Offshore law firm Mourant Ozannes sets out issues for high net worth figures to consider before buying private jets, increasingly important as wealthy persons consider getting into this market.

“Put it on my bill” is not something you’ll often hear in a private
jet show room, despite statistics showing bubbling demand for aircrafts
in Asia. While the region’s buyers are there and ready to sign on the
dotted line, they should first consider some of the obstacles that the
industry will face in the coming decade, and also carefully choose the
most appropriate financing option.

Offshore law firm, Mourant Ozannes, shed some light on these themes in an interview with WealthBriefingAsia.

“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 [in China] 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.