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 and a tax sharing agreement. We also have an intercompany borrowing and lending arrangement with Boeing. As described below, on January 23, 2013 Boeing issued guarantees of all of our outstanding publicly issued debt securities, and the support agreement is being terminated, effective February 22, 2013.

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.

Debt Guarantees

On January 23, 2013, Boeing entered into guarantees with Deutsche Bank Trust Company Americas on behalf of the holders of BCC’s outstanding debt securities issued under (i) an indenture dated as of April 15, 1987 and supplemented as of June 12, 1995 and (ii) an indenture dated as of August 31, 2000 (collectively, the “Guarantees”). The Guarantees provide for the full and unconditional guarantee of all the outstanding publicly issued debt securities of BCC.

Support Agreement

As of December 31, 2012, we had 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,

–

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.

In conjunction with Boeing issuing a guarantee of all of our outstanding publicly-issued debt securities and announcing that we intend to suspend our separate SEC reporting obligations, we entered into a termination agreement with Boeing on January 23, 2013 to terminate the support agreement. That termination will be effective February 22, 2013.

Intercompany Credit Arrangements

The term of the credit facilities between Boeing and its banks was extended on October 15, 2012. As of December 31, 2012, Boeing had given us exclusive access to $750 of the 364-day line expiring in November 2013 and $750 of the $2,300 five-year revolving credit line expiring in November 2017. 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, 2012 and 2011, we had no amounts outstanding under these credit facilities. On January 24, 2013, in connection with our plan to suspend our separate SEC reporting obligations, we terminated the arrangement with Boeing in which Boeing reserved amounts for us under Boeing’s committed revolving credit line agreements.

No amounts were outstanding under our intercompany borrowing and lending arrangement with Boeing at December 31, 2012 and 2011. On January 15, 2013, we borrowed $400 from Boeing under this intercompany borrowing and lending arrangement.

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, 2012, we were the beneficiary of up to a maximum of $1,481 under our guarantees from Boeing which mitigates our risk with respect to portfolio assets totaling $1,797.

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


	2012				2011
	Guarantee Amount		Carrying Value		Guarantee Amount		Carrying Value
717 (out of production)	$	1,401	$	1,674	$	1,481	$	1,790
Out of production single-aisle aircraft		43		43		55		55
Other, including other Boeing aircraft		37		80		41		83
	$	1,481	$	1,797	$	1,577	$	1,928

At December 31, 2012 and 2011, Accounts with Boeing included $33 and $38 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:


	2012			2011			2010
Finance lease income ⁽¹⁾	$	(2	)	$	(1	)	$	19
Interest income on notes receivable		2			2			13	⁽²⁾
Operating lease income		43			63			50
Net gain on disposal of assets		–			2			9
Asset impairment expense		–			–			7
	$	43		$	66		$	98

⁽¹⁾

For the years ended December 31, 2012, 2011 and 2010, 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, 2012, 2011 and 2010, Boeing recorded charges of $29, $9, and $87, respectively, related to asset impairment and accrued expenses and $(5), $(244) and $34 respectively, related to provision for (recovery of) losses.

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

For the years ended December 31, 2012, 2011 and 2010, we recorded new business volume of $290, $105 and $39, 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:


	2012		2011
Federal income tax payable	$	43	$	38
Other payable		37		38
	$	80	$	76

For the years ended December 31, 2012 and 2011, we paid dividends (including return of capital) totaling $89 and $228.

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 allocates to us 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, 2012, 2011 and 2010, the charge for these services was $25, $21, and $19.