The current oversupply of funds in the airfinance market could be dramatically reversed by the threat of regulatory changes to the most popular aircraft finance structures.
The most serious threat is from draft plans by the Japan's National Tax Authority to reduce the benefits of the Japanese leveraged lease, which accounted for almost 20% of aircraft financings last year. The authority leaked its plans to eliminate accelerated depreciation on tax leases, cutting the financial benefits by more than half. 'That would kill the JLL,' says Thomas Budgett at lawyers Clifford Chance.
Most observers forecast a period of consultation and lobbying, followed by the announcement of a final rule at the beginning of Japan's fiscal year next April. Actual changes could either take effect then or at a later date.
Most observers foresee an uphill battle for the JLL. Japan's finance ministry has never been sympathetic towards the structure and faces increased pressure to boost government revenues while other tax receipts remain sluggish. The recent re-election of prime minister Hashimoto's government has emboldened Tokyo to offer corporations more tax relief as a way of lifting Japan out of recession. That means closing loopholes like the JLL to pay for the cuts.
Finance lawyers predict the Japanese Leasing Association will lobby for some relief from the proposed changes, but will focus on domestic use. Budgett notes that the number of Japanese lessors involved in offshore JLLs has declined. Japan's ministry for international trade and development has usually been the JLL's strongest advocate, and uncertainty centres on how hard it will fight to protect the structure. Barring its strong support, many foresee a few local concessions but an end to crossborder structures.
Another major worry is that any change could be retroactive. A number of JLLs have already been withdrawn from the market. Several others have gone through, but with unwind clauses to protect investors against the risk of lost tax benefits.
Japan's actions could also accelerate plans to reduce tax breaks in other jurisdictions. Janine Schellhorn, managing director of Deutsche Structured Finance, predicts that the JLL's demise will encourage German authorities to tighten rather than relax their own tax lease rules. If the JLL ends, she predicts, local officials 'won't need to worry about competition from the Japanese'.
The German lease market has grown to more than US$2 billion a year and partly filled the gap left by changes in the US which reduced the attraction of US leveraged leases.
The attack on the JLL by the Japanese authorities has compounded an announcement by French tax regulators who said they would withdraw an exemption previously enjoyed by all French special purpose companies (GIEs) from social security tax. Since these are commonly formed to finance Airbus aircraft with JLLs, the effect is to tighten the squeeze on net present values as the tax gradually takes effect. Its phase-in is now about half complete. By next year, when it takes full effect, GIEs will face a levy of up to 0.13 per cent of total sales, which includes both interest earned over the life of a JLL and the purchase price of the aircraft.
Thomas Budgett says that French action itself will not end JLLs, but could well make them less common.
David Knibb
Source: Airline Business
