Sales Financing Arrangements
In support of sales, the Company may agree to participate in the
financing of selected customers. As a result, the Company has a
portfolio of leases and other financing arrangements with airlines
and other customers. The risks arising from the Company’s sales
financing activities may be classified into two categories: (i) credit
risk, which concerns the customer’s ability to perform its obligations
under a financing arrangement, and (ii) aircraft value risk, which
primarily relates to unexpected decreases in the future value of
aircraft. Measures taken by the Company to mitigate these risks
include optimised financing and legal structures, diversification over
a number of aircraft and customers, credit analysis of financing
counterparties, provisioning for the credit and asset value exposure,
and transfers of exposure to third parties. No assurances may be
given that these measures will protect the Company from defaults
by its customers or signifi cant decreases in the value of the financed
aircraft in the resale market.
The Company’s sales financing arrangements expose it to aircraft
value risk, because it generally retains security interests in aircraft for
the purpose of securing customers’ performance of their financial
obligations to the Company, and/or because it may guarantee a
portion of the value of certain aircraft at certain anniversaries from
their delivery to customers. Under adverse market conditions,
the market for used aircraft could become illiquid and the market
value of used aircraft could signifi cantly decrease below projected
amounts. In the event of a financing customer default at a time when
the market value for a used aircraft has unexpectedly decreased,
the Company would be exposed to the difference between the
outstanding loan amount and the market value of the aircraft, net
of ancillary costs (such as maintenance and remarketing costs,
etc.). Similarly, if an unexpected decrease in the market value of
a given aircraft coincided with the exercise window date of an
asset value guarantee with respect to that aircraft, the Company
would be exposed to losing as much as the difference between
the market value of such aircraft and the guaranteed amount,
though such amounts are usually capped. The Company regularly
reviews its exposure to asset values and adapts its provisioning
policy in accordance with market financings and its own experience.
However, no assurances may be given that the provisions taken by
the Company will be sufficient to cover these potential shortfalls.
Through the Airbus Asset Management department or as a result
of past financing transactions, the Company is the owner of used
aircraft, exposing it directly to fluctuations in the market value of
these used aircraft.
In addition, the Company has outstanding backstop commitments
to provide financing related to orders on Airbus’ and ATR’s backlog.
While past experience suggests it is unlikely that all such proposed
financing actually will be implemented, the Company’s sales
financing exposure could rise in line with future sales growth
depending on the agreement reached with customers. Despite the
measures taken by the Company to mitigate the risks arising from
sales financing activities as discussed above, the Company remains
exposed to the risk of defaults by its customers or signifi cant
decreases in the value of the financed aircraft in the resale market,
which may have a negative effect on its future results of operation
and fi nancial condition.