Subject to the nature of the particular finance package and the commercial drivers in any particular deal, the general goal of any contractual arrangement which is set up using an SPV in these circumstances is to:

  • achieve an off-balance sheet structure which does not affect the accounting position of the financier, the airline, the trustee, or the originator;
  • achieve bankruptcy remoteness from the originator – particularly where there is a connection with the United States bankruptcy courts, which have a power to consolidate groups of companies in certain circumstances;
  • ensure the SPV does not part of the assets available to creditors of the trustee or originator if either were to become insolvent; and
  • achieve limited recourse – the recourse of the financiers will be limited to the aircraft and any other supporting security provided by the SPV over its ancillary assets. In order to provide the best possible security to the financiers, the aircraft can be ring-fenced by comprehensive security over the aircraft so that in the event of insolvency of the SPV the aircraft will not form part of the insolvent estate of the SPV.

SPV Formation

In a typical transaction structure utilizing a Cayman Islands incorporated bankruptcy remote SPV, the company is incorporated as an exempted company, the shares of which are issued to a Cayman Islands trustee (usually a licensed trust company) for the benefit of a charitable or purpose trust.  The aim is to ensure that the SPV’s shares are vested in a third party so that it is not regarded as a subsidiary of the originator or financier and is therefore often referred to as an orphan SPV.

A charitable trust is used most regularly to facilitate  these transactions however alternative structures can of course be considered.

In respect of such an orphan SPV, any potential profit upon an eventual sale of the aircraft must be considered, as this could become payable to the charity upon termination of the trust arrangements at maturity of the transaction.  It is usual for the SPV to receive a small profit (eg. US$1,000) which is helpful for commercial benefit issues of the SPV and also ultimately paid to the charity. Because recourse to the SPV is usually limited, the small profit can usually be justified by the minimal risk involved.

The SPV will also appoint an administrator to provide directors and officers and day to day administration of the SPV.  Appleby, through its various service companies and subsidiaries, can simplify this process by providing the trustee, administrator and independent directors.

Independent directors are essential to assist with “off-balance-sheet” treatment and to avoid the risk that the directors may not be able to discharge their fiduciary duties to act in the best interests of the SPV.

Legal Framework

There are broadly three basic structures (or a combination of) seen in aircraft finance transactions:

  • A borrower incurs a loan from a financial institution secured by, at a minimum, a mortgage over the aircraft;
  • The ownership and lease of the aircraft (involving either an operating lease or a finance lease);
  • A capital markets transaction whereby an entity issues bonds or notes secured by, at a minimum, a mortgage on the aircraft.

In a common scenario, by way of general example, an airline will contract with an aircraft manufacturer to purchase the aircraft.  Prior to delivery of the aircraft the airline will assign that purchase agreement to the SPV pursuant to which the SPV will purchase the aircraft and register it on delivery in the registry of choice, as may be commercially agreed with financiers or investors.

For bankruptcy remoteness purposes, the SPV will enter into the relevant contractual arrangements with the original owner of the aircraft (“Originator”) to ensure that a “true sale” of the aircraft from the Originator has been effected (by which we mean that the asset has been removed from the insolvency estate of the Originator).

The SPV might obtain the monies to purchase the aircraft from the Originator by issuing asset-backed commercial paper in the form of debt notes to chosen investors. By use of this particular financing structure, any incidental borrowing costs are reduced with the issuance of notes and the airline does not need to be concerned with incorporating the aircraft (and related debt) into its balance sheet.

Once it owns the aircraft, the SPV will enter into a lease arrangement with the airline or lessee depending on the broader commercial structure of the deal. The lease documentation will provide for payment of lease rentals and covenants in favour of the lessor in default of which the SPV shall have available a number of remedies including repossession.

There will most often be security documents as part of the financing package which secure the obligations of the SPV which might include an aircraft mortgage, a debenture, a security assignment (usually assigning rights under particular contracts which are the focus of the transaction e.g. insurances, rights of the aircraft owner under the lease arrangement in any operating lease transaction, or the purchase agreement in a PDP financing etc).  There is often also an equitable mortgage over the shares of the SPV granted by the trustee which enables financiers, as mortgagees, to assume control of the SPV in the event of default in a financing or leasing arrangement.

An aircraft mortgage will enable a financier, as mortgagee, to assume control of the aircraft and by taking the necessary steps on enforcement to ultimately transfer registered ownership of the aircraft into its own name.

There will also often be an IDERA and deregistration power of attorney enabling the financier, in an event of default, to deregister the aircraft from its existing registry and take ownership.

Cape Town Convention

The Convention on International Interests in Mobile Equipment and the associated Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (collectively, the “Cape Town Convention”) came into effect in Cayman on 1 November 2015, in line with its entry into force in the United Kingdom on the same date. The Cape Town Convention provides for an internationally recognised system of “international interests” to be created and registered, and standard remedies in a default scenario giving creditors certainty as to the likelihood of being able to recover the aircraft.  The effect of the Convention further enhances the desirability of using a Cayman Islands entity for aviation finance as financiers and lessors can now rely on the certainty of the International Registry and international enforcement.

Economic substance

The International Tax Co-operation (Economic Substance) Act (as amended) was originally introduced in the Cayman Islands in 2019 and is supported by the International Tax Co-operation (Economic Substance) Regulations, 2020 as amended (together, the “ES Act”). There has also been published ES Guidance on Economic Substance for Geographically Mobile Activities (“ES Guidance”), most recently the third version was published on 13 July 2020.

The ES Act imposes requirements on certain types of entities including an SPV typically found in an aircraft finance structure. With respect to an in-scope entity that carries on certain designated activities which may capture certain types of financing and leasing, subject to certain exceptions, these requirements include a requirement to satisfy an economic substance test in respect of those activities.  It will be key to ensure Cayman Islands legal advice is obtained at the outset in structuring any aircraft financing deals utilizing any Cayman Islands incorporated SPVs to ensure that the relevant analysis is undertaken to confirm whether the proposed transaction is in scope for the purposes of the ES Act.


As a creditor friendly jurisdiction, the sophistication of the financing and leasing structures available in the Cayman Islands coupled with the expertise of the service providers, lends itself to transactions capable of being structured to meet the requirements of leading aircraft lending institutions free of unnecessary risks as well as meeting the unique requirements of airlines in their home jurisdictions.

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