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This article discusses pre-delivery payment, or PDP, financing transactions for aircraft. PDPs are progress payments that a purchaser makes to a manufacturer while new aircraft are being built. They represent a significant cash expense for the purchaser, on average amounting to as much as 30% of the price of finished aircraft. The high cost of PDPs, particularly for airlines and lessors purchasing large numbers of aircraft, has led to the widespread use of PDP financing in the aviation industry.
The first part of this article is a guide to the fundamentals of PDP financing. It discusses how lenders determine the amount of money they will advance against an aircraft in a PDP financing--the amount advanced is usually a function of the projected value of the aircraft at delivery, the projected purchase price for the aircraft, and the PDPs being paid by the purchaser that are not being financed.
The article also discusses the contractual terms that are typically agreed to with manufacturers when they consent to a PDP financing--the typical arrangement is that the lender will agree with the manufacturer that upon enforcement it will elect either to assume the purchaser's obligations to buy the aircraft, or will release its security and become an unsecured creditor of the purchaser. If the lender elects to enforce, then the manufacturer will have the right to buy out the lender's loan. If the manufacturer does not exercise that buy-out right, then the lender assumes the purchaser's obligations to buy the aircraft.
The second part of the article discusses bankruptcy and "claw-back" risk in a PDP financing. "Claw-back" refers to the situation where the manufacturer is required to disgorge PDPs in an insolvency of the original purchaser. This article discusses how "claw-back" risk is allocated between the lender and the manufacturer as well as structures for mitigating "claw-back" risk, including using a bankruptcy remote special purpose entity and other structures discussed below.
The third part of this article discusses the unique intercreditor issues for lenders in PDP financing transactions. As noted above, upon enforcement a lender must agree to assume the purchaser's obligations to buy the aircraft or must release its collateral and become an unsecured creditor. The implication of this agreement for multiple lender transactions is that intercreditor...