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01 August 2012
The Bluesky case in England has increased the attention paid to aircraft mortgages as an element of a security package in aircraft financing. Mortgages given over aircraft registered in Brazil have been used for many years. There are several major differences between Brazilian aircraft mortgages and those given under New York or English law. An understanding of these differences assists banks and other lending institutions in deciding:
Few aircraft finance transactions in Brazil rely on mortgages as the sole security. There are several reasons for this - primarily, that repossession is not a remedy available to a mortgagee under a Brazilian mortgage. This update analyses some of the publicity aspects of Brazilian aircraft mortgages, as well as some unusual information requirements, remedies, reasons for requiring mortgages in the right circumstances and the possibility of using foreign law mortgages in Brazil in future, based on Brazil's Cape Town Convention declarations.
In order to create security interests for aircraft registered in Brazil, the relevant aircraft mortgages must be registered with the Brazil Aeronautical Register (RAB). Documents registered with the RAB are public and can be obtained by any person requesting a copy and paying the applicable fee. The practice of filing redacted copies of mortgages, prevalent in the United States with the Federal Aviation Administration, is not generally followed in Brazil. Therefore, lenders taking Brazilian aircraft mortgages should understand and accept that their mortgages will be public.
The Brazilian Aeronautical Code requires the inclusion of information that is rarely included in US and UK aircraft mortgages, such as the amount secured, the interest rate, the location for repayment and the insurance policies. Inclusion of the location for repayment and insurance policy information may be inconvenient, but is innocuous.
Listing secured amounts may seem simple at first glance, but in today's multi-aircraft transactions with cross-collateralisation requirements, determining the amount secured at any given time is a challenge and the results can be imprecise. Since a cross-collateralised figure will almost always greatly exceed the value of the aircraft, an imprecise amount may be acceptable. However, care is needed to ensure that a mortgage is not released prematurely due to a poorly defined amount of secured obligations.
Describing interest rates in mortgages is also difficult, as financing transactions today are rarely based on simple fixed rates or simple fluctuation formulae. Rates are often the subject of pages of text with references to different criteria and several adjustment conditions.
In addition to the difficulty of listing secured obligations and interest rates, the above-mentioned public nature of mortgages may give rise to lender concerns in relation to this required information.
Most US and English-law aircraft mortgages include more general descriptions of secured obligations, usually by cross-references to loan and other credit documents. Adapting this approach in a Brazilian aircraft mortgage might work, but it runs the risk of not including an essential element. It is therefore preferable to include some information notwithstanding the undesired public disclosure.
In many civil law jurisdictions, repossession is not a remedy afforded to a mortgagee. Brazil follows this principle. The basic remedy of a mortgagee is a foreclosure procedure, which results in a court taking possession of the mortgaged asset, selling the asset through public auction and then discharging the mortgagee's claim from the sale proceeds. While this may seem like a logical procedure, there are several uncertainties.
First, it is unclear how a Brazilian operator's quiet enjoyment rights may be affected by such a sale if the mortgagor is a leasing company and not the operator itself. Second, it would be difficult to assure a mortgagee that a Brazilian court would conduct an auction in US dollars. Most court-sponsored auctions are conducted locally in Brazilian reais. Furthermore, Brazil has strict foreign exchange controls, so payments raised in local currency might not be freely remittable in dollars. In a foreclosure sale it is unknown how long the Central Bank might take to authorise remittance of the sale proceeds to a mortgagee (if indeed it agrees to such remittance in the first place). Third, due to a general lack of precedent, it is unknown how long a court would require in order to take possession of an aircraft and then organise an auction. However, court procedures such as auctions generally tend to be slow and there is a risk of an aircraft depreciating due to the passage of time or even lack of proper care during the waiting period.
When a financing structure involves a lease to a Brazilian operator (most Brazilian aircraft finance structures are based on leases), the remedy of repossession can be secured through a security assignment. After the occurrence of stipulated events of default, the mortgagee would assume the position of a lessor and seek repossession in that capacity.
Given the disadvantages of taking mortgages described above one might wonder why a financial institution would ever want to take a Brazilian aircraft mortgage in the first place. There are some valid reasons, but these assume that the overall financing structure for a transaction is based on a lease to the Brazilian operator. For the reasons mentioned above, financiers should not rely solely on mortgages for security. However, in lease transactions where a lender is financing a leasing company, a Brazilian aircraft mortgage can be an important part of a security package, as it would give the lender the status of a secured creditor in the event the leasing company were to become insolvent.
In addition, the RAB requires the written consent of a registered mortgagee before deregistering aircraft. Thus, through an aircraft mortgage, a lender can ensure that the lender and operator will not deregister an aircraft without its knowledge. As mentioned above, a security assignment enabling a lender to assume the position of the lessor in a default situation and to demand repossession if a lease event of default has occurred is essential.
Brazilian aircraft mortgages must be governed by Brazilian law. This is the result of a combination of provisions of the Geneva and Chicago Conventions, both of which have been incorporated into the Brazilian Aeronautical Code. The Geneva Convention provides that rights in rem over aircraft are governed by the law of nationality of an aircraft (Articles XI, II(2) and I(1)(a)). The Chicago Convention provides that an aircraft's nationality is determined by the country in which it is registered (Article 17). Due to these provisions, Brazilian aircraft mortgages have traditionally been governed by Brazilian law.
When approving the Cape Town Convention, Brazil chose to apply Article VIII of the Aircraft Protocol, which enables parties to elect the law to govern their agreement. This raises the interesting question of whether parties will have the freedom to choose foreign laws to govern aircraft mortgages in future. The Cape Town Convention became effective in Brazil on March 1 2012, so it is too early to tell whether foreign-law mortgages will become acceptable in Brazil. However, this possibility may exist in future.
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