“From an aircraft finance perspective, we’ve had a great 12 months,” Simon Lawrenson, partner in  Mourant Ozannes' Hong Kong office said. The offshore law firm is currently working on its 18^th business jet financing project since May 2012 and act for a range of European and Chinese lenders.

Demand

The firm sees demand for business jets coming from high or ultra-high net worth individuals, predominantly in Asia, including China, Hong Kong, Indonesia and Malaysia, who are looking to acquire, by way of financing, jets as business utility tools.

Many of the deals Lawrenson works on involve Bombardier Global 5000s, Dassault Falcon 7xs and Gulfstream G450s – or “higher-end” jets, in layman’s terms.

“A statistic that sticks out for me is Bombardier’s estimate that there will be 1700 new business aircraft in Asia by 2021, which is a phenomenal amount of new deliveries over the next 8 years, especially given it has been reported there are an estimated 150 – 200 private jets in China currently.”

So while Mourant Ozannes is getting ready to pounce on the prospective market share, also evidenced by a new addition to its Hong Kong team – a lawyer formerly at Clifford Chance – Lawrenson highlighted some challenges the jet industry will need to address to accommodate the anticipated surge in jet acquisitions.

Challenges

“From a regulators perspective, the airspace is largely controlled by the military at the moment - that may impact on the ability of business jet owners to operate their aircraft with the flexibility that they want,” he said.

“There’s also lack of civilian airports - so there has to be a significant amount of project development over the next decade to support the growth of the market, “he added.

Another observation that has stuck in Lawrenson’s mind is a point made at a recent conference by the chief executive of a leading Asian based jet operator, who noted that if the market is going to grow by 1700 aircraft in the next decade, then a  requisite increase in the number of captains, first officers and engineers would be required.

 “Currently, we understand there isn’t the industry talent within the Asian market to support this growth, so either they have to be trained or they have to be brought in from outside the region. And this is a new industry so we’re also talking about necessary growth in maintenance facilities and operational support as well - all of this costs money and takes time,” he added.

Financing

All of the projects that Lawrenson has worked on have been financed through British Virgin Islands or "BVI" vehicles.

Advice on the offshore aspects of the transaction may include establishing the BVI vehicle, of which the high net worth individual may or may not be a shareholder, and the company entering into a purchase agreement with the manufacturer of the aircraft. In the meantime the HNW individual would then approach his bank to help finance the acquisition, for which Mourant Ozannes would advise on the offshore aspects.

“We advise on the offshore aspect of the negotiation of the loan documentation, providing security over the BVI company, and conducting the various security registrations that take place, to protect the lender’s position,” Lawrenson said.

Offshore

He cited a number of reasons why offshore financing is favoured by lenders and jet buyers alike.

From a lenders perspective, using an offshore vehicle is one of the the most effective ways of limiting structural risk.

 “By structuring lending through a BVI company, if the transaction goes wrong, for instance the borrower fails to repay the loan, the lender can take control of the borrower, using merchanisms like ‘self-help’ remedies, which avoid having to go to a court and obtaining consent to take ownership of the shares,” Lawrenson explained. "The lender is then in a position, as registered shareholder, to sell the shares in the aircraft holding company or even dispose of the aircraft itself."

“This is one of the potential problems of lending into a PRC company - there isn’t at this stage sufficient  clarity and confidence that the security created will be recognised or enforceable under Chinese law.  Structuring offshore mitigates some of those risks,” he added.

In turn the borrower reaps benefits too - the more the lender is able to lessen its risk, the better possible margin the borrower can obtain from the lender.

Additionally, offshore financing, specifically in BVI, also has the advantage of relative cost effectiveness, tax neutrality and confidentiality. “For example, the register of members of a BVI company is not publically available and that may suit high net worth individuals, who don’t necessarily want that information to be disclosed,” Lawrenson concluded.