20-F
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT OF
1934 |
OR
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þ |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
For the fiscal year ended December 31, 2008
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1-33200
GENESIS LEASE LIMITED
(Exact name of Registrant as specified in its charter)
Bermuda
(Jurisdiction of incorporation or organization)
4450 Atlantic Avenue
Westpark
Shannon
Co. Clare, Ireland
(Address of principal executive office)
John McMahon, Telephone number: +353 61 233 300, Fax number: +353 61 364 642
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
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Title of each class
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Name of each exchange on which registered |
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American Depositary Shares
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New York Stock Exchange |
Common Shares, par value of $0.001 per share
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New York Stock Exchange* |
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Not for trading, but only in connection with the registration of American Depositary Shares
representing these shares, pursuant to the requirements of the Securities and Exchange
Commission. |
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
Indicate the number of outstanding shares of each of the issuers classes of capital or common
shares as of the close of the period covered by the annual report.
34,341,095 Common Shares, par value of $0.001 per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes o No þ
If this report is an annual or transition report, indicate by check mark, if the registrant is
not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filero |
Indicate by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
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U.S. GAAP þ
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International Financial Reporting Standards as issued
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Other o |
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by the International Accounting Standards Board o |
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If Other has been checked in response to the previous question, indicate by check mark which
financial statement item the registrant has elected to follow:
Item 17 o Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
PRELIMINARY NOTE
This Annual Report should be read in conjunction with the financial statements and
accompanying notes included in this report.
This Annual Report contains forward-looking statements that involve risks and uncertainties. These
statements include forward-looking statements both with respect to us specifically and the aircraft
leasing industry generally. Statements that include the words expect, intend, plan,
believe, project, anticipate, will, and similar statements of a future or forward-looking
nature identify forward-looking statements. The forward-looking statements contained in this
Annual Report are based on managements current expectations and are subject to uncertainty and
changes in circumstances. There can be no assurance that future developments affecting us will be
those that we have anticipated. Actual results may differ materially from these expectations due to
changes in global, regional or local political, economic, business, competitive, market, regulatory
and other factors, many of which are beyond our control. We believe that these factors include, but
are not limited to, those described under Item 3.D. Risk Factors and elsewhere in this Annual
Report. Should one or more of these risks or uncertainties materialize, or should any of our
assumptions prove incorrect, our actual results may vary in material respects from those projected
in these forward-looking statements. We undertake no obligation to publicly update or review any
forward-looking statement, whether as a result of new information, future developments or
otherwise.
We acquired our initial portfolio of 41 commercial jet aircraft (the Initial Portfolio) from
affiliates of General Electric Company (GE) on December 19, 2006, with the net proceeds of our
initial public offering (IPO), a private placement of shares to GE (the private placement) and
the issuance of aircraft lease-backed notes in a securitization transaction (the securitization).
Since our IPO, we have increased our portfolio from 41 to 54 aircraft through acquisitions from
affiliates of GE and from independent airlines in purchase-leaseback transactions.
Unless the context requires otherwise, when used in this Annual Report, (1) the term Company
refers only to Genesis Lease Limited, (2) the terms Genesis, we, our and us refer to
Genesis Lease Limited and its subsidiaries, including Genesis Funding Limited (Genesis Funding),
Genesis Acquisition Limited (Genesis Acquisition) and Genesis Portfolio Funding I Limited
(Genesis Portfolio), (3) GECAS refers to GE Commercial Aviation Services Limited, together with
its subsidiaries, (4) our predecessor refers to the combination of the 41 aircraft included in
our Initial Portfolio from the date that each aircraft was acquired by an affiliate of GE, as such
aircraft were owned by affiliates of GE until the completion of our IPO on December 19, 2006, (5)
all references to our shares refer to our common shares held in the form of American Depositary
Shares, (ADSs), and (6) all percentages and weighted averages of the aircraft in our portfolio
have been calculated using the average of half life appraised base values as at December 31, 2008,
and percentages may not total due to rounding.
1
INDEX
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PART ONE
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4 |
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4 |
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4 |
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4 |
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5 |
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5 |
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5 |
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32 |
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32 |
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32 |
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36 |
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36 |
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46 |
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46 |
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46 |
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55 |
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63 |
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63 |
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64 |
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64 |
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66 |
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67 |
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67 |
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70 |
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73 |
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74 |
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74 |
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75 |
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75 |
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75 |
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75 |
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76 |
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76 |
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77 |
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77 |
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2
PART I
Item 1. Identity of Directors, Senior Management and Advisors
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
A. Selected Financial Data
The following selected financial data is derived from our audited combined and consolidated
financial statements, prepared in conformity with accounting principles generally accepted in the
United States of America (U.S. GAAP), and should be read in conjunction with, and is qualified by
reference to, Item 5. Operating and Financial Review and Prospects and our combined and
consolidated financial statements and related notes thereto included in Item 18. Financial
Statements in this Annual Report.
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Combined |
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and |
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Combined |
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Combined |
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Consolidated |
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Consolidated |
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Consolidated |
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Years Ended December 31, |
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2004 |
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2005 |
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2006 |
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2007 |
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2008 |
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(USD in thousands, except share and per share data) |
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Revenues |
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Rental of Flight Equipment |
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$ |
99,414 |
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$ |
117,861 |
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$ |
153,187 |
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$ |
181,333 |
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$ |
215,985 |
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Other income |
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6,771 |
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8,045 |
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Total revenue |
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99,414 |
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117,861 |
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153,187 |
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188,104 |
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224,030 |
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Expenses |
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Depreciation |
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35,005 |
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42,462 |
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51,398 |
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62,259 |
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78,690 |
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Interest |
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28,680 |
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34,995 |
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46,026 |
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55,236 |
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70,971 |
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Maintenance expense |
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1,019 |
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1,989 |
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2,327 |
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1,073 |
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3,344 |
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Selling, general and administrative |
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2,400 |
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3,144 |
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7,312 |
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20,991 |
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23,884 |
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Other expenses |
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3,337 |
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Total operating expenses |
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67,104 |
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82,590 |
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107,063 |
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142,896 |
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176,889 |
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Income Before Taxes |
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32,310 |
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35,271 |
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46,124 |
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45,208 |
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47,141 |
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Provision for income taxes |
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14,892 |
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13,900 |
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17,367 |
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6,053 |
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6,224 |
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Net Income |
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$ |
17,418 |
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$ |
21,371 |
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$ |
28,757 |
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$ |
39,155 |
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$ |
40,917 |
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We calculate our earnings per share in accordance with Statement of Financial Accounting Standards
(SFAS) 128, Earnings Per Share. Basic net earnings per share is computed based on the weighted
average number of common shares outstanding during the year. Diluted net earnings per share
reflects the dilution potential that could occur if securities or other contracts to issue common
shares were exercised resulting in the issuance of common shares that then shared in our net
income.
The shares used in the computation of our basic and diluted net earnings per share are as follows:
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2006 |
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2007 |
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2008 |
Weighted average number of shares outstanding: |
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Basic
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1,116,296 |
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35,859,164 |
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35,968,128 |
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Diluted
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1,118,050 |
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35,867,105 |
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35,968,128 |
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The following table presents the net income per share calculated for the year ended December
31, 2006, 2007 and 2008:
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Net income per share |
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Basic |
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$ |
25.76 |
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$ |
1.09 |
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$ |
1.14 |
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Diluted |
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$ |
25.72 |
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$ |
1.09 |
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$ |
1.14 |
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4
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As at December 31, |
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2004 |
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2005 |
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2006 |
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2007 |
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2008 |
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(USD in thousands) |
Balance Sheet Data: |
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Cash and cash equivalents |
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$ |
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$ |
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$ |
26,855 |
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$ |
30,101 |
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$ |
60,206 |
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Restricted cash |
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15,471 |
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32,982 |
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33,718 |
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Total assets |
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936,918 |
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1,082,997 |
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1,316,058 |
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1,675,169 |
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1,757,695 |
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Long-term debt |
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810,000 |
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1,050,961 |
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1,128,393 |
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Total liabilities |
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92,115 |
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101,006 |
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839,383 |
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1,132,830 |
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1,282,258 |
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GE net investment |
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844,803 |
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981,991 |
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Total shareholders equity |
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476,675 |
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542,339 |
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475,437 |
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Total liabilities and GE net
investment/shareholders
equity |
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$ |
936,918 |
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$ |
1,082,997 |
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$ |
1,316,058 |
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$ |
1,675,169 |
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$ |
1,757,695 |
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B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
You should carefully consider the following risks. These risks could materially and adversely
affect our business, prospects, financial condition, results of operations, cash flows and ability
to pay dividends and cause the trading price of our shares to decline. Additional risks and
uncertainties not currently known to us or that we currently deem to be immaterial may also
materially and adversely affect our business, prospects, financial condition, results of
operations, cash flows and ability to pay dividends.
Risks Related to Our Business
Changes in economic conditions could adversely affect our business.
Our business and results of operations are significantly impacted by general economic and
industry conditions. The stress experienced by global capital markets that began in the second half
of 2007 continued and substantially increased during 2008 and into 2009. In particular, the
substantial losses experienced by the global banking industry have led to a dramatic increase in
the cost and deterioration in the availability of capital. Many governments have sought to
establish programs to support the banking industry in order to encourage lending and to mitigate
against a sustained recessionary environment. Nevertheless, continued concerns over the
availability and cost of credit, declining business and consumer confidence and increased
unemployment, have precipitated an economic recession throughout the world, resulting in expectations for reduced global
economic growth.
A continued decline in economic activity and conditions in the United States, Europe and other
markets in which we operate could adversely affect our financial condition and results of
operations. For example, several airlines across the world filed for bankruptcy in 2008 due to high
oil prices in the first half of the year and decreased demand for air travel resulting from the
downturn in economic conditions. As a result,
5
some of our leases with airlines have been
terminated, and we have been required to bear unforeseen maintenance expenses, additional
remarketing expenses and lost revenues. The economic downturn and the impairment of credit markets
have also resulted in a decline in
aircraft values and lease rates. A protracted economic downturn could exacerbate these
adverse conditions. Although several governments have taken steps to mitigate the disruption to
financial markets, there can be no assurances that government responses will restore consumer
confidence for the foreseeable future.
We will need additional capital to finance our growth, and we may not be able to obtain such
capital on terms acceptable to us, or at all.
Our liquidity needs include the financing of additional aircraft and other aviation assets that we
expect will drive our growth. We plan to finance acquisitions through borrowings under our
revolving credit facility or other debt facilities, additional equity and debt offerings, and
private placements of equity and debt securities.
Our ability to execute our business strategy to acquire these additional assets depends to a
significant degree on our ability to access debt and equity capital markets. During 2008, the
capital and credit markets experienced extreme volatility and disruption. As a result, access to
capital and credit markets and to other available forms of financing and liquidity has been
significantly impaired for us and for many other companies.
Current market conditions have exerted significant downward pressure on the price of our common
shares, which could impact our ability to raise capital through the issuance of additional equity
related securities, or to obtain shareholder approval (if required) for the issuance of equity
securities. If we were to issue equity or equity-related securities, such securities could take
various forms, including convertible or hybrid debt, common shares, preferred shares and warrants.
Preferred shares would have terms that are more favorable than our common shares. Any issuance of
equity securities could dilute the interests of our existing shareholders and adversely affect the
trading price of our common shares.
Our access to capital markets also will depend on a number of other factors, such as our historical
and expected performance, compliance with the terms of our debt agreements, industry and market
trends and the relative attractiveness of alternative investments. During 2008, the turmoil in the
financial markets has caused banks and financial institutions to decrease the amount of capital
available for lending. If we are unable to raise funds through debt and equity capital markets on
terms that are acceptable to us, then we may be unable to implement our growth strategy of making
acquisitions of additional aircraft and other aviation assets.
A deterioration in the financial condition of the commercial airline industry would have an adverse
impact on our ability to lease our aircraft.
The financial condition of the commercial airline industry is of particular importance to us
because we lease most of our aircraft to commercial airline customers. Our ability to achieve our
primary business objectives of growing our lease portfolio will depend on the financial condition
and growth of the commercial airline industry. The risks affecting our airline customers are
generally beyond our control, but because they have a significant impact on our customers they
affect us as well. Our ability to succeed depends on the financial strength of our customers and their
ability to manage these risks. To the extent that our customers are adversely affected by these
risk factors, we may experience:
6
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a higher incidence of lessee defaults, lease restructurings, repossessions and
airline bankruptcies and restructurings, resulting in lower lease margins due to
maintenance, legal and other costs associated with the repossession, as well as lost
revenue for the time the aircraft are off lease and possibly lower lease rates from the
new lessees; and |
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an inability to lease aircraft on commercially acceptable terms, resulting in lower
lease margins due to aircraft not earning revenue and resulting in storage, insurance and
maintenance costs. |
The aviation industry is inherently cyclical and a significant downturn in the industry would
adversely impact our lessees ability to make payments to us, which would adversely affect our
financial results and growth prospects.
