Recovering Arrears of Rent and Loans on Two Aircraft

Discover how Kroll helped recover nearly $40 million for a lender to an Irish-based aircraft lessor who leased two aircraft to a Chinese airline, which then suffered a hit on their revenues during COVID-19.

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The Challenge

Prior to COVID-19, Kroll’s client lent funds to two Irish-based aircraft lessors. The lessors subsequently leased two aircraft to a Chinese airline (“the lessee”). The advent of the COVID-19 pandemic caused major disruption for the aviation and travel industry worldwide. By April 2020, more than 16,000 aircraft worldwide had been taken out of service and were grounded as a result of COVID-19. The Chinese lessee was a domestic airline, and the restrictions imposed on movement and air travel in China were extremely strict. As a result, the lessee witnessed a significant reduction in their cashflow, and they suffered a major hit on their revenues. The lessee was unable to make the contractual rental payments to the lessors, which subsequently impacted the lessors’ ability to pay their obligations to the lender. In 2022, when it became apparent that cashflow difficulties were continuing, Kroll’s client decided to enforce on its security and take control of the assets.

Kroll's Solution

In this instance, the aircraft were based in China, the lessors were domiciled in Ireland, and the lender was located in Europe. Recognizing the unique demands of the assignment and the geographical challenges, Kroll assembled a team of experts from Ireland and China to liaise with the lessee. Kroll’s multi-jurisdictional experts were able to establish a good line of communication with the representatives of the Chinese airline, eliminating language and cultural barriers, and ensuring clear messaging.

In order to understand the condition of the two aircraft, Kroll hired skilled technicians who examined the aircraft, and prepared a report to enable the Kroll team to assess the options and costs associated with various scenarios.

The technical inspection revealed a number of issues with the two aircraft and the associated documentation. Components and parts replaced during the lease had Civil Aviation Administration of China (CAAC) tags only, instead of the EASA/FAA standards as required by the lease. While several parts of the aircraft were due for maintenance, the engines were the biggest concern. One of the title engines was undergoing overhaul at a Maintenance, Repair and Operations (MRO) facility in Europe, with an estimated cost of $8 million to be paid to release the engine. Another two of the engines required a full overhaul, and the final one was installed on another aircraft not held by the lender as security. The APUs for both aircraft were removed and awaiting a shop visit. The installed landing gears were not those delivered with the aircraft. The cabin LOPA, seat covers, cushions and curtains were all changed, but again, were approved to CAAC standards only. In addition, the aircraft records were not in the format required by the regulatory bodies.

Kroll completed an options analysis of likely costs to bring the aircraft to the required lease standards, including timelines, versus working with the lessee on a redelivery/buyout or selling the assets “as is”.

Following extensive negotiations, Kroll’s experts managed to agree to a solution whereby the lessee would secure funding from external third parties, and would be given a period of time to repay the arrears and ultimately buy the two aircraft. While the solution had risks attached, the timeline afforded to the lessee was short, and there were various financial milestones that were required to be met in order to enable the purchase to progress.

The Impact

Kroll’s team ensured a winning commercial outcome for our client in a deal that not only presented geographical challenges but also unearthed significant technical challenges. Kroll’s multi-jurisdictional team was able to deliver almost $40 million in receipts to the client and eliminated the risk of redelivery or repossession of the assets, while sparing the need for further costs, which would have been incurred in leasing or selling both of the aircraft. Ultimately, Kroll’s solution resulted in a significant uplift in the value of the assets and an optimal return for the client.

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