Concept and Nature of Aircraft Covered Bonds
Aircraft covered bonds are special debt securities secured by aircraft mortgages, which a credit institution, acting as issuer, grants for the refinancing of loans that are secured by registered rights in aircraft. They represent a particular type of regulated covered bond under German law and are governed by the Pfandbrief Act (PfandBG). The objective of aircraft covered bonds is to make long-term financing in the aviation sector transparent, legally secure, and attractive for capital investors.
Legal Basis and Regulatory Framework
Legal Sources
The relevant regulations for the issuance and securing of aircraft covered bonds can be found in the Pfandbrief Act (PfandBG), in particular §§ 1 (1) No. 4, §§ 21 et seq. PfandBG. Further provisions are found in the German Civil Code (BGB) and the Aviation Act (LuftVG). Internationally, instruments such as the Cape Town Convention on International Interests in Mobile Equipment also apply.
Eligible Issuers
Only credit institutions licensed specifically for this purpose are entitled to issue aircraft covered bonds; these must have an authorization from the Federal Financial Supervisory Authority (BaFin) and fulfill certain requirements regarding creditworthiness, organization, and cover pool management. They are subject to particularly strict banking supervisory oversight.
Definition of the Aircraft Mortgage
According to §§ 1 ff., 1068 ff. BGB and § 1 (1) sentence 2, 21 (1) No. 1 PfandBG, the aircraft mortgage is the central security instrument. It is established by agreement and registration in the register for security rights over aircraft at the competent registry court. The mortgage covers all essential components of the aircraft.
Cover Pool and Security of Aircraft Covered Bonds
Composition of the Cover Pool
The cover pool serves to secure the aircraft covered bonds and comprises loan receivables secured by mortgages. These receivables and mortgages must be managed strictly separately from other banking business. Realization of cover is only permitted, under §§ 4, 21 PfandBG, with respect to expressly registered aircraft that have a significant minimum value and are eligible for registration (> 10 million Euros).
Requirements for Mortgage Loans
Mortgage loans in the cover pool are subject to criteria such as loan-to-value ratio and the loan amount. According to § 22 PfandBG, the loan-to-value should generally not exceed 60% of the market value of the aircraft, as determined by an independent appraisal. The market value must be proven in accordance with international valuation standards.
Cover Register and Insolvency Protection
The cover register serves to meet all requirements for security and transparency. In the event of the issuer’s insolvency, aircraft covered bonds are linked to special assets protected from insolvency. The bondholders enjoy priority satisfaction from the cover pool (right of separate satisfaction) in accordance with §§ 30, 31 PfandBG.
Issuance, Offering, and Trading of Aircraft Covered Bonds
Issuance Process
For issuance, a securities prospectus must be prepared, disclosing to investors all relevant information about cover, valuation, risks, and legal framework. Following review by BaFin, placement takes place with institutional or private investors.
Tradability
Aircraft covered bonds are considered a safe asset class. They can be traded on or off the stock exchange and offer investors benefits through statutory security as well as tax privileges. Subordinated claims can largely be excluded in the event of insolvency.
Legal Particularities and Distinctions
Distinction from Other Types of Covered Bonds
Aircraft covered bonds differ from mortgage covered bonds (real estate), public covered bonds, and ship covered bonds by the type of collateral (aircraft) and the specific provisions of § 21 et seq. PfandBG.
International References
Multi-jurisdictional securities often require additional registrations, such as under the Cape Town Convention. The international mobility of the collateral necessitates cross-border coordination regarding the applicability and enforceability of the mortgage.
Risks, Benefits and Economic Significance
Security and Investor Interests
Aircraft covered bonds enjoy a high standing among institutional investors due to their statutory regulation and strict administration. Systematic oversight of the cover pool and the evaluation and management provisions offer significant protection.
Economic Significance
They make a decisive contribution to financing the international aviation industry, making capital available for investment in modern aircraft. For issuers, a reliable refinancing market is opened up.
Summary
Aircraft covered bonds are a specifically regulated financing instrument secured with mortgages on aircraft. They are subject to strict legal requirements regarding issuance, cover, and insolvency protection. As a special form of covered bond, they make a significant contribution to the stability and transparency of aircraft financing, combining legal security with economic efficiency.
Frequently Asked Questions
Which legal provisions govern the issuance of aircraft covered bonds in Germany?