The aviation industry is inherently cyclical. The years 2001 through 2004 were characterized by
falling demand, rising costs and significant financial losses, particularly in the US and Europe.
This downturn was exacerbated by the terrorist attacks on September 11, 2001, prolonged military
action in Iraq and Afghanistan, rising fuel prices, SARS and avian influenza and saw many airlines,
including some of our lessees, file for bankruptcy protection or implement reductions in capacity,
service and workforce.
The period from 2005 through 2007 was
characterized by rising demand, airline profitability and significant purchases of new aircraft. The period from 2007 through 2008,
however, was characterized by a dramatic deterioration in the global financial markets, declining business and
consumer confidence and increased unemployment, resulting in expectations for reduced global
economic growth going forward. During 2008, the aviation industry also experienced a significant
spike in oil prices and given the developing economic downturn, the industry continues to face many
challenges including falling traffic demand, reductions in capacity and the financing of
substantial commitments for new aircraft in a market where there has been a deterioration in the
availability of capital.
A significant downturn may place already financially weakened lessees under further duress and may
result in further airline bankruptcies exerting downward pressure on lease rates, aircraft and
engine market values and the grounding of significant numbers of aircraft.
The recent changes in demand and supply of aircraft could depress lease rates and the value of our
aircraft portfolio.
The economic downturn and the expected slowdown in air travel have contributed to a decrease in the
demand for aircraft, while a number of recent airline bankruptcies, as well as financial challenges
potentially facing other airlines, may result in an increase in the supply of aircraft. In
addition, several large portfolios of leased aircraft may be available for sale. For example, it
has been reported that American International Group intends to sell International Lease Finance
Corporation (ILFC), its aircraft leasing business, which is the largest aircraft lessor in the
world, measured by portfolio value. It has also been reported that Royal Bank of Scotland is
considering a sale of its aircraft financing arm, RBS Aviation Capital. Allco Finance Group,
another aircraft lessor, has announced the appointment of voluntary administrators under
Australian law and may sell its aircraft portfolio. Babcock & Brown has also announced an asset disposal program, including the sale of its aircraft leasing business. This shift in supply/demand dynamics may lead
to decreases in aircraft lease rates and values. A decrease in lease rates could adversely affect
our lease revenues in future periods as our current leases expire or to the extent that airlines
default on their leases. A decrease in aircraft values would adversely affect the value of the
aircraft in our portfolio. Furthermore, secondary aircraft trading may be financed through
borrowings, and this may exert further pressure on the availability of aircraft financing in
the market, which could adversely affect our ability to obtain additional borrowings or refinance
our existing debt.
7
A decrease in lease rates and the value of our leased assets could have an adverse effect on our
financial results, growth prospects and ability to meet our obligations.
The supply and demand for aircraft is affected by various cyclical and non-cyclical factors that
are beyond our control, including:
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cancellations of orders for aircraft; |
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accuracy of estimates relating to future supply and demand made by manufacturers and
lessees; |
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operating costs, availability of jet fuel and general economic conditions affecting
our lessees operations; |
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geopolitical and other events, including war, acts of terrorism, outbreaks of
epidemic diseases and natural disasters; |
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governmental regulation, including new airworthiness directives and environmental
regulations; |
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manufacturer production levels, technological innovation and delays in delivery of
aircraft; |
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retirement and obsolescence of aircraft models; |
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manufacturers merging or exiting the industry or ceasing to produce aircraft or
engine types; |
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reintroduction into service of aircraft or engines previously in storage; and |
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airport and air traffic control infrastructure constraints. |
These factors may produce sharp decreases in asset values and achievable lease rates, which would
have an impact on our cost of acquiring aircraft or other aviation assets, may result in lease
defaults and could delay or prevent the aircraft or other aviation assets from being re-leased on
favorable terms, or, if desired, sold on favorable terms.
Factors that increase the risk of decline in aircraft value and achievable lease rates could have
an adverse effect on our financial results and growth prospects and on our ability to meet our
obligations.
Factors that may affect the value and achievable lease rates of our aircraft and other aviation
assets include:
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the particular maintenance and operating history of the airframes and engines; |
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the number of operators using that type of aircraft or engine; |
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whether an aircraft or other aviation asset is subject to a lease and, if so, whether
the lease terms are favorable to the lessor; |
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the age of our aircraft and other aviation assets; |
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airworthiness directives and service bulletins; |
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aircraft noise and emission standards; |
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any tax, customs, regulatory and other legal requirements that must be satisfied when
an aircraft is purchased, sold or re-leased; |
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compatibility of our aircraft configurations or specifications with other aircraft
owned by operators of that type; and |
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decreases in the creditworthiness of our lessees. |
Any decrease in the values of and achievable lease rates for commercial aircraft or other aviation
assets that may result from the above factors or other unanticipated factors may
have a material adverse effect on our financial results and growth prospects and our ability to
meet our obligations.
8
We operate in a highly competitive market for investment opportunities in aircraft and other
aviation assets.
The leasing and remarketing of commercial jet aircraft is highly competitive. As the exclusive
servicer of our aircraft, GECAS competes in leasing, re-leasing and selling our aircraft with other
aircraft leasing companies, including ILFC, AerCap, Aircastle, Aviation Capital Group, AWAS,
Babcock & Brown Aircraft Management, Babcock & Brown Air Limited, BOC Aviation, Boeing Capital, CIT Aerospace,
Macquarie Aircraft Leasing and RBS Aviation Capital, among others. We also may
encounter competition from other entities that selectively compete with us, including:
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airlines; |
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aircraft manufacturers; |
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financial institutions (including those seeking to dispose of repossessed aircraft at
distressed prices); |
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aircraft brokers; |
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special purpose vehicles formed for the purpose of acquiring, leasing and selling
aircraft; and |
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public and private partnerships, investors and funds, including private equity and
hedge funds. |
Competition for a leasing transaction is based principally upon lease rates, delivery dates, lease
terms, reputation, management expertise, aircraft condition, specifications and configuration and
the availability of the types of aircraft necessary to meet the needs of the customer. Some of our
competitors have significantly greater resources than we have. In addition, some competing aircraft
lessors have a lower overall cost of capital and may provide financial services, maintenance
services or other inducements to potential lessees that we cannot provide. Given the financial
condition of the airline industry, many airlines have reduced their capacity by eliminating select
types of aircraft from their fleets. This has resulted in an increase in available aircraft of
these types, a decrease in rental rates for these aircraft and a decrease in market values of these
aircraft.
Competition in the purchase and sale of used aircraft is based principally on the availability of
used aircraft, the availability of capital, price, the terms of the lease to which an aircraft is
subject and the creditworthiness of the lessee. When we decide to dispose of an aircraft, GECAS, as
our servicer, will arrange the disposition pursuant to the terms of the servicing agreements for
that used aircraft. In doing so, GECAS may compete with the aircraft leasing companies listed
above, as well as with the other types of entities described above and other investors. GECAS is
not required to assist us in the purchase of aircraft, and therefore we also may compete with GECAS
when seeking to acquire aircraft.
If demand for leased aircraft does not increase, we may not be able to expand our business.
Over the past 20 years, the worlds airlines have leased a growing proportion of their aircraft.
According to market data, the proportion of the global fleet under operating lease has increased
from 17% in 1990 to more than 30% in recent years. Our growth strategy contemplates future
acquisitions and leasing of additional commercial aircraft and other
aviation assets. If, however, the aggregate demand for leased aircraft does not expand, then we may
be unable to implement our growth strategy through aircraft acquisitions.
9
Fuel prices affect the profitability of the airline industry, and increases in fuel prices may have
an adverse effect on our lessees ability to meet their lease payment obligations to us.
Airlines are significantly impacted by changes in the price and availability of fuel. Governmental
policy concerning fuel production, transportation or marketing, changes in fuel production
capacity, weather-related events, natural disasters, political disruptions or wars involving
oil-producing countries, environmental concerns, currency exchange rates and other unpredictable
events may result in fuel supply shortages and fuel price increases. Fuel prices increased in 2008
to new record highs, with the price of crude oil reaching more than $145 per barrel in July 2008
before falling to under $34 per barrel in December 2008. Many airlines entered into hedging
arrangements which locked in fuel at relatively high prices. As a consequence, some airlines were not
in a position to benefit from a fall in fuel prices during the latter part of 2008, and a number of
them will realize significant losses from these hedging positions.
Although fuel costs have receded significantly from their highs in 2008, they will continue to have
a significant impact on airline profitability. Due to the competitive nature of the airline
industry, airlines have limited ability to pass increases in fuel prices to their customers by
increasing fares. In addition, airlines may not be able to hedge their exposure to price increases.
Increases in fuel prices may:
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lead to further airline bankruptcies, which may lead to cancellations of our leases
and the return of our aircraft; |
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impair our lessees ability to make rental and other lease payments; |
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lead to lease restructurings and aircraft repossessions; and |
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increase the costs of servicing and remarketing our aircraft at favorable rates. |
Any of these effects could have a material adverse effect on our financial condition, results of
operations and prospects.
The effects of terrorist attacks and geopolitical conditions may negatively affect the airline
industry. This may cause our lessees to default on their lease payment obligations to us.
As a result of the September 11, 2001 terrorist attacks in the United States and subsequent
terrorist attacks in other parts of the world, airports have increased security restrictions, airline costs for aircraft
insurance and enhanced security measures have increased and airlines have faced increased
difficulties in acquiring war risk and other insurance at reasonable costs. Terrorist attacks and
geopolitical conditions have harmed the airline industry, and concerns about geopolitical
conditions and further terrorist attacks could harm airlines in the future as a result of various
factors, including:
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higher costs to airlines because of increased security measures; |
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the inconvenience of additional security measures; |
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the price and availability of jet fuel and the cost and |
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significantly higher costs of aircraft insurance coverage for claims caused by acts
of war, terrorism, sabotage, hijacking and other similar perils, and the extent to which
such insurance has been or will continue to be available. |
Future terrorist attacks, war or armed hostilities, or the fear of such events, may further
increase airline costs, depress air travel demand, cause certain aviation insurance to become
available only at significantly increased premiums or not be available at all and
could have a further adverse impact on the airline industry and on the financial condition and
liquidity of
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our lessees, aircraft values and rental rates, all of which could adversely affect our
financial results and growth prospects.
We depend on aircraft and engine manufacturers success in remaining financially stable and
producing aircraft.
The supply of aircraft, which we purchase and lease, is dominated by two airframe manufacturers,
Boeing and Airbus, and a limited number of engine manufacturers. We therefore depend on these
manufacturers success in remaining financially stable and producing aircraft and related
components which meet airlines demands and providing customer support. Further, competition
between the manufacturers for market share is escalating and may cause instances of deep
discounting for certain aircraft types and may have a negative impact on our competitive pricing
when we sell or lease aircraft. Should the manufacturers fail to respond appropriately to changes
in the market environment or fail to fulfill their contractual obligations, we may experience:
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an inability to acquire aircraft and related components on terms that will allow us
to lease those aircraft and related components to customers at our anticipated profit
levels, resulting in lower growth rates or a contraction in our fleet; |
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poor customer support from the manufacturers of aircraft and components resulting in
reduced demand for a particular manufacturers product, creating downward pressure on
demand for those aircraft and components in our fleet and reduced market lease rates for
those aircraft; and |
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reduction in our competitiveness due to deep discounting by the manufacturers, which
may lead to reduced market lease rates and may adversely affect the value of our portfolio
and our ability to remarket or sell some of the aircraft in our fleet. |
Unforeseen difficulties and costs associated with the acquisition, financing and/or management of
our aircraft portfolio and other aviation assets could reduce or prevent our future growth and
profitability.
Our growth strategy contemplates future acquisitions and leasing of additional commercial aircraft
and other aviation assets. Any acquisition of aircraft or other aviation assets may not be
profitable to us after the acquisition and may not generate sufficient cash flow to justify our
investment. In addition, our acquisition growth strategy exposes us to risks that may harm our
business, financial condition, results of operations and cash flows, including risks that we may:
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fail to realize anticipated benefits, such as new customer relationships or cash flow
enhancements; |
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impair our liquidity by using a significant portion of our available cash or
borrowing capacity to finance acquisitions; |
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significantly increase our interest expense and financial leverage to the extent we
incur additional debt to finance acquisitions; |
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incur or assume unanticipated liabilities, losses or costs associated with the
aircraft or other aviation assets that we acquire; or |
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incur other significant charges, including asset impairment or restructuring charges. |
Unlike new aircraft, existing aircraft typically do not carry warranties as to their conditions
(although certain manufacturer warranties may still be effective and assignable when the aircraft
is purchased). Although we may inspect an existing aircraft and its documented maintenance, usage,
lease and other records prior to acquisition, such an inspection normally
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would not provide us with
as much knowledge of an aircrafts condition as we would have if it had been built for us. In
addition, we may not have the opportunity to inspect each aircraft that we acquire. Repairs and
maintenance costs for existing aircraft are difficult to predict and generally increase as aircraft
age and may have been adversely affected by prior use. These costs could decrease our cash flow and
reduce our liquidity.
