An introduction to the Global Aircraft Trading System (GATS)
The Aviation Working Group (AWG) is a not-for-profit legal entity comprising aviation industry players who collaborate to advance international aviation financing and leasing. In spring 2019, AWG announced that it had contracted with technology solutions company Fexco to build, support and operate the the Global Aircraft Trading System (GATS) platform. AWG also published drafts of the standard form documents underpinning the system to allow industry participants to familiarise themselves with their terms before GATS officially goes live in the spring of 2020.
Modernising aircraft equipment trading and financing
The trading and financing of aircraft equipment subject to leases is an increasingly important part of the aviation industry. In recent years, as the number of such trades has significantly increased, inefficiencies have developed. That has resulted in wasted time and resources for airlines, lessors and financiers alike.
The main purposes of GATS are to facilitate the trading and financing of aircraft equipment by reducing the burdens on all players. It also promotes aircraft equipment trading and financing in an efficient, secure and predictable manner which protects the rights of all parties involved including and especially the relevant lessee’s rights under the applicable aircraft lease agreement.
Through GATS, users are permitted to create, transfer and secure interests in aircraft equipment without disturbing the existing leasing arrangements or having an impact on the contractual rights or protections of the parties to the lease agreement relating to such aircraft equipment.
There are multiple parties involved when aircraft equipment subject to a lease is traded. For example, the seller, the buyer, the lessee leasing the aircraft equipment, any lender providing financing to the seller prior to the trade and any lender proposing to provide financing to the buyer to make the trade.
Each of these interested parties can use GATS for different purposes. The participants with the most direct involvement in the system are the owners and secured financiers of aircraft equipment. These participants are permitted to use GATS to create, transfer and secure interests in aircraft equipment. Participation in and use of GATS to effect and record transfers is entirely voluntary.
How GATS will work
GATS builds on the practice of holding aircraft equipment in trusts, with bare legal title to the aircraft equipment being held by a professional trustee on behalf of a beneficiary bearing the economic risks and benefits sof ownership of the aircraft equipment.
A common law trust is an equitable obligation that creates a fiduciary relationship in which one party, the owner trustee, agrees to hold title to assets for the benefit tof another party, the beneficiary. The owner trustee is the bare legal owner of the assets on trust for the beneficiary. This practice is well established and widely adopted for aircraft equipment ownership in the United States. It has been used in Ireland and elsewhere. GATS will expand this practice globally.
One of the principal benefits of holding aircraft equipment in a trust is that the economic and beneficial ownership of that aircraft equipment can be transferred from one party to another without having an impact on the contractual rights, remedies and protections agreed in the relevant lease agreement. The professional trustee is the lessor of record both before and after the transfer so there should be no need to novate or assign the lease agreement as a result of a beneficial linterest transfer.
To further and substantially increase efficiency, GATS features standard forms of transfer documents executed electronically through the GATS platform. A GATS user will be prompted to provide factual information for example, details of a transferor and transferee. These will be automatically populated into the final form GATS documents to be executed and delivered electronically through the GATS portal so that the transfer is completed 100% electronically.
Details of ownership and security interests created through GATS and the aircraft equipment held in a GATS trust will be recorded in an electronic ledger, using secure technology, searchable by any user of the system. The GATS electronic ledger is immediately updated following each transfer to ensure that an accurate, live record of ownership of each piece of aircraft equipment in the system is maintained.
Reduces the burdens on and time required by lessees, lessors and financiers
After a GATS trust has been created, the beneficiary shall be permitted to transfer the beneficial interest to another party, subject to any conditions to a transfer of interests in the aircraft equipment set out in the relevant aircraft lease agreement. The trust remains intact and the contractual terms of the agreements (including lease documents) entered into by the owner trustee of that trust are unaffected by the beneficial linterest transfer. Lessees that wish to have advance conditions to transfer (advance requirements) populated in the GATS system would require such in their lease terms and would utilise the electronic system to confirm the satisfaction (or waiver) of those requirements.
Protection of rights of lessees
The rights of a lessee of aircraft equipment held in a GATS trust are protected in two ways:
- GATS enables both a transfer of the beneficial linterest in a GATS trust and the creation of a security interest in a GATS trust to take effect without changing the contractual provisions of the lease agreement, fully respecting and reinforcing the ‘no increased obligations’ protections of the lessee.
