of the Erste Bank MSN 1635 Facility, with an outstanding balance of $57.5 million as of March 31, 2017, from November 24, 2017 to February 9, 2023.

 



 

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Deutsche Bank Secured Credit Facility and Repayment of the 2017 Notes

In July 2017, we entered into a secured credit agreement with Deutsche Bank for $175 million to provide leverage on our two unencumbered Airbus A330-300 aircraft on long-term leases with Turkish Airlines and for the refinancing of one Airbus A330-300 aircraft on long-term lease with Turkish Airlines that was previously financed with Deutsche Bank. The loans mature between December 2022 and April 2023. The net proceeds were used to repay the 2017 Notes in full maturity.

Leases with Turkish Airlines and Delivery of Final A330-300 Aircraft to Turkish Airlines

We have fully executed leases with Turkish Airlines for the seven Airbus A330-300 aircraft that were previously subject to leases with Skymark Airlines. As of the date of this prospectus, all seven Airbus A330-300 aircraft were delivered on long-term lease to Turkish Airlines. The delivery of these seven aircraft to Turkish Airlines marks the completion of the reconfiguration program, of which we have financed $26.1 million of the reconfiguration costs with vendor financings. See “Other Debt” under “Description of Indebtedness” for additional information regarding the vendor financings.

Alitalia files for Extraordinary Administration

In May 2017, Alitalia, an Italian airline, filed a petition for the admission to the Extraordinary Administration (“EA”) proceeding in the Italian Bankruptcy Court. EA proceedings are aimed at enabling a debtor in financial difficulty to restructure its operations, including its debt, in order to continue its activities. We understand that Alitalia intends to continue its normal operations while the EA process is pending. Alitalia continues to operate our two Airbus A330-200 aircraft that are on long-term lease with the airline in their normal schedules, and, as of the date of this prospectus, is current on all basic rent and post-EA maintenance reserve payments. See “Risk Factors—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.”

Citibank Secured Credit Facility

In April 2017, we entered into an amendment with Citibank regarding one of our existing secured credit agreements. The credit agreement amendment, among other terms, extended the maturity date of the Citi MSN 1554 Facility, with an outstanding balance of $57.6 million as of March 31, 2017, from June 30, 2017 to December 30, 2018.

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 March 31, 2017, each of Reservoir and Centerbridge held     %, respectively, of our outstanding investor interests and management held     % 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 $6 billion of assets under management as of March 31, 2017.

 



 

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Centerbridge is a private investment firm with offices in New York and London and has approximately $29 billion in capital under management as of March 31, 2017. 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 financial condition of our lessees;

 

    the concentration of aircraft types in our portfolio;

 

    risks associated with our international operations and emerging markets;

 

    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;

 

    failure to properly maintain aircraft;

 

    competition from other aircraft lessors;

 

    recent changes to our business strategy to expand our fleet mix by acquiring select narrowbody aircraft and freighter aircraft in addition to widebody aircraft;

 

    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.

 



 

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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.

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.

 



 

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Implications of Being an Emerging Growth Company

As a company with less than $1.07 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 non-binding 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 $1.07 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.

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 and for 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                     , 2017, 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 2017 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, 2016, 2015 and 2014 and summary balance sheet data as of December 31, 2016 and 2015 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, 2014 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 three months ended March 31, 2017 and 2016 and summary balance sheet data as of March 31, 2017 have been derived from our unaudited condensed 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 three months ended March 31, 2017 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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    Three Month Ended
March 31,
    Year Ended December 31,  
    2017     2016     2016     2015     2014  
    (unaudited)                    
(in thousands)                              

Consolidated Statements of Operations Data:

         

Revenues:

         

Rental income

  $ 71,354     $ 63,333     $  254,251     $ 254,642     $ 186,094  

Net gain on sale of aircraft

                8,583              
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    71,354       63,333       262,834       254,642       186,094  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

         

Selling, general and administrative expenses

    5,825       5,844       21,000       23,848       23,080  

Depreciation

    27,992       27,133       99,821       109,357       59,579  

Other operating expenses

    2,710       932       4,755       2,115       5,200  

Settlement income, net(1)

          (27,160     (27,160     (24,068      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    36,527       6,749       98,416       111,252       87,859  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    34,827       56,584       164,418       143,390       98,235  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

         

Interest expense

    (33,764     (36,016     (133,610     (111,377     (71,965

Gains (losses) on derivative financial instruments

    64       (19,500     (574     (18,230     (30,914

Other income (expense)

    86       (50     28       (217     (11

Interest income

    18       14       63       61       6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

    (33,596     (55,552     (134,093     (129,763     (102,884
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

    1,231       1,032       30,325       13,627       (4,649

Income tax expense

          336       667       1,073       869  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    1,231       696       29,658     $ 12,554     $ (5,518
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per Class(2)

         

Preferred return to Class A LLC interests

  $ 7,000     $ 6,890     $ 26,647     $ 23,877     $ 19,231  

Income (loss) attributable to Class B LLC interests

    (5,769     (6,194     3,011       (11,323     (24,749

Pro forma information of Intrepid Aviation Limited(3)

         

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(4)

         

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  
    Three Months Ended
March 31,
    Year Ended December 31,    
    2017     2016     2015     2014  
    (unaudited)                    
(in thousands, except percentages, ratios and
aircraft)
                       

Other Operating and Financial Data:

       

Total debt to members’ equity

    4.53     4.39     4.77     4.90

Total debt to total capitalization(5)

    81.9     81.4     82.7     83.0

Total debt to total assets(6)

    78.2     77.3     78.7     77.9

Adjusted net income(7)

  $ 1,625     $ 32,046     $ 36,467     $ 28,047  

Annual total contracted revenue from owned aircraft(8)

  $ 313,699     $ 277,391     $ 259,636     $ 215,241  

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

  $ 379,060     $ 349,391     $ 343,734     $ 258,705  

Aircraft owned

    30       29       29       22  

Aircraft owned and placed (or committed under existing purchase agreements)

    33       33       35       35  

 

     As of March 31,     As of December 31,  
     2017     2016     2015     2014  
     (unaudited)                    
(in thousands)                         

Consolidated Balance Sheet Data:

        

Cash(9)

   $ 15,054     $ 68,312     $ 55,560     $ 53,762  

Restricted cash(9)

     119,160       118,525       124,625       102,175  

Aircraft deposits

     59,603       87,627       207,274       290,698  

Net book value of aircraft

     3,050,505       2,882,583       2,906,610       2,283,609  

Total assets

     3,347,700       3,270,361       3,312,591       2,768,649  

Total debt, net

     2,617,591       2,528,118       2,606,605       2,155,676  

Total other long-term liabilities

     114,815       111,444       114,037       126,095  

Total liabilities

     2,770,501       2,693,824       2,765,712       2,328,313  

Total members’ equity

     577,199       576,537       546,879       440,336  

Total liabilities and members’ equity

     3,347,700       3,270,361       3,312,591       2,768,649  

 

    Three Months Ended
March 31,
    Year Ended December 31,  
    2017     2016     2016     2015     2014  
    (unaudited)                    
(in thousands)                              

Consolidated Statements of Cash Flows:

         

Net cash provided by operating activities

  $ 16,444     $ 33,264     $ 131,775     $ 101,720     $ 90,915  

Net cash provided by (used in) investing activities

    (159,884     1,954       (28,576     (629,240     (1,188,086

Net cash provided by (used in) financing activities

    90,182       (49,634     (90,447     529,318       1,132,951  

 

(1) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a description of settlement income, net. Settlement income of $27.2 million, recognized as a result of the civil rehabilitation of Skymark Airlines, is included in the year ended December 31, 2016 and the three months ended March 31, 2016. Settlement income of $30.0 million, offset in part by $5.9 million of expenses, also related to the civil rehabilitation of Skymark Airlines, was recognized during the year ended December 31, 2015. See “Business—Legal Proceedings” for additional information regarding the civil rehabilitation proceedings with Skymark Airlines.

 



 

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(2) For additional information on Earnings per Class see note 2(u) and note 14 to our consolidated financial statements for the year ended December 31, 2016, and note 2(u) and note 13 to our unaudited condensed consolidated financial statements for the three months ended March 31, 2017, each included elsewhere in this prospectus.
(3) 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 year ended December 31, 2016, and note 15 to our unaudited condensed consolidated financial statements for the three months ended March 31, 2017, each included elsewhere in this prospectus, for additional information regarding the pro forma information.
(4) 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.
(5) Total debt to total capitalization is calculated by dividing total debt, net by the sum of total debt, net and total members’ equity.
(6) Total debt to total assets is calculated by dividing total debt, net by total assets.
(7) 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 and premiums, 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, U.S. GAAP. It is also not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to operating profit or any other performance measures derived in accordance with U.S. 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 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 U.S. 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 U.S. 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 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.”

 



 

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

 

     Three Months Ended
March 31,
    Year Ended December 31,  
     2017     2016     2015     2014  
     (unaudited)     (unaudited)  

Net income (loss)

   $ 1,231     $ 29,658     $ 12,554     ($ 5,518

As adjusted for:

        

Non-cash management compensation(a)

     28       83       372       4,473  

Amortization of deferred financing costs and debt discounts and premiums

     2,515       12,697       9,221       8,254  

Losses (gains) on fair value of derivatives

     (2,149     (10,392     (6,151     20,838  

Other(b)

                 20,471        
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net income (loss)

   $ 1,625     $ 32,046     $ 36,467     $ 28,047  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) Non-cash management compensation expense for the year ended December 31, 2014 includes an amount accrued under long term bonus which was paid in 2015.
  (b) Related to accelerated depreciation on specific buyer furnished equipment, primarily seats and seat power, on seven owned aircraft formerly on lease to Skymark Airlines.

 

(8) Annual total contracted revenue from owned aircraft and annual total contracted revenue from owned and placed aircraft represent our current estimate of our anticipated annualized operating results from our owned and placed aircraft portfolio. As of March 31, 2017, we owned 30 aircraft. We calculate annual total contracted revenue from our owned aircraft on the basis of 27 of our 30 owned aircraft under lease (excludes three owned aircraft that are subject to fully executed leases with Turkish Airlines as of March 31, 2017, which delivered to Turkish Airlines subsequent to March 31, 2017), at the monthly contractual rent pursuant to the terms of the applicable lease agreement, as of March 31, 2017, multiplied by 12. We calculate annual total contracted revenue from our owned and placed aircraft on the basis of (i) 27 owned aircraft under lease as of March 31, 2017, (ii) three owned aircraft that have fully executed leases with Turkish Airlines, (iii) one placed Boeing 747-8F freighter aircraft that is to be delivered in September 2017 on long-term lease with AirBridgeCargo Airlines, and (iv) two placed Boeing 777-300ER aircraft that are to be delivered in December 2017 on long-term leases with Philippine Airlines, in each case, at the expected monthly contractual rent pursuant to the terms of the applicable lease agreements, multiplied by 12. Lease revenue for floating rate leases have been calculated using the prevailing rate as of March 31, 2017. 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. In addition, our ability to acquire these aircraft will also depend on 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 or that the actual contractual monthly rent provided for in any such lease will equal the expected monthly contractual rent.

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 placed aircraft is based on certain estimates and assumptions and actual results may differ materially from such estimated operating results.”

 



 

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(9) We consider cash on hand (excluding restricted cash) and deposits in banks to be cash. Restricted cash primarily consists of security deposits and aircraft maintenance reserves associated with our aircraft leases held on deposit with banks in segregated accounts. See note 2(d) to our consolidated financial statements for the year ended December 31, 2016 and note 2(d) to our unaudited condensed consolidated financial statements for the three months ended March 31, 2017, each 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 aircraft commitment and grow our business, we will require additional capital, 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 our commitment under our existing purchase contract with Boeing and to execute our growth strategy. As of March 31, 2017, we had three aircraft under a purchase commitment that are scheduled to deliver on long-term leases in the second half of 2017. We have no aircraft commitments beyond the three aircraft under our existing purchase contract with Boeing. If we fail to meet our commitment under our existing purchase contract, we may forfeit any deposit paid on that aircraft to that point. In addition, with respect to purchase agreements 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 or reschedule 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, and to seek damages against us. As of March 31, 2017, we have paid total deposits of approximately $59.6 million. 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 or our LLC Agreement (as defined herein);

 

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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 markets 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 aircraft under our existing aircraft commitment), 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 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 and air cargo rates;

 

    passenger air travel and air cargo demand;

 

    airport access;

 

    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 and air cargo levels;

 

    labor conditions;

 

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    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 greenhouse gas 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. One of our former lessees, Skymark Airlines, filed for civil rehabilitation proceedings in 2015. See “Business—Legal Proceedings” for additional information regarding the civil rehabilitation proceedings with Skymark Airlines.

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.

One of our current lessees, Alitalia, filed for EA proceedings in May 2017. As of March 31, 2017, we have two owned aircraft under leases with Alitalia. If Alitalia is unable to successfully restructure its operations, including its debt pursuant to the EA proceedings, its ability to continue to pay contracted lease rates could be adversely affected. In addition, our leases with Alitalia could be terminated and we could be required to repay substantial amounts of debt relating to the two aircraft on lease to Alitalia. We could incur significant expenses in connection with repossessing those aircraft, and we may not be able to re-lease those aircraft promptly or at favorable rates. Any of these factors could have a material adverse effect on our business, financial condition and results of operations. See “Prospectus Summary—Recent Developments” for additional information regarding Alitalia’s EA proceedings.

 

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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.