The terms of our indebtedness may limit our operational flexibility.
The terms of our indebtedness expose us to certain risks and operational restrictions, including:
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our aircraft leases and several of our aircraft serve as collateral for our
financings, the terms of which restrict our ability to sell aircraft and require us to use
proceeds from sales of aircraft, in part, to repay amounts outstanding under those
financings; |
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we are required to dedicate a significant portion of our cash flow from operations to
debt service payments, thereby reducing the amount of our cash flow available to fund
working capital, make capital expenditures and satisfy other needs; |
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restrictions on our subsidiaries ability to distribute excess cash flow to us under
certain circumstances; |
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lessee, geographical and other concentration limits on flexibility in leasing our
aircraft; |
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requirements to obtain policy provider consents and rating agency confirmations for
certain actions (in the case of the notes issued in the securitization); and |
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restrictions on our ability to incur additional debt, create liens on assets, sell
assets, make freighter conversions and make certain investments or capital expenditures. |
The restrictions described above may impair our ability to operate and to compete effectively with
our competitors. Similar restrictions may be contained in the terms of future financings that we
may enter into to finance our growth, including our credit facility.
We are a holding and a financing company and rely on our subsidiaries to provide us with funds
necessary to meet our financial obligations.
We are a holding and a financing company and our principal asset is the equity interests we hold in
our subsidiaries that hold our aircraft. As a result, we depend on dividends and other payments
from these subsidiaries and from any other subsidiaries through which we may conduct operations in
the future, to generate the funds necessary to meet our financial obligations. The subsidiaries
that hold our aircraft are legally distinct from us and are often restricted from paying dividends
or otherwise making funds available to us pursuant to agreements governing our indebtedness. Any
other subsidiaries through which we may conduct operations in the future will also be legally
distinct from us and may be similarly restricted from paying dividends or otherwise making funds
available to us under certain conditions.
All of our principal debt facilities have financial covenants. If we are unable to comply with
these covenants, then the amounts outstanding under these facilities may become immediately due and
payable, cash generated by our subsidiaries may be unavailable to us and/or we may be unable to draw additional amounts under these facilities. The Initial
Portfolio financed by Genesis Fundings securitization requires that Genesis Funding maintain a
debt service coverage ratio from November 2009 through November 2011 above the threshold specified
under this financing. If lessees of the aircraft held by Genesis Funding default under their
leases, then Genesis Funding may be unable to comply with this
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covenant and all available cashflow
from the Initial Portfolio will be applied to the repayment of the securitization notes. Genesis Portfolios term loan facility requires that Genesis Portfolio
maintain a loan-to-value ratio (tested annually) below the threshold specified in the facility. If
aircraft values decline, then Genesis Portfolio may be unable to comply with this covenant and
would be required to prepay outstanding borrowings to restore compliance with the covenant; otherwise, the
amounts outstanding under the term loan facility would become immediately due and payable.
Genesis Acquisitions revolving credit facility requires that Genesis Acquisition maintain minimum
ratios of earnings before interest, taxes, depreciation and amortization (EBITDA) to interest
expense and a loan-to-value ratio (tested semi-annually) below the
threshold specified in the revolving credit
facility in respect of any aircraft financed through the revolving
credit facility. As at December 31, 2008 there
were no aircraft financed through Genesis Acquisitions revolving credit facility. However, to the extent aircraft
are financed in the future and subsequently aircraft values decline and/or if lessees default
under their leases, then Genesis Acquisition may be unable to comply with the covenants and could lose the
ability to make further borrowings under the revolving credit facility. The events that could cause our
subsidiaries not to be in compliance with their financial covenants such as a decline in
aircraft values or lessee defaults may be beyond our control, but they nevertheless could have a
substantial adverse impact on the amount of our cash flow available to fund working capital, make
capital expenditures and satisfy other needs, including payments of dividends to shareholders.
For a description of the operating and financial restrictions in our debt facilities, see Item 5.B.
Liquidity and Capital Resources.
We may not be able to refinance the notes issued in the securitization on favorable terms or at
all, which may require us to seek more costly or dilutive financing for our investments or to
liquidate assets.
We currently intend to refinance the notes that Genesis Funding issued in the securitization
through a long-term financing prior to December 2011. After December 2011 if we have not
refinanced the notes, we will be required to apply all of the available cash flow from our Initial
Portfolio of 41 aircraft to repay the principal on the notes. We bear the risk that we will not be
able to refinance our existing indebtedness on favorable terms or at all. The inability to
refinance our securitization indebtedness may require us to seek more costly or dilutive financing
for our aircraft or to liquidate assets.
Most of our debt obligations are subject to interest rate risk.
The majority of our long-term debt has floating interest rates, which subjects us to the risk of an
increase in interest rates and to the risk that our cash flows may be insufficient to make
scheduled interest payments if interest rates were to increase. To limit the risks of interest rate
fluctuations, we have entered into interest rate swaps. If any counterparty
to the interest rate swaps were to default on its obligations, then a mismatch in the floating rate
interest obligations and fixed rate lease payments may arise. This could impair our subsidiaries
ability to make distributions to us, which could, in turn, adversely affect our ability to meet our
financial obligations.
We may not be able to pay or maintain dividends on our shares. The failure to do so would adversely
affect the trading price of our shares.
There are a number of factors that could affect our ability to pay dividends, including but not
limited to the following:
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lack of availability of cash to pay dividends due to changes in our operating cash
flow, capital expenditure requirements, working capital requirements and other cash needs; |
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our inability to refinance the notes that we have issued in the securitization before
December 2011, when we will be required to apply all available cash flow from our Initial
Portfolio to repay the principal amount thereof on a monthly basis; |
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our inability to renew, extend or repay our debt facilities when due, which could
prevent our subsidiaries from making any distributions to us; |
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restrictions imposed by our financing arrangements, including under the notes issued
in the securitization, our debt facilities and any indebtedness incurred in the future to
refinance our existing debt or to expand our aircraft portfolio; |
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application of funds to make and finance acquisitions of aircraft and other aviation
assets; |
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reduced levels of demand for, or value of, our aircraft; |
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increased supply of aircraft; |
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obsolescence of aircraft; |
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lower lease rates on new aircraft and re-leased aircraft; |
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delays in re-leasing our aircraft after the expiration or early termination of
existing leases; |
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impaired financial condition and liquidity of our lessees; |
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deterioration of economic conditions in the commercial aviation industry generally; |
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unexpected or increased fees and expenses payable under our agreements with GECAS and
its affiliates and other service providers; |
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poor performance by GECAS and its affiliates and other service providers and our
limited rights to terminate them; |
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unexpected or increased maintenance, operating or other expenses or changes in the
timing thereof; |
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a decision by our board of directors to modify or revoke its policy to distribute a
portion of our cash flow available for distribution; |
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changes in Irish tax law, the tax treaty between the United States and Ireland (the
Irish Treaty) or our ability to qualify for the benefits of such treaty; |
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restrictions under Bermuda law on the amount of dividends that we may pay; and |
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the other risks discussed under this Item 3.D. Risk Factors. |
The failure to maintain or pay dividends may adversely affect the trading price of our shares.
The death, incapacity or departure of senior management could harm our business and financial results.
Our future success depends to a significant extent upon our chief executive officer, John McMahon,
our chief financial officer, Alan Jenkins, and our chief commercial officer, Cian Dooley. Mr.
McMahon has substantial experience in the aviation industry, and his continued employment is
crucial to the development of our business strategy and to the growth and development of our
business. Mr. Jenkins and Mr. Dooley also have significant experience in the aviation industry on
which we depend. If Mr. McMahon, Mr. Jenkins or Mr. Dooley were to die, become incapacitated for a
short or long period, or leave our company, we may not be able to replace each of them,
respectively, as the case may be, with another chief executive officer, chief financial officer or
chief commercial officer with equivalent talent and experience, and our business, prospects,
financial condition, results of operations and cash
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flows may suffer. Because we have a limited
staff, the impact of any of Mr. McMahons, Mr. Jenkinss or Mr. Dooleys departure could be severe
on our business.
Risks Relating to Our Aircraft and Leases
The concentration of aircraft types in our portfolio could harm our business and financial results should any difficulties specific to these particular types of aircraft occur.
Of the aircraft in our portfolio, approximately 34.2% are Airbus A320-200 aircraft, approximately
31.9% are Boeing 737-800 aircraft and approximately 33.9% are various other aircraft. If any of
these aircraft types (or other types that we acquire in the future) should encounter technical or
other difficulties, such affected aircraft types may be subject to grounding or diminution in value
and we may be unable to lease such affected aircraft types on favorable terms or at all. The
inability to lease the affected aircraft types may reduce our revenues and net income to the extent
the affected aircraft types comprise a significant percentage of our aircraft portfolio.
We will need to re-lease or sell aircraft as leases expire to continue to generate sufficient funds to meet our debt obligations, and finance our growth and operations.
We may not be able to re-lease or sell aircraft on favorable terms, or at all.
Our business strategy entails the need to re-lease aircraft as our current leases expire to
generate sufficient revenues to meet our financial obligations and finance our growth and
operations. The ability to re-lease aircraft depends on general market and competitive conditions.
Some of our competitors may have greater access to financial resources and, as a result of
restrictions on us contained in the terms of our indebtedness, may have greater operational
flexibility. If we are not able to re-lease an aircraft or to do so on favorable terms, we may
attempt to sell the aircraft to provide funds for debt service or operating expenses. Our ability
to re-lease or sell aircraft on favorable terms or without significant off-lease time could be
adversely affected by depressed conditions in the airline and aircraft industries, airline
bankruptcies, the effects of terrorism and war, the sale of other aircraft by financial
institutions or other factors.
The advent of superior aircraft technology could cause our existing aircraft portfolio to become
outdated and therefore less desirable, which could adversely affect our financial results and
growth prospects and our ability to compete in the marketplace.
As manufacturers introduce technological innovations and new types of aircraft, including the
Boeing 787 Dreamliner and the Airbus A350 XWB (currently scheduled to enter service in 2010 and
2013, respectively) and potential replacement types for the Boeing 737 and Airbus A320 families of
aircraft, certain aircraft in our existing aircraft portfolio may become less desirable to
potential lessees. In addition, although all of the aircraft in our portfolio are Stage 3
noise-compliant, the imposition of more stringent noise or emissions regulations may make certain
of our aircraft less desirable in the marketplace. Any of these risks could adversely affect our
ability to lease or sell our aircraft on favorable terms or at all or our ability to charge rental
amounts that we would otherwise seek to charge.
Depreciation expenses and impairment charges could have a material adverse effect on our financial
condition and results of operations.
Our aircraft have finite economic lives, their values depreciate in the ordinary course over time
and their ability to generate earnings and cash flow for our business declines over time. If
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depreciated aircraft are not replaced with newer aircraft, our ability to generate earnings will be
reduced. We depreciate our aircraft for accounting purposes on a straight-line basis to the
aircrafts estimated residual value over its estimated useful life. If we dispose of an aircraft
for a price that is less than its depreciated value, then we would be required to recognize a loss
that would reduce our net income during the period of the disposition and reduce our total assets.
The aircraft in our portfolio and any other aircraft and other aviation assets that we acquire in
the future are expected to be under operating leases that are subject to periodic review for
impairment for accounting purposes. We believe the carrying value of the aircraft in our portfolio
is currently recoverable through the cash flows expected to result from their use and eventual
disposition. However, if these expected cash flows are adversely affected by factors including
credit deterioration of a lessee, declines in rental rates, other market conditions and residual
values, then we may be required to recognize impairment charges that would reduce our net earnings
or increase our net losses. Under U.S. GAAP, once an impairment results in a reduction to the
carrying value of an asset, the carrying value of such asset cannot thereafter be increased.
Aircraft
liens could impair our ability to repossess, re-lease or sell our aircraft.
In the normal course of business, liens that secure the payment of airport fees and taxes, custom
duties, air navigation charges, landing charges, crew wages, repairers charges, salvage or other
obligations are likely, depending on the laws of the jurisdictions where aircraft operate, to
attach to the aircraft (or, if applicable, to the engines separately). The liens may secure
substantial sums that may, in certain jurisdictions or for limited types of liens (particularly
fleet liens), exceed the value of any particular aircraft to which the liens have attached. Until
they are discharged, the liens described above could impair our ability to repossess, re-lease or
sell our aircraft.
Although financial obligations are the responsibilities of the lessees, if they fail to fulfill
their obligations, liens may attach. In some jurisdictions, aircraft liens or separate engine liens
may give the holder thereof the right to detain or, in limited cases, sell or cause the
forfeiture of the aircraft (or, if applicable, the engines separately). We cannot assure you that
the lessees will comply with their obligations under the leases to discharge liens arising during
the terms of the leases. We may, in some cases, find it necessary to pay the claims secured by such
liens in order to repossess the aircraft or obtain the aircraft or engines from a creditor thereof.
