CANADA, AIR CANADA AND THE GREAT CAPE TOWN ADVENTURE!
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CANADA, AIR CANADA
AND THE GREAT CAPE TOWN
ADVENTURE!
EUROPEAN SEMINAR ON THE CAPE TOWN CONVENTION
AND ITS AIRCRAFT PROTOCOL
WARSAW, POLAND
16 September 2014
Donald G. Gray
Head, Aircraft Financing
Blake, Cassels & Graydon LLP
Toronto ON Canada
AWG Legal Advisory Panel (Past Chair)
Aviation and Aerospace Group
INDEX
1. The Cape Town Convention and Aircraft Protocol
(CTC) – Canada Overview
A. A Canadian Idea!
B. Canadian Contributions
C. 11 Years, 4 Months and 16 Days…
D. Rationale for CTC in Canada
E. Economic Benefits for Canadian Airlines
Aviation and Aerospace Group
2INDEX (cont’d)
2. Air Canada EETC 2013-1: Lessons Learned for Non-U.S. Cape
Town Transactions
A. The U.S. Experience
B. The Canadian Experience (Pre-CTC)
C. Rating Agency Analysis
D. Key Drivers:
(a) CTC Declarations
(b) CTC Legal Opinions
(c) Judicial Deference to Treaty/Statutory Law
E. Rating Agency Reports
F. Great Results!
G. Lessons Learned
Aviation and Aerospace Group
3Aviation and Aerospace Group 4
1. THE CAPE TOWN CONVENTION AND AIRCRAFT
PROTOCOL (CTC) - CANADA OVERVIEW
A. A Canadian Idea!
• Initial idea came from discussion between
Professor Ronald Cuming (U of Sask) and
Professor Roy Goode (Oxford U)
• 1988, Professor Goode report on International
Regulation of Security Interests in Mobile
Equipment led to proposal by Canada to UNIDROIT
Governing Council to study the issue
Aviation and Aerospace Group
51. THE CAPE TOWN CONVENTION AND AIRCRAFT
PROTOCOL (CTC) - CANADA OVERVIEW (cont’d)
• Canadian Report stressed the need for uniform
rules governing security interests in mobile assets
in cross border transactions (need to change lex
situs rule)
• Project expanded to include International Registry,
U.S.-style 1110-type protections, Self Help and
Government assistance with de-registration and
export
• The rest is history!
Aviation and Aerospace Group
61. THE CAPE TOWN CONVENTION AND AIRCRAFT
PROTOCOL (CTC) - CANADA OVERVIEW (cont’d)
B. Canadian Contributions
• Of the 4 joint UNIDROIT/ICAO sessions, 2 were in
Rome and 2 hosted by Canada in Montreal
• Canadian Delegation at each of these sessions,
including the Diplomatic Conference in South
Africa, was second only to U.S. in terms of size and
active participation
• Canadian Delegates were active members of the
Treaty Drafting Groups, in both English and French,
and chaired several Drafting Group sessions
Aviation and Aerospace Group
71. THE CAPE TOWN CONVENTION AND AIRCRAFT
PROTOCOL (CTC) - CANADA OVERVIEW (cont’d)
• Canadian Delegate chaired the Insolvency Sub-
group that prepared the vital Insolvency Provisions
including Alternative A
• Canadian Delegation, with representatives from both
common law and civil law systems, formed key
bridge in compromises on difficult issues
• Canadian Delegation was the only delegation, other
than the U.S., that included multiple delegates
experienced in aircraft finance transactions
Aviation and Aerospace Group
81. THE CAPE TOWN CONVENTION AND AIRCRAFT
PROTOCOL (CTC) - CANADA OVERVIEW (cont’d)
• Air Canada was the first major flag carrier to speak
publicly as a Debtor (at the second Montreal
session) in favour of the Treaty
• The International Registry is largely based on
Quebec’s civil law electronic personal property
security registry
• Canada was one of 55 original countries to sign the
Final Act at the Diplomatic Conference in South
Africa on 16 November 2001
Aviation and Aerospace Group
92. TREATY BACKGROUND
HIGHLIGHTS
• Joint sponsorship by Unidroit/ICAO with full IATA
support when Treaty and Aircraft Protocol signed
at Cape Town, South Africa on 16 November
2001
• Rare Debtor (IATA) and Creditor (AWG)
unanimous agreement on key points
10
Aviation and Aerospace Group2. TREATY BACKGROUND
HIGHLIGHTS (cont’d)
• IATA 2002 Annual Report:
“This [Cape Town] achievement crowns many years of
effort by IATA… the benefits should be felt soon.