Our annual total contracted revenue from owned aircraft and annual total contracted revenue from owned and placed 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 placed aircraft set forth under “Prospectus Summary—Summary Financial and Other Data” and elsewhere in this prospectus represent our best current estimate of our anticipated annualized operating results from our owned and placed aircraft portfolio as of March 31, 2017 and in certain instances, as of the date of this filing. Our annual total contracted revenue from owned aircraft and annual total contracted revenue from owned and placed 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 placed aircraft, our ability to secure adequate financing to pay the balance of the purchase price of placed aircraft, the satisfaction of the conditions in our aircraft acquisition and associated lease agreements for placed 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 placed aircraft are subject to material risks, uncertainties and contingencies and actual results may differ materially from such estimated operating results. See “Presentation of Financial and Other Information” and “Prospectus Summary—Summary Financial and Other Data” for a discussion of the limitations of non-GAAP financial measures and the annual total contracted revenue from owned aircraft and annual total contracted revenue from owned and placed aircraft revenue calculations included in this prospectus.

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

Due to the high concentration of Airbus A330 aircraft in our fleet, our business, financial condition or results of operations may be materially adversely affected if the demand for Airbus A330 aircraft declines (including if airlines move away from widebodies to narrowbodies), if Airbus A330 aircraft are redesigned or replaced by Airbus or if Airbus A330 aircraft experience design or technical problems. As

 

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of March 31, 2017, we had five aircraft types in our owned aircraft portfolio. 21 of our owned aircraft as of March 31, 2017 are manufactured by Airbus, including 20 and one, in the Airbus A330 and Airbus A320 family of aircraft, respectively. Nine of our owned aircraft are manufactured by Boeing, including seven and one, in the Boeing 777 and Boeing 787 Dreamliner classes, respectively, as well as one owned aircraft in the Boeing 747 (freighter) class. As of March 31, 2017, our placed aircraft comprised of two aircraft in the Boeing 777 class and one aircraft in the Boeing 747 (freighter) class.

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 types could result in the grounding of the aircraft. Acquisition of a new type of aircraft 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 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 three months ended March 31, 2017 and the year ended December 31, 2016, 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, France, Italy, Namibia, the Philippines, Poland, Russia, Taiwan, Thailand and Turkey, 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;

 

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    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 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, various government agencies may require export licenses, and may seek to impose modifications to business practices, including cessation of business activities in sanctioned countries or with sanctioned persons or entities. We may incur costs for compliance programs and we may be subject to enforcement actions or penalties for noncompliance. Our leased aircraft are flown by our lessees to destinations throughout the world. Additionally, if our leased aircraft were to be taken to countries that are subject to trade and economic sanctions, embargoes, and other restrictions imposed by the United States or other nations, or if we were to engage in business transactions with persons that are the target of such laws and regulations, we may also be subject to enforcement of sanctions laws and regulations. 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. There can be no assurance that we will maintain compliance with such laws and regulations, particularly as the scope of certain laws may be unclear or subject to changing interpretations.

 

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Violations of sanctions and embargo laws can result in civil and criminal penalties. Any such violations by us or our lessees could negatively impact our reputation and could materially adversely affect our business, financial condition or results of operations.

Recent events in Ukraine and Crimea have resulted in the European Union and the United States imposing and escalating sanctions on Russia and certain businesses, sectors and individuals in Russia, including the airline industry. The European Union and the United States have also suspended the granting of certain types of export licenses to Russia. Russia has imposed its own sanctions on certain individuals in the United States and may impose other sanctions on the United States and the European Union and/or certain businesses or individuals from these regions. We cannot assure you that the current sanctions or any further sanctions imposed by the European Union, the United States or other international interests will not 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, Taiwan, Thailand and Turkey. 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. For example, S&P lowered Turkey’s credit rating in July 2016 one level to BB and assigned a negative outlook to Turkey due to political uncertainty. In addition, in the aftermath of political events in Turkey, the FAA had issued a notice banning Turkish Airlines’ flights to the United States from July 16, 2016, which was lifted on July 19, 2016. In addition, terrorist attacks in Turkey, including at Istanbul Ataturk Airport, could reduce demand for travel to Turkey. On March 21, 2017, the Department of Homeland Security enhanced security measures for select last point of departure airports with commercial flights to the United States, which included Istanbul’s Ataturk International Airport, which could also reduce demand for travel from Turkey to the United States. On July 5, 2017, the Department of Homeland Security lifted a ban on electronic devices larger than a smartphone for flights departing from Istanbul’s Ataturk International Airport, but put in place additional security measures. Moreover, the aircraft leasing industry in Russia has been severely hurt by events including the impact of sanctions against Russia, the devaluation of the Ruble, the significant decline in oil prices, the destruction by terrorists of an aircraft flying from Egypt and increased tensions with Turkey. Continued uncertainty in Russia could lead to the early termination of our leases or repossession of our aircraft based in Russia. 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

 

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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 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.

Some of our debt financings bear interest at a floating interest 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. We seek to mitigate our floating interest rate risk on long-term debt by entering into fixed-pay interest rate derivatives, as appropriate, thereby offsetting some or all of the financial impact. As of March 31, 2017, we had $327.1 million in floating-rate debt (excluding debt issuance costs and discounts and premiums) not fixed by a corresponding interest rate swap. As of March 31, 2017, 87.6% of our debt is either fixed rate or synthetically fixed using interest rate swaps, and 8.0% of our debt is floating rate and relates to lease agreements with floating-rate cash flows. 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 interest rate with respect to our floating rate debt instruments not fixed by a corresponding interest rate swap were to

 

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increase by 100 basis points, we would expect to incur additional interest expense on our existing indebtedness as of March 31, 2017, of approximately $3.3 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. Fuel prices have been relatively stable over the last several years and had stabilized at prices significantly higher than historical averages, although they have recently declined significantly. If fuel prices increase, 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 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. Conversely, if fuel prices decline, as has occurred recently, this could lead to potential lessees deciding to keep existing, less fuel-efficient aircraft, reducing lease demand. Any of these events could materially adversely affect our business, financial condition or results of operations.

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

 

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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.

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.

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 March 31, 2017, we had three committed aircraft under a purchase agreement with Boeing that are scheduled to deliver on long-term leases in the second half of 2017. We cannot assure you that we will acquire all of these aircraft because the acquisitions are subject to a variety of factors, such as, 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 our commitment under our existing purchase contract with Boeing or agreements with engine manufacturers, we may forfeit any deposit paid on those aircraft or engines to that point. In addition, with respect to purchase contracts with airframe and engine

 

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manufacturers, if we are in default under the relevant purchase contract, the seller would have the right to, among other things, suspend or reschedule 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, and to seek damages against us. As of March 31, 2017, we have paid total deposits of approximately $59.6 million.

With regard to our three placed aircraft subject to a purchase agreement with Boeing, one 747-8F freighter aircraft is scheduled to be delivered in September 2017 on long-term lease with AirBridgeCargo Airlines, and two 777-300ER aircraft are scheduled to be delivered on long-term basis with Philippine Airlines in December 2017. This represents the remaining three aircraft that are to be purchased under our purchase agreement with Boeing. As of March 31, 2017, we have fully executed leases with Turkish Airlines for seven owned aircraft, four of which delivered on long-term lease to Turkish Airlines between December 1, 2016 and March 31, 2017, and the remaining three owned aircraft delivered on long-term lease subsequent to March 31, 2017. See “Prospectus Summary—Recent Developments” for additional information regarding our leases with Turkish Airlines. 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.

If we do not complete the purchase and lease transactions of any of the aircraft for which we have a binding purchase commitment, we may experience delays in locating and securing attractive alternative investments or leasing opportunities and will not achieve projected revenue or net income.

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 operations 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;

 

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    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 operations or growth prospects and our ability to meet our obligations.

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

Aircraft appraisers play a significant role in shaping market perception of aircraft values. Each appraiser’s valuation is based on that appraiser’s professional opinion. Appraisals can be subjective because they are based on various assumptions and conditions with regard to the specific aircraft appraised and the commercial aviation industry generally. In addition, appraisers may use historical data, and subsequent changes or additions to such data may not be adequately captured in the appraised value. Appraisals are also typically prepared without a physical inspection of the aircraft. Appraisals that are based on other assumptions and methodologies (or a physical inspection of the aircraft) may result in valuations that are materially different from those contained in such appraisals.

Moreover, an appraisal is only an estimate of value and does not necessarily indicate the price at which an aircraft may be purchased or sold in the market. In particular, the appraisals of the aircraft are estimates of the values of the aircraft assuming the aircraft are in a certain condition, which may not be the case. An appraisal should not be relied upon as a measure of realizable value. The value of an aircraft will depend on various factors, including market, economic and airline industry conditions; the supply of similar aircraft; the availability of buyers; the condition of the aircraft; the time period in which the aircraft is sought to be sold; and whether the aircraft is sold separately or as part of a block.

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

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 operations 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

 

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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.

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. We will be required to bear the entire cost of maintaining any of our aircraft that are not under a lease and of 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, AWAS Aviation Capital Limited, BOC Aviation Ltd., CDB Leasing, C2 Aviation, 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.

 

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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 operations may be adversely affected.

We have recently changed our business strategy to expand our fleet mix by acquiring select narrowbody passenger aircraft and freighter aircraft in addition to widebody aircraft and, therefore, we have limited historical operating experience with narrowbody aircraft or freighter aircraft from which you can evaluate our future prospects.

We intend to expand our fleet mix by acquiring select narrowbody passenger aircraft and freighter aircraft that are currently in widespread use, are in-demand with airlines, and that we expect will have long useful lives, while still maintaining a greater focus on acquiring widebody passenger aircraft. Given our limited history of leasing narrowbody passenger aircraft and freighter aircraft, we have little historical information upon which you can evaluate our prospects, including our ability to acquire narrowbody aircraft and freighter aircraft on favorable terms or to enter into profitable aircraft leases for narrowbody passenger aircraft or freighter aircraft. We cannot assure you that we will be able to implement our business objectives, that any of our objectives will be achieved or that we will be able to lease narrowbody passenger or freighter aircraft profitably. The results of our operations will depend on several factors, including the availability of opportunities for the acquisition of narrowbody passenger aircraft and freighter aircraft, disposition and leasing of narrowbody passenger aircraft and freighter aircraft, our ability to capitalize on any such opportunities for narrowbody passenger aircraft and freighter aircraft, the creditworthiness of our counterparties, the availability of adequate short- and long-term financing for narrowbody passenger aircraft and freighter aircraft and other economic conditions, particularly as these conditions impact airlines and manufacturers of narrowbody aircraft. Our limited historical operations of narrowbody aircraft and freighter aircraft place us at a competitive disadvantage that our competitors may exploit, which may adversely affect our business and operations.

We lease our aircraft to a limited number of customers.

As of March 31, 2017, our owned aircraft portfolio included 30 leases placed with 13 customers with whom we had signed leases. Three of our lessees accounted for approximately 45% of our aircraft, based on net book value. For the three months ended March 31, 2017, three customers individually represented more than 10% of our consolidated revenues: Philippine Airlines (17%), Sichuan Airlines (14%), and Air France (10%). For the year ended December 31, 2016, four customers individually represented more than 10% of our consolidated revenues: Sichuan Airlines (15%); Air France (11%); EVA Airways (11%); and Air Namibia (10%). For the year ended December 31, 2015, four customers individually represented more than 10% of our consolidated revenues: Sichuan Airlines (15%); Skymark Airlines (11%) (including $19.4 million realized within rental income related to the recognition of maintenance reserves and security deposits); Air France (11%); and Air Namibia (10%). Additionally, four customers individually represented more than 10% of our consolidated revenues for the year ended December 31, 2014: Skymark Airlines (16%); Air Namibia (14%); Sichuan Airlines (12%); and Alitalia (10%). As of March 31, 2017, we have fully executed leases for seven owned aircraft with Turkish Airlines, four of which delivered on long-term lease to Turkish Airlines between December 1, 2016 and March 31, 2017, and the remaining three owned aircraft delivered on long-term lease subsequent to March 31, 2017. In addition, as part of our remaining commitment to purchase three new aircraft from Boeing, one 747-8F freighter aircraft is scheduled to deliver on long-term lease to AirBridgeCargo Airlines in September 2017 and two 777-300ER aircraft will deliver on long-term lease to Philippine Airlines in December 2017. Accordingly, we expect that Turkish Airlines and Philippine Airlines will account for a significant amount of our consolidated revenues. 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

 

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of a lessee might require a significant portion of our aircraft to be remarketed. See “—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.” 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 Aviation, 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. 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 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 was conducted by the National Transportation Safety Board. 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 agreement with Boeing 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,

 

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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. 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.

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 and air cargo 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;

 

    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.

 

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During recent years, the airline industry has committed to a significant number of aircraft deliveries for certain types of aircraft through order placements with manufacturers. In response, aircraft manufacturers have raised their production output for these types of aircraft. 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 and our lessees are exposed to foreign currency risks, which may materially adversely affect 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. Shifts in foreign exchange rates can be significant and can occur quickly.

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.

In addition, our lessees are exposed to currency risk due to the fact that they earn revenues in their local currencies while a significant portion of their liabilities and expenses, including fuel, debt service, and lease payments are denominated in U.S. dollars. In the case of a devaluation of the local currency, our lessees may not be able to increase revenue sufficiently to offset the impact of exchange rates on these expenses. This difference is magnified in the event of an appreciating U.S. dollar, due to the relative strengthening of the U.S. economy and the expectation of rising U.S. interest rates. Currency volatility, particularly as witnessed recently in China, Russia, Turkey and other emerging market countries, could impact the ability of some of our customers to meet their contractual obligations in a timely manner.