These payments would be a required expense for us and would reduce our net income and our cash
flows.
Some of the aircraft in our portfolio have been damaged and subsequently repaired.
Some of the aircraft in our portfolio have been damaged. Even though these aircraft have been
repaired, we may not be able to resell or re-lease such aircraft on terms as favorable as those for
an aircraft that has not been damaged.
Government regulations could require substantial expenditures, reduce our profitability and limit
our growth.
Certain aspects of our business are subject to regulation and require the oversight and regulation
by state, federal and foreign governmental authorities. Aircraft are subject to regulations imposed
by aviation authorities regarding aircraft maintenance and airworthiness. Laws affecting the
airworthiness of aircraft generally are designed to ensure that all aircraft
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and related equipment
are continuously maintained in proper condition to enable safe operation of the aircraft. Aircraft
manufacturers may also issue their own recommendations. Airworthiness directives and similar
requirements typically set forth particular special maintenance actions or modifications to certain
aircraft types or models that the owners or operators of aircraft must implement.
Each lessee generally is responsible for complying with airworthiness directives with respect to
its aircraft and is required to maintain the aircrafts airworthiness. To the extent that a lessee
fails to comply with airworthiness directives required to maintain its certificate of airworthiness
or other manufacturer requirements in respect of an aircraft or if the aircraft is not currently
subject to a lease, we may have to bear the cost of such compliance. Under many leases, we have
agreed to share with our lessees the cost of obligations under airworthiness directives (or similar
requirements). In addition, if the aircraft is not subject to a lease, we may be forced to bear
(or, to induce a prospective lessee to take the aircraft on lease, have to agree to pay) the cost
of compliance with airworthiness directives. These expenditures can be substantial, and, to the
extent we are required to pay them, our cash flow could be substantially adversely affected.
In addition to these expenditures, which may be substantial, significant new requirements with
respect to noise standards, emission standards and other aspects of our aircraft or their operation
could cause our costs to increase and could cause the value of our aircraft portfolio to decrease.
Other governmental regulations relating to noise and emissions levels may be imposed not only by
the jurisdictions in which the aircraft are registered, possibly as part of the airworthiness
requirements, but also by other jurisdictions where the aircraft operate. In addition, most
countries aviation laws require aircraft to be maintained under an approved maintenance program
having defined procedures and intervals for inspection, maintenance and repair. To the extent that
our aircraft are off lease or a lessee defaults in effecting such compliance, we are required to
comply with such requirements at our expense.
Various environmental regulations may cause lessees to default on their lease payment obligations
to us.
Governmental regulations regarding aircraft and engine noise and emissions levels apply based on
where the relevant aircraft is registered and operated. For example, jurisdictions throughout the
world have adopted noise regulations which require all aircraft to comply with noise level
standards. In addition to the current requirements, the United States and the International Civil
Aviation Organization, or ICAO, have introduced new standards for noise
levels which apply to newly certified aircraft types on or after January 1, 2006. Currently,
there are no regulations that would require any phase-out of aircraft that qualify with the older standards
applicable to engines manufactured or certified prior to January 1, 2006, but the European Union
has established a framework for the imposition of operating limitations on aircraft that do not
comply with the new standards. These regulations could limit the economic life of the aircraft and
engines, reduce their value, limit our ability to lease or sell the non-compliant aircraft and
engines or, if engine modifications are permitted, require us to make significant additional
investments in the aircraft and engines to make them compliant.
In addition to more stringent noise restrictions, the United States and other jurisdictions are
beginning to impose more stringent limits on nitrogen oxide, carbon monoxide and carbon dioxide
emissions from engines, consistent with current ICAO standards. These limits
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generally apply only
to engines manufactured after 1999. Many of the aircraft engines owned by us were manufactured
after 1999. Because aircraft engines are replaced from time to time in the usual course, it is
likely that the number of such engines may increase over time. Concerns over global warming could
result in more stringent limitations on the operation of aircraft powered by older, non-compliant
engines.
European countries generally have relatively strict environmental regulations that can restrict
operational flexibility and decrease aircraft productivity. The European Parliament has confirmed
that aviation is to be included in the European Unions Emissions Trading Scheme starting from
2012. This inclusion could possibly distort the European air transport market leading to higher
ticket prices and ultimately a reduction in the number of airline passengers. As an answer to these
concerns, European airlines have established the Committee for Environmentally Friendly Aviation to
promote the positive environmental performance of airlines. The United Kingdom has doubled its air
passenger duties, effective February 1, 2007, in recognition of the environmental costs of air
travel. Similar measures may be implemented in other jurisdictions as a result of environmental
concerns.
Compliance with current or future regulations, taxes or duties imposed to deal with environmental
concerns could cause the lessees to incur higher costs and to generate lower net revenues,
resulting in an adverse impact on their financial conditions. Consequently, such compliance may
affect the lessees ability to make rental and other lease payments and reduce the value received
for the aircraft upon any disposition, which could have an adverse effect on our ability to pay the
interest on and principal of the securitization notes in full or on a timely basis.
It may be difficult or impossible to obtain title to two of the aircraft in our portfolio upon a
bankruptcy or default by its owner and manager.
Two of the aircraft in our portfolio (with an aggregate net book value of $100.7 million as of
December 31, 2008) are on lease to lessees based in Japan. Under Japanese law, legal title to each
aircraft registered in Japan must be held by a Japanese entity. In order
to permit the registration of these aircraft in Japan, legal title to the aircraft is held by
third-party Japanese corporations owned and managed by one of the major trading companies in Japan.
However, beneficial ownership of the aircraft is effectively held by entities in which the
beneficial interest is held by us. Title to these aircraft will be transferred under the terms of a
conditional sales agreement to such entities upon payment by such entities to the third-party
Japanese owners of the remaining installment in the amount of one U.S. dollar on the date the lease
of each aircraft expires or any earlier dates elected by such entities provided that (1) there is
no continuing default by such entities and certain representations and warranties of such entities
remain true and accurate and (2) the third-party Japanese owner is indemnified by the lessees for
costs and taxes that arise as a result of the title transfer. Because we have not relinquished
control over these aircraft upon transfer of title to the Japanese entities, as evidenced by the
one dollar purchase option in the conditional sale agreement which is exercisable at any time, and
we have retained all of the risks and rewards of ownership of the aircraft, we have not recognized
these transactions as sales for accounting purposes and continue to recognize the aircraft as
Flight equipment under operating lease in our financial statements.
While these liabilities are the responsibility of the lessee, if they are not paid, the entities
holding the beneficial interest may effectively have to pay such amounts in order for title to be
transferred. Under the conditional sale agreements, we effectively hold the beneficial
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ownership interest of the aircraft, including all of the risks and rewards of ownership, and have
full control over the leasing of the aircraft to the lessees, but full liability to the Japanese
title owners with respect to the aircraft if the lessees do not perform their indemnity or other
obligations. The obligations of the third-party Japanese owners to transfer title to such entities
are secured by mortgages over the leased aircraft and share pledges over the entire share capital
of the third-party Japanese owners, each in favor of such entities. Although the conditional sale
agreements provides for title to transfer automatically, a bill of sale may be required to legally
effect such transfer of title. There may be tax-related considerations or issues relating to the
validity of the method of title transfer depending on the location of the aircraft (and the related
engines) at the time of transfer that may need to be considered at the time of transfer and which
may affect the decision as to when to transfer title. It is also possible that the Japanese title
owners or their manager parent company could breach their obligation to provide a bill of sale to
document properly the title transfer to us, which could also result in possible impairment of our
ability to obtain such evidence of title to the aircraft in a timely fashion or at all.
In the event of a bankruptcy proceeding involving the Japanese manager of these aircraft, the
separateness of the corporate existence of the Japanese owners of the aircraft and the Japanese
manager may be disregarded and these aircraft, if the third-party Japanese owners still hold legal
title to them, may be consolidated with the assets of the Japanese manager and may become part of
the bankruptcy estate, resulting in the possible impairment of our ability to obtain title to these
aircraft in a timely fashion or at all.
We rely on our lessees continuing performance of their lease obligations.
We operate as a supplier to airlines and are indirectly impacted by the risks facing airlines
today. Our success depends upon the financial strength of our lessees, our ability to assess the
credit risk of our lessees and the ability of lessees to perform their contractual obligations to
us. The ability of each lessee to perform its obligations under its lease will depend primarily on
the lessees financial condition and cash flow, which are affected by factors beyond our control.
Some of our lessees may experience payment difficulties, particularly if economic conditions
deteriorate. In addition, the demand for aircraft generally diminishes as they age, and the
creditworthiness of the lessees of older aircraft is generally lower than the creditworthiness of
the lessees of newer aircraft.
We are typically not in possession of an aircraft while it is on lease. Consequently, our ability
to determine the condition of any aircraft or whether lessees are properly maintaining our aircraft
is limited to periodic inspections that we perform or that are performed on our behalf by
third-party service providers or aircraft inspectors. A lessees failure to meet its maintenance
obligations under a lease could:
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result in a grounding of the aircraft; |
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cause us to incur costs in restoring the aircraft to an acceptable maintenance
condition to re-lease the aircraft; |
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adversely affect lease terms in the re-lease of the aircraft; and |
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adversely affect the value of the aircraft. |
We cannot assure you that, in the event that a lessee defaults under a lease, any security deposit
paid or letter of credit provided by the lessee will be sufficient to cover the lessees
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outstanding or unpaid lease obligations and required maintenance expenses, or be sufficient to
discharge liens that may have attached to our aircraft.
Lease defaults could result in significant expenses and loss of revenues.
If we are unable to agree upon acceptable terms for a lease restructuring, then we have the right
to repossess aircraft and to exercise other remedies upon a lessee default. Repossession,
re-registration and flight and export permissions after a lessee default typically result in
greater costs than those incurred when an aircraft is returned at the end of a lease. These costs
include legal expenses that could be significant, particularly if the lessee is contesting the
proceedings or is in bankruptcy. Delays resulting from repossession proceedings would also increase
the period of time during which an aircraft or other aviation asset does not generate rental
revenue. In addition, we may incur substantial maintenance, refurbishment or repair costs that a
defaulting lessee has failed to pay and that are necessary to put the aircraft in a condition
suitable for re-lease or sale, and we may need to pay off liens, taxes and governmental charges on
the aircraft or other aviation asset to obtain clear possession and to remarket the asset
effectively.
If we repossess an aircraft or other aviation asset, we will not necessarily be able to export or
deregister and profitably redeploy the asset. Where a lessee or other operator flies only domestic
routes in the jurisdiction in which an aircraft is registered, repossession may be more difficult,
especially if the jurisdiction permits the lessee or the other operator to resist deregistration.
Significant costs may also be incurred in retrieving or recreating aircraft records required for
registration of the aircraft and obtaining a certificate of airworthiness for the aircraft or other
aviation assets.
Risks associated with the concentration of our lessees in certain geographical regions could harm
our business.
Our business is exposed to local economic and political conditions that can influence the
performance of lessees located in a particular region. The effect of these conditions on payments
to us will be more or less pronounced, depending on the concentration of lessees in the region with
adverse conditions.
European concentration. Lease rental revenues from lessees based in Europe accounted for 38.4% of
total rental revenues for the year ended December 31, 2008. Commercial airlines in Europe face, and
can be expected to continue to face, increased competitive pressures, in part as a result of the
deregulation of the airline industry by the European Union and the development of low-cost
carriers. European countries generally have relatively strict environmental regulations and traffic
constraints that can restrict operational flexibility and decrease aircraft productivity, which
could significantly increase aircraft operating costs.
Asian concentration. Lease rental revenues from lessees based in Asia (including China and India)
accounted for 36.6% of total rental revenues for the year ended December 31, 2008. There are
significant obstacles to the development of Chinese and Indian airline industries, including
continuing government control and regulation over the industry. In addition, India faces poor
aviation infrastructure and continuing losses from operations due to overcapacity. If these
difficulties persist or expand, the Chinese and Indian airline industries likely would experience a
significant decrease in growth or restrictions on future growth.
North American concentration. Lease rental revenues from lessees based in North America accounted
for 13.8% of total rental revenues for the year ended December 31, 2008. During
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the past 15 years a number of North American passenger airlines filed Chapter 11 bankruptcy
proceedings and several major U.S. airlines ceased operations altogether. High labor costs, high
fuel costs, the strength of labor unions in collective bargaining negotiations, the war and
prolonged conflict in Iraq and the September 11, 2001 terrorist attacks in the United States have
imposed additional financial burdens on most U.S. airlines.
The geographic classifications and revenue information for the lessees discussed above are based on
the financial statements as of and for the year ended December 31, 2008, which are included at Item
18 in this Annual Report.
Because many of our lessees operate in emerging markets, we are indirectly subject to many of the
economic and political risks associated with competing in such markets.
