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Aircraft Finance Lease Guarantee


 

Introduction

Aircraft finance lease guarantee mainly means that Bank of China provides American and European export credit agencies' aircraft finance lease business with a guarantee, their businesses have a typical financing structure, namely financing guarantee combining with commercial bank loans.

Financing lease is a supply contract signed between the lessor and the third Party (hereinafter referred to as "supplier") in accordance with the specification provided by the lessee. Based on this contract, the lessor obtains factory, capital goods or other equipments (hereinafter referred to as "equipments") in accordance with clauses on the scope related to the interest agreed by the lessee. And the lessor and the lessee (hereinafter referred to as "user") enter into a lease contract to grant the lessee rights for using the equipments on condition that the lessee pays the rental.
Aircraft finance lease, a kind of lease with dual functions of fund-raising and leasing-asset, means that the lessor purchases aircraft selected by the lessee (the airline company) to possess the ownership of aircraft, and lease the aircraft to the lessee who uses aircraft upon payment within a certain period. At expiry of lease term, the lessee may renew it, or have the priority to purchase it at market or fixed price.

Category of Aircraft Finance Lease

American style: export credit guaranteed by the American import and export institution plus general commercial bank loans;

European style: whatever for export credit or commercial loans, the bank's business department entrusts the international settlement department to open letter of guarantee under such style.

Features

In accordance with classification of lease by the Accounting Standards for Enterprises - Leases, the financing lease refers to the lease transferring all risks and rewards related to the ownership of assets. That is to say all risks and rewards are transferred to the lessee from the lessor, and the ownership may be transferred or not. Other leases except for financing lease are all operating leases.

1. Financing lease is a kind of trilateral transaction which involves in at least three parties (the lessor, the lessee and the supplier) and at least two contracts (sales contract and lease contract). The three parties correlate with each other and the two contracts restrict mutually.

2. Equipment to be leased is selected by the lessee. And the lessor only provides convenience for finance and purchases equipment in accordance with requirements of users, and will not bear responsibility of equipment deficiency and delayed delivery, equipment maintenance, etc. The lessee shall not delay or refuse to pay the rental for above reasons.

3. Full reimbursement means that the lessor only leases the equipment to a specific user within the basic lease term, and total rental collected by the lessor from the user shall be equal to all investments and profits of the lease, or to a certain percentage of the total investment, such as 80%, in accordance with standard on finance lease in the country of the lessor. In other words, the lessor will withdraw all or most of investments in just one transaction.

4. For the lessee, financing lease belongs to a subject of balance sheet, in which leased equipment shall be reflected; therefore, the accrued depreciation of the equipment shall be accounted by the lessee. Charges of insurance, maintenance and repair for equipment and obsolescence risk shall be undertaken by the lessee.

5. The ownership and right of use of the equipment shall be separated for a long term. The lessor legally reserves the ownership, and the lessee economically reserves the right of use.

6. The lessee generally has three options as purchase, renewal or off-lease at the expiry of lease term.

7. Nature of insolvability. For the lessee, leased equipment is selected by the lessee on its own need; therefore, the lessee may not terminate the contract in advance on the condition of returning equipment. The lessor may not increase rental on the condition of market appreciation since equipment has been purchased. All in all, both Parties have no rights to suspend the contract within the lease term.

8. Aircraft lease business covers large amount and long term.

9. Comparison of aircraft finance lease business with other aircraft finance business.

 

Business
Type
Comparison
Aircraft Finance Lease Guarantee Bank of China mainly provides American and European export credit agencies' aircraft finance lease business with a guarantee, their businesses have a typical financing structure, namely financing guarantee combining with commercial bank loans.
Aircraft Operating Lease Guarantee Bank of China issues letter of guarantee for rental payment to the lessor to unconditionally and irrevocably ensure that the airline company pays enough rental for aircraft operating lease on time and our bank will compensate upon the lessor's requirement when the airline company fails to pay the rental.
Aircraft Direct Finance A kind of finance business that the airline company applies to Bank of China for finance direct for purchasing the needed aircraft from the aircraft manufacturing company and owning property of the aircraft.
Aircraft Advance Payment Finance A kind of finance business that the airline company applies to Bank of China for finance for advance payment before purchasing the needed aircraft from the aircraft manufacturing company.
Aircraft Sale Lease Back A kind of finance business that the domestic aircraft lease company (the lessor) applies to Bank of China for finance for the purpose of purchasing the aircraft with the ownership and discretionary from the domestic airline company (the lessee) and then leasing it back to its original airline company, the rental of which will be collected to compensate loans from Bank of China.