The legal basis for the issuance of aircraft covered bonds in Germany is the Pfandbrief Act (PfandBG), which, with its specific provisions for different types of covered bonds, forms the basis for these special bonds. The PfandBG is supplemented in particular by regulations and supervisory requirements issued by the Federal Financial Supervisory Authority (BaFin). Aircraft covered bonds are explicitly regulated in § 1 (1) sentence 2 No. 3 PfandBG as well as in §§ 26 et seq. PfandBG, which define both the requirements for the cover assets and for the valuation of aircraft receivables. In addition, relevant European regulations, such as Regulation (EU) No. 575/2013 on prudential requirements for credit institutions and investment firms (CRR), must also be taken into account, especially regarding capital requirements. The legal requirements concerning transparency, cover register, and ongoing monitoring of the cover assets are also detailed in the PfandBG in order to ensure a high level of security and stability of the covered bond system.
What requirements must loans meet to qualify as cover assets for aircraft covered bonds?
In order for a loan to qualify as cover assets for an aircraft covered bond, § 26 (1) PfandBG mandates a series of requirements. First, the loan must be secured by an aircraft within the meaning of the Aviation Act (LuftVG) that is entered in the German aircraft register or a register considered equivalent under the EEA Agreement. The PfandBG also requires that the secured aircraft is either already completed and delivered or is at an advanced stage of completion, whereby the eligibility of aircraft still under construction is subject to strict conditions. Furthermore, the value of the secured aircraft must exceed the amount of the outstanding loan, and the valuation methodology must adhere to clearly defined conservative requirements (§ 26 (4) PfandBG). The claims from the loan must be clear, unambiguous, and free of material legal or factual uncertainties. Furthermore, where applicable, international agreements such as the Cape Town Convention on International Interests in Mobile Equipment must be considered if aircraft are operated or registered in third countries.
What role does the cover register play for aircraft covered bonds and how is it legally structured?
The cover register is a central component of the legal structure of aircraft covered bonds. According to § 5 PfandBG, every issuing institution is obliged to maintain a separate register for each type of covered bond. In the cover register for aircraft covered bonds, all loans serving as cover are continuously documented, including all relevant collateral and encumbrances. This also includes details on the aircraft’s valuation, the status of the loan, and necessary remarks on special arrangements such as cross-collateralization. The cover register is legally protected and enjoys special protection in the event of the issuer’s insolvency under §§ 30 et seq. PfandBG, by being separated from the insolvency estate. A trustee (cover register auditor), appointed by BaFin, monitors the lawful management of the register and ensures the sufficient cover of issued covered bonds.
How is the value of the aircraft cover legally assessed and monitored?
The legal assessment of the value of the cover assets is comprehensively regulated in the PfandBG, in particular in § 26 (4) and § 6 PfandBG. Independent and qualified valuations must be used to determine both the current market value of the mortgaged aircraft and to conservatively anticipate future depreciations. The loan amount may not exceed a certain loan-to-value threshold, which must be below the market value. Ongoing monitoring is carried out by internal and external auditors as well as regularly by BaFin. Internal risk management systems must ensure that threats to value (e.g., depreciation due to aging or market changes) are identified in time and appropriate measures taken. In the event of a crisis, the cover register auditor ensures ongoing supervision and reporting to regulators.
What special insolvency protection do holders of aircraft covered bonds enjoy?
The Pfandbrief Act provides holders of aircraft covered bonds with extraordinarily strong insolvency protection. Should a covered bond bank face financial distress or insolvency, the claims of the covered bond creditors are met with priority from the cover pool. Under § 30 et seq. PfandBG, the assets recorded in the cover register are treated as a separate estate, excluded from the general insolvency estate. The management of the separate estate is undertaken by a trustee (administrator) appointed by the court, whose sole objective is to safeguard the interests of the covered bond creditors. Furthermore, there are extensive notification and action obligations to the supervisory authorities to identify and minimize risks to the cover pool and bondholders at an early stage.
What disclosure obligations must issuers of aircraft covered bonds comply with?
Issuers of aircraft covered bonds are subject to strict disclosure requirements as set out in § 28 PfandBG and supplementary supervisory requirements. These include, in particular, at least quarterly reporting on the current status of the cover pool, detailed information on outstanding aircraft covered bonds, related collateral, and ongoing valuation changes. Additional disclosure obligations exist towards BaFin, which also has the right to demand information during the year. The reporting obligations serve the purpose of transparency and are intended to enable investors, supervisory authorities, and rating agencies to appropriately assess the profile of the cover pool and the risks of the issued bonds at all times. Breaches of these disclosure obligations can result in regulatory sanctions, up to and including a ban on new issuances.