Emerging markets are countries which have developing economies that are vulnerable to business and
political disturbances, such as significant economic instability, interest and exchange rate
fluctuations, civil unrest, government instability and the nationalization or expropriation of
private assets. The occurrence of any of these events in markets served by our lessees domiciled in
emerging markets and the resulting instability may adversely affect our ownership interest in
aircraft or the ability of lessees which operate in these markets to meet their lease obligations
and these lessees may be more likely to default than lessees that operate in developed economies.
Some of our leases provide the lessees with early termination rights.
Ten of the leases in our portfolio provide the lessees with early termination rights. We also could
enter into leases in the future that provide lessees with early termination rights. If any lease is
terminated early at a time when we could not re-lease the aircraft at rates at least as favorable
to us as the terminated lease, our results of operations could be adversely affected. See Item 4.D.
Property, Plants and EquipmentOur LeasesEarly Termination Rights.
We cannot assure you that all lessees will comply with the registration requirements in the
jurisdictions where they operate.
All of our aircraft are required to be registered at all times with appropriate governmental
authorities. Generally, in jurisdictions outside the United States, failure by a lessee to maintain
the registration of a leased aircraft would be a default under the applicable lease, entitling us
to exercise our rights and remedies thereunder. If an aircraft were to be operated without a valid
registration, the lessee operator or, in some cases, the owner or lessor might be subject to
penalties, which could constitute or result in a lien being placed on such aircraft. Failure to
comply with registration requirements also could have other adverse effects, including inability to
operate the aircraft and loss of insurance. We cannot assure you that all lessees will comply with
these requirements.
Our lessees may have inadequate insurance coverage or fail to fulfill their respective indemnity
obligations, which could result in us not being covered for claims asserted against us and may
negatively affect our business, financial condition and results of operations.
Although we do not expect to control the operation of our leased aircraft, our ownership of the
aircraft could give rise, in some jurisdictions, to strict liability for losses resulting from
their operation. Our lessees are required to indemnify us for, and insure against, liabilities
arising out of the use and operation of the aircraft, including third-party claims for death or
injury to persons and damage to property for which we may be deemed liable. Lessees are also
required to maintain public liability, property damage and hull all risks and hull war risks
insurance on
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the aircraft at agreed upon levels. However, they are not generally required to maintain political
risk insurance.
Following the terrorist attacks of September 11, 2001, aviation insurers significantly reduced the
amount of insurance coverage available to airlines for liability to persons other than employees or
passengers for claims resulting from acts of terrorism, war or similar events. At the same time,
they significantly increased the premiums for such third-party war risk and terrorism liability
insurance and coverage in general. As a result, the amount of such third-party war risk and
terrorism liability insurance that is available at any time may be below the amount required under
the initial leases and required by the market in general.
We cannot assure you that the insurance maintained by our lessees will be sufficient to cover all
types of claims that may be asserted against us. Any inadequate insurance coverage or default by
lessees in fulfilling their indemnification or insurance obligations, as well as the lack of
available insurance, could reduce the proceeds upon an event of loss and could subject us to
uninsured liabilities, either of which could adversely affect our business, financial condition and
results of operations.
Risks Related to Our Relationships with GECAS, Its Affiliates and Other Service Providers
We depend on GECAS to service our portfolio and additional aircraft that we acquire in the future.
We were formed in 2006 and had 21 permanent employees as of December 31, 2008, as well as 2
consultants who work with us on a contract basis. Our business strategy involves outsourcing our
servicing and remarketing of aircraft to GECAS. Our initial business operations consisted of owning
and leasing a portfolio of aircraft acquired from affiliates of GE. These aircraft assets were
previously owned, managed and leased by GE and its affiliates as part of their larger aircraft
leasing enterprise. We do not have the same infrastructure as GECAS to support these aircraft
assets, and we continue to rely on GECAS for the servicing of our aircraft. Pursuant to our
servicing agreements, GECAS provides us with a variety of services, including collecting rents and
other payments from the lessees of our aircraft, monitoring maintenance, insurance and other
obligations under our leases, enforcing rights against lessees, remarketing aircraft for re-lease
or sale and other aircraft-related services. GECAS has a high level of autonomy in its servicing of
our aircraft, and our operational success, revenues, aircraft and lease related costs and ability
to execute our growth strategy depend significantly on GECASs satisfactory performance of these
services. GECASs failure to perform these services satisfactorily would significantly impair our
ability to maximize our lease or sale income, monitor our lessees compliance with their lease
obligations and/or comply with our contractual obligations under our leases. Our rights to
terminate the servicing agreements are limited. In particular, we have no right to terminate GECAS
as servicer simply because it is performing unsatisfactorily. See Even if we are dissatisfied
with GECASs performance, there are only limited circumstances under which we will be able to
terminate the servicing agreements and we may not terminate the servicing agreement for our Initial
Portfolio without the prior written consent of the policy provider. Similarly, under certain
financing agreements, we may not terminate the servicing agreement without the prior consent of the
lenders.
GECAS is not obligated to service all aircraft that we acquire in the future. The servicing
agreements provide that GECAS may decline to accept newly acquired aircraft for servicing for a
number of specified reasons. See Item 10.C. Additional InformationMaterial
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ContractsServicing Agreements. For example, GECAS may decline to service an aircraft if a bank
lender that finances such aircraft imposes conditions on the servicing of such aircraft to which
GECAS does not agree. If GECAS declines to service any aircraft we acquire in the future, we will
need to find a replacement servicer for such aircraft. The quality of any replacement services may
not be as high or provided on terms as favorable as the terms currently offered by GECAS.
In addition, if any of the servicing agreements were to be terminated, or if their terms were to be
altered, we will not be entitled to benefit from certain terms of the leases, such as
cross-defaults and various insurance terms, which apply only if GECAS is the servicer, and we may
not be able to replace these services promptly. If we are unable to maintain a strong, positive
relationship with GECAS, our business, financial condition, results of operations and cash flows
could be materially and adversely affected.
GECAS and its affiliates may have conflicts of interest with us, and their limited contractual or
other duties may not restrict them from favoring their own business interests to our detriment.
Conflicts of interest may arise between us and GECAS, as the servicer for our aircraft, with
respect to our operations and business opportunities. These conflicts may arise because GECAS
manages and remarkets for lease or sale aircraft for us, itself, its affiliates and for many other
entities. GECAS also has extensive information about our business and operations as a result of the
continued servicing of our aircraft, including access to sensitive competitive information such as
lease and aircraft pricing, whereas we do not have access to similar information with respect to
GECAS. If a conflict of interest arises as to one of our aircraft and other aircraft managed by
GECAS, the servicing agreements provide that GECAS must perform the services in good faith, and, to
the extent that either two or more of our particular aircraft or one of our aircraft and other
aircraft managed by GECAS have substantially similar objectively identifiable characteristics that
are relevant for purposes of the particular services to be performed, GECAS has agreed not to
discriminate among our aircraft or between any of our aircraft and any other managed aircraft on an
unreasonable basis. Nevertheless, despite these contractual undertakings, GECAS may favor its own
interests and the interests of other managed entities over our interests.
Conflicts may arise, for example, when our aircraft are leased to entities that also lease other
aircraft owned or managed by GECAS and decisions affecting some aircraft may have an adverse impact
on others. For example, when a lessee in financial distress seeks to return some of its aircraft,
GECAS will be required to decide which aircraft to accept for return and may favor its or another
managed entitys interest over ours. Conflicts also may arise when our aircraft are being marketed
for re-lease or sale at a time when other aircraft owned or managed by GECAS are being similarly
marketed. These conflicts may be especially pronounced when an affiliate of GECAS is providing
financing for a lessee or for the marketed aircraft or where GECASs contractual arrangements with
a third party have the effect of requiring preferential treatment for other aircraft.
Under the terms of our servicing agreements with GECAS, we are not entitled to be informed of all
conflicts of interest involving GECAS and are limited in our right to replace GECAS because of
conflicts of interest. Any replacement servicer may not provide the same quality of service or may
not afford us terms as favorable as the terms currently offered by GECAS. Moreover, in certain
situations we may incur duplicative servicing fees for services we obtain when there is a conflict
of interest. If GECAS, as the servicer, makes a decision that is adverse
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to our interests, our business, financial condition, results of operations and cash flows could
suffer. See Even if we are dissatisfied with GECAS, there are only limited circumstances under
which we will be able to terminate the servicing agreements and we may not terminate the servicing
agreement for our Initial Portfolio without the prior written consent of the policy provider.
Our servicing agreements limit our remedies against GECAS for unsatisfactory performance and
provide certain termination rights to the policy provider.
Under our servicing agreements with GECAS, in many cases we may not have the right to recover
damages from GECAS for unsatisfactory performance. In addition, although GECAS is subject to
standards of care and conflicts as provided in the servicing agreements, GECAS is not contractually
responsible for:
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the transfer of aircraft, leases or other assets to our company; |
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determining the adequacy of the terms of any aircraft lease, including rent payments
or security deposits; |
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determining the reliability or creditworthiness of any lessee; or |
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our compliance with the terms of our agreements with other parties, including the
indenture for the securitization and our credit facility. |
We have agreed to indemnify GECAS and its affiliates for broad categories of losses arising out of
the performance of services for our aircraft and leases, unless they are finally adjudicated to
have been caused directly by GECASs gross negligence or willful misconduct (including willful
misconduct that constitutes fraud) in respect of GECASs obligation to apply its standard of care
or conflicts standard in the performance of its services. We have also agreed to indemnify GECAS
and its affiliates for losses arising out of the disclosures in this Annual Report (except certain
disclosures provided to us by GECAS and losses arising out of our compliance with our obligations
to any holders of any securities issued by us or any of our subsidiaries or any governmental
authorities).
Under certain circumstances the provider of the financial guarantee insurance policy with respect
to the securitization notes has the right to terminate GECAS as the servicer for our Initial
Portfolio without our consent and may terminate GECAS at a time which may be disadvantageous to us.
Even if we are dissatisfied with GECASs performance, there are only limited circumstances under
which we will be able to terminate the servicing agreements and we may not terminate the servicing
agreement for our Initial Portfolio without the prior written consent of the policy provider.
We have the right to terminate any servicing agreement with GECAS (except in the case of the
servicing agreement for our Initial Portfolio, which also requires the prior written consent of the
policy provider and under certain financings which require lender consent) if, among other things,
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GECAS ceases to be at least majority-owned directly or indirectly by General Electric
Capital Corporation, or GE Capital, or its ultimate parent, GE; |
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GECAS fails in any material respect to perform any material services under the
servicing agreements which results in liability of GECAS due to its gross negligence or
willful misconduct (including willful misconduct constituting fraud) in respect of its
obligation to apply the standard of care or conflicts standard in respect of performance
of the services in a manner that is materially adverse to us and our applicable
subsidiaries taken as a whole; |
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GECAS fails in any material respect to perform any material services under the
servicing agreements in accordance with the standard of care or the conflicts standard in
a manner that is materially adverse to us and our applicable subsidiaries taken as a
whole; |
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GECAS, GE Capital or GE becomes subject to bankruptcy or insolvency proceedings; |
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with respect to the master servicing agreement, we have insufficient funds for the
payment of certain dividends while a significant portion of our available aircraft remain
off-lease for a specified period; |
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with respect to the servicing agreement for our Initial Portfolio, we have
insufficient funds for the payment of interest on the notes for a period of at least 60
days; |
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with respect to the servicing agreement for our Initial Portfolio, at least 15% of
the number of aircraft assets remain off-lease but available for re-lease for a period of
at least three months following specified events set forth in the trust indenture; or |
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with respect to the servicing agreement for our Initial Portfolio, without limiting
GECASs rights under the security trust agreement, GECAS takes any steps for the purpose
of processing the appointment of an administrative receiver or the making of any
administrative order or for instituting a bankruptcy, reorganization, arrangement,
insolvency, winding up, liquidation, composition or any similar proceeding under the laws
of any jurisdiction with respect to any person in the Genesis Funding, and any of its
subsidiaries, or any of the aircraft assets. |
In addition, in the case of the servicing agreement for our Initial Portfolio, the policy provider
also has the right to terminate such servicing agreement under the circumstances described above.
In the absence of any of these events, neither we nor the policy provider has a right to terminate
any servicing agreement, even if we are or it is dissatisfied with GECASs performance. In
addition, because of our substantial dependence on GECAS, our board of directors may be reluctant
to initiate litigation against GECAS to enforce contractual rights under any servicing agreement.