Charges

Guarantee fee: both Parties agree the guarantee rate in accordance with the agreement signed by the lessee and the guarantor.

Target Customers

The airline companies registered in the territory of the People's Republic of China.

Application Qualifications

When applying for aircraft finance lease guarantee, you shall follow the conditions:

1. Business license of enterprise issued by the industrial and commercial administration departments;

2. Loan cards issued by People's Bank of China;

3. Documents approved by the State Development Planning Commission(now as the National Development Reform Commission) for agreeing to introduce aircraft in the way of lease;

4. Normal business condition, prominent economic efficiency and ability to repay rental in time;

5. Agreement for aircraft finance lease signed with the lessor.

Application Procedures

1. Applicant shall submit application to company business department of our bank concerning on the leased aircraft project, in which type, quantity, amount, delivery time of aircraft and other contents required by company business department shall be specified clearly. Applicant shall also provide following documents and materials:

① Documents approved by the State Development Planning Commission for introducing aircraft in the way of lease;

② Documents approved by the Civil Aviation Administration of China for allocating aircraft to the airline company;

③ Introduction to applicant;

④ Financial statements of applicant in the last three years;

⑤ Financial forecast for introducing aircraft;

⑥ Unconditional and irrevocable letter of counter-guarantee provided by domestic unit for counter-guarantee to Bank of China;

⑦ Documents that is enough to prove economic strength of the unit for counter-guarantee, such as introduction about unit for counter-guarantee, financial statements of the last three years;

⑧ Introduction to finance structure (finance lease) or lease structure (operating lease);

⑨ Introduction to arranger for aircraft finance lease(finance lease).

2. In the business of finance lease, in order to control finance cost, the business department of the company may assign personnel to attend selection of finance proposal, finance arrangement and negotiation of clauses of letter of guarantee for each aircraft;

3. Project review will commence after the completion of above mentioned procedures.

Process

1. The airline company and the aircraft manufacturing company sign the purchase agreement;

2. The airline company or the financier registers to establish SPC on a tax exemption island, and transfers the purchase agreement to SPC;

3. The financier provides full finance to SPC at price in the purchase agreement, includingthe export credit of finance guarantee (80%-85%) provide by European and American export credit agencies, combining with syndicated bank loans composed by part of commercial bank loans;

4. SPC pays full amount to the aircraft manufacturing company to gain the ownership of aircraft. At the same time, SPC mortgages the aircraft to the creditor who is the first mortgagee;

5. The  lessor SPC and the lessee airline company sign the lease agreement;

6. In accordance with the lessee's application, Chinese banks (as the guarantor meanwhile) issue unconditional and irrevocable letter of guarantee for rental payment to benificiary SPC (as the lessor meanwhile) as the beneficiary, to ensure that the guarantor will bear the payment responsibility when the airline company (as the lessee meanwhile) fails to pay rental;

7. Based on the financier's requirement, the lessor transfers relevant rights and interests under letter of guarantee for rental payment issued by the guarantor to the financier who becomes the first beneficiary of such letter of guarantee;

8. The lessee and the guarantor sign a compensation agreement to confirm the credit and debt relationship of both Parties, and provide acceptable domestic counter-guarantee to the guarantor meanwhile;

9. The financier and the guarantor sign a subrogation agreement, which specifies that the guarantor will gain all rights and interests under such agreements of finance and mortgage of the original financier after the lessee breaches and compensates. That is to say the guarantor will replace the position of the creditor.

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