How to Manage Assets and Risk from a Legal Perspective William KK Ho & Co. Jackson Chow, 30 October 2012, Hong Kong

William KK Ho & Co.  Introduction  Asset Finance Market  General Features  Key Players – “Who should take the risk”  Part 1: Risks – Structuring and Documentation  Risk mitigation – a legal perspective  Managing risks by structures  Managing risks by contractual terms  Part 2: Protecting the asset in a default situation  Preparing for default  Remedies for default  Jurisdictional issues

William KK Ho & Co. Asset Finance Players Key Players  Banks & other financial institutions/ Equity providers  Airlines/ operators/ charter companies  Asset managers & servicers  Manufacturers  Leasing companies  Governmental agencies – Aviation Authorities, ECAs  Insurance companies  Security Trustees  Professional advisers “Who should take what risk” Page  2

William KK Ho & Co. Part 1: Risks – Structuring and Documentation  “Risk” defined - “Exposure to the possibility of loss, injury, or other adverse or unwelcome circumstance; a chance or situation involving such a possibility” Oxford Dictionary  the potential that a chosen action (or non action) or activity could lead to a loss  Implies a choice having an influence on an outcome  Potential losses construed as “risks” “All human endeavors carries some risk, but some are much more risky than others.”

William KK Ho & Co. Leases and Loans – context for managing risks Borrower = User/Operator Lender Loan Lessor Lease Lessee = User/Operator Mortgage Seller Sale Page  4

William KK Ho & Co. Common Risks associated with Asset Financing Types of RisksCharacteristics Credit Risk Risks associated with a borrower / lessee being capable of repaying its debts when due -risk and reward Equipment / Operating Risk Risks relating to the asset / equipment -maintaining equipment value: mark to market, residual value, appraised values Structural Risk Risk relating to the structure of a transaction - Tax - Illegality - Change in law

William KK Ho & Co. Types of Risks Characteristics Default Risk Risk of being in default - payment default - other defaults Legal Risk The potential for loss arising from the uncertainty of legal proceedings. Closing Risk Risk of not being able to close a transaction Reputation Risks Risks associated with one’s reputation -Market Practice -Setting a precedent -Adverse market recognition

William KK Ho & Co. Mitigating Risks by Contractual Terms RisksMitigants Credit RiskPayment Streams - “hell or highwater” provisions - Direct repayments to Lender Credit Support - Guarantees - SD, MRs & LCs - Indemnities Information Covenants - Disclosure - Reporting - Access Negative Pledges - Disposal of assets - Not merge or consolidate Equipment / Operational Risk Operational Covenants - Conditions of use & Maintenance - Compliance with regulations Insurance - Total Loss Proceeds - 3 rd party liability - Step in rights Equipment Warranties - Making sure warranties do not become void. Return Conditions - Depends on who takes residual value risk - Actual Value vs Residual Value Structural Risk Tax Risk - WHT - Duty and VAT Change in Law - Who is best positioned to take on such risks Illegality - Prepayment / Termination Material Adverse Change - Prepayment / Termination / Restructuring

William KK Ho & Co. Mitigating Risks by Contractual Terms RisksMitigants Default Risk Circumstances of Default - Is there a default Recourse to credit support - Is it effective Remedies following Default - Effective security Jurisdictional analysis Market RiskIncreased Cost - Change in law Market Disruption - Changes affecting financial markets Credit Support Providers - Monolines - LC Providers Hedging - Fixed / Floating Rates Legal Risks Legal, valid and binding - Legal Opinions Recourse to ultimate credit - Piercing the corporate veil Effective Security - Enforcement Governing Law and Jurisdiction Closing Risk Conditions Precedent - Funding Indemnity - CPs Third party Performances - Reliance on Third Parties to deliver CPs Legal Opinions - Legal opinions be addressed early in a transaction Funding Mechanics - Do the funding mechanics work

William KK Ho & Co. Risks and Structuring - Leveraged Leases Investor/ Equity & SPC Parent Lender/ Debt Limited recourse Debt SPC Lessor and Titleholder Lessee Leveraged Lease Lease (Finance Lease with Purchase Option) Manufacturer Sale Equity contribution Sublessee/ Operator Page  9 Closing Risk Default Risk Credit Risk Reputation Risk Closing Risk Structural Risk Market Risk Default Risk (including Lessor Default) Equipment Risk Credit Risk Market Risk Legal Risk Default Risk Reputation Risk Structural Risk

William KK Ho & Co. Risk Aircraft Value Airline Credit External Risk Contract Terms & Structure Covenants Reps and warranties Default Provisions Commercial Arrangements Pricing Risk allocation & mitigation

William KK Ho & Co.  Evaluate pricing and commercial principles based on assessing risks -credit worthiness; -LTV ratios; and -asset value, etc.  Managing different risks, defining commercial principles and contractual terms are not linear.

William KK Ho & Co. Part 2: Protecting the Asset in a Default situation Agenda 1.Review of Financing Documentation 2.Security Documentation 3.Notice of Default 4.Locating the Aircraft & Repossession 5.Security Interests and other Prior Interests 6.Sale 7.Deregistration 8.Foreign Jurisdictions

William KK Ho & Co. 1. Review of Financing Documentation Has an Event of Default occurred?  Default  Can the default be cured, grace periods expired Quiet Enjoyment Covenant – is this being breached? 2. Security Documentation Enforceability of security documentation Legal Opinions Security Packages

William KK Ho & Co. 3. Notice of Default Accuracy of default notice Service of notice 4. Locating the Aircraft and Repossession Repossession - Is a court order necessary? Locating the Aircraft Maintenance of insurances, aircraft maintenance; incurring costs in connection with Aircraft – who pays?

William KK Ho & Co. 5. Security Interests and other Prior Interests Prior interest? Repairman’s, maintenance, storage, repair, aviation charges 6. Sale Aircraft mortgage usually will provide for an express power of sale Private Sale Pre-judgment court sale 7. Deregistration Deregistration of the Aircraft as a condition to sale

William KK Ho & Co. 8. Foreign Jurisdictions Local Law Advice  Enforcement of local law securities – court appointed orders  Compliance with local law requirements regarding repossession  Liaison with regulatory authorities  Deregistration  Choice of law and jurisdiction  Peculiar Jurisdictional Requirements Foreign Conventions  Cape Town Convention – Creditors may exercise certain default remedies – sale, receive income from profits grant a lease  Remedies exercisable without a court order, unless Contracting State has declared otherwise

William KK Ho & Co. Part 2: Protecting the Asset in a Default situation Basic checklist 1.Review of Financing Documentation 2.Security Documentation 3.Notice of Default 4.Locating the Aircraft & Repossession 5.Security Interests and other Prior Interests 6.Sale 7.Deregistration 8.Foreign Jurisdictions

How to Manage Assets and Risk from a Legal Perspective William KK Ho & Co.