Canada and Australia ratify the Cape Town Convention in light of the ASU

Moves to ratify the Cape Town Convention by the Canadian and Australian governments have been welcomed by some of the airlines set to benefit from more competitive aircraft financing and leasing terms. The introduction of the new Aircraft Sector Understanding, as well as certain banks reducing their exposure to dollar-denominated assets, have helped to speed up the lengthy ratification processes experienced in each country.
The Australian Government began consulting with its aviation industry as far back as 2003 on its views on ratifying the Cape Town Convention, eventually issuing a consultation paper in 2008. Further progress on the topic was delayed by the reform process of Australia’s Personal Property Securities Act (PPS), a federal law that governs taking, registering and enforcing security over all personal property other than land or buildings, to ensure the implementation of the Convention would be consistent with the final PPS legislation. Consultations with industry continued in 2009 and 2010 with the Government releasing a further consultation paper on largely technical issues. Following the lengthy consultation process Australian Transport Minister Anthony Albanese announced in October the decision to move forward with ratification of the treaty. It is to come into force in Australia in 2014.

Air Canada and WestJet have welcomed moves by the Canadian Government to fully implemented the Cape Town Convention

Australian Government estimates issued in support of the ratification indicate that once ratified the Convention could save an Australian airline AUD2.5 million on the cost of an Airbus A380 and about AUD330,000 on a new ATR72 turboprop aircraft. This is because the protections provided to creditors under the convention, such as internationally recognised creditor’s rights in the event of a debt default or insolvency and the international register for creditors, will mean more competitive terms for airlines. The ratification, combined with the Aircraft Sector Understanding on Export Credits for Civil Aircraft (which now allows discounted financing on a wider range of aircraft, including turboprops), will help Australian airlines to renew their fleets with newer, more fuel efficient aircraft according to Transport Minister Albanese.Australian Government estimates show that once it has ratified the convention an Australian airline could save AUD2.5 million on the cost of an Airbus A380 and about AUD330,000 on a new ATR72 turboprop aircraft

Ratification of the Convention in Canada has also been a slow process. In February 2005 Canada’s Federal Government enacted the International Interests in Mobile Equipment (aircraft equipment) Act (Canada) (the CTC Act). The CTC Act is the Federal implementing legislation for the Convention but, due to Canada’s federal structure, it in itself was not sufficient to adopt the Convention as certain areas, in particular aspects of property and civil rights, are under provincial, not federal, authority, leading to an initial delay in the process. While aspects of the CTC Act were implemented later in 2005, the next major moves for full implementation of the Convention happened in 2008 and 2009 with the Canadian Government and aviation industry consulting and agreeing on a way forward for full implementation, with certain provisions being implemented at that time. However, very little progress had been reported on ratification of the Convention but the dual hit of the introduction of the new ASU and the pulling back of certain banks from financing dollar-denominated assets, seems to have accelerated the process to ensure Canadian airlines are able to benefit from more competitive financing terms for aircraft acquisitions.

The recent legislative amendments by the Canadian Federal Government have been welcomed by Air Canada. ‘Air Canada applauds the federal Government for taking these steps towards ratification of the 2001 Cape Town Convention, of which Canada is a signatory,’ said Michael Rousseau, Air Canada’s executive vice president and chief financial officer. ‘With ratification, Canada would join the growing ranks of countries benefiting from this important international agreement that will provide Canada’s airlines with access to more competitive aircraft financing and leasing terms on international finance markets, for the benefit of Canada’s airlines and all stakeholders.’ Once the convention is ratified, Canadian airlines would be able to more easily secure aircraft financing on terms that have been available to U.S. airlines.

WestJet have also welcomed the latest moves. ‘We are pleased to see the Canadian Government recognize the importance of the Cape Town Convention for the Canadian airline industry,’ said Candice Li, vice-president, treasury, WestJet. ‘As an airline with a keen focus on cost, we recognize the savings benefits for the overall Canadian air carrier industry, potentially saving millions of dollars in financing costs over the lifetime of an aircraft.’

The Cape Town Convention, signed in 2001 is a result of negotiations involving 68 countries. It is a multilateral agreement that establishes an international legal framework to protect security and leasing interests in aircraft equipment, such as airframes, engines and helicopters. It facilitates cross-border, asset-based financing and leasing of this equipment. As a result of this legal framework financiers are able to reduce risk premiums and offer more competitive lending rates which can lead to cost savings for airlines covered by the convention. The aircraft protocol of the Cape Town Convention was ratified in 43 states by the end of 2011.

Welcoming the Australian ratification moves, Australian law firm, Kingwood Mallinsons said that under the ASU, ‘Australian airlines will have the benefit of reduced premiums in export credit financing arrangements. To apply, the OECD will need to be satisfied that the Convention and its qualifying declarations have been adequately implemented into national law. Financiers and lessors also stand to benefit for all transactions (not just export credit transactions), as the Convention brings speed and certainty to the repossession process, which should significantly reduce the risk of lending or leasing to Australian airlines.’

It raised concerns however that following the implementation of the recently introduced Personal Property Securities Act 2009 (‘PPSA’) on 30 January 2012 (‘RCT’) in Australia (a new system for the creation, registration and enforcement of security interests in assets, which replaced the previous registration of company charges at ASIC that the PPSA contains transitional provisions which affect security interests created before the RCT and which will enjoy temporary perfection until 30 January 2014 unless registered before this date. ‘Absent any current detail on the implementation of the Convention, registration of these security interests should continue under the PPSA,’ it says.

‘It is unclear how the Government intends to deal with the registration of interests under the Convention and PPSA following the implementation of Cape Town in 2014. In our view, it is essential that there is no duplication of registrations systems or registration costs for parties to aircraft financing transactions. If not implemented efficiently, parties may need to register under Cape Town and under the PPSA,’ the firm said.

‘We are speaking to the Government about the best way of moulding the systems moving forward. We need to ensure that there is consistent interplay between the PPSA and the Convention to avoid any duplication of registration and costs for parties under the two regimes. We made submissions to the Government in 2010 in support of the implementation of the Convention into Australia provided that it ties in with the PPSA,’ it said.
Aviation Finance, Nov 2012