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

We had net income (loss) of $1.2 million, $29.7 million, $12.6 million and $(5.5) million for the three months ended March 31, 2017 and years ended December 31, 2016, 2015 and 2014, 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

 

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we therefore have encountered, and will likely continue to encounter, intense competition 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. Sachau, our Chief Executive Officer, and our other senior officers, each of whose services are critical to the success of our business strategies. 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 lease 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. See also “Business—Legal Proceedings” for additional information regarding the civil rehabilitation proceedings with Skymark Airlines, including the Skymark Airlines debt facilities and our other indebtedness.

 

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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 mechanic’s 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 or 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 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 was on hold through 2016 for flights operating fully or partly outside the EU in light of ICAO’s effort to introduce a global program to reduce greenhouse gas emissions from aircraft. On February 3, 2017, the European Commission submitted a proposal to continue applying the scope of the emissions trading scheme to flights strictly within the EU. On October 6, 2016, ICAO approved the Carbon Offsetting and Reduction Scheme for International Aviation (“CORSIA”), under which most airlines will be required to buy credits to offset carbon dioxide emissions from international flights after 2020, which credits will come from projects that cut greenhouse gas pollution in other sectors, like forest conservation programs and renewable energy installations. The scheme will be voluntary from 2021 to 2026 and mandatory from 2027, with most small developing countries exempt. Sixty-five nations, including the United States, the member states of the EU, China, Qatar, the United Arab Emirates and several small countries especially impacted by climate change are participating from the start of scheme. In addition, in March 2017, ICAO adopted new carbon dioxide emissions standards that would apply not only to new aircraft types as of 2020, but also to new deliveries of current in-production aircraft types from 2023. Also, a cut-off date of 2028 for production of aircraft that do not comply with the proposed standards was adopted. These standards are considered to be especially stringent for larger aircraft weighing over 60 tons, such as our aircraft. In July 2016, the United States Environmental Protection Agency (“EPA”) finalized a determination under the Clean Air Act (“CAA”) that six greenhouse gas emissions from aviation endanger public health and welfare, triggering the EPA’s duty under the CAA to promulgate emissions standards. The EPA has stated that it anticipates moving forward on standards that would be at least as stringent as ICAO’s standards.

This is an area of law that is rapidly changing. 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 controls, market-based policies or other environmental laws or regulations will be passed or implemented, and if passed or implemented, what impact such controls, policies, 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.

 

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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 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 re-lease such aircraft in a timely manner on commercially reasonable terms, our results of operations and financial condition, cash flow would be materially adversely affected.

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 and Crimea, 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.

 

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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

 

    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, Ebola and Zika virus, 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

 

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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 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 or 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

 

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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.

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

 

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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.

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 March 31, 2017, our total debt was approximately $2.6 billion (excluding debt issuance costs, discounts and premiums).

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

 

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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;

 

    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, which could result in an event of default under such indebtedness, which, if not cured or waived, could result in the acceleration of all our debt.

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 2019 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. The agreements governing our existing indebtedness restrict our ability to dispose of assets and use the proceeds from those dispositions. In addition, the agreements governing our existing indebtedness may also restrict our ability to raise debt or equity capital to be used to repay our existing indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due. See “Description of Indebtedness.”

 

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In addition, we conduct all of our operations through our subsidiaries. Accordingly, repayment of our existing indebtedness is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Unless they are guarantors of our existing indebtedness, our subsidiaries do not have any obligation to pay amounts due on our existing indebtedness or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our existing indebtedness. Each subsidiary is a distinct legal entity, and under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the agreements governing our existing indebtedness may limit the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our existing indebtedness.

Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations.

If we cannot make scheduled payments on our debt, we will be in default and the lenders under certain of our existing indebtedness could terminate their commitments to loan money, the lenders could foreclose against the assets securing their borrowings and we could be forced into bankruptcy or liquidation.

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, including applicable state corporate laws. We cannot assure you that the agreements governing our current and future indebtedness of our subsidiaries, applicable laws or state regulation will permit our subsidiaries to provide us with sufficient dividends, distributions or loans to fund payments on our indebtedness.

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 March 31, 2017, we have committed to purchase three aircraft from Boeing. In order to complete the acquisitions of these aircraft, we must secure financing for such aircraft, which will result

 

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in the incurrence of additional indebtedness. 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. In addition, the holders of our indebtedness will generally be entitled to any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding up of our company before such proceeds are distributed to you. If new debt is added to our currently anticipated debt levels, the related risks that we and the subsidiary guarantors 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

 

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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—Shareholders 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.

Specifically, pursuant to a shareholders agreement that we will enter into with Reservoir and Centerbridge prior to the consummation of this offering, for so long as Reservoir and Centerbridge, collectively, own a majority of our outstanding common shares, Reservoir and Centerbridge will each have the right to nominate three directors (out of ten directors) with three additional directors initially nominated jointly by Reservoir and Centerbridge (subject to applicable independence requirements), as more fully described under “Management—Board Composition and Election of Directors.” In addition, initially Reservoir and Centerbridge will agree to vote in favor of all of each other’s board nominees (subject to applicable independence requirements of each committee) and such obligation will continue so long as the nominating party owns at least 50% of its initial post-IPO holdings. The obligation to vote in favor of each other’s nominees will apply only to the next two nominees to come up for re-election for so long as such nominating party owns common shares representing less than 50% of its initial post-IPO holdings until such date on which such nominating party owns common shares representing less than 25% of its initial post-IPO holdings. Thereafter, the obligation to vote in favor of each other’s nominees will apply only to the next one nominee to come up for re-election and, at such time as either Reservoir or Centerbridge holds less than 5% of our outstanding shares, the obligation of the other party to vote in favor of its nominees shall cease. Moreover, Reservoir and Centerbridge will agree not to vote in favor of the removal of any director who shall have been nominated by the other shareholder unless such shareholder also has voted for such removal. In addition, we will agree to take all necessary and desirable actions within our control to cause the election and removal of such directors in accordance with the shareholders agreement and applicable law. See “Certain Relationships and Related Party Transactions—Shareholders Agreements.”

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, other than any of our 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.

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

 

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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.

Our bye-laws and shareholders agreement, 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 and shareholders agreement, as well as Bermuda law, contain provisions that may discourage, delay or prevent a merger, acquisition, or other change in control that shareholders may consider favorable, including transactions in which you might otherwise receive a premium for your common shares. These provisions may also prevent or frustrate attempts by our shareholders to replace or remove our management. Our corporate governance documents include provisions:

 

    authorizing blank check preferred shares, which could be issued without shareholder approval and with voting, liquidation, dividend and other rights superior to our common shares;

 

    providing that any action required or permitted to be taken by our shareholders must be taken at a duly called annual or special meeting of such shareholders and may not be taken by any consent in writing by such shareholders; provided that for so long as Reservoir and Centerbridge, collectively, own a majority of our outstanding common shares, any action (except the removal of an auditor) which may be done by resolution of the shareholders in a general meeting may be done by resolution in writing, signed by the shareholders who at the date of the notice of the resolution in writing represent the majority of votes that would be required if the resolution had been voted on at a meeting of the shareholders;

 

    requiring advance notice of shareholder proposals for business to be conducted at meetings of our shareholders and for nominations of candidates for election to our board of directors;

 

    establishing a classified board of directors so that not all members of our board are elected at one time;

 

    providing that for so long as Reservoir and Centerbridge, collectively, own more than     % of our outstanding common shares, certain actions required or permitted to be taken by our shareholders, including amendments to our bye-laws and certain specified corporate transactions, may be effected only with the affirmative vote of a majority in number of our board of directors, which majority must include the affirmative vote of at least one Reservoir nominee and one Centerbridge nominee, in addition to any other vote required by applicable law;

 

    prohibit us from engaging in a business combination with a person who acquires at least 10% of our common shares for a period of three years from the date such person acquired such common shares unless approved by the board of directors and authorized at an annual or special meeting by the affirmative vote of at least two-thirds of our issued and outstanding voting shares that are not owned by such person, subject to certain exceptions;

 

   

limiting the filling of vacancies or newly created seats on the board to our board of directors then in office; provided that for so long as Reservoir and Centerbridge, collectively, own a

 

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majority of our outstanding common shares, any vacancies will be filled in accordance with the designation provisions set forth in the shareholders agreement; and

 

    providing that directors may be removed by shareholders only for cause by the affirmative vote of the holders of at least a majority of our outstanding common shares; provided, that pursuant to the shareholders agreement Reservoir and Centerbridge have agreed not to vote in favor of the removal of any director who shall have been nominated by the other sponsor unless such sponsor also has voted to such removal.

The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for common shares. They could also deter potential acquirers of our Company, thereby reducing the likelihood that you could receive a premium for your common shares in an acquisition. See “Description of Share Capital” for a more detailed discussion of these provisions.

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 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;

 

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    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 continue to purchase aircraft and for 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              million common shares for issuance under our 2017 Incentive Award Plan, including             . See “Executive Compensation—New Incentive Plans—2017 Incentive Award Plan.” Any common shares that we issue, including under our 2017 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                     , 2017. 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

 

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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 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;

 

    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 non-binding 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 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.

 

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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 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. 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. 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 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

 

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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.

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.

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

 

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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 placed 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;

 

    recent changes to our business strategy;

 

    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.”

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

 

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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 purchase aircraft and for 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 completion of this offering will be contributed, directly or indirectly, to Intrepid Aviation Limited in exchange for shares of Intrepid Aviation Limited. Accordingly, Intrepid Aviation Limited intends to enter into contribution agreements with the direct or indirect interest holders of Intrepid Holdings pursuant to which each interest holder will contribute, 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. Immediately prior to entering into the contribution agreements, Intrepid Aviation Limited will file a memorandum of increase of share capital to issue             of its common shares for the purpose of effectuating such transactions. Upon the contribution 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, January 16, 2014, November 24, 2015, April 14, 2016, and May 8, 2017, among Reservoir Intrepid Investors, LLC, CB-INA Acquisition, LLC, Brian Rynott, Thomas Schmid and Olaf Sachau and Intrepid Holdings.

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 March 31, 2017, as follows:

 

    on an actual basis;

 

    on a pro forma basis to reflect (1) the contribution 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 March 31, 2017  
     Actual      Pro Forma      Pro Forma As
Adjusted
 
(in thousands, except unit and share numbers)    (unaudited)      (unaudited)      (unaudited)  

Unrestricted Cash(1)

   $ 15,054      $                   $  

Restricted Cash(1)

     119,160        

Total debt:

        

Secured credit facilities(2)

     1,993,333        

Senior unsecured notes(2)

     635,000        

Other debt(2)

     18,496        

Members’ equity:

        

Investor interests, actual

     576,174                

Retained Earnings

     1,025        
  

 

 

    

 

 

    

 

 

 

Total members’ equity (deficit)

   $ 577,199                
  

 

 

    

 

 

    

 

 

 

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

   $ 3,358,242      $      $               
  

 

 

    

 

 

    

 

 

 

 

(1) We consider cash on hand (excluding restricted cash) and deposits in banks to be cash. Restricted cash primarily consists of security deposits and aircraft maintenance reserves associated with our aircraft leases held on deposit with banks in segregated accounts. See note 2(d) to our unaudited condensed consolidated financial statements for the three months ended March 31, 2017, included elsewhere in this prospectus.
(2) For a description of secured credit facilities, senior unsecured notes, and other debt, see “Description of Indebtedness.” Amounts are presented gross of debt issuance costs, debt discounts and premiums.

 

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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 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 March 31, 2017 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 March 31, 2017, 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 March 31, 2017 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 March 31, 2017, 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 March 31, 2017, 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.

The following table summarizes on the pro forma as adjusted basis described above, as of March 31, 2017, the differences between the number of shares purchased from us, the total

 

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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 2017 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 condensed consolidated statements of operations data and statements of cash flow data for the three months ended March 31, 2017 and 2016 and summary balance sheet data as of March 31, 2017 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The selected historical consolidated statements of operations data and statements of cash flow data for the years ended December 31, 2016, 2015 and 2014 and selected balance sheet data as of December 31, 2016 and 2015 have been derived from our 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 years ended December 31, 2013 and 2012 and selected balance sheet data as of December 31, 2014, 2013 and 2012 have been derived from our audited consolidated financial statements that are not included elsewhere in this prospectus. Historical results are not necessarily indicative of the results to be expected for future periods and operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the full year.

