Aircraft Finance Vademecum

Since the entry into force of the Pfandbrief Act Amendment in March 2009 Pfandbrief Banks engaged in aircraft finance can use the new Aircraft Pfandbrief as an additional refinancing istrument for their aircraft loans. It enables the refinancing of aircraft loans on favourable conditions. Therefore, Pfandbrief Banks can often offer more attractive conditions to their customers.

In order to refinance aircraft loans by issuing an Aircraft Pfandbrief, certain conditions have to be met: There must be an aircraft mortgage, the law also prescribes a lending limit, some loan modalities and sufficient insurance coverage.

In detail:

Aircraft suitable for cover
Pursuant to § 26b par.1 Pfandbrief Act the loan is limited to aircraft within the meaning of § 1 par. 2 sent. 1 no. 1 of the German Air Traffic Act (LuftVG) which are recorded in a (German or foreign) public register.

Pursuant to § 14 par. 1 of the Luftverkehrs-Zulassungs-Ordnung (LuftVZO) the aircraft has to be registered in the aircraft register (Luftfahrzeugrolle) of the German Federal Office of Civil Aviation (Luftfahrt-Bundesamt), located in Brunswick (Braunschweig). The legal basis for register is the German Air Navigation Act (LuftVG).Pusruant to § 8 par. 2 LuftVZO, a license is granted only if the Federal Office has confirmed the airworthiness of aircraft. The airworthiness certificate is a document which grants authorization to operate an aircraft in flight. Pursuant to § 9 LuftVZO the airworthiness certificate can be revoked at any time.

The registration of an aircraft is not possible if the aircraft is registered in an aircraft register of another country.

Aircraft Mortgage
Only claims secured by registered liens in accordance with § 1 of the Law on Rights in Aircraft (LuftFzRG) or by comparable foreign aircraft mortgages may be used as cover for Aircraft Pfandbriefe.

Pursuant to §1 LuftFzgG, only an aircraft registered in an aircraft register can be the object of a register lien (aircraft mortgage).

An aircraft mortgage under German law necessitates agreement between the parties and registration in the register for liens in aircraft at the local court (Amtsgericht) of Brunswick, which is the central registration court. The authority of the pledgor for registration of aircraft mortgage is to be proved in publicly accredited form. The registered lien is intrinsically linked to the underlying loan claim. The registered lien and the secured claim may only be transferred together.

Pursuant to § 26b par. 4 Pfandbrief Act, aircraft which are registered abroad are suitable for cover if under the laws of the state in whose register the aircraft is recorded

1. a right in rem can be created on aircraft which is recorded in a public register,

2. the right in rem grants the creditor a security comparable to a registered lien under German law, in particular the right to seek satisfaction of the secured loan claim from the aircraft, and

3. legal action is not made significantly more difficult for creditors belonging to another state compared to nationals of that state.

Lending Limit
Up to 60 per cent of an aircraft’s mortgage lending value can be included in the cover pool of a bank’s Aircraft Pfandbriefe. This means that the security may be included in the cover register up to this amount.
Insurance Cover prescribed by the law
The Pfandbrief Act prescribes the obligation to insure the aircraft for the entire duration of the loan for an amount equal to 110 per cent of the respective outstanding loan claims.

Customary Insurance cover:

Third Party Liability Insurance: covers liability to third parties for accidental bodily injury or property damage

Hull All Risks Insurance: covers the loss of or damage to the Aircraft

Hull War Risk Insurance:
includes war risks excluded from Hull All Risks Insurance, such as civil war and war where there is no formal declaration, strikes, riots, civil commotions and labour disturbances, terrorist acts, malicious or sabotage acts and hi-jacking.
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