GECAS may resign under any servicing agreement with respect to all aircraft serviced thereunder or
any affected aircraft, as the case may be, if it reasonably determines that directions given, or
services required, would, if carried out, be unlawful under applicable law, be in violation of any
GE corporate policy regarding business practices or legal, ethical or social matters, be likely to
lead to an investigation by any governmental authority of GECAS or its affiliates, expose GECAS to
liabilities for which, in GECASs good faith opinion, adequate bond or indemnity has not been
provided or place GECAS in a conflict of interest with respect to which, in GECASs good faith
opinion, GECAS could not continue to perform its obligations under the servicing agreements with
respect to all serviced aircraft or any affected aircraft, as the case may be (but with respect to
the foregoing circumstances, GECAS may resign only with respect to the affected aircraft). Whether
or not it resigns, GECAS is not required to take any action of the foregoing kind. GECAS may also
resign if it becomes subject to taxes for which we do not indemnify GECAS. GECASs decision to
resign under any servicing agreement would significantly impair our ability to re-lease or sell our
aircraft and service our leases.
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We may compete with GECAS for acquisitions and dispositions of aircraft as well as the re-leasing
of our aircraft that are not serviced by GECAS.
We may compete with GECAS in the market for aircraft acquisitions and dispositions and in
re-leasing any of our aircraft that GECAS does not service. Currently, GECAS manages a fleet of
approximately 1800 aircraft owned by its affiliates and by other entities with 28 offices and over
270 customers in 78 countries and thus has considerably greater scale than we have. GECAS also has
extensive information about our business and operations as a result of the continued servicing of
our aircraft, including access to sensitive competitive information such as lease and aircraft
pricing, whereas we do not have access to similar information with respect to GECAS. In addition,
GECAS has significantly greater financial resources than we have. As a result, we are likely to be
at a competitive disadvantage to GECAS as we seek to acquire or dispose of aircraft or to re-lease
any of our aircraft that GECAS does not service.
The terms of certain agreements with GECAS and other affiliates of GE were negotiated without
independent assessment on our behalf, and these terms may be less advantageous to us than if they
had been the subject of arms-length negotiations.
In connection with our IPO, we entered into various agreements with GECAS and other affiliates
of GE that effected the transactions relating to our formation, the securitization, the acquisition
of our Initial Portfolio and our ongoing operations and business. Although the pricing and other
terms of these agreements were reviewed by our management and our board of directors, they were
determined by GE-affiliated entities in the overall context of our IPO and the related
transactions. As a result, provisions of these agreements may be less favorable to us than they
might have been had they been the result of arms-length transactions among unaffiliated third
parties.
Risks Related to Our Financial Information
The historical financial information included in this Annual Report for periods prior to
December 19, 2006, the completion of our IPO, does not reflect the financial condition, results of
operations or cash flows we would have achieved during the periods presented as a stand-alone
company, and therefore may not be a reliable indicator of our future financial performance.
We completed our IPO and commenced independent operations on December 19, 2006. As a result, we
have a limited independent operating history, and our prospects must be considered in light of the
risks, expenses and difficulties frequently encountered when any new business is formed. The
historical financial information included in this Annual Report for periods prior to December 19,
2006 (the date of our IPO) does not reflect the financial condition, results of operations or cash
flows that we would have achieved as a stand-alone company during the periods presented or that we
will achieve in the future. This is primarily a result of the following factors:
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The historical combined financial information included in this Annual Report for
periods prior to our IPO does not reflect our ongoing cost structure, management, financing
costs or business operations. Instead, this combined financial information represents the
combination of results attributable to some of the aircraft included in our Initial
Portfolio of 41 aircraft as owned, managed, financed and operated by GECAS and its
affiliates. Following our acquisition of the Initial Portfolio, the cost of financing and
operating these aircraft has changed due to: |
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the fact that the historical combined financial information for periods prior
to the completion of our IPO reflects allocations of corporate expenses from affiliates
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GE and GECAS to our Initial Portfolio. These allocations are different from the
comparable expenses we incur as a stand-alone public company due to a number of factors,
including the likelihood that we are not able to realize economies-of-scale and
negotiating leverage achieved by GE and GECAS;
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the need for additional personnel and service providers to perform services
previously provided by GECAS and other affiliates of GE; |
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legal, accounting, compliance and other costs associated with being a public
company with listed equity, including compliance with the Sarbanes-Oxley Act of 2002
and rules subsequently implemented by the Securities and Exchange Commission, or the
SEC, and the New York Stock Exchange, or the NYSE; and |
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the fact that the historical combined financial information prior to our IPO
reflects only the number of aircraft included in our Initial Portfolio owned by
affiliates of GE for the periods or as of the dates specified therein, rather than all
of the aircraft currently included in our portfolio. |
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Our predecessors working capital requirements were satisfied as part of GEs
corporate-wide cash management policies. Although we have access to a credit facility for
the acquisition of additional aircraft, we may not be able to obtain financing on terms as
favorable as our predecessor obtained from or through GE and our cost of debt will likely
be higher. |
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The depreciation of capitalized major maintenance costs and our maintenance expenses
are higher than reflected in the historical combined financial information due to the aging
of our aircraft. |
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Our effective tax rate is lower than our predecessors as a result of our tax residency
in Ireland. Our cash tax payments are also lower as a result of our ability to depreciate
aircraft under Irish tax law over eight years, which is a more accelerated rate than our
predecessor used to depreciate aircraft under U.S. tax law. |
Our subsidiaries in many cases have owned their aircraft prior to our acquisition of them and may
have unknown contingent liabilities that we may be required to fund.
There is a risk that our subsidiaries, many of which have owned their aircraft in our portfolio
prior to our acquisition of such subsidiaries, could have material contingent liabilities that are
unknown to us and that were incurred by third parties from operating and leasing the aircraft in
our portfolio or for other reasons.
Affiliates of GE, from which we acquired certain aircraft in our portfolio, have made
representations and warranties relating to:
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the existence of a valid and final transfer of the beneficial interests of entities
that hold the aircraft or entities that hold the beneficial interests of any such entities
and that were sold to us by affiliates of GE; |
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the title of our aircraft-owning subsidiaries to the applicable aircraft; and |
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the lack of additional liabilities of our aircraft-owning subsidiaries or liens on
the aircraft other than disclosed to us or otherwise permitted. |
These representations and warranties are subject to time limits. If a liability arises and we are
called on to pay it but are not able to recover any amount from the sellers for such liability, our
liquidity could decrease significantly.
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Risks Related to the Ownership of Our Shares
Market interest rates may have an effect on the trading value of our shares.
One of the factors that investors may consider in deciding whether to buy or sell our shares is our
dividend rate as a percentage of our share price relative to market interest rates. If market
interest rates increase, prospective investors may demand a higher dividend yield on our shares or
seek alternative investments paying higher dividends or interest. As a result, interest rate
fluctuations and capital market conditions can affect the market value of our shares. For instance,
if interest rates rise, the market price of our shares may decrease as market rates on
interest-bearing securities, such as bonds, increase.
We have anti-takeover provisions in our bye-laws that may discourage a change of control.
Our bye-laws contain provisions that could make it more difficult for a third party to acquire us
without the consent of our board of directors. These include:
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provisions that permit us to require any competitor of GECAS that acquires beneficial
ownership of more than 10% of our common shares either to tender for all of our remaining
common shares for no less than their fair market value, or sell such number of common
shares to us or to third parties as would reduce its beneficial ownership to less than
10%, in either case within 90 days of our request to so tender or sell; |
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provisions that reduce the vote of each common share held by a competitor of GECAS
that beneficially owns 10% or more, but less than 50%, of our common shares to one-fifth
of one vote per share on all matters upon which shareholders may vote; |
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provisions that permit our board of directors to determine the powers, preferences
and rights of our preference shares and to issue such preference shares without
shareholder approval; |
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advance notice requirements by shareholders for director nominations and actions to
be taken at annual meetings; and |
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no provision for cumulative voting in the election of directors, such that all the
directors standing for election may be elected by our shareholders by a plurality of votes
cast at a duly convened annual general meeting, the quorum for which is two or more
persons present in person or by proxy at the start of the meeting and representing in
excess of 50% of all votes attaching to all shares in issue entitling the holder to vote
at the meeting. |
These provisions may make it difficult and expensive for a third party to pursue a tender offer,
change in control or takeover attempt that is opposed by our management and/or our board of
directors. Public shareholders who might desire to participate in these types of transactions may
not have an opportunity to do so. These anti-takeover provisions could substantially impede the
ability of public shareholders to benefit from a change in control or change our management and
board of directors and, as a result, may adversely affect the market price of our shares and your
ability to realize any potential change of control premium.
We are a Bermuda company that is managed and controlled in Ireland. It may be difficult for
investors to enforce judgments against us or against our directors and executive officers.
We were incorporated under the laws of Bermuda and are managed and controlled in Ireland. Our
business is based outside the United States, a majority of our directors and officers, and some of
the experts named in this Annual Report, reside outside the United States and a
28
majority of our assets and some or all of the assets of such persons are located outside the United
States. As a result, it may be difficult or impossible to effect service of process within the
United States upon us or those persons, or to recover against us or them on judgments of U.S.
courts, including judgments predicated upon the civil liability provisions of the U.S. federal
securities laws. Further, no claim may be brought in Bermuda or Ireland against us or our directors
and officers in the first instance for violation of U.S. federal securities laws because these laws
have no extraterritorial application under Bermuda or Irish law and do not have force of law in
Bermuda or Ireland. However, a Bermuda or Irish court may impose civil liability, including the
possibility of monetary damages, on us or our directors and officers if the facts alleged in a
complaint constitute or give rise to a cause of action under Bermuda or Irish law.
There is doubt as to whether the courts of Bermuda or Ireland would enforce judgments of U.S.
courts obtained in actions against us or our directors and officers, as well as the experts named
herein, predicated upon the civil liability provisions of the U.S. federal securities laws, or
entertain actions brought in Bermuda or Ireland against us or such persons predicated solely upon
U.S. federal securities laws. Further, there is no treaty in effect between the United States and
Bermuda or Ireland providing for the enforcement of judgments of U.S. courts in civil and
commercial matters, and there are grounds upon which Bermuda or Irish courts may decline to enforce
the judgments of U.S. courts. Some remedies available under the laws of U.S. jurisdictions,
including some remedies available under the U.S. federal securities laws, may not be allowed in
Bermuda or Irish courts as contrary to public policy in Bermuda or Ireland. Because judgments of
U.S. courts are not automatically enforceable in Bermuda or Ireland, it may be difficult for you to
recover against us or our directors and officers based upon such judgments.
Shareholders of our company may have greater difficulties in protecting their interests than
shareholders of U.S. corporations.
The Companies Act 1981 of Bermuda, as amended, which we refer to as the Companies Act, applies to
our company and differs in material respects from laws generally applicable to U.S. corporations
and their shareholders. Taken together with the provisions of our bye-laws, some of these
differences may result in greater difficulties in protecting the interests of shareholders of our
company than of shareholders of a U.S. corporation. This affects, among other things, the
circumstances under which transactions involving an interested director are voidable, whether an
interested director can be held accountable for any benefit realized in a transaction with our
company, what approvals are required for business combinations by our company with a large
shareholder or a wholly-owned subsidiary, what rights shareholders may have to enforce specified
provisions of the Companies Act or our bye-laws, and the circumstances under which we may indemnify
our directors and officers.
Risks Related to Taxation
We are a passive foreign investment company, or PFIC. Unless U.S. holders of our shares make
certain elections under U.S. federal income tax rules, they are subject to certain adverse U.S.
federal income tax rules.
Because we are a PFIC, U.S. holders of our shares are subject to certain adverse U.S. federal
income tax rules. Under the PFIC rules, a U.S. holder who disposes or is deemed to dispose of
29
our shares at a gain, or who receives or is deemed to receive certain distributions with respect to
our shares, generally will be required to treat such gain or distributions as ordinary income and
pay an interest charge on the tax imposed. Certain elections may be used to reduce or eliminate the
adverse impact of the PFIC rules for holders of our shares (QEF elections and mark-to-market
elections), but these elections may accelerate the recognition of taxable income and may result in
the recognition of ordinary income in excess of amounts distributed to you. In addition, because we
are a PFIC, our distributions will not qualify for the reduced rate of U.S. federal income tax that
applies to qualified dividends paid to non-corporate U.S. taxpayers. The PFIC rules are extremely
complex, and prospective U.S. investors are urged to consult their own tax advisers regarding the
potential consequences to them of our being classified as a PFIC. See Item 10.E. Taxation
ConsiderationsU.S. Federal Income Tax ConsiderationsTaxation of U.S. Holders of Shares.
We may fail to qualify for tax treaty benefits and U.S. statutory tax exemptions which would reduce
our net income and cash flow by the amount of the applicable tax.
Special U.S. tax rules apply to U.S. source transportation income. U.S. source gross rental income
that is not connected with a U.S. trade or business may be subject to 30% withholding tax.
Alternatively, certain U.S. source rental income could be subject to a 4% tax on gross
transportation income. U.S. source transportation income connected with a U.S. trade or business
would be taxed on a net basis. In order for us to be exempt from U.S. federal income taxation on
all categories of U.S. source rental income, we and our Irish tax resident subsidiaries must
qualify for benefits of the Irish Treaty. Qualification for Irish Treaty benefits depends on many
factors, including that at least 50% of the vote and value of each of our Irish tax resident
subsidiaries continues to be held by us and that our principal class of shares be substantially and
regularly traded on one or more recognized stock exchanges. We may not satisfy all the requirements
of the Irish Treaty and thereby may not qualify each year for the benefits of the Irish Treaty.