Those benefits are: reduced risk of credit financing and
therefore diminished costs of financing aircraft, greater
access to financing…and improved ability to dispose of
used aircraft.”
11
Aviation and Aerospace Group1. THE CAPE TOWN CONVENTION AND AIRCRAFT
PROTOCOL (CTC) - CANADA OVERVIEW (cont’d)
• Canada was one of only three countries to bid to
host the International Registry
• Canada is home to ICAO, the Supervisory Authority
for the International Registry
• Canada provided formal signature to the Cape Town
Convention and Aircraft Protocol on 31 March 2004
Aviation and Aerospace Group
121. THE CAPE TOWN CONVENTION AND AIRCRAFT
PROTOCOL (CTC) - CANADA OVERVIEW (cont’d)
C. 11 Years, Four Months, and 16 Days…
• For a variety of reasons, including domestic policy
reasons and a reduction in Canadian airline Boeing
and Airbus deliveries, Canadian ratification efforts
slowed down for several years after Canada lost its
bid to host the International Registry
Aviation and Aerospace Group
131. THE CAPE TOWN CONVENTION AND AIRCRAFT
PROTOCOL (CTC) - CANADA OVERVIEW (cont’d)
• Canada’s hesitation proved very costly to Canada’s airline
industry as both Air Canada and WestJet lost significant
financing discounts that would otherwise have been available for
their new Boeing deliveries from Ex-Im
• Between 2001 and 2013, Canadian Industry pushed the
Government hard for ratification
– Worked with Uniform Law Conference of Canada to develop model
provincial implementing legislation (aviation and bankruptcy is
Federal responsibility; equipment financing is Provincial
responsibility)
– Worked with Federal and Provincial Governments to ensure priority
for CTC over potentially conflicting Federal and Provincial
legislation and to ensure compatibility with all ASU Qualifying
Declarations
Aviation and Aerospace Group
141. THE CAPE TOWN CONVENTION AND AIRCRAFT
PROTOCOL (CTC) - CANADA OVERVIEW (cont’d)
• Canada introduced Implementing Legislation (“CTC Act”) and partially
implemented CTC in 2005 by amending its Bankruptcy Statutes to provide
for 1110-type (mirrored Alternative A) protection for Aircraft/Engines
• CTC came into force Internationally on 1 March 2006
• In 2008, Ottawa meetings held between Industry representatives and
Federal and Provincial Government representatives to discuss status -
Federal Government offered two options to Industry: implement
immediately, without Qualifying Declarations including Alternative A, or wait
until existing conflicting legislation could be amended to accommodate
Qualifying Declarations
• Industry unanimously selecting waiting and getting it right
• Over next five years, Federal Government began process of amending
conflicting statutes to meet this objective
• Final necessary Amendments were passed in December of 2012
Aviation and Aerospace Group
151. THE CAPE TOWN CONVENTION AND AIRCRAFT
PROTOCOL (CTC) - CANADA OVERVIEW (cont’d)
Federal Implementation Schedule:
Federal Implementing Legislation (CTC Act) received Royal Assent
on 24 February 2005
Bankruptcy (Alternative A) Amendments proclaimed 2005
Bank Act Amendments (to exclude Cape Town “Aircraft Objects”)
took effect on 14 April 2008
Amendments to CTC Act permitting ratification with all ASU/OECD
Qualifying Declarations – introduced as part of Federal Budget
Omnibus Bill 18 October 2012
Amendments passed 14 December 2012
Deposit of Ratification Documents with UNIDROIT on 21 December
2012
Cape Town became Canadian law 1 April 2013
Aviation and Aerospace Group
161. THE CAPE TOWN CONVENTION AND AIRCRAFT
PROTOCOL (CTC) - CANADA OVERVIEW (cont’d)
Provincial/Territorial Implementation Schedule (Pending Federal
Ratification in each case pre-2013):
Alberta (2006) Prince Edward Island (2013)*
British Columbia (2011) New Brunswick (2014)**
Manitoba (2012)
Newfoundland and Labrador (2006)