 

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    Three Months Ended
March 31,
    Year Ended December 31,  
    2017     2016     2016     2015     2014     2013     2012  
(in thousands)   (unaudited)                                

Consolidated Statements of Operations Data:

             

Revenues

             

Rental income

  $ 71,354     $ 63,333     $ 254,251     $ 254,642     $ 186,094     $ 46,017     $ 20,566  

Net gain on sale of aircraft

                8,583                          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    71,354       63,333       262,834       254,642       186,094       46,017       20,566  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

             

Selling, general and administrative expenses

    5,825       5,844       21,000       23,848       23,080       16,052       14,002  

Depreciation

    27,992       27,133       99,821       109,357       59,579       15,669       6,866  

Other operating expenses

    2,710       932       4,755       2,115       5,200       3,079       12  

Settlement income, net(1)

          (27,160     (27,160     (24,068                  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    36,527       6,749       98,416       111,252       87,859       34,800       20,880  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    34,827       56,584       164,418       143,390       98,235       11,217       (314
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

             

Interest expense

    (33,764)       (36,016     (133,610     (111,377     (71,965     (7,296      

Gains (losses) on derivative financial instruments

    64       (19,500     (574     (18,230     (30,914     (431      

Other income (expense)

    86       (50     28       (217     (11     (185     137  

Interest income

    18       14       63       61       6       4       26  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

    (33,596)       (55,552     (134,093     (129,763     (102,884     (7,908     163  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

    1,231       1,032       30,325       13,672       (4,649     3,309       (151

Income tax expense

          336       667       1,073       869       571        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 1,231     $ 696     $ 29,658     $ 12,554     $ (5,518   $ 2,738     $ (151
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per Class(2)

             

Preferred return to Class A LLC interests

  $ 7,000     $ 6,890     $ 26,647     $ 23,877     $ 19,231     $ 12,046     $  

Income (loss) attributable to Class B LLC interests

    (5,769     (6,194     3,011       (11,323     (24,749     (9,308     (151

 

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    Three Months Ended
March 31,
    Year Ended December 31,  
    2017     2016     2016     2015     2014     2013     2012  
(in thousands)   (unaudited)                                

Consolidated Statements of Cash Flows:

             

Net cash provided by operating activities

  $ 16,444     $ 33,264     $ 131,775     $ 101,720     $ 90,915     $ 27,896     $ 5,396  

Net cash provided by (used in) investing activities

    (159,884     1,954       (28,576     (629,240     (1,188,086     (1,048,001     (172,333

Net cash provided by (used in) financing activities

    90,182       (49,634     (90,447     529,318       1,132,951       1,031,900       156,394  

 

    As of March 31,     As of December 31,  
    2017     2016     2015     2014     2013     2012  
(in thousands)   (unaudited)                                

Consolidated Balance Sheet Data:

           

Cash(3)

  $ 15,054     $ 68,312     $ 55,560     $ 53,762     $ 17,982     $ 7,143  

Restricted cash(3)

    119,160       118,525       124,625       102,175       47,056       18,736  

Aircraft deposits

    59,603       87,627       207,274       290,698       382,173       247,936  

Net book value of aircraft

    3,050,505       2,882,583       2,906,610       2,283,609       1,045,661       159,920  

Total assets

    3,347,700       3,270,361       3,312,591       2,768,649       1,536,250       452,065  

Total debt, net

    2,617,591       2,528,118       2,606,605       2,155,676       982,867       167,490  

Total other long-term liabilities

    114,815       111,444       114,037       126,095       82,843       43,438  

Total liabilities

    2,770,501       2,693,824       2,765,712       2,328,313       1,090,075       215,639  

Total members’ equity

    577,199       576,537       546,879       440,336       446,175       236,426  

Total liabilities and members’ equity

    3,347,700       3,270,361       3,312,591       2,768,649       1,536,250       452,065  

 

(1) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a description of settlement income, net. Settlement income of $27.2 million, recognized as a result of the civil rehabilitation of Skymark Airlines, is included in the year ended December 31, 2016 and the three months ended March 31, 2016. Settlement income of $30.0 million, offset in part by $5.9 million of expenses, also related to the civil rehabilitation of Skymark Airlines, was recognized during the year ended December 31, 2015. See “Business—Legal Proceedings” for additional information regarding the civil rehabilitation proceedings with Skymark Airlines.
(2) For additional information on Earnings (loss) per Class see note 2(u) and note 14 to our consolidated financial statements for the year ended December 31, 2016 and note 2(u) and note 13 to our unaudited condensed consolidated financial statements for the three months ended March 31, 2017, each included elsewhere in this prospectus.
(3) We consider cash on hand (excluding restricted cash) and deposits in banks to be cash. Restricted cash primarily consists of security deposits and aircraft maintenance reserves associated with our aircraft leases held on deposit with banks in segregated accounts. See note 2(d) to our consolidated financial statements for the year ended December 31, 2016 and note 2(d) to our unaudited condensed consolidated financial statements for the three months ended March 31, 2017, each 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 March 31, 2017 and 2016 and as of and for the years ended December 31, 2016, 2015 and 2014.

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 primarily passenger aircraft to a diverse group of airlines throughout the world. We lease primarily young, modern, fuel-efficient twin-engine widebody passenger aircraft and larger narrowbody passenger aircraft. Our strategy is to enter into long-term leases (typically with initial terms ranging from ten to twelve years for widebody passenger aircraft and six to ten years for larger narrowbody passenger aircraft) with well-established airlines, while seeking to maximize long-term earnings growth and to generate attractive returns through the economic cycle. We intend to expand our fleet mix by acquiring aircraft that are currently in widespread use, are in-demand with airlines and that we expect will have long useful lives.

Our owned and placed portfolio includes twin-engine widebody passenger aircraft, such as Airbus A330-300, Airbus A330-200, Boeing 777-300ER and Boeing 787-8 Dreamliner, as well as the Airbus A321 narrowbody passenger aircraft and the Boeing 747-8F freighter aircraft. As of March 31, 2017, we owned 30 aircraft which had an aggregate net book value of $3.1 billion. Our owned aircraft as of March 31, 2017 have an average age of 3.1 years and an average remaining lease term of 8.5 years (the average remaining lease term excludes three owned aircraft that are subject to fully executed leases with Turkish Airlines delivered subsequent to March 31, 2017), weighted by net book value. As of March 31, 2017, we had commitments to purchase three new aircraft directly from Boeing with an aggregate purchase value of $1.1 billion at list price, subject to the satisfaction of customary closing conditions. In addition, our ability to acquire these aircraft will also depend on our ability to secure adequate financing.

Our business model is designed to generate stable and highly predictable revenue, earnings and cash flows. We target lessees that we believe will attract better lease terms, including higher lease rates, longer lease durations, and higher lease renewal rates which drive profitability and reduce residual value risk. 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 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 March 31, 2017, our owned aircraft have been placed on lease with a diverse group of 13 airline customers in 11 different countries. Our customers are well-established airlines or flag

 

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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 seek to continue to diversify our portfolio by asset type, OEM, customer base and region. We will continue to focus primarily on markets with the greatest growth in demand for air travel, 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 interests. 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 interests 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 interests holder of Intrepid Holdings will contribute, 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 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 Aviation Group Holdings for all periods presented.

 

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Market and Industry Trends

Our revenues are principally derived from operating leases of our aircraft with commercial airlines. As of March 31, 2017, 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 as of March 31, 2017 and December 31, 2016 are as follows:

 

     March 31,
2017
     December 31,
2016
 

Number of owned aircraft

     30        29  

Weighted average fleet age (in years)(1)

     3.1        3.0  

Weighted average remaining lease term(1)(2)

     8.5        8.5  

Aggregate aircraft net book value

   $ 3,050,505      $ 2,882,583  

 

(1) Weighted average fleet age and remaining lease term calculated based on aircraft net book value.
(2) Excludes three owned aircraft not in revenue-generating service as of March 31, 2017 (six owned aircraft as of December 31, 2016) that delivered on long-term lease to Turkish Airlines subsequent to March 31, 2017.

The net book value of our aircraft based on the geographic location of our customers as of March 31, 2017 and December 31, 2016 is as follows:

 

     March 31, 2017     December 31, 2016  

Region

   Number
of
Aircraft
     NBV of
Aircraft
     % of
Total
    Number
of
Aircraft
     NBV of
Aircraft
     % of
Total
 

Asia

     14      $ 1,445,242        48     14      $ 1,458,906        51

Europe

     10        1,018,606        33     6        556,819        19

Africa

     3        316,618        10     3        319,664        11

Other(1)

     3        270,039        9     6        547,194        19
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

     30      $ 3,050,505        100     29      $ 2,882,583        100
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) Represents three Airbus A330-300 aircraft not in revenue-generating service as of March 31, 2017 (six Airbus A330-300 aircraft as of December 31, 2016). These three Airbus A330-300 aircraft delivered on long-term leases to Turkish Airlines subsequent to March 31, 2017.

Lease Terms

Most of our leases provide that the lessee’s payment obligations are absolute and unconditional under any and all circumstances. Of our 30 owned aircraft as of March 31, 2017, 28 have fixed rental

 

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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 early termination and/or 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 to gross up lease payments where they are subject to withholdings and other taxes. We also use contractual terms in the 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.

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

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—leasing and selling of commercial aircraft.

Key Income Statement Items

Rental Income

Rental income consists of lease rental income derived from leasing commercial 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 in accordance with ASC 840, “Leases”. Monthly lease rentals are generally paid in advance, and a security deposit is typically maintained during the term of the lease. Rentals received, but unearned, under our leases are deferred and recorded as “Unearned rental revenue” on our consolidated balance sheet.

For all lease contracts, any amounts of accrued maintenance liability existing at the end of a lease are 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 (loss) on disposal of aircraft.

Net gain on sale of aircraft

From time to time we may choose to sell one or more of our aircraft and, accordingly, the net gain or loss on the sale of aircraft is recorded as a component of total revenues.

 

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Selling, General and Administrative Expenses

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

We have 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 and we will likely need to hire additional personnel.

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 our aircraft are between 25 and 30 years from the date of manufacture, and are reviewed annually or when a triggering event has occurred. The aircraft depreciate to an estimated residual value which approximates 5% to 15% of the original cost for the aircraft. We expect depreciation to increase as we acquire additional aircraft.

Other Operating Expenses

Other operating expenses primarily consists of certain costs incurred with respect to the reconfiguration of seven aircraft for Turkish Airlines, and expenses related to the creation and ongoing maintenance of the legal structure of our aircraft-owning entities. This includes certain accounting, legal and professional fees. We expect these expenses to increase as we acquire additional aircraft.

Settlement income, net

Settlement income, net relates to income and expenses recognized as a result of the civil rehabilitation of Skymark Airlines. We recognized a gain associated with our share of the award to Skymark’s creditors, net of expenses incurred in connection with the repossession of the aircraft that were on lease to Skymark.

Interest Expense

Our interest expense is comprised of interest expense on borrowings, as well as the amortization of debt issuance costs and debt discounts and premiums. We expect interest expense to increase as we acquire and finance additional aircraft.

Gains (losses) on Derivative Financial Instruments

Gains (losses) on derivative financial instruments consists of the changes in fair values of interest rate swap contracts and, to a lesser extent, foreign currency forward contracts. We utilize interest rate swap contracts to economically hedge our variable interest rate exposure on certain of our borrowings. Under the swap transactions, we make fixed payments and receive 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. Foreign currency forwards are used in certain cases to minimize exposure to positive or negative exchange rate fluctuations versus the U.S. Dollar.

Income Tax Expense

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

 

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the income tax returns of the unit holders. 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.

Results of Operations

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2017 and 2016

 

     2017     2016     Change  
     (unaudited)        

Revenues:

      

Rental income

   $ 71,354     $ 63,333     $ 8,021  
  

 

 

   

 

 

   

 

 

 

Total revenues

     71,354       63,333       8,021  
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Selling, general and administrative expenses

     5,825       5,844       (19

Depreciation

     27,992       27,133       859  

Other operating expenses

     2,710       932       1,778  

Settlement income, net

           (27,160     27,160  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     36,527       6,749       29,778  
  

 

 

   

 

 

   

 

 

 

Operating income

     34,827       56,584       (21,757
  

 

 

   

 

 

   

 

 

 

Other income (expense):

      

Interest expense

     (33,764     (36,016     2,252  

Gains (losses) on derivative financial instruments

     64       (19,500     19,564  

Other income (expense)

     86       (50     136  

Interest income

     18       14       4  
  

 

 

   

 

 

   

 

 

 

Total other expense

     (33,596     (55,552     21,956  
  

 

 

   

 

 

   

 

 

 

Income before taxes

     1,231       1,032       199  

Income tax expense

           336       (336
  

 

 

   

 

 

   

 

 

 

Net income

   $ 1,231     $ 696     $ 535  
  

 

 

   

 

 

   

 

 

 

Rental income

Rental income increased by $8.1 million from $63.3 million for the three months ended March 31, 2016 to $71.4 million for the three months ended March 31, 2017. The change in rental income was primarily attributed to an increase in the average number of revenue-generating aircraft in service from an average of 22 aircraft for the three months ended March 31, 2016 to an average of 25 aircraft for three months ended March 31, 2017. Six aircraft, comprised of two new Boeing 777-300 ER aircraft and four owned Airbus A330-300 aircraft, delivered on long-term lease between October 1, 2016 and March 31, 2017. Incremental rental income associated with these six aircraft for the three months ended March 31, 2017 compared to March 31, 2016 was partially offset by lower rental income attributed to two A330-300 aircraft that were sold on April 1, 2016 and December 22, 2016.

Selling, general and administrative expenses

Selling, general and administrative expenses were $5.8 million for each of the three months ended March 31, 2017 and 2016. As a percentage of revenue, selling, general and administrative expenses decreased 100 basis points from 9.2% for the three months ended March 31, 2016 compared to 8.2% for the three months ended March 31, 2017 attributed to an increase in rental income and continued scaling of the business.

 

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Depreciation

Depreciation increased approximately $0.9 million from $27.1 million for the three months ended March 31, 2016 to $28.0 million for the three months ended March 31, 2017 attributed to a change in the mix of aircraft type from March 31, 2016 to March 31, 2017.

Other operating expenses

Other operating expenses increased $1.8 million for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 due to non-capitalizable costs incurred with regard to the reconfiguration of six aircraft for Turkish Airlines (excludes one aircraft that delivered on long-term lease to Turkish Airlines in 2016).