- Any agreed requirements in the lease to be met prior to a transfer of an interest in the aircraft equipment held in a GATS trust can be added to the GATS platform (in an encrypted format) as ‘advance requirements’. The GATS platform will not permit the beneficial interest in such GATS trust to be transferred (or subjected to a security interest) unless each of the agreed advance requirements has been marked as satisfied don the system by the lessee. This strengthens the position of lessees compared to current practice, where a lessee would only have an after-the-fact contractual claim in connection with a disputed transfer.
Granting security interest through GATS
In addition to a standard mortgage over the relevant aircraft equipment and a security assignment of the relevant lease agreement, a secured lender advancing funds against aircraft equipment owned by a GATS trust will also be permitted to take security over the beneficial linterest in the GATS trust. From the perspective of a lessee, any agreed conditions (advance requirements) which must be met in order to grant security over the beneficial interest in the GATS trust can be enshrined on the GATS platform as pre-conditions to the system allowing the grant of the security interest to be completed through GATS.
If the beneficiary defaults on its secured financing and the secured party is entitled to enforce its security, the secured party will be permitted to transfer the beneficial interest in the GATS trust to itself or to a third party. Any such transfer would be subject to the same terms, conditions and restrictions as are agreed with the lessee in respect of a regular beneficial linterest transfer.
Interaction of GATS with the Cape Town Convention
While there is no legal relationship between GATS and the Cape Town Convention (CTC), the two are complementary. CTC, an international treaty, deals with the creation and effects including in insolvency, of ‘international interests’ in and sales of aircraft and engines. CTC contemplates registration with the International Registry relating to transactions within its scope.
GATS does not deal with direct interests in aircraft and engines as it is based on beneficial linterests in trusts over aircraft and engines. No registrations in the CTC International Registry are to be made in connection with transfers of or security over GATS beneficial linterests. However, the lease from a GATS trust to an airline, an absolute or security assignment of that lease, and any mortgage over the aircraft or engines held in the GATS trust remain subject to CTC, and, without limitation, should be the subject of CTC registrations.
GATS jurisdictions
GATS is a global system with the GATS platform accessible worldwide. Initially, each GATS trust will be formed in one of Ireland, Singapore or the United States. The laws of each applicable jurisdiction will govern the instruments used to create, transfer and grant security interests in such GATS trusts. AWG may expand the list of available jurisdictions over time. This initial trust-jurisdiction limitation does not limit the use of GATS in transactions to airlines worldwide, provided that trusts are recognised in an airline’s jurisdiction. Building on the requirement in the CTC to recognise trusts, AWG is working to advance global recognition of trusts in the GATS context.
Tax implications
A GATS objective is to have the GATS trust treated as a transparent entity (a pass-through) for tax purposes, i.e. for the tax authority to look through the trust to the beneficiary. The standard forms of trust instrument contain features designed to support the treatment of the trust as transparent for tax purposes in Ireland, Singapore or the United States (as appropriate). A beneficiary tax resident in the US, Ireland or Singapore should be entitled to claim tax depreciation on the consideration incurred for the acquisition of the beneficial linterest in the aircraft held in a GATS trust considered transparent for tax purposes.
In general, the transfer of a beneficial interest in a GATS trust should be within the scope of transfer taxes. Tax treatment of a GATS trust and each GATS transaction will depend on the pertinent facts and circumstances and the tax legislation in each jurisdiction. Specific tax advice should be sought in each case.
Outlook
The legal theory behind GATS is sound. The need to modernise current novation practices is clear and the move toward electronic transaction management is inevitable. Changes to long-accepted practices will not happen overnight but the aircraft leasing companies and financiers who are embracing GATS and taking steps already to get themselves ‘GATS-ready’ are likely to benefit tthe most from the efficiencies created by the system.
For queries in relation to this topic or any other aviation finance matter please contact David Berkery, Partner at A&L Goodbody or your usual A&L Goodbody Aviation & Transport Finance contact.
This article first appeared in July/August 2019 edition of the Airfinance Journal.
Date published: 1 July 2019