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“Gekommene Fliege mit mir….”

March 7, 2009

Come fly with me . . . .”

Germany’s Federal Cabinet must love Frank Sinatra . . . or recognize a good opportunity when it presents itself.  It has created aviation bonds that will soon allow German banks to refinance aircraft loans with more favorable terms than previously granted.  Considering the current economy and today’s news regarding two of the U.S.’s aviation financiers, investors will likely have plenty of reason to see friendly skies.

The law retains the 60% resale value restriction seen in other German  bonds, thus, in the context of aviation bonds, the loan value is limited to 60% of the plane’s resale value “the first 20 years of its useful life.”  The new bond will protect the bank, however, in the event of a forced asset sale, by allowing it to remain the legal owner of the aircraft–as if it were solvent and without regard to its insolvency–being liable only to the bondholders (provided the cover is adequate).

Such protection is accomplished by a “separation of assets,” triggered by the bankruptcy and forced sale.  Specifically, the Mortgage Lending Act provides that, with regard to the bonded loan, the bank’s representative and managerial body are transmuted from the managing board to the trustee (thereby preventing the bank from being subject to, inter alia, the law on liens and bankruptcy laws concerning the bonded loan).  (For more information about German banking laws click here and here.)

The resulting “delineation of covers” occurs as a formality after entry into the mortgage register, allowing a quick and summary “separation of assets” in the event of a bankruptcy and forced sale.  Hence, the representative and managerial body of the bank remain the managing board with regard to assets subject to a forced sale (and concomitant civil laws), while acting as trustee of the aircraft owned by the defunct bank.

Given its success with the Pfandbriefe bond, the government’s stated goal of passing the law to “strengthen German bonds and to assert their pre-eminent position [in the aircraft financing market],” should be heeded by the wise and . . . starry-eyed.

Updated here.

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