Settlement income, net

During the three months ended March 31, 2016, the final portion of the Skymark rehabilitation claim allocable to creditors under the terms of the approved rehabilitation plan of $27.2 million was received and recognized within “Settlement income, net” in our consolidated statement of operations. No such income was recorded during the three months ended March 31, 2017.

Interest expense

Interest expense was $33.8 million for the three months ended March 31, 2017, compared to $36.0 million for the three months ended March 31, 2016. The decrease in interest expense is primarily attributed to a lower average debt balance outstanding for the three months ended March 31, 2017 ($2,540.8 million) compared to the three months ended March 31, 2016 ($2,582.1 million).

Included within the three months ended March 31, 2016 was $3.0 million of costs associated with the restructuring of two secured credit facilities, as well as interest expense of $2.4 million related to one secured credit facility that matured in 2016 and two secured credit facilities that were fully paid in connection with the sale of the corresponding aircraft. The decrease in interest expense period over period related to the above items was partially offset by incremental interest expense related to two aircraft purchased and financed during the three months ended December 31, 2016.

Gains (losses) on derivative financial instruments

We recognized gains on derivative financial instruments of $0.1 million for the three months ended March 31, 2017 and losses on derivative financial instruments of $19.5 million for the three months ended March 31, 2016. The change is primarily attributed to mark-to-market adjustments on our interest rate swaps (used to economically hedge interest expense on certain variable-rate borrowings) due to favorable changes in interest rates from March 31, 2016 to March 31, 2017. We recognized unrealized gains on derivative financial instruments of $2.1 million for the three months ended March 31, 2017, compared to unrealized losses on derivative financial instruments of $16.7 million for the three months ended March 31, 2016.

Net Income (loss)

We had net income of $1.2 million and $0.7 million for the three months ended March 31, 2017 and 2016, respectively, an increase of $0.5 million.

 

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Consolidated Statements of Operations for the Years Ended December 31, 2016 and 2015

 

     2016     2015     Change  

Revenues:

      

Rental income

   $ 254,251     $ 254,642     $ (391

Net gain on sale of aircraft

     8,583             8,583  
  

 

 

   

 

 

   

 

 

 

Total revenues

     262,834       254,642       8,192  
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Selling, general and administrative

     21,000       23,848       (2,848

Depreciation

     99,821       109,357       (9,536

Other operating expenses

     4,755       2,115       2,640  

Settlement income, net

     (27,160     (24,068     (3,092
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     98,416       111,252       (12,836
  

 

 

   

 

 

   

 

 

 

Operating income

     164,418       143,390       21,028  
  

 

 

   

 

 

   

 

 

 

Other income (expense):

      

Interest expense

     (133,610     (111,377     (22,233

Losses on derivative financial instruments

     (574     (18,230     17,656  

Other income (expense)

     28       (217     245  

Interest income

     63       61       2  
  

 

 

   

 

 

   

 

 

 

Total other expense

     (134,093     (129,763     (4,330
  

 

 

   

 

 

   

 

 

 

Income before taxes

     30,325       13,627       16,698  

Income tax expense

     667       1,073       (406
  

 

 

   

 

 

   

 

 

 

Net income

   $ 29,658     $ 12,554     $ 17,104  
  

 

 

   

 

 

   

 

 

 

Rental income

Rental income decreased by $0.3 million from $254.6 million for the year ended December 31, 2015 to $254.3 million for the year ended December 31, 2016. Rental income for the year ended December 31, 2015 included $19.4 million of security deposits and maintenance reserves recognized into rental income in relation to a customer default, as well as revenues of $9.5 million associated with four aircraft on lease to the relevant customer prior to the termination of these leases. The decrease in rental income for the year ended December 31, 2016 of $28.9 million was offset by an increase in rental income of $28.6 primarily attributed to (i) the full-year impact of four revenue-generating aircraft that delivered during the year ended December 31, 2015 (includes one aircraft that was sold on April 1, 2016) and (ii) two aircraft that delivered new on long-term lease during the year ended December 31, 2016.

Net gain on sale of aircraft

The year ended December 31, 2016 includes a $8.6 million gain on the sale of two Airbus A330-300 aircraft, net of the related costs. We did not sell any aircraft during the year ended December 31, 2015.

Selling, general and administrative expenses

Selling, general and administrative expenses were $21.0 million and $23.8 million for the years ended December 31, 2016 and 2015, respectively, a decrease of $2.8 million. The change is primarily attributed to lower travel and personnel costs during the year ended December 31, 2016, partially offset by higher insurance costs due to a larger average fleet compared to the year ended

 

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December 31, 2015. The average fleet increased by four aircraft to 28 aircraft for the year ended December 31, 2016, from an average of 24 aircraft for the year ended December 31, 2015. We did not incur any severance costs during the year ended December 31, 2016 compared to $1.4 million of one-time severance cost in the year ended December 31, 2015.

Depreciation

Depreciation decreased approximately $9.6 million from $109.4 million for the year ended December 31, 2015 to $99.8 million for the year ended December 31, 2016. The year ended December 31, 2015 included accelerated depreciation of $20.5 million on specific buyer furnished equipment, primarily seats and seat power, related to the seven aircraft formerly on lease to Skymark Airlines. Additionally, the year ended December 31, 2016 included a decrease in depreciation expense of $6.2 million in connection with our accounting policy for maintenance rights. Excluding the two aforementioned items, depreciation expense increased $17.2 million year over year, primarily attributed to $15.9 million related to the full-year impact of seven aircraft that delivered during the year ended December 31, 2015 (includes one aircraft that was sold on April 1, 2016), and $1.3 million related to two aircraft that delivered during the year ended December 31, 2016. As previously noted, the average fleet increased by four aircraft year-over-year.

Other operating expenses

Other operating expenses increased $2.7 million for the year ended December 31, 2016 compared to the year ended December 31, 2015 due to non-capitalizable costs incurred with regard to the reconfiguration of seven aircraft for Turkish Airlines.

Settlement income, net

Settlement income, net was $27.2 million for the year ended December 31, 2016, compared to $24.1 million for the year ended December 31, 2015, as a result of the civil rehabilitation of Skymark Airlines. This increase in the year ended December 31, 2016 is due to receiving the final portion of the rehabilitation claim allocable to creditors under the terms of the approved rehabilitation plan for Skymark Airlines. As the award was paid in Japanese Yen, we entered into a forward contract to economically hedge its exposure to movements in the Japanese Yen versus the U.S. Dollar, which was physically settled during March 2016. We were awarded common benefit and administrative claims approximating $30.0 million during 2015 due to the Skymark rehabilitation process. Accordingly, we recognized this amount, $30.0 million, net of the related costs, $5.9 million, in Settlement income, net for the year ended December 31, 2015.

Interest expense

Interest expense was $133.6 million for the year ended December 31, 2016, compared to $111.4 million for the year ended December 31, 2015. The increase, $22.2 million, is partially attributed to six aircraft purchased and financed during the year ended December 31, 2015 (excludes one unencumbered aircraft that was purchased during the year ended December 31, 2015). Additionally, $5.0 million relates to incremental interest expense incurred for the 2017 Notes which were issued in July 2015. Further, interest expense for the year ended December 31, 2016 includes $4.9 million of costs associated with the restructuring of two secured credit facilities, and accelerated amortization of deferred financing costs in connection with the sale of two Airbus A330-300 aircraft.

Losses on derivative financial instruments

We recognized losses on derivative financial instruments of $0.6 million and $18.2 million for the years ended December 31, 2016 and 2015, respectively, representing a change of $17.6 million. Such

 

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losses for the years ended December 31, 2016 and 2015 were primarily attributed to realized losses related to interest rate swaps (used to economically hedge variable interest rate expense on certain borrowings) due to changes in interest rates during the respective periods.

Income tax expense

Income tax expense was $0.7 million and $1.1 million for the years ended December 31, 2016 and 2015, respectively, a decrease of $0.4 million.

Net Income

We had net income of $29.7 million and $12.6 million for the years ended December 31, 2016 and 2015, respectively, an increase of $17.1 million.

Consolidated Statements of Operations for the Years Ended December 31, 2015 and 2014

 

     2015     2014     Change  

Revenues:

      

Rental income

   $ 254,642     $ 186,094     $ 68,548  

Operating expenses:

      

Selling, general and administrative

     23,848       23,080       768  

Depreciation

     109,357       59,579       49,778  

Other operating expenses

     2,115       5,200       (3,085

Settlement income, net

     (24,068           (24,068
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     111,252       87,859       23,393  
  

 

 

   

 

 

   

 

 

 

Operating income

     143,390       98,235       45,155  
  

 

 

   

 

 

   

 

 

 

Other income (expense):

      

Interest expense

     (111,377     (71,965     (39,412

Losses on derivative financial instruments

     (18,230     (30,914     12,684  

Other expense

     (217     (11     (206

Interest income

     61       6       55  
  

 

 

   

 

 

   

 

 

 

Total other expense

     (129,763     (102,884     (26,879
  

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

     13,627       (4,649     18,276  

Income tax expense

     1,073       869       204  
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 12,554     $ (5,518   $ 18,072  
  

 

 

   

 

 

   

 

 

 

Our financial results are impacted by the timing and size of acquisitions and dispositions of aircraft we complete. As of December 31, 2015 and 2014, we had 29 and 22 aircraft in our portfolio, respectively. As of December 31, 2015, our owned aircraft were on lease to 13 customers in 11 countries.

Rental Income

Rental income increased by $68.5 million to $254.6 million for the year ended December 31, 2015. $59.5 million of the increase was primarily attributable to the full year impact of 12 aircraft placed in service (or delivered) during the year ended December 31, 2014 combined with the impact of deliveries during 2015. The impact of the seven owned aircraft previously on lease with Skymark Airlines of $9.9 million (primarily driven by $19.4 million of revenue realized in relation to security deposits and maintenance reserves) also contributed to the increase.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $23.8 million and $23.1 million for the years ended December 31, 2015 and 2014, respectively, an increase of $0.7 million. Included within 2015 was

 

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approximately $1.4 million of expenses from a severance agreement with our former chief executive officer. Selling, general and administrative expenses decreased as a percentage of total revenues to 9.4% from 12.4% due to the continued expansion of our fleet in 2015, the full year impact of additions to our fleet in 2014 and cost cutting initiatives in 2015.

Depreciation

Depreciation was $109.4 million and $59.6 million for the years ended December 31, 2015 and 2014, respectively, an increase of $49.8 million. This increase was primarily driven by the full year impact of the 12 aircraft placed in service during the year ended December 31, 2014 of approximately $24.1 million and the impact of seven owned aircraft placed in service during the year ended December 31, 2015 of $5.2 million. In addition to the full year impact of aircraft placed into service in 2014 and additions to our fleet in 2015, we accelerated $20.5 million of depreciation expenses related to specific buyer furnished equipment related to seven owned aircraft formerly on lease to Skymark Airlines. Management currently estimates that this equipment has no material salvage value as a result of its specific customization for Skymark Airlines and our expectation of limited interest in the secondary market to purchase it.

Other Operating Expenses

Other operating expenses were $2.1 million and $5.2 million for the years ended December 31, 2015 and 2014, respectively, a decrease of $3.1 million. This decrease was primarily attributable to a non-recurring prior year management compensation program, which was satisfied in April 2015. Expense recognized during the year ended December 31, 2014 under this program was $4.5 million, approximately $4.1 million higher than the $0.4 million recorded during the year ended December 31, 2015.

Settlement income, net

Settlement income, net for the year ended December 31, 2015 consisted of $30.0 million of income and $5.9 million of expenses recognized as a result of the civil rehabilitation of Skymark Airlines. We incurred expenses associated with the repossession of the aircraft that were on lease to the airline and an offsetting gain associated with its share of the award to Skymark’s creditors.

Interest Expense

Interest expense was $111.4 million for the year ended December 31, 2015, compared to $72.0 million for the year ended December 31, 2014. The increase of $39.4 million in interest expense was primarily attributable to the impact of the six aircraft purchased and financed during the year ended December 31, 2015, as well as the full year impact of the 12 aircraft purchased and financed during the year ended December 31, 2014. In addition, we issued $215 million and $120 million of senior unsecured notes in August 2014 and July 2015, respectively, driving an increase year over year in interest expense of approximately $17.0 million.

Losses on Derivative Financial Instruments

Losses on derivative financial instruments were $18.2 million for the year ended December 31, 2015 compared to $30.9 million for the year ended December 31, 2014. Losses were primarily attributable to the changes in the fair value of interest rates swaps used to economically hedge variable interest rate expense on certain borrowings. Although rates increased throughout the year, we realized a portion of our position at weighted average interest rates lower than those for which we fixed our interest rate swaps.

 

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Other Expense

Other expense was an insignificant amount for the years ended December 31, 2015 and 2014 and was primarily comprised of foreign exchange gains and losses that were incurred on our non-U.S. dollar denominated activities.

Income Tax Expense

Income tax expense was $1.1 million and $0.9 million for the years ended December 31, 2015 and 2014, respectively, an increase of $0.2 million.

The total income tax expense for the year ended December 31, 2015 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 to our consolidated financial statements included elsewhere 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 of $12.6 million and a net loss of $5.5 million for the years ended December 31, 2015 and 2014, respectively, an increase of $18.1 million.

Liquidity and Capital Resources

We finance the acquisition of our aircraft with available cash balances, internally generated funds from our aircraft-owning subsidiaries, cash flow from operations, debt financings, equity capital and U.S. capital market transactions. During the three months ended March 31, 2017, we purchased one new Boeing 747-8F freighter aircraft, which was financed with $123.0 million of secured debt. During the year ended December 31, 2016 we purchased two new Boeing 777-300ER aircraft, which were financed with $240.0 million of secured debt. During the year ended December 31, 2015, we purchased seven new Airbus A330-300 aircraft, which were financed with $413.0 million of secured debt (excluding pre-delivery payment facilities).