Northwest Territories (2009)
Nova Scotia (2004)
Nunavut (2011)
Ontario (2002)
Quebec (2007)
Saskatchewan (2006)
Yukon (2013)*
_____________________
**To take effect 1 October 2014
**Not yet subject to an amended Canadian Declaration Aviation and Aerospace Group
171. THE CAPE TOWN CONVENTION AND AIRCRAFT
PROTOCOL (CTC) - CANADA OVERVIEW (cont’d)
D. Rationale for CTC in Canada
KEY CAPE TOWN PRE-CTC CANADIAN CANADIAN LAW
PRINCIPLES LAW CHANGES
Rules to facilitate Asset-Based Similar Improved
Financing
lex situs rule (location of Debtor for Same None
Mobile Assets)
International Registry Similar Minimal (will continue with PPSA/CCQ
registrations for ancilliary collateral)
Independent Engine Security Interests Similar None
Aircraft Title Registration None Much improved
Insolvency: Section 1110/Alternative A Similar since 2005 Much improved (Canadian bankruptcy
60-day rule legislation amendments replaced by
Alternative A on stand-alone basis;
requirement to preserve value of Aircraft
Collateral)
IDERA (Irrevocable De-registration and Similar Improved – formalizes TCA requirement
Export Request Authorisation) to cooperate with
de-registration and export
Self Help Similar in all provinces except Quebec Much improved in Quebec
Aviation and Aerospace Group
181. THE CAPE TOWN CONVENTION AND AIRCRAFT
PROTOCOL (CTC) - CANADA OVERVIEW (cont’d)
E. ECONOMIC BENEFITS FOR CANADIAN PARTIES
OECD New Aircraft Sector Understanding (ASU) provides for ECA risk
premium reductions* and has been adopted by all major aircraft
manufacturing nations including Canada
Canada has implemented Cape Town with all OECD/ASU Qualifying
Declarations
Canadian importers such as Air Canada and WestJet will benefit from
reduced export credit financing rates
Canadian manufacturers such as Bombardier will have greater
flexibility to require Cape Town terms for customers
All Canadian aircraft operators should benefit from enhanced
availability and/or terms for aircraft financing
_____________________
*subject to Contracting State “Qualifying Declarations”
Aviation and Aerospace Group
19AIR CANADA EETC 2013-1 (COLLATERAL – 5 X B777-300ERs)
Aviation and Aerospace Group
202. AIR CANADA EETC 2013-1: LESSONS LEARNED
FOR NON-U.S. CAPE TOWN TRANSACTIONS
A. The U.S. Experience
• Long history of EETCs from U.S. airlines at
very favourable financing rates
• S. 1110 of U.S. Bankruptcy Code results in
ratings upgrade for capital markets
transactions
• Great deal of market and legal experience in
U.S. with S. 1110 proceedings
• Strong investor confidence in S. 1110
protections Aviation and Aerospace Group
212. AIR CANADA EETC 2013-1: LESSONS LEARNED FOR
NON-U.S. CAPE TOWN TRANSACTIONS (cont’d)
B. The Canadian Experience (Pre-CTC)
• Judicial discretion to extend stays in the public
interest
• Minimal market experience with enforcement
proceedings
• No practical market experience with CTC
proceedings (in Canada or elsewhere)
• S. 1110/Alternative A–like provisions adopted into
insolvency laws (2006)
• Primary reason for Air Canada support of CTC was to
try to obtain access to U.S. capital markets
Aviation and Aerospace Group
222. AIR CANADA EETC 2013-1: LESSONS LEARNED FOR
NON-U.S. CAPE TOWN TRANSACTIONS (cont’d)
C. RATING AGENCY ANALYSIS
• Key drivers for non-1110 transactions:
1. Fulsome CTC Declarations – ASU/OECD “five
star” list is “J.D. Power Seal of Approval”
2. Clean and comprehensive CTC Legal Opinions
3. History of national judicial deference to Treaty
Law and Domestic Law Reform
Aviation and Aerospace Group
232. AIR CANADA EETC 2013-1: LESSONS LEARNED FOR
NON-U.S. CAPE TOWN TRANSACTIONS (cont’d)
D. Key Drivers
(a) CTC Declarations
• Alternative A selected with 60-day stay cut off
• All OECD Qualifying Declarations required
• Express and specific enumeration of Legislation that
could take priority over CTC
