Note 2 – Relationship and Transactions with Boeing

As a wholly owned subsidiary of Boeing, our mission is to arrange for the financing of products manufactured by Boeing. When third party financing is not available, we may provide such financing directly.

We have a number of general contractual arrangements with Boeing to facilitate our operations including, among others, a support agreement, tax sharing agreement and an agreement allowing us to borrow under Boeing's committed revolving lines of credit. We also have an intercompany borrowing and lending arrangement with Boeing.

In addition, we may require other forms of support from Boeing with respect to certain financing transactions we undertake. This support may take the form of intercompany guarantees, subsidies, remarketing agreements or other support arrangements.

There can be no assurances that these intercompany arrangements will not be terminated or modified by us or Boeing.

Support Agreement

We have a support agreement dated December 23, 2003 with Boeing with these principal features:

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Boeing will maintain 51% or greater ownership of us,

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Boeing will make contributions to us if our fixed-charge coverage ratio falls below 1.05-to-1 on a four-quarter rolling basis, and

–

Boeing will make contributions to us, if needed, to maintain our tangible net worth at a level of at least $50.

The support agreement may not be modified or terminated unless (a) the holders of at least two-thirds of the aggregate principal amount of our debt then outstanding consent or (b) the modification or termination does not adversely affect the credit ratings of our debt (as determined by each of Moody's, Standard & Poor's, and Fitch that rates our debt at the time of the modification or termination). "Debt" for purposes of the support agreement means all present or future indebtedness of BCC for borrowed money, evidenced by bonds, debentures, notes or similar instruments, excluding intercompany indebtedness. The support agreement is not a guarantee of any of our indebtedness, and is not directly enforceable against Boeing by third parties. The holders of more than 50% of the aggregate principal amount of all our debt have the right to demand that we enforce our rights with respect to the obligations of Boeing listed above.

Intercompany Credit Arrangements

The credit facilities between Boeing and its banks were renewed on November 10, 2011. Boeing has given us exclusive access to $750 of the $2,300 364-day line expiring in November 2012 and $750 of the $2,300 five-year revolving credit line expiring in November 2016. The 364-day facility has a one-year term out option which allows the borrower to extend the maturity of any borrowings one year beyond the aforementioned expiration date. At December 31, 2011 and 2010, we had no amounts outstanding under these credit facilities. Any borrowings by us under these agreements will be guaranteed by Boeing.

No amounts were outstanding under our intercompany borrowing and lending arrangement with Boeing at December 31, 2011 and 2010.

Federal Income Tax

Our operations are included in the consolidated federal income tax return of Boeing. Our tax sharing agreement with Boeing provides that so long as consolidated federal tax returns are filed, Boeing will pay us, or we will pay Boeing, as appropriate, an amount equal to the BCC's taxable income or loss times the statutory tax rate applicable to Boeing. Under this agreement an intercompany payable/receivable is recorded when federal income taxes are due or federal income tax benefits are generated.

Intercompany Transactions

We are the beneficiary of certain intercompany guarantees and other subsidies from Boeing in respect of specific financing transactions we undertake.

Intercompany guarantees primarily relate to residual value guarantees, first loss deficiency guarantees and rental loss guarantees. Residual value guarantees cover a specified asset value at the end of a lease agreement in the event of a decline in market value of the financed aircraft. We typically call on intercompany residual value guarantees upon recognition of an other-than-temporary decline in residual value of direct finance leases. We recognize the benefit of the guarantee through Finance lease income. First loss deficiency guarantees cover a specified portion of our losses on aircraft that we finance in the event of a loss upon disposition of the aircraft following a default by the lessee. Rental loss guarantees are full or partial guarantees covering us against the lessee's failure to pay rent under the lease agreement or our inability to re-lease these aircraft at or above a specified rent level.

Due to intercompany guarantees from Boeing, our accounting classification of certain third party leases may differ from the accounting classification in Boeing's Consolidated Financial Statements. As a result of these intercompany guarantees, the required balance for the allowance for losses on receivables and the required provision for losses we recognized have been mitigated. Receipts under Boeing guarantees would be net of realization of underlying residual values, partial rent receipts, re-lease rental receipts or other mitigating value received.

At December 31, 2011, we were the beneficiary of up to a maximum of $1,577 under our guarantees from Boeing which mitigates our risk with respect to portfolio assets totaling $1,928.

Intercompany guarantee amounts by aircraft type are summarized as follows at December 31:


	2011				2010
	Guarantee Amount		Carrying Value		Guarantee Amount		Carrying Value
717 (out of production)	$	1,481	$	1,790	$	1,586	$	2,099
Out of production single-aisle aircraft		55		55		66		66
Out of production twin-aisle aircraft		–		–		51		71
Other, including other Boeing aircraft		41		83		46		90
	$	1,577	$	1,928	$	1,749	$	2,326

At December 31, 2011 and 2010, Accounts with Boeing included $38 and $47 for deferred revenue associated with guarantee and subsidy settlements and terminations.

We recorded the following activity under the intercompany guarantee and subsidy agreements for the years ended December 31:


	2011			2010			2009
Finance lease income ⁽ ¹ ⁾	$	(1	)	$	19		$	7
Interest income on notes receivable		2			13	⁽²⁾		3
Operating lease income		63			50			46
Net gain on disposal of assets		2			9			–
Asset impairment expense		–			7			–
	$	66		$	98		$	56

⁽¹⁾

For the years ended December 31, 2011, 2010 and 2009, finance lease income included $2, $2 and $2 for fees paid to Boeing related to guarantee agreements.

⁽²⁾

During 2010 the prepayment of third party notes receivable totaling $163 was facilitated through Boeing. Included in interest income on notes receivable is $10 attributable to this prepayment.

Additionally, under the terms of the intercompany guarantee agreements, for the years ended December 31, 2011, 2010 and 2009, Boeing recorded charges of $9, $87, and $12, respectively, related to asset impairment and accrued expenses and $(244), $34 and $21 respectively, related to provision for (recovery of) losses.

For the years ended December 31, 2010 and 2009, we recorded operating lease income from Boeing, exclusive of guarantees and subsidies of $6 and $20. During 2010 and 2009, we sold C-40 aircraft at their carrying value to Boeing at lease expiration for $26 and $28.

For the years ended December 31, 2011, 2010 and 2009, we recorded new business volume of $105, $39 and $618, respectively, related to new Boeing aircraft, equipment or services we purchased or financed.

Other Intercompany Transactions

Accounts with Boeing consisted of the following at December 31:


	2011		2010
Federal income tax payable	$	39	$	34
Other payable		38		32
	$	77	$	66

For the years ended December 31, 2011 and 2010, we paid dividends (including return of capital) totaling $228 and $108.

We also receive support services from Boeing. Eligible employees are members of Boeing's pension plans, insurance plans, savings plan and executive compensation programs. Boeing generally charges us with the actual costs of these plans attributable to our employees and these expenses are reflected in Operating expenses. For each of the years ended December 31, 2011, 2010 and 2009, the charge for these services was $21, $19, and $11.