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.

 

We believe that our available liquidity, consisting of unrestricted cash balances of $15.1 million as of March 31, 2017, combined with internally generated funds from our aircraft-owning subsidiaries, including cash flows provided by operations, will be sufficient to satisfy our operating requirements for the next twelve months. In addition to our available liquidity, we will need access to additional capital through debt or equity financings to meet commitments under our existing purchase contract, to execute our growth strategy and to repay or refinance our existing debt. Specifically, we intend to fund

 

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our unfunded commitments under our existing purchase contract with secured debt financing from leading commercial banks, additional capital, including additional capital from our existing members, or proceeds from capital markets transactions (including levering our two unencumbered aircraft). We have access to $105 million of additional capital from Reservoir, subject to Reservoir’s approval. However, after the consummation of this offering, we do not anticipate receiving any additional capital contributions from Reservoir or our other members. Our access to additional sources of financing, including debt and equity capital, and our ability to repay or refinance amounts outstanding under our existing 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, compliance with the terms of our limited liability company agreement (including obtaining the approval of a member of our board of managers appointed by Centerbridge with respect to certain corporate transactions), interest rate fluctuations, and our current and potential future earnings and cash distributions. There can be no assurance that we will be able to access additional capital through debt or equity financings on commercially reasonable terms or at all.

We expect to incur approximately $10 million of reconfiguration costs per aircraft, most of which will be capitalizable, in connection with our leases to Turkish Airlines. With regard to the four aircraft that were delivered to Turkish Airlines between December 1, 2016 and March 31, 2017, we capitalized $36.1 million of reconfiguration costs within the cost of aircraft. We expect to continue to incur reconfiguration costs through the delivery of the remaining three aircraft to Turkish Airlines.

Cash Flows

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

 

    Three Months Ended
March 31,
    Year Ended December 31,  
    2017     2016     2016     2015     2014  
    (unaudited)                    

Consolidated Statements of Cash Flows:

         

Net cash provided by operating activities

    $16,444       $33,264     $ 131,775     $ 101,720     $ 90,915  

Net cash provided by (used in) investing activities

    (159,884)       1,954       (28,576     (629,240     (1,188,086

Net cash provided by (used in) financing activities

    90,182       (49,634)       (90,447     529,318       1,132,951  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash

    (53,258)       (14,416)       12,752       1,798       35,780  

Cash at beginning of period

    68,312       55,560       55,560       53,762       17,982  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash at end of period

    $15,054       $41,144     $ 68,312     $ 55,560     $ 53,762  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows for the Three Months Ended March 31, 2017 and 2016.

Net cash provided from operating activities for the three months ended March 31, 2017 and 2016 was $16.4 million and $33.3 million, respectively, a decrease of $16.9 million. Net cash provided from operating activities for the three months ended March 31, 2016 included the final settlement proceeds of $27.2 million received in connection with the civil rehabilitation claim of Skymark Airlines. Excluding this amount, net cash provided from operating activities increased $10.3 million primarily attributed to an increase in net income (excluding the impact of unrealized gains or losses on derivative financial instruments) and changes in working capital during the three months ended March 31, 2017 compared to the three months ended March 31, 2016.

 

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Net cash used by investing activities for the three months ended March 31, 2017 was $159.9 million compared to net cash provided from investing activities of $2.0 million for the three months ended March 31, 2016. Net cash used by investing activities for the three months ended March 31, 2017 primarily consisted of $158.5 million related to the purchase and delivery of one new Boeing 747-8F aircraft, as well as the purchase of buyer furnished equipment for the reconfiguration of the Turkish Airlines’ aircraft. We did not purchase any aircraft during the three months ended March 31, 2016.

Net cash provided from financing activities for the three months ended March 31, 2017 was $90.2 million compared to $49.6 million of net cash used by financing activities for the three months ended March 31, 2016. Net cash provided from financing activities for the three months ended March 31, 2017 included proceeds from new debt of $129.3 million primarily related to the financing of one Boeing 747-8F aircraft that was purchased and delivered and, to a lesser extent, vendor financing for a portion of the Turkish Airlines’ reconfiguration costs. This was partially offset by $41.9 million of principal repayments during the three months ended March 31, 2017. Net cash used by financing activities for the three months ended March 31, 2016 primarily included $51.6 million of principal repayments.

Cash Flows for the Years Ended December 31, 2016 and 2015

Net cash provided by operating activities for the years ended December 31, 2016 and 2015 approximated $131.8 million and $101.7 million, respectively. The increase, $30.1 million, is primarily attributed to changes in working capital and an increase in net income during the year ended December 31, 2016. Net income for the year ended December 31, 2015 included the non-cash recognition of $19.4 million of security deposits and maintenance reserves into rental income in relation to a customer default.

Net cash used in investing activities for the year ended December 31, 2016 was $28.6 million compared to $629.2 million for the year ended December 31, 2015. Net cash used in investing activities for the year ended December 31, 2016 primarily consists of $232.8 million related to the purchase and delivery of two new Boeing 777-300ER aircraft, as well as the purchase of buyer furnished equipment for the Turkish Airlines’ aircraft currently being reconfigured. This was partially offset by proceeds received from the sale of two Airbus A330-300 Aircraft of $214.2 million during the year ended December 31, 2016. We did not sell any aircraft during the year ended December 31, 2015. Net cash used in investing activities for the year ended December 31, 2015 included the impact of cash paid for the purchase of seven Airbus A330-300s, in addition to pre-delivery payments related to the Boeing order book and two Airbus A330-300s that were delivered during the year ended December 31, 2015. We did not make any pre-delivery payments during the year ended December 31, 2016.

Net cash provided by (used in) financing activities for the year ended December 31, 2016 was $90.4 million of net cash used in financing activities compared to $529.3 million of net cash provided by financing activities for the year ended December 31, 2015. Net cash used in financing activities for the year ended December 31, 2016 primarily consisted of the repayment of debt principal of $344.6 million. Of the aforementioned amount, $135.1 million relates to the repayment of secured debt associated with the two Airbus A330-300 that were sold during the year ended December 31, 2016. Additionally, we paid $52.2 million related to one of our secured credit agreements that matured in the current year, as well as $11.0 million of principal prepayments related to the amendment of one of our secured credit agreements. The year ended December 31, 2016 also includes proceeds from new debt of $258.6 million primarily related to the financing of two Boeing 777-300ER aircraft that were purchased and delivered. Net cash provided by financing activities in the year ended December 31, 2015 included cash provided by financing activities related to $94.0 million of capital contributions, in addition to proceeds received in connection with new financings (inclusive of secured credit agreements, PDP

 

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debt, and the issuance of senior unsecured notes) of $713.6 million, partially offset by repayments of debt financings and PDP debt of $259.2 million.

Cash Flows for the Years Ended December 31, 2015 and 2014

Net cash provided by operating activities for the years ended December 31, 2015 and 2014 was $101.7 million and $90.9 million, respectively. The increase was primarily attributable to cash received as part of the rehabilitation settlement from Skymark Airlines.

Net cash used in investing activities for the years ended December 31, 2015 and 2014 was $629.2 million and $1,188.1 million, respectively. The decrease was primarily attributable to lower expansion of our fleet in 2015 compared to 2014.

Net cash provided by financing activities for the years ended December 31, 2015 and 2014 was $529.3 million and $1,133.0 million, respectively. The decrease was primarily attributable to lower financing requirements associated with the aircraft purchased in 2015 compared to 2014 due to the lower expansion of our fleet in 2015 compared to 2014.

Indebtedness

The table below sets forth the details of our existing long-term debt and secured obligations as of March 31, 2017 and December 31, 2016.

 

     March 31,
2017
    December 31,
2016
 
     (unaudited)        

Secured term loans

   $ 1,993,333     $ 1,907,623  

Senior unsecured notes

     635,000       635,000  

Other debt

     18,496       16,834  
  

 

 

   

 

 

 

Total debt

     2,646,829       2,559,457  

Less: debt issuance costs and debt discount

     (31,212     (33,560

Add: debt premium

     1,974       2,221  
  

 

 

   

 

 

 

Net debt

     2,617,591       2,528,118  

Less: current maturities of long-term debt

     (482,249     (402,635
  

 

 

   

 

 

 

Long-term debt, net of current maturities

   $ 2,135,342     $ 2,125,483  
  

 

 

   

 

 

 

Number of aircraft pledged as collateral

     28       27  

Net book value of aircraft pledged as collateral

   $ 2,853,175       2,683,540  

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, $1,294.8 million is considered nonrecourse as of March 31, 2017. These loans contain provisions that generally require the payment of principal and interest throughout the term of the loan. The interest rates on the senior loans are based on fixed rates between 2.80% and 6.21% and 1-month and 3-month LIBOR plus a margin between 1.70% and 5.00% on the floating loans. The interest rates on the subordinated loans are based on fixed rates between 7.80% and 11.12% and 3-month LIBOR plus a margin of 5.25% for the floating-rate loan.

In April 2017, we entered into an amendment with Citibank regarding one of our existing secured credit agreements. The credit agreement amendment, among other terms, extended the maturity date of the Citi MSN 1554 Facility, with an outstanding balance of $57.6 million as of March 31, 2017, from

 

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June 30, 2017 to December 30, 2018. We determined that the restructuring of the facility represented an insubstantial modification under ASC 470, “Debt”. In accordance with ASC 470, we included the principal outstanding (excluding the portion of principal to be paid within one year) in “Long-term debt” on our unaudited condensed consolidated balance sheet as of March 31, 2017.

Senior Unsecured Notes

On January 29, 2014 and August 18, 2014, we issued $300 million and $215 million, respectively, of aggregate principal amount of the 2019 Notes at issue prices of 100% and 102%, respectively, under the same bond indenture. The 2019 Notes have a stated coupon interest rate of 6.875% per annum payable semi-annually beginning August 15, 2014 and will mature on February 15, 2019. We used the net proceeds for aircraft acquisitions and general corporate purposes.

On July 2, 2015, we issued $120 million of aggregate principal amount of the 2017 Notes at an issue price of 100%. The 2017 Notes have a stated coupon interest rate of 8.250% per annum payable semi-annually beginning January 15, 2016 and matured on July 15, 2017 (which were repaid at maturity). We used the net proceeds of the 2017 Notes for aircraft acquisitions and general corporate purposes.

Other Debt

During three months ended March 31, 2017 and the year ended December 31, 2016, we entered into vendor financings for a portion of the Turkish Airlines’ reconfiguration costs of $6.3 million and $18.5 million respectively, with one year terms. Of the total vendor financings, $18.5 million was outstanding as of March 31, 2017. Subsequent to March 31, 2017, we entered into the final vendor financing for the reconfiguration costs of $1.3 million with one year terms. The Turkish Airlines’ reconfiguration costs financed with vendor financings totaled $26.1 million.

The table below sets forth the details of our future payments due under our existing indebtedness as of March 31, 2017 for fiscal years ending:

 

    2017
(remaining
nine
months)
    2018     2019     2020     2021     Thereafter     Total  

Secured term loans

  $ 184,150     $ 325,873     $ 166,082     $ 207,696     $ 313,516     $ 796,016     $ 1,993,333  

Senior unsecured notes

    120,000             515,000                         635,000  

Other debt

    16,921       1,575                               18,496  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 321,071     $ 327,448     $ 681,082     $ 207,696     $ 313,516     $ 796,016     $ 2,646,829  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 March 31, 2017 and December 31, 2016 we were in compliance with all covenants related to our 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 our forward aircraft orders. For the three months ended March 31, 2017 and 2016, and the years ended December 31, 2016, 2015 and 2014, interest costs incurred and capitalized were as follows:

 

     Three Months Ended
March 31,
    Years Ended
December 31,
 
     2017     2016     2016     2015     2014  
     (unaudited)                    

Interest on borrowings

   $ 34,917     $ 38,901     $ 144,536     $ 125,999     $ 89,832  

Less capitalized Interest

     (1,153     (2,885     (10,926     (14,622     (17,867
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

   $ 33,764     $ 36,016     $ 133,610     $ 111,377     $ 71,965  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended March 31, 2017 and 2016 and, cash coupon interest paid on our secured term loans, senior unsecured notes, and other debt was $34.9 million and $38.9 million, respectively. We capitalized $1.2 million and $2.9 million during the three months ended March 31, 2017 and 2016 primarily related to the financing of our aircraft deposits for our Boeing forward order. As our aircraft deliver, capitalized interest becomes part of the aircraft book value and will be depreciated over the useful life of the respective asset.

Off-Balance Sheet Arrangements

We have not created, and are not party to, any 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, 2016, we had contractual obligations in future years related to our purchase agreement with Boeing, consisting of our forward order of two 777-300ER and two 747-8F freighter aircraft. The obligations relate to the purchase of aircraft airframes, aircraft engines and related equipment. The following chart details the contractual obligations in future years:

 

    2017     2018     2019     2020     2021     Thereafter     Total  

Total purchase commitments (1)

  $ 758,200     $     $ 679,200     $     $     $     $ 1,437,400  

Aircraft deposits paid to date

    (50,000           (30,127                       (80,127
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Remaining commitments on aircraft purchases

    708,200             649,073                         1,357,273  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Principal repayments

    402,635       158,513       681,082       207,696       313,516       796,015       2,559,457  

Interest payments (2)

    135,028       113,065       87,824       61,003       48,492       80,130       525,542  

Other obligations (3)

    689       777       843       855       868       1,119       5,151  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total contractual obligations

  $ 1,246,552     $ 272,355     $ 1,418,822     $ 269,554     $ 362,876     $ 877,264     $ 4,447,423  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1) Includes our four committed aircraft under the Boeing purchase agreement as of December 31, 2016. All aircraft acquisitions are included at purchase list price and 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 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, 2016. 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 Dublin, Ireland.