Aviation and Aerospace Group
242. AIR CANADA EETC 2013-1: LESSONS LEARNED FOR
NON-U.S. CAPE TOWN TRANSACTIONS (cont’d)
(b) CTC Legal Opinions
• Unqualified Opinion in the AWG Practitioner’s Guide
recommended form, including:
- Validity and priority of International Interests
- Creditor entitlement to Alternative A benefits with
maximum 60-day stay period
- Entitlement to all IDERA benefits (airline plus
Contracting State obligation)
- Priority of CTC over local law (with reasonable but
specific carve outs)
Aviation and Aerospace Group
252. AIR CANADA EETC 2013-1: LESSONS LEARNED FOR
NON-U.S. CAPE TOWN TRANSACTIONS (cont’d)
(c) Judicial Deference to Treaty/Statutory Law
• Canadian Courts have long history of respecting
black letter law reform
• Canadian Courts have consistently held that statutes
are to be applied harmoniously with scheme of
statute, and intentions of Parliament (notwithstanding
Court’s views of public policy)
- Transamerica case (Air Canada CCAA)
Aviation and Aerospace Group
262. AIR CANADA EETC 2013-1: LESSONS LEARNED FOR
NON-U.S. CAPE TOWN TRANSACTIONS (cont’d)
E. FITCH RATINGS – REPORT EXCERPTS
“Importantly, Canada has adopted CTC in the manner that is intended to be most favorable to
EETC holders in a potential default with all the key declarations including: (i) Alternative A,
which essentially ‘exports Section 1110’ into foreign jurisdictions with the same 60-day stay
period following an insolvency event (ii) self-help remedies, (iii) an Irrevocable De-Registration
and Export Request Authorization (IDERA) registration, which obligates AC and the Canadian
government to assist creditors in the deregistration and export of the aircraft, and (iv) choice of
law. CTC Alternative A also requires AC to maintain and preserve the aircraft and its value in
accordance with the financing agreement during the 60-day stay period, which is an additional
enhancement over Section 1110 …
Fitch views the creditor protection provided by CTC Alternative A in Canada to be the same as
the legal protection provided by Section 1110 in the U.S. The CTC has yet to be tested in
Canadian courts, which adds some uncertainty, but Fitch does not view this as a significant
concern in Canada given the reliability of its legal system. However, it could be an issue in
other CTC jurisdictions along with the political risk inherent in some countries. The general
insolvency regime in Canada is strong, with case law precedent from AC’s 2003 CCAA filing in
favor of the aircraft lessor.”1
_______________
1. Press Release, 24 April 2013 (Emphasis added)
Aviation and Aerospace Group
27E. MOODY’S INVESTORS SERVICE –
REPORT EXCERPTS
“These EETCs differ from traditional EETCs in that 1) the security
interest is subject to the Cape Town Treaty that became part of
Canadian law on 1 April 2013, rather than Section1110 of the US
Bankruptcy Code …
We believe Canada’s adoption of the Cape Town Convention
provides a comparable level of protection to that found in
transactions governed by Section 1110 given the form of Canada’s
adoption (Alternative A) and the country’s historical record of
complying with its federal and provincial laws and obligations under
international treaties … Our approach to Cape Town in this
transaction should not be construed as a precedent for other
transactions issued in other jurisdictions; the specifics of the
adoption of Cape Town can differ by jurisdiction and are an
important consideration in our ratings assessment …
Aviation and Aerospace Group
28E. MOODY’S INVESTORS SERVICE -
REPORT EXCERPTS (cont’d)
The ratings assignment reflects our belief that the Government of Canada and the 10 of its 13
provinces and territories that have adopted Cape Town will honor the parameters of Cape
Town that became part of Canadian and provincial and territorial law on 1 April 2013.
