The Hong Kong conferences are over for another year, and our Aviation Finance team had another very productive week at the various sessions. It was great to see so many familiar faces and connect with new people, and doing so in what is fast becoming one of the world’s new aviation finance powerhouse jurisdictions gave the meetings a real buzz.

There was a lot to discuss, including the retention of younger members of the aviation finance sector, the desirability of the investment grade rating and the resilience of the industry generally, but on balance the three major takeaways were as follows:

  1. Investment in China: Even in the context of the current ‘trade war’, industry interest in China is continuing to grow, and people are thinking about new structures to facilitate the movement of assets and finance. Lessors are opening new local offices, more people are attending the conferences, and expertise in Chinese financial regulation is in very high demand, especially as attention continues to be drawn to the possibilities of the Belt and Road Initiative. Interestingly, while it was noted that China is thought more likely to be affected by the ‘war’ than the United States, Chinese airlines are considered well placed and able to withstand the pressure.

There is a palpable sense of momentum in this space, and we expect to see a lot of activity here especially for lessors and financiers over the next couple of years.

  1. Cape Town Compliance Index: There was some interesting discussion of the Cape Town Compliance Index, which is being developed by the Aviation Working Group (AWG) for the benefit of lessors and financiers. This is intended to be a very nuanced review of the various factors influencing compliance by each contracting state, designed to incentivise compliance and to make the industry more transparent and attractive to lenders. The Index will provide a score from 1-100 based on its assessment of a jurisdiction’s ‘actual and anticipated compliance with the terms and intent of the treaty’ (http://www.awg.aero/projects/capetownconvention/), which will be publically available online. More detailed forms of the index will also be available to AWG members, governments and others, with ‘certified for transaction’ versions on request for AWG members and a further level of reporting available only to OECD members in relation to the Aircraft Sector Understanding relevant factors.

Some panellists noted that they have seen the Cape Town Convention serving as the deciding factor in whether or not a transaction went ahead, on the basis of the comfort that this provided to the financiers in circumstances where the political risk associated with the operator’s jurisdiction (where this was a contracting state) meant that they would otherwise not have done so. It is therefore likely that the Cape Town Compliance Index, once published towards the end of 2019, will become an important reference point for the aviation finance industry and tool for financiers when evaluating credit risk, reflecting the centrality of the Convention itself.

  1. Lessor wish list: the recurring ‘most wanted’ items from the panellists and from those we met with were:
    1. increased lending in the mid-life sector, which is a slice of the market currently receiving a huge amount of attention from lessors and operators;
    2. increased speed and simplicity in novations to make the market more liquid and attractive;
    3. decreased paperwork and fees in ABS structures, which continue to be very popular vehicles for lessors; and
    4. increased efficiency generally using new technology to run transactions – for example, using blockchain for contracts and technical records.

See you all at the next one!