Subsequent to December 31, 2016, we entered into the following contractual obligations:

 

    In April 2017, we entered into an amendment with Citibank regarding one of our existing secured credit agreements. The credit agreement amendment, among other terms, extended the maturity date of the Citi MSN 1554 Facility, with an outstanding balance of $58.2 million as of December 31, 2016, from June 30, 2017 to December 30, 2018.

 

    We secured vendor financing for a portion of the Turkish Airlines’ reconfiguration costs in the amount of $7.6 million during 2017, representing the final vendor financings related to the Turkish Airlines reconfiguration program.

 

    Six Airbus A330-300 aircraft delivered on long-term leases to Turkish Airlines in 2017. As of the date of this prospectus, all seven Airbus A330-300 aircraft delivered on long-term lease to Turkish Airlines, and marked the completion of the reconfiguration program.

 

    In March 2017, we executed an agreement with Philippine Airlines for the long-term lease of two new 777-300ER aircraft, representing the placement of the remaining two 777-300ER aircraft under our purchase agreement with Boeing. The two 777-300ER aircraft are scheduled for delivery to Philippine Airlines in December 2017. Prior to the placement of these two 777-300ER aircraft with Philippine Airlines, the two aircraft had scheduled deliveries in the first half of 2019.

 

    In connection with our Boeing purchase agreement, we purchased and took delivery of one 747-8F freighter aircraft on March 31, 2017, which was leased to AirBridgeCargo Airlines on the acquisition date. We entered into a secured debt agreement, for a $123 million loan, to provide acquisition financing for the purchase of the 747-8F freighter aircraft. The loan matures 12 months after the drawdown date.

 

    In July 2017, we entered into a secured credit agreement with Deutsche Bank for $175 million to provide leverage on our two unencumbered Airbus A330-300 aircraft on long-term leases with Turkish Airlines and for the refinancing of one Airbus A330-300 aircraft on long-term lease with Turkish Airlines that was previously financed with Deutsche Bank. The loans mature between December 2022 and April 2023. The net proceeds were used to repay the 2017 Notes.

 

    In July 2017, we entered into an amendment with Erste Bank regarding one of our existing secured credit agreements. The credit agreement amendment, among other terms, extended the maturity date of the Erste Bank MSN 1635 Facility, with an outstanding balance of $57.5 million as of December 31, 2016, from November 24, 2017 to February 9, 2023.

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

 

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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 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 Holdings, 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, which typically requires the customer pay all operating expenses including maintenance, taxes and insurance. Under certain of our lease arrangements we, periodically, collect maintenance reserve payments in restricted cash accounts based on the passage of time or usage of the aircraft measured by hours flown or cycles operated. Upon the submission of claims for expenses incurred by the lessee for certain major maintenance (up to a maximum amount that is typically determined based on maintenance reserves paid by the lessee), we use the restricted cash in the maintenance reserve to fund such claims. 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.

Aircraft

Purchased aircraft held for lease, are stated at cost less accumulated depreciation and are depreciated using the straight-line method over their estimated useful lives. Estimated useful lives of the currently owned aircraft are between 25 and 30 years from the date of manufacture. Estimated residual values are determined to be approximately 5% to 15% of original cost of the aircraft. We periodically review the estimated useful lives and residual values of our aircraft based on our knowledge and external factors coupled with market conditions to determine if they are appropriate, and record adjustments to depreciation prospectively on an aircraft-by-aircraft basis as necessary.

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

With regard to our owned aircraft, we make estimates about the expected useful lives, the fair value of attached leases, assumed maintenance liabilities and the estimated residual values. Changes in the estimated useful lives or residual values for aircraft could have a significant impact on our results of operations and financial condition. These estimates include certain assumptions that are based upon actual industry experience with the same or similar aircraft types and our anticipated use of the aircraft. As part of our due diligence review of each aircraft we purchase through trading activities, we evaluate the transaction to consider whether there are other assets acquired and/or liabilities assumed,

 

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such as those related to lease terms that are above or below market as well as maintenance rights. If we determine the lease to be above or below market, we recognize a separate lease asset or liability for the contract respectively which is recognized over the remaining lease term. In addition, we recognize maintenance right assets or liabilities, taking into consideration the then-current maintenance status of the aircraft and the relevant provisions of any existing lease. The maintenance reserve is designed to protect us from any liability with respect to maintenance costs, subject to certain limited exceptions.

Aircraft Maintenance

Under all of our aircraft leases, the lessee has to return the aircraft in full-life condition 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. Our leases require the lessee to pay cash maintenance reserves periodically, to post letters of credit or make full-life financial adjustment payments.

In certain 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 us 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 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 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 re-delivered in a different condition than at acceptance, there is a full-life financial adjustment for the difference at re-delivery. We recognize receipts of full-life financial adjustment as additional rental income when received and payments of full-life financial adjustment as leasing expense. Other lease contracts require the lessee to post letters of credit to ensure that we take re-delivery of our aircraft in the condition specified in the lease.

In the future, we may incur repair and maintenance expenses for off-lease aircraft. For planned major maintenance activities for aircraft off-lease, the Company capitalizes the actual maintenance cost of the major maintenance events, which are depreciated on a straight-line basis over the period until the next maintenance event is required.

For all lease contracts, any amounts of accrued maintenance liability existing at the end of a lease are 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 (loss) on disposal of aircraft.

Impairment of Aircraft

Aircraft are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. 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, or a significant reduction in the useful life of aircraft.

 

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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 judgment 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 net cash flows consist of cash flows from currently contracted leases, future projected lease rates, reconfiguration costs 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, we determine the estimated fair value of the aircraft through various valuation techniques, including discounted cash flow models and third-party independent appraisals. If the carrying value of the long-lived asset or asset group is not recoverable, impairment is recognized to the extent that the carrying value exceeds its estimated fair value.

There were no impairment losses recorded on aircraft for the three months ended March 31, 2017 and 2016 and for the years ended December 31, 2016, 2015, and 2014.

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 swaps (derivative financial instruments) on a recurring basis. Our valuation model for interest rate swaps, based on inputs considered 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 derivative assets or liabilities. Our interest rate swaps are sensitive to market changes in LIBOR.

Assets subject to fair value measurements include aircraft. We adjust aircraft to its 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.

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. Foreign currency forwards are used in certain cases to minimize exposure to positive or negative exchange rate fluctuations versus the U.S. dollar.

All interest rate derivative financial instruments 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 “Gains (losses) on derivative financial instruments” in

 

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the consolidated statements of operations. We determine fair value for our interest rate swaps 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 consider the credit risk of the Company itself and that of the counterparty as required.

As of March 31, 2017 and 2016, December 31, 2016, 2015 and 2014, and for the periods then ended, we did not apply hedge accounting to any of our derivative instruments.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit 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. We evaluate deferred tax assets on an annual basis to determine if valuation allowances are required by considering available positive and negative evidence. Changes in recognition or measurement are reflected in the period in which the change in recoverability 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.

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 the evaluation of the more likely than not threshold occurs. We record interest and penalties related to unrecognized tax benefits in income tax expense. As of March 31, 2017 and December 31, 2016, we did not have any unrecognized tax benefits.

Intrepid Holdings 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 Holdings. 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, our consolidated financial statements included elsewhere in this prospectus do not include a significant provision for non-U.S. income tax.

Recently Issued Accounting Pronouncements

On May 28, 2014, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) (collectively, the “Boards”), jointly issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. Lease contracts within the scope of Accounting Standards Codification (“ASC”) 840, “Leases”, are specifically excluded from ASU No. 2014-09. The standard requires companies to recognize revenue when they transfer promised goods or services to customers in an amount that reflects the consideration to which a

 

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company expects to be entitled in exchange for those goods or services. The standard is effective for public entities for annual periods (including interim reporting periods within those periods) beginning after December 15, 2017, and for nonpublic entities for annual periods beginning after December 15, 2018 and interim periods beginning after December 15, 2019. Companies are permitted to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The standard does not impact the accounting of our rental income as it does not fall within the scope of ASU No. 2014-09. While we are still performing our analysis, we do not expect the impact of this standard to be material to our consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, which replaces the existing guidance in ASC 840, “Leases”. The accounting for leases by lessors under the new standard is largely unchanged from the concepts that exist in ASC 840. ASC 842 requires lessors to classify leases as a sales-type, direct financing, or operating lease. The new standard is effective for public entities for annual periods (including interim reporting periods within those periods) beginning after December 15, 2018, and for nonpublic entities for annual periods beginning after December 15, 2019 and interim periods beginning after December 15, 2020. Early adoption is permitted, however, we have not yet decided whether we will early adopt the new standard. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are currently evaluating the effect of adoption of ASC 842 on our consolidated financial statements and do not believe the new standard will significantly impact our existing or potential lessees’ economic decisions to lease aircraft between now and adoption.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718)”. The update amends the guidelines for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. We adopted the standard on its required effective date, January 1, 2017. The Standard did not have a material impact on our consolidated financial statements in regards to our current liability-classified awards. However, to the extent we grant future awards, we will evaluate the impact of the standard on such awards and our consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230)”. The amendments in ASU 2016-15 address eight classification issues related to the statement of cash flows. The standard will be effective for public entities for annual periods (including interim reporting periods within those periods) beginning after December 15, 2017, and for nonpublic entities for annual periods beginning after December 15, 2018 and interim periods beginning after December 15, 2019 (early adoption is permitted). The standard is required to be adopted using a retrospective transition method to each period presented. We are currently evaluating this guidance to determine the impact it will have on our consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230)”. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The ASU also requires an entity to provide a reconciliation of cash, cash equivalents and restricted cash reported within the balance sheet that sum to the total of the same such amounts shown in the statement of cash flows, as well as disclose information about the nature of restrictions on cash, cash equivalents, and restricted cash. The standard will be effective for public entities for annual periods (including interim reporting periods within those periods) beginning after December 15, 2017, and for nonpublic entities for annual periods beginning after December 15, 2018 and interim periods beginning after December 15, 2019 (early adoption is permitted). The standard is required to be adopted using a retrospective transition method to each period presented. We are currently evaluating this guidance to determine the impact it will have on our consolidated financial statements.

 

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

We present Non-GAAP Consolidated Net Income, Non-GAAP Consolidated Adjusted EBITDA and Non-GAAP Consolidated Interest Expense, each as defined in the indenture governing our 2017 Notes (which matured on July 15, 2017 and were repaid) and the indenture governing our 2019 Notes, as supplemental measures of our performance and ability to service debt and incur additional debt. For instance, the indentures governing our senior unsecured notes contain limitations on the incurrence or guarantee of additional indebtedness, subject to certain exceptions, including, but not limited to, the ability to incur additional indebtedness if on the date of such incurrence, after giving effect to such incurrence, (a) our Consolidated Net Worth (as defined in the indentures governing our senior notes) is not less than the sum of (i) $447.5 million plus (ii) 50% of any net cash proceeds received (not to exceed $52.5 million in the aggregate), (b) the ratio of our Consolidated Adjusted EBITDA and Consolidated Interest Expense for the most recently ended four full fiscal quarters would have been at least 2.00 to 1.00 on an incurrence basis and (c) our ratio of Consolidated Indebtedness (as defined in the indentures governing our senior notes) to Consolidated Assets (as defined in the indentures governing our senior notes) is no greater than 0.80 to 1.00 on an incurrence basis. 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 Non-GAAP Consolidated Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these types of adjustments. Non-GAAP 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 Consolidated Net Income, Non-GAAP Consolidated Adjusted EBITDA and Non-GAAP 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 Non-GAAP Consolidated Adjusted EBITDA

Non-GAAP Consolidated Net Income is defined in the indentures governing our senior unsecured notes as net income (or loss) of the Company and its consolidated subsidiaries for a period, on a consolidated basis; provided that there shall be excluded any net income, gain or losses during such period from (1) any change in accounting principles in accordance with GAAP, (2) any prior period adjustment resulting from any change in accounting principles in accordance with GAAP, (3) any discontinued operations, (4) any unusual or non-recurring items, (5) any gain (or loss) realized upon

 

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the sale or other disposition of any assets of the Company, its consolidated subsidiaries or any other person (including pursuant to any sale I leaseback arrangement) which are not sold or otherwise disposed of in the ordinary course of business, as determined in good faith by the Board of Directors, and any gain (or loss) realized upon the sale or other disposition of any capital stock of any person, (6) gains (or losses) in respect of foreign currency transactions, (7) solely for the purpose of determining the amount available for restricted payments under the indenture governing the senior unsecured notes, any net income (loss) of any subsidiary (other than guarantors) if such subsidiary is subject to restrictions, directly or indirectly, to either issuer or a guarantor by operation of the terms of such subsidiary’s charter or any agreement, instrument, judgment, decree, order, statute or governmental rule or regulation applicable to such subsidiary or its shareholders (other than (a) restrictions that have been waived or otherwise released and (b) restrictions pursuant to the notes or the indenture), except that the Company’s equity in the net income of any such subsidiary for such period will be included in such Non-GAAP Consolidated Net Income up to the greater of (x) the aggregate amount of cash or cash equivalents permitted to be distributed during such period to the Company or another subsidiary as a dividend or other distribution (subject, in the case of a dividend to another subsidiary, to the limitation contained in this clause) or (y) the actual amount of cash and cash equivalents distributed to the Company in respect of investments made in such subsidiary, (8) the effects of adjustments resulting from the application of purchase accounting in relation to any acquisition that is consummated after the issuance date, net of taxes, (9) any gain (or loss) arising from changes in the fair value of derivatives, (10) any valuation allowance against a deferred tax asset, and (11) amortization of (i) fair value lease premiums and discounts, (ii) lease incentives, (iii) fair value debt discounts, and (iv) debt discounts in respect of indebtedness prior to the existing notes issue date shall be excluded.