Canada has now adopted the most creditor friendly elements of Cape Town, including Article
VIII of the protocol (choice of law), Article XI (Alternative A) and Article XIII (de-
registration and export request or IDERA). Cape Town’s Alternative A mirrors the terms of
Section 1110 of the US Bankruptcy Code. Canada’s adoption provides for a 60 calendar day
period for the mortgagee, lessee or conditional buyer of an aircraft or aircraft engine to affirm
its obligations under an aircraft or engine financing, lease or CSA under a default scenario for
such mortgagee, lessee or conditional buyer. Additionally, the operator is required to
preserve the condition of the aircraft or engine pursuant to the terms of the underlying
agreements during the 60 day period. This is an enhancement not found in Section 1110. If
the airline affirms its obligations, delinquent installments, if any, under each financing plus
accrued interest must be paid and the company would need to remain current on all future
payments due pursuant to the CSAs. We believe that the provisions of Cape Town that are
now part of Canadian, and applicable, provincial and territorial law will function as planned,
such that secured parties with international interests so registered in the Cape Town registry
(The International Registry) can expect to recover their aircraft and or engine assets under a
default scenario where the operator no longer would like to use the aircraft or engine assets or
attempts to maintain use without making contractual payments.”2
_______________
2. Pre-Sale Report, April 24, 2013 (Emphasis added)
Aviation and Aerospace Group
29E. MOODY’S INVESTORS SERVICE –
REPORT EXCERPTS (cont’d)
“The ratings of the Certificates consider the credit
quality of Air Canada … The ratings also reflect
Moody’s opinion of … the international interests
(security interests) recognized by the Cape Town
Convention …
Any combination of future changes in the underlying
credit quality or ratings of Air Canada … court rulings
or changes to Canadian law that weaken or remove
Cape Town or Alternative A could cause Moody’s to
change its ratings of the Certificates …”3
_______________
3. Press Release, April 24, 2013
Aviation and Aerospace Group
30E. STANDARD & POOR’S – REPORT
EXCERPTS
“The pass-through certificates benefit from legal protections afforded by Article XI,
Alternative A, of the Protocol to the Cape Town Convention on International
Interests in Mobile Equipment, as adopted in Canada. Alternative A is similar to
Section 1110 of the U.S. Bankruptcy Code …
The Cape Town Convention went into effect in Canada on April 1, 2013, and has
not yet been applied by the Canadian courts. Accordingly there is not precedent
determining how the Cape Town Convention would be enforced by the courts of
Canada. However, consistent with our generally positive view of the Canadian
legal system, our analysis assumes that Canadian courts will interpret the statutory
provisions that implement the Cape Town Convention in a manner that will give
effect to the protections afforded by Cape Town Convention and the related
protocol. Our analysis, therefore, anticipates that in a scenario where the loan
trustee seeks to exercise its remedies under the conditional sale agreements or the
equipment notes, as applicable, in the case of an insolvency related event of Air
Canada …, that the legal protections afforded by Article XI, Alternative A of the
Protocol to the Cape Town Convention will be available.”4
_______________
4. Press Release, April 24, 2013 (Emphasis added)
Aviation and Aerospace Group
31F. GREAT RESULTS!
1. Canadian CTC adoption given similar (or enhanced) weight and
respect to U.S. 1110 provisions
2. U.S. Airline-equivalent Pricing achieved
3. U.S. “pure” EETC Terms achieved
─ 18 month Liquidity Facility
─ No additional structural enhancements required (such as
extended Liquidity Facility and/or Repossession Facility)
─ No Pricing Premium required
4. Minimal documentary changes
Aviation and Aerospace Group
32F. GREAT RESULTS! (Cont’d)
5. Air Canada received the maximum available 9-notch ratings
upgrade (S&P/F; 7 notches for M) based largely on their view of
effectiveness of CTC in Canada
6. NPV benefits for Air Canada over pricing for next best financing
option at high end of range
7. Deal was heavily oversubscribed – C Class was issued same day
(very unusual)
8. Airfinance Journal and Airline Economics “Deal of the Year”
Awards in 2014
Aviation and Aerospace Group
33G. LESSONS LEARNED
▪ Key is to overcome objection to “new law” and lack
of “testing” of Cape Town enforcement locally by
demonstrating, to extent possible, that:
1. CTC will always take priority (with certain
acceptable specific exclusions)
2. Contracting State has unblemished record in
respecting its treaty obligations
3. Courts in Contracting State do not have
discretion to ignore black letter law reforms
Aviation and Aerospace Group
34Donald G. Gray
Blake, Cassels & Graydon LLP
Head, Aircraft Finance
Aviation and Aerospace Group
199 Bay Street
Suite 4000, Commerce Court
Toronto, Ontario
M5L 1A9
Dir: 416.863.2750
Cell: 416.258.8385
Fax: 416.863.2653
Doc ID. 12731269
Aviation and Aerospace Group
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