Failure to so qualify could result in the income attributable to aircraft used for flights to, from
or within the United States being subject to U.S. federal income taxation. The imposition of such
taxes would adversely affect our business and would reduce cash available for distribution to our
shareholders. See Item 10.E. Taxation ConsiderationsU.S. Federal Income Tax
ConsiderationsTaxation of Genesis Lease Limited and Our Subsidiaries. In addition, we cannot
assure you that the Double Taxation Agreement between Ireland and the United States would not be
re-negotiated in the future and the current tax treaty benefits may no longer be available.
We may become subject to income or other taxes in the jurisdictions in which our aircraft operate,
where our lessees are located or where we perform certain services which would adversely affect our
business and reduce cash available for distributions to shareholders.
We and our Irish tax resident subsidiaries are subject to the income tax laws of Ireland. In
addition, we may be, or become, subject to income or other taxes in other jurisdictions by reason
of our activities and operations or those of our service providers, where our aircraft operate or
where the lessees of our aircraft (or others in possession of our aircraft) are located. The
imposition of such taxes would adversely affect our business and would reduce earnings available
for distribution to our shareholders.
In addition, because Ireland does not have tax treaties with all jurisdictions, we may find it
necessary to establish subsidiaries in other jurisdictions to lease or sublease aircraft to
customers in those jurisdictions. Such subsidiaries may be subject to taxation in the
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jurisdictions in which they are organized, which would reduce our net income and have an adverse
impact on our cash flow available for distribution to our shareholders.
The tax rate applicable to us and our Irish tax resident subsidiaries would be higher than we
expect if we or they were considered not to be carrying on a trade in Ireland for the purposes of
Irish law.
Because we are managed and controlled in Ireland, we and our Irish resident subsidiaries are
subject to Irish corporation tax on our net trading income at the rate of 12.5%. Under Irish tax
law, non-trading income is taxed at the rate of 25% and capital gains are taxed at the rate of 22%.
Each of us intend to carry on sufficient activity in Ireland, directly and indirectly, through a
servicer, so as to be treated as carrying on a trade in Ireland for the purposes of Irish tax law.
In calculating our net trading income we deduct tax depreciation on the aircraft. Whether we and
our Irish tax-resident subsidiaries are carrying on a trade for the purposes of Irish tax are
questions of fact and we cannot assure you that we or they will qualify, and we will depend on the
Irish Revenue authorities accepting that we are engaged in an active business in Ireland.
One of the grounds for our Irish tax resident subsidiaries being treated as engaged in an active
business in Ireland is that GECAS, as servicer for the Initial Portfolio, is an Irish company, and
GECAS performs a major part of its obligations under the servicing agreement for the Initial
Portfolio in Ireland. However, the servicing agreement does not require that GECAS perform any of
its obligations in Ireland, and GECAS could relocate its operations in the future and not perform
any such obligations in Ireland. If that happens, the Irish Revenue Authorities may reexamine the
eligibility of our Irish tax resident subsidiaries for the 12.5% tax rate, and, if they were found
to be not engaged in an active business in Ireland, all of their net income from leasing would be
subject to the higher Irish corporate tax rate of 25%. As a result, our Irish tax resident
subsidiaries would be liable earlier and in greater amounts for tax on such income.
If we or any of our Irish tax resident subsidiaries were considered not to be carrying on a trade
in Ireland, we or they may be subject to additional Irish tax liabilities. The application of a
higher tax rate (25% instead of 12.5%) on taxable income could reduce the cash flow available for
distribution to our shareholders. In addition, we cannot assure you that the 12.5% tax rate
applicable to trading income, the 22% tax rate applicable to capital gains or the 25% tax rate
applicable to non-trading income will not be changed in the future.
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Item 4. Information on the Company
A. History and Development of the Company
We are Genesis Lease Limited, a Bermuda exempted company incorporated on July 17, 2006 under the
provisions of Section 14 of the Companies Act 1981 of Bermuda. Our registered office is located at
Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda. Although we are organized under the laws
of Bermuda, we are resident in Ireland for Irish tax purposes and thus are subject to Irish
corporation tax on our income in the same way, and to the same extent, as if we were organized
under the laws of Ireland. Our principal executive offices are located at 4450 Atlantic Avenue,
Westpark, Shannon, Co. Clare, Ireland. Our telephone number at that address is +353 61 233 300.
We were formed at the direction of GECAS to acquire our Initial Portfolio from affiliates of GE and
to develop an independent aircraft leasing business. On December 19, 2006, we (1) completed our IPO
and issued 27,860,000 shares at a public offering price of $23.00 per share, (2) issued 3,450,000
shares to an affiliate of GE, in a private placement, for a price of $23.00 per share, (3) issued
$810.0 million of aircraft lease-backed notes as part of a securitization transaction, and (4) used
the net proceeds of the IPO, the private placement and the securitization to finance the
acquisition of our Initial Portfolio of 41 commercial aircraft from affiliates of GE.
The purchase price for our Initial Portfolio was $1,459.4 million, which was the sum of the net
proceeds of our IPO, our private placement and the securitization, less the portion of such
proceeds that was used to fund our formation and offering-related expenses, up-front costs and
expenses related to our securitization, and a cash balance of $20.0 million that we retained for
general corporate purposes.
On January 16, 2007, we sold 4,179,000 additional shares at a public offering price of $23.00 after
the underwriters of our IPO exercised their over-allotment option in full, as well as 517,500
additional shares at a price of $23.00 per share in a private placement to GE.
Since our IPO, we have increased our portfolio by 13 aircraft from 41 to 54 aircraft. Twelve
aircraft were purchased during the year ended December 31, 2007, eight from GECAS affiliates and
four from two airlines on a sale and leaseback basis. One further aircraft was purchased from a GE
affiliate during the year ended December 31, 2008.
B. Business Overview
Our Company
We are an aviation company that acquires and leases commercial jet aircraft and other aviation
assets. Our aircraft are leased under long-term contracts to a diverse group of airlines throughout
the world. We leverage the worldwide platform of GECAS to service our portfolio of leases, allowing
our management to focus on executing our growth strategy. Our strategy is to grow our portfolio
through acquisitions of aircraft from third parties, such as airlines and financial investors.
The aircraft in our portfolio are modern, operationally efficient passenger and cargo jet aircraft
that have long expected remaining useful lives. As at December 31, 2008, the weighted average age
of our aircraft was 6.6 years, and the weighted average remaining lease term on our aircraft was
4.5 years. As at December 31, 2008, four of our aircraft were non-revenue generating and on the
ground. Our aircraft are subject to net operating leases under which the lessee is responsible for
most operational and insurance costs, and 45 of the 50 leases in our
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portfolio are subject to fixed rental rates. Others have floating rate rentals based on six-month
LIBOR. The terms of our leases provide us with a stable source of revenues and cash flows.
Our long-term agreements with GECAS enable our management team to focus primarily on pursuing
acquisitions of additional aircraft and other aviation assets. Pursuant to such arrangements, GECAS
provides us with most services related to leasing our fleet, including marketing aircraft for lease
and re-lease, collecting rents and other payments from the lessees of our aircraft, monitoring
maintenance, insurance and other obligations under our leases and enforcing rights against lessees.
We believe we can continue to capitalize on the overall size and growth of the global aircraft
market by acquiring and leasing additional aircraft. According to Airline Monitor, between 1998 and
2007, global passenger traffic, measured in revenue passenger miles, increased by 52%, or 4.9% per
year. According to data from Ascend, as of December 2008, the current world commercial jet fleet
consisted of more than 21,600 aircraft, and Boeing forecasts that the world fleet will reach 35,800
aircraft by 2027. Over the past 20 years, the worlds airlines have leased a growing share of their
aircraft instead of owning them outright, and, according to market data, the proportion of the
global fleet under operating lease has increased from 17% in 1990 to approximately 30% in recent
years and may reach 40% over the next ten years. We believe these industry trends provide a large
and growing available pool of aircraft and other aviation assets to acquire and lease in the
future.
GECAS, the commercial aircraft financing and leasing businesses of GE Capital, is a
leading global player in commercial aircraft leasing and financing, with over 1,800 owned and
managed aircraft, 28 offices, and over 270 customers in 78 countries. We believe GECAS broad
regional presence and industry expertise as the owner and servicer of one of the worlds largest
portfolios of commercial aircraft enhance our ability to manage our portfolio effectively, to
acquire and lease additional aircraft and to remarket our aircraft when leases expire.
Our Acquisition Strategy
We pursue acquisitions of additional aircraft and other aviation assets through our
relationships with aircraft operators, manufacturers, financial institutions, private investors and
third-party lessors and through our business opportunities agreement with GECAS. We may acquire
aircraft for lease directly from manufacturers, in the secondary market or pursuant to
sale-leaseback transactions with aircraft operators.
Our management has extensive experience in the aircraft leasing industry and maintains strong
relationships with a wide variety of market participants throughout the world. We seek to build a
diversified portfolio of aircraft that can be deployed worldwide across a large operator base. Each
potential acquisition will be evaluated to determine if it supports our primary objective of
growing our distributable cash flow while maintaining desired portfolio characteristics. We expect
that key considerations in our decision to purchase an aircraft will include its price, market
value, specification/configuration, condition and maintenance history, operating efficiency, lease
terms, financial condition and creditworthiness of the lessee, jurisdiction, industry trends, and
the potential for future redeployment and conversion into freighter configuration. We believe that
careful analysis of these factors will enable us to maintain a diversified portfolio that maximizes
our returns and minimizes our risk profile.
As part of our growth strategy, we have entered into a business opportunities agreement with
GECAS which we expect will lead to opportunities to purchase aircraft from third-party sources that
GECAS encounters in its global operations, as well as certain aircraft offered directly by GECAS.
For a description of this agreement, see Item 10.C. Additional InformationMaterial
ContractsBusiness Opportunities Agreement.
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Competition
The leasing and remarketing of commercial jet aircraft is highly competitive. As the exclusive
servicer of our aircraft, GECAS competes in leasing, re-leasing and selling our aircraft with other
aircraft leasing companies, including ILFC, AerCap, Aircastle, Aviation Capital Group, AWAS,
Babcock & Brown Aircraft Management, Babcock & Brown Air
Limited, BOC Aviation, Boeing Capital, CIT Aerospace,
Macquarie Aircraft Leasing and RBS Aviation Capital, among others. We also may
encounter competition from other entities that selectively compete with us, including:
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airlines; |
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aircraft manufacturers; |
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financial institutions (including those seeking to dispose of repossessed aircraft at
distressed prices); |
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aircraft brokers; |
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special purpose vehicles formed for the purpose of acquiring, leasing and selling aircraft;
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public and private partnerships, investors and funds, including private equity and hedge
funds. |
Competition for a leasing transaction is based principally upon lease rates, delivery dates,
lease terms, reputation, management expertise, aircraft condition, specifications and configuration
and the availability of the types of aircraft necessary to meet the needs of the customer. We
believe we compete favorably in leasing our aircraft due to the reputation and experience of our
management, our access to market opportunities through our servicing agreements with GECAS and our
ability to structure lease rates and other lease terms to respond to market dynamics and customer
needs. However, some of our competitors have significantly greater resources than we have. In
addition, some competing aircraft lessors have a lower overall cost of capital and may provide
financial services, maintenance services or other inducements to potential lessees that we cannot
provide. Given the financial condition of the airline industry, many airlines have reduced their
capacity by eliminating certain aircraft from their fleets. This has resulted in an increase in
available aircraft of these eliminated types, a decrease in rental rates for these aircraft and a
decrease in market values of these aircraft.
Competition in the purchase and sale of used aircraft is based principally on the availability
of used aircraft, price, the terms of the lease to which an aircraft is subject and the
creditworthiness of the lessee. When we decide to dispose of an aircraft, GECAS, as our servicer,
will arrange the disposition pursuant to the terms of the servicing agreement for that aircraft. In
doing so, GECAS will compete with the aircraft leasing companies listed above, as well as with the
other types of entities described above and other investors. GECAS is not required to assist us in
the purchase of used aircraft, and therefore, in addition to competing with the entities identified
above, we may compete with GECAS when seeking to acquire used aircraft.
