Bermuda: The Ideal Jurisdiction for Aircraft
Finance and Registration.

by Julie McLean.

In this number of Coelum. We have the pleasure to host Julie McLean as a guest author of the article featured this month. Julie is an experienced and prominent attorney practicing law at Conyers Dill & Pearman in Bermuda. We are proud and thankful for her contribution to our publication which we are pleased to share with all our readers.

Bermuda is a key offshore financial centre with strong IDR ratings (Fitch AA, S&P AA-; Moody’s Aa2). Its political and economic stability, its respected and consistent judicial system, a favourable legislative framework and tax regime and the absence of exchange control and currency restrictions, make Bermuda the ideal jurisdiction in ownership, financing and securitisation structures. When linked with a commercial aircraft registration capability, Bermuda is a leader in the international structuring and ongoing oversight of aviation linked transactions.

Bermuda is also a well regarded participant in international financial transparency and information exchange. Bermuda has thirty (30) tax information and exchange agreements (“TIEAs”) in place including with all the G7 countries. Of particular note is the TIEA with Mexico which came into force on 1 January, 2011. As a result of such TIEA (which is listed in Annex 10 of the Miscellaneous Tax Regulations in Mexico), we understand that payments made to residents of Bermuda are exempted from the 40% withholding tax. Companies formed in Bermuda for asset finance transactions would be considered residents of Bermuda.

The Legal Framework

Lenders and leasing companies are very comfortable using Bermuda as a jurisdiction. Such financiers want to hold assets in international well respected jurisdictions which clearly recognise their ownership rights based on common law principles. Financiers involved in asset based finance transactions require the possession rights of a borrower as well as the security rights of a lender to be clearly and consistently applied. Financiers require that their rights in moveable equipment such as aircraft be registrable in a universally understood and recognised manner. They want to deal with a jurisdiction familiar with, and prepared for, sophisticated finance and leasing structures. Bermuda meets all of these needs.

The legal framework of Bermuda is known, stable, consistent and based upon the common law with the highest court of appeal in Bermuda being the Judicial Committee of the UK Privy Council.

A unique feature of Bermuda for aircraft financing structures is the use of the special purpose trust. Often the financiers do not wish to have a financed aircraft on their balance sheet nor do they want it on the operator’s balance sheet in case the operator goes bankrupt and the aircraft falls into the hands of general creditors. Using a Bermuda special purpose company (SPV) as the borrower who then leases the aircraft onto the operator (often indirectly through a jurisdiction which the operator has a double taxation treaty with) gives lenders the additional protection of bankruptcy remoteness. The Bermuda SPV is owned by a special purpose trust which has been formed purely for the “purpose” of the financing structure. There is no need to establish a charity as a beneficiary and indeed, the special purpose trust has no beneficiaries.

Registering Security

In Bermuda the Mortgaging of Aircraft and Aircraft Engines Act 1999 and related regulations have been in place since 1 July 1999. Under this legislation, it is possible to register security interests on the Register of Aircraft Mortgages and/or the Register of Aircraft Engine Mortgages (as the case may be) in both aircraft and aircraft engines which are owned by or otherwise in the lawful possession of a company incorporated in Bermuda. It is also possible to establish priority of a yet to be executed mortgage by filing a priority notice with the BDCA pursuant to which the priority of such yet to be executed mortgage can be fixed for a 14 day renewable period.
It is also possible to register a charge over the shares of a Bermuda company or assets of a Bermuda company with the Registrar of Companies in Bermuda. Such registration is not needed for enforceability purposes but does establish priority over unregistered charges and subsequently registered charges.

Bermuda Aircraft Register

The Bermuda Aircraft Register (the “Register”) has been in existence since 1931. Currently there are just over 700 aircraft on the Register and the majority of these are low age assets with significant value. Aircraft are registered in the private or commercial categories. Many of the private registrations relate to large executive jets such as the Boeing 747 SP, Boeing Business Jet, Gulfstream GV, Falcon 900B, Bombardier Global Express and Airbus Corporate Jetliner or commercial type craft such as the Boeing 777, Boeing 757 and Boeing 737 registered for private use. Commercial craft operated by international airlines and presently registered in Bermuda include the full range of Airbus, Bombardier and Boeing aircraft.

The current policy of the Bermuda Department of Civil Aviation (“BDCA”) is that aircraft may only be registered by a Bermuda exempted company which either owns or has a valid lease hold interest in the aircraft to be registered.

The BDCA has entered into a number of agreements with foreign jurisdictions regarding the transfer to operator states of certain regulatory oversight functions and duties relating to commercial category aircraft only under Article 83 bis of the Convention on International Civil Aviation (Chicago, 1944) to which the United Kingdom (representing Bermuda) is a party. In this way, certain functions and duties normally carried out by a state of registry are transferred, under strict guidelines, to an operator’s state. The aim of this highly successful operational initiative is to ensure on the spot safety oversight and allow for greater efficiencies at both the government and operator level.

Presently an active bis agreement is in place with the government of Russia such that there are approximately 550 aircraft operated by Russian commercial airlines on the Register. Additional agreements are in place with Uzbekistan, Azerbaijan and Austria.

The commercial operators of Bermuda registered aircraft must maintain high levels of operational safety. A commercial operator wishing to operate a Bermuda registered aircraft for the first time must apply to the BDCA for approval as only aircraft operated by accepted operators will be considered for registration.

Benefits of Registration in Bermuda

Owners and operators enjoy a Bermudian administration which is rated as a Category 1 Aviation Regulatory Authority by the US Federal Aviation Administration. The BDCA is prepared to accept more than one internationally recognised set of airworthiness requirements and various flight crew licences for validation. The Bermuda registration marks VP-B and VQ-B with two subsequent letters are seen as a low-profile, neutral mark of high standard which is internationally accepted. This is especially valuable when the aircraft is operated in areas of the world subject to security risks or political instability.

Owners and operators have expressed satisfaction with the high level of responsiveness of the BDCA when dealing with enquiries and requirements. This is made possible by the absence of the degree of administrative bureaucracy often encountered when dealing with other key aviation jurisdictions. Bermuda does, however, offer the full range of professional and administrative services necessary to ensure that all legal and other requirements are properly met and to ensure the BDCA and the Register retains a high level of international respect and confidence.

Registration in Bermuda is not subject to any requirements that demand the aircraft be based in or operated through Bermuda. Bermuda registered aircraft may be operated anywhere in the world, excluding war zones and the like or practically, areas restricted by its insurances.

Conclusion

For all of the reasons stated above, Bermuda is an ideal jurisdiction to structure financing of aircraft. In addition, registration in Bermuda of aircraft in either the private or commercial categories offers many benefits.