Non-GAAP Consolidated Adjusted EBITDA is defined in the indentures governing our senior unsecured notes as Non-GAAP Consolidated Net Income plus, to the extent deducted in determining Non-GAAP 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 (as defined in “Certain Relationships and Related Party Transactions—Limited Liability Company 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 indentures governing our senior unsecured notes (whether or not successful), including such fees, expenses or charges related to the offering of such 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 (in the case of the 2019 Notes) or July 2, 2015 (in the case of the 2017 Notes), (4) the amount of management, monitoring, consulting and advisory fees (including termination fees) and related expenses paid or accrued in such period to the extent otherwise permitted under the indentures governing our 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.

 

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The table below shows the reconciliation of net income (loss) under U.S. GAAP to the Non-GAAP measure of Consolidated Net Income and the Non-GAAP measure of Consolidated Adjusted EBITDA as defined in the indentures governing our senior unsecured notes for the three months ended March 31, 2017 and 2016 and for the years ended December 31, 2016, 2015 and 2014:

 

    Three Months Ended
March 31,
    Year Ended
December 31,
 
    2017     2016     2016     2015     2014  
    (unaudited)     (unaudited)  

Net income (loss)

  $ 1,231     $ 696     $ 29,658     $ 12,554     $ (5,518

Adjustments:

         

Loss on asset disposition (1)

                      20,471        

Loss (gain) on foreign exchange

    107       34       45       303       19  

Loss (gain) on fair value of derivatives

    (2,149     16,746       (10,392     (6,151     20,838  

Amortization of debt discounts for indebtedness issued prior to the Senior unsecured notes

    409       1,178       1,442       1,178       1,664  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP Consolidated Net Income

  $ (402   $ 18,654     $ 20,753     $ 28,355     $ 17,003  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments:

         

Depreciation (2)(3)

    27,992       27,133       99,821       88,886       59,579  

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

    33,355       34,837       132,168       110,198       70,301  

Income tax expense

          336       667       1,073       869  

Non-cash management compensation (4)

    28             83       372       4,473  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP Consolidated Adjusted EBITDA

  $ 60,973     $ 80,960     $ 253,492     $ 228,884     $ 152,225  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Related to accelerated depreciation on specific buyer furnished equipment, primarily seats and in seat power, on seven owned aircraft formerly on lease to Skymark Airlines. As of the date of this prospectus, these seven Airbus A330-300 aircraft are on long-term lease to Turkish Airlines.
(2) For the year ended December 31, 2015, represents depreciation of $109,357 less $20,471 related to accelerated depreciation on specific buyer furnished equipment on seven owned aircraft formerly on lease to Skymark Airlines, which is included as an adjustment above in calculating Non-GAAP Consolidated Net Income.
(3) Depreciation expense for the year ended December 31, 2016 includes a decrease of $6.2 million compared to the prior year in connection with our accounting policy for maintenance rights. See note 2(l) and note 3 to our consolidated financial statements for the year ended December 31, 2016, included elsewhere in this prospectus.
(4) Non-cash management compensation expense for the year ended December 31, 2014 includes an amount previously accrued under long term bonus which was paid in 2015.

 

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Non-GAAP Consolidated Interest Expense

Non-GAAP Consolidated Interest Expense as defined in the indentures governing our senior unsecured notes represents, for any period, Non-GAAP consolidated interest expense as calculated in accordance with U.S. GAAP, excluding all debt discounts and expense amortized or required to be amortized in the determination of our Non-GAAP Consolidated Net Income for such period. The table below shows the reconciliation of interest expense under U.S. GAAP to our Non-GAAP Consolidated Interest Expense as defined in the indentures governing our senior unsecured notes to Non-GAAP Consolidated Interest Expense for the three months ended March 31, 2017 and 2016 and for the years ended December 31, 2016, 2015 and 2014:

 

     Three Months Ended
March 31,
    Year Ended
December 31,
 
     2017     2016     2016     2015     2014  
    

(unaudited)

    (unaudited)  

Interest expense

   $ 33,764     $ 36,016     $ 133,610     $ 111,377     $ 71,965  

Less amortization of debt discounts or indebtedness issued prior to the 2019 Notes

     (2,324     (2,122     (12,265     (8,936     (6,590
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP Consolidated Interest Expense

   $ 31,440     $ 33,894     $ 121,345     $ 102,441     $ 65,375  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 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. When there is significant exposure to foreign currency, we will hedge our position to minimize exposure to such fluctuations. As of March 31, 2017 and 2016, and December 31, 2016, 2015 and 2014, we did not have any hedge positions.

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. 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). We seek to mitigate our floating interest rate risk on long-term debt by entering into fixed-pay interest rate derivatives, as appropriate. Approximately $327.1 million of our third-party debt instruments have floating interest rates not fixed by a corresponding interest rate swap. Our floating-rate debt primarily relates to lease agreements with floating-rate cash flows, and requires payments based on a variable interest rate index such as LIBOR. 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

 

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rate and refinancing risk. As of March 31, 2017, 87.6% of our debt is either fixed rate or synthetically fixed using interest rate swaps, and 8.0% of our debt is floating rate and relates to lease agreements with floating-rate cash flows. If our interest rate on our floating-rate debt not fixed by a corresponding interest rate swap were to increase by 100 basis points, we would expect to incur additional interest expense on our existing indebtedness as of March 31, 2017 of approximately $3.3 million (excluding the effect of capitalized interest) on an annualized basis, which would negatively affect our financial condition, cash flow and results of operations. Our outstanding debt has a weighted average remaining term of 4.9 years as of March 31, 2017.

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.

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 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.

 

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INDUSTRY

Air Transportation Industry

The aviation industry is a critical component of the global economy. According to AVITAS, recent data available indicates that the world’s airlines carry over three billion passengers per year and 50 million tons of freight per year. Over 58 million people are employed worldwide in aviation and related tourism and of this total, 8.7 million people work directly in the air transport industry. There are 27,000 commercial passenger and air cargo aircraft in operation today. 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 4.2% average annual growth in passenger traffic through 2020, and 5.6% average annual growth between 2021 and 2030. The 20-year average annual growth rate from 2015 to 2035 is forecasted at 4.6%. The Airbus 2016 Global Market Forecast (“GMF”) predicts that RPKs will grow at an average of 4.5% per annum between 2015 and 2035. Boeing in its 2016 Current Market Outlook (“CMO”) projects 4.8% average annual RPK growth between 2015 and 2035. 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 1975 to 2035.

Air Travel a Strong Growth Market

LOGO

Source: Airbus Global Market Forecast 2016.

 

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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 2015 to 2035, growing to approximately 40,000 aircraft. Airbus forecasts that the supply of new commercial aircraft will total approximately 33,000 units during this period, approximately 12,800 of which will replace in-service aircraft and 20,200 of which represent incremental growth. The advent of efficient, new-technology 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.

Projected Commercial Aircraft Fleet Growth: OEMs 20 Year Forecasts

LOGO

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

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

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 the Airbus A350. While small and medium widebody aircraft represent 21% of the 2015 in-service fleet excluding regional jets and turboprops, they represent 18% of the future order book by aircraft count as of March 15, 2017 according to CAPA, which would represent a significantly greater percentage by value or cost. Boeing forecasts that $2.6 trillion of the $5.9 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 2015 and 2035 of 128% and 125%, respectively, representing faster fleet growth than other aircraft categories or commercial passenger aircraft overall as shown in the forecasts in the charts below.

 

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Boeing Forecast by Type

 

           New Deliveries  
Size    2015      2035      % Change     Aircraft      $ billions  

Large widebody

     740        700        (5 )%      530      $ 220  

Medium widebody

     1,640        3,690        125     3,470        1,250  

Small widebody

     2,660        6,060        128     5,100        1,350  

Single aisle

     14,870        32,280        117     28,140        3,000  

Regional jets

     2,600        2,510        (3 )%      2,380        110  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

     22,510        45,240        101     39,620      $ 5,930  

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 2015 to 2035 broken down by size category and by region.

Boeing Delivery Forecast Between 2015 and 2035 by Region (2015 dollars in billions)

 

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

Asia

   $ 10      $ 1,210      $ 560      $ 520      $ 50      $ 2,350  

Europe

     10        640        260        200        10        1,120  

North America

     70        570        220        160        10        1,030  

Middle East

     0        160        150        320        140        770  

Latin America

     10        270        60        10        0        350  

Africa

     0        80        70        20        0        170  

C.I.S.

     10        70        30        20        10        140  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

World

   $ 110      $ 3,000      $ 1,350      $ 1,250      $ 220      $ 5,930  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Source: Boeing 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.

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 8.5 billion people in 2030, marked by strong and rapid

 

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urbanization and middle-class growth in emerging markets, particularly in Asia. In 2030, it is expected that approximately 60% of the world population will live in a city compared to approximately 54% in 2016. DESA anticipates the number of cities with more than 1 million inhabitants will increase between 2016 and 2030 by more than 29%, with 104 cities of over five million inhabitants, together representing 23% of the urban population, up from 20% in 2016.

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.

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 6.2%, 4.4% and 5.5%, respectively through 2035. By 2035, the Asia Pacific region is expected to have nearly twice the level of airline traffic of North America. The following table highlights the growth in air traffic as measured in RPKs by region.

Growth in Air Traffic by Region

 

LOGO

Source: Airbus Global Market Forecast 2016.
(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.

 

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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$)

2035 trips per capita

 

LOGO

2015 real GDP per capita (2010 $US thousands at Purchasing Power Parity)

Source: Airbus Global Market Forecast 2016

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 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. With the exception of last two years, the jet fuel spot price has remained elevated over the last 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. More recently, however, fuel prices have declined. If this trend continues, it could slow demand for new fuel-efficient aircraft. 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.

 

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Evolution of Fuel Cost as a

Share of Operating Expenses

 

  

Historical Jet Fuel Spot Price

 

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Source: EIA and IATA forecast, December 2016.    Source: EIA as of March 15, 2017.

As airframe and engine technologies and operational capabilities continue to improve, twin-engine 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 aircraft on long-haul, dense routes. However as newer, more-capable large twin-engine aircraft have entered service over the past 15 years, they have taken increasing market share from four-engine aircraft such as the Boeing 747 and Airbus A340 with their relatively superior operating economics.

According to AVITAS, the average age of the Boeing 747 fleet of 295 aircraft is 19 years old, and the average age of the Airbus 340 fleet of 269 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

 

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Source: Ascend Flightglobal—December 2016.   Source: Ascend Flightglobal—December 2016.

 

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As four engine 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 New 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 due to the increasing demand for long-haul travel on routes for which these aircraft are best-suited.

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 2016, long-haul traffic, as measured in offered available seats, grew at a 5.0% average annual rate compared to a 4.4% 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 2016.

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

 

 

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Source: Airbus.

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 approximately 50% between 2002 and 2016 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 2016.

 

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Source: Airbus Global Market Forecast 2015, Diio Mi.

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 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 long-haul 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 Eurowings.

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

 

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demand more twin-engine widebody aircraft to reclaim CASM economics. IATA estimates that approximately 303 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—February 2017.  

Source: Diio Mi through March 2017.

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

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.

Aircraft Supply

According to ICF, aircraft supply characteristics are as follows:

 

    There is a well-established Airbus and Boeing 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 64% 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 2000 to December 2016

 

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Source: Flightglobal ACAS-December 2016

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 747-8F 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.

 

   

“Next-generation”: Re-engined aircraft such as the recently launched Airbus A330neo and the new-technology Boeing 777X aircraft families that are expected to offer fuel burn improvements

 

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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.

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. Over the past 10 years, the percentage of premium seats on widebody aircraft has ranged from 11% to 13% while narrowbody aircraft premium seats have ranged from 4% to 7%. 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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Source: OAG as of March 2017.

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. 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.

 

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Percentage of Aircraft on Lease with the Original Lessee

 

 

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Source: Flightglobal Ascend—April 2017.

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

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. According to data from Ascend, since 1980, the percentage of the global active commercial aircraft fleet under operating lease has increased from 3% to 38% by the first quarter of 2017, 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 1984 to 2016, the rate of lessor ownership of Airbus and Boeing twin-engine widebody aircraft has increased from 5% to 36%. 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

 

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aircraft. Between 1996 and 2016, the number of twin engine widebody aircraft owned by lessors has grown at a 7.5% annual rate compared to an 8.8% 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. As of December 31, 2016, 47% of Airbus and Boeing narrowbody passenger aircraft and 33% of Airbus and Boeing widebody passenger aircraft are managed or owned by lessors. 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 Airbus and Boeing narrowbody and twin engine widebody aircraft.

 

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

 

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Source: Ascend Flightglobal.

Note: Includes only Boeing and Airbus passenger aircraft as of December 31, 2016.

(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.

We believe there are significant barriers to entry in the aircraft 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 aircraft 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