Insurance
We require our lessees to carry those types of insurance which are customary in the air
transportation industry, including comprehensive liability insurance, aircraft all-risk hull
insurance and war-risk insurance covering risks such as hijacking, terrorism (but excluding cover
for weapons of mass destruction and nuclear events), confiscation, expropriation, seizure and
nationalization. In general, we are named as an additional insured on liability policies carried by
our lessees, and we usually are designated as a loss payee in the event of a total loss of the
aircraft. The servicer will obtain certificates of insurance from the lessees insurance brokers to
evidence the existence of such insurance. These certificates of insurance generally contain a
breach of warranty endorsement so that, subject to certain standard exceptions, our interests are
not prejudiced by any act or omission of the lessee. Coverage under liability policies generally is
not subject to deductibles except those as to baggage and cargo that are standard in the airline
industry, and coverage under all-risk aircraft hull insurance policies generally is subject to
agreed deductible levels in respect of partial damage to the aircraft. In addition, we maintain
contingent liability insurance and contingent hull insurance with respect to our aircraft, which is
intended to provide coverage in the event that the insurance
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maintained by any of our lessees should not be available for our benefit as required pursuant
to the terms of the contract.
Insurance premiums are generally paid by the lessee, with coverage acknowledged by the broker
or carrier. The certificates of insurance contain, among other provisions, a no co-insurance
clause and a provision prohibiting cancellation or material change without a reasonable period of
advance written notice to the insurance broker, who is obligated to give us prompt notice. War and
allied perils insurance policies customarily provide seven days advance written notice for
cancellation and may be subject to lesser notice under certain market conditions. Furthermore, the
insurance is primary and not contributory, and insurance carriers generally are required to waive
rights of subrogation against us.
The stipulated loss value schedule under aircraft hull insurance policies is on an agreed
value basis. In all cases, the sum of the stipulated loss value and our own additional coverage in
place is at least equal to the appraised value of the aircraft. In cases where the servicer
believes that the agreed value stated in the lease is not sufficient, the servicer will purchase
additional total loss only coverage for the deficiency. Aircraft hull policies contain standard
clauses covering aircraft engines. They also contain deductibles and in various cases and under
certain circumstances the lessee has the right to self-insure some or all of the risk (which has
the effect of significantly increasing the deductible amounts). The lessee is required to pay all
deductibles, and would be responsible for payment of amounts self-insured. Furthermore, the
aircraft hull policies contain war-risk endorsements and/or supplemental war-risk policies,
including, but not limited to, confiscation, seizure, hijacking and similar forms of retention or
terrorist acts (where available).
The comprehensive liability insurance listed on certificates of insurance include provisions
for bodily injury, property damage, passenger liability, cargo liability and such other provisions
reasonably necessary in commercial passenger and cargo airline operations. As a result of the
terrorist attacks on September 11, 2001, the insurance market unilaterally terminated war risk
liability coverage for a short period of time. When it became available again, the insurance market
imposed a sub limit on each operators policy for third-party war risk liability, which is
currently between $50 million and $150 million on the customary war-risk liability endorsement
available in the London market. U.S., Canadian and certain other non-European Community-based
airlines have government war-risk insurance programs available in which they currently participate.
Although we currently require each lessee to purchase third party war risk liability in amounts
greater than such sublimits, or obtain an indemnity from their government, the market or applicable
governments may discontinue to make such excess coverage available for premiums that are acceptable
to carriers. As a result, it is possible that we may be required to permit lessees to operate with
considerably less third-party war risk liability coverage than currently carried, which could have
a material adverse effect on the financial condition of our lessees and on us in the event of an
uncovered claim. In late 2005, the international aviation insurance market unilaterally introduced
exclusions for physical damage to aircraft hulls caused by dirty bombs, bio-hazardous materials,
electromagnetic pulsing and similar causes of loss. It is possible that exclusions for the same
types of perils may be introduced into liability policies in the future.
We cannot assure you that we have adequately insured against all risks, that lessees will at
all times comply with their obligations to maintain insurance, that any particular claim will be
paid, or that we will be able to procure adequate insurance coverage at commercially reasonable
rates in the future. Consistent with industry practice, our insurance policies are subject to
commercially reasonable deductibles or self-retention amounts.
Government Regulation
The air transportation industry is highly regulated. Because we do not operate aircraft, we
generally are not directly subject to most of these laws. However, our lessees are subject to
extensive regulation under the laws of the jurisdiction in which they are registered or under which
they operate. These laws govern, among other things, the registration, operation, maintenance and
condition of our aircraft.
Most of our aircraft are registered in the jurisdictions in which the lessees of our aircraft
are certified as air operators. As a result, our aircraft are subject to the airworthiness and
other standards imposed by these
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jurisdictions. Laws affecting the airworthiness of aircraft generally are designed to ensure
that all aircraft and related equipment are continuously maintained in proper condition to enable
safe operation of the aircraft. Aircraft manufacturers may also issue their own recommendations in
regards to reliability and product improvements.
Each lessee generally is responsible for complying with all applicable airworthiness
directives with respect to its aircraft and is required to maintain the aircrafts airworthiness.
Under certain leases, we have agreed to share with our lessees the cost of implementing certain
airworthiness directives (or similar requirements).In addition, if an aircraft is not subject to a
lease, we may be forced to bear (or, to induce a prospective lessee to take the aircraft on lease,
may have to agree to pay) the cost of compliance with airworthiness directives.
In addition to these direct cost expenditures, which may be substantial, significant new
requirements with respect to noise standards, emission standards and other aspects of our aircraft
or their operation could cause the value of our aircraft portfolio to decrease unless embodied.
Other regulations may be imposed, from time to time, not only by the jurisdictions in which the
aircraft are registered, possibly as part of the airworthiness requirements, but also in other
jurisdictions where the aircraft operate. In addition, aviation regulations require aircraft to be
maintained under an approved maintenance program having defined procedures and intervals for
inspection, maintenance and repair. To the extent that our aircraft are off lease or a lessee
defaults in effecting such compliance, we may be required to comply with such requirements at our
expense.
C. Organizational Structure
We own our aircraft through five subsidiaries: Genesis Funding, Genesis Acquisition, Genesis
Portfolio, Genesis Lease Atlantic Alpha and Westpark 1 Aircraft Leasing. A charitable trust holds
interests in Genesis Funding and Genesis Acquisition, with limited voting rights and less than
0.001% of the economic interest in these subsidiaries. Each of these subsidiaries is organized
under the laws of Bermuda and is tax resident in Ireland.
As at December 31, 2008, 41 of our aircraft were held in Genesis Funding, 11 in Genesis Portfolio, one in Genesis Lease Atlantic Alpha Limited and one in Westpark 1 Aircraft Leasing
Limited.
D. Property, Plants and Equipment
Our Aircraft Portfolio
Our
portfolio consists of 54 aircraft. As at December 31, 2008, 50
of those aircraft are in operation with 34 airlines located in 19 countries. The remaining four aircraft are
non-revenue-generating but are subject to contracted lease agreements
with two new customers for delivery in the
second quarter of 2009. However, one of the customers may not be in a
position to take delivery of two of these aircraft. Forty-five of the fifty leases in operation in our portfolio are subject to fixed rental
rates. The weighted average remaining lease term of our total portfolio of aircraft is 4.5 years.
Our portfolio includes 46 narrow-body aircraft (Boeing 737-400, 500, 700 and 800, Airbus A319-100
and A320-200), four cargo aircraft (Boeing 747-400SF and 767-200PC), two regional jets (ERJ170-100)
and two wide-body passenger aircraft (Airbus A330-200 and Boeing 767-300ER). These aircraft are
typically compliant with noise (Stage 3) and other environmental standards, relatively fuel
efficient and technologically advanced.
In this annual report, all percentages and weighted averages of the aircraft in our portfolio have
been calculated using the average of half life appraised values as at December 31, 2008. The
average value of those appraised base values of the aircraft in our portfolio (assuming that each
aircraft is in half-life condition) is $1.62 billion. The following table presents the aircraft in
our portfolio:
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Our Portfolio
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Equipment |
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Airframe |
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Lessee |
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Type |
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Type |
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Engine Type(1) |
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Build Date |
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Percent |
ABX Air
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767-200PC
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Cargo(2)
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CF6-80A
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November 1984
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0.20 |
% |
ABX Air
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767-200PC
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Cargo(3)
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CF6-80A
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February 1985
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0.20 |
% |
Air Baltic
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737-500
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Narrow-body
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CFM56-3C1
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October 1991
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0.50 |
% |
Air Berlin
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737-700
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Narrow-body
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CFM56-7B26
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November 2001
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1.70 |
% |
Air Berlin
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737-700
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Narrow-body
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CFM56-7B26
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October 2001
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|
1.70 |
% |
Air Canada
|
|
A319-100
|
|
Narrow-body
|
|
CFM56-5B6/P
|
|
March 2003
|
|
|
1.60 |
% |
Air China Cargo
|
|
747-400SF
|
|
Cargo(4)
|
|
PW 4056-3
|
|
January 1991
|
|
|
3.50 |
% |
Air China Cargo
|
|
747-400SF
|
|
Cargo(5)
|
|
PW 4056-3
|
|
August 1991
|
|
|
3.50 |
% |
Air Europa
|
|
737-800
|
|
Narrow-body
|
|
CFM56 7B26
|
|
November 2005
|
|
|
2.30 |
% |
American
|
|
737-800
|
|
Narrow-body
|
|
CFM56-7B27
|
|
September 2001
|
|
|
1.90 |
% |
American
|
|
737-800
|
|
Narrow-body
|
|
CFM56-7B27
|
|
September 2001
|
|
|
1.90 |
% |
China Southern
|
|
737-800
|
|
Narrow-body
|
|
CFM56-7B26
|
|
November 2005
|
|
|
2.30 |
% |
China Southern
|
|
737-800
|
|
Narrow-body
|
|
CFM56-7B26
|
|
September 2005
|
|
|
2.30 |
% |
El Al
|
|
737-800
|
|
Narrow-body
|
|
CFM56-7B26
|
|
February 1999
|
|
|
1.60 |
% |
EVA Airways
|
|
A330-200
|
|
Wide-body
|
|
CF6-80E1A3
|
|
February 2005
|
|
|
4.50 |
% |
Garuda
|
|
737-400
|
|
Narrow-body
|
|
CFM56-3C1
|
|
July 1998
|
|
|
0.90 |
% |
Germanwings
|
|
A319-100
|
|
Narrow-body
|
|
CFM56-5B6/P
|
|
November 1999
|
|
|
1.30 |
% |
Germanwings
|
|
A319-100
|
|
Narrow-body
|
|
CFM56-5B6/P
|
|
December 1999
|
|
|
1.30 |
% |
GOL
|
|
737-800
|
|
Narrow-body
|
|
CFM56-7B27
|
|
August 2006
|
|
|
2.40 |
% |
GOL
|
|
737-800
|
|
Narrow-body
|
|
CFM56-7B27
|
|
August 2006
|
|
|
2.50 |
% |
Iberworld
|
|
A320-200
|
|
Narrow-body
|
|
CFM56-5B4/P
|
|
March 2002
|
|
|
1.70 |
% |
IndiGo
|
|
A320-200
|
|
Narrow-body
|
|
V2527-A5
|
|
July 2007
|
|
|
2.50 |
% |
IndiGo
|
|
A320-200
|
|
Narrow-body
|
|
V2527-A5
|
|
September 2007
|
|
|
2.50 |
% |
JAL
|
|
B767-300ER
|
|
Widebody
|
|
CF6-80C2B7F
|
|
January 2008
|
|
|
4.70 |
% |
KTHY
|
|
737-800
|
|
Narrow-body
|
|
CFM56-7B26
|
|
May 2001
|
|
|
1.70 |
% |
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment |
|
Airframe |
|
|
|
|
|
|
Lessee |
|
Type |
|
Type |
|
Engine Type(1) |
|
Build Date |
|
Percent |
Lion Air
|
|
737-400
|
|
Narrow-body
|
|
CFM56-3C1
|
|
January 1991
|
|
|
0.60 |
% |
LOT
|
|
ERJ170-100
|
|
Regional Jet
|
|
CF34-8E5
|
|
April 2004
|
|
|
1.10 |
% |
LOT
|
|
ERJ170-100
|
|
Regional Jet
|
|
CF34-8E5
|
|
February 2004
|
|
|
1.10 |
% |
LTU
|
|
A320-200
|
|
Narrow-body
|
|
CFM56-5B4/P
|
|
February 2001
|
|
|
1.60 |
% |
LTU
|
|
A320-200
|
|
Narrow-body
|
|
CFM56-5B4/P
|
|
May 2001
|
|
|
1.60 |
% |
MyTravel
|
|
A320-200
|
|
Narrow-body
|
|
CFM56-5B4/P
|
|
January 2003
|
|
|
1.90 |
% |
MyTravel
|
|
A320-200
|
|
Narrow-body
|
|
CFM56-5B4/P
|
|
February 2003
|
|
|
1.90 |
% |
MyTravel
|
|
A320-200
|
|
Narrow-body
|
|
CFM56-5B4/P
|
|
February 2003
|
|
|
1.90 |
% |
Norwegian Air
|
|
737-800
|
|
Narrow-body
|
|
CFM56-7B26
|
|
April 2001
|
|
|
1.80 |
% |
PAL
|
|
A320-200
|
|
Narrow-body
|
|
CFM56-5B4/P
|
|
December 1998
|
|
|
1.40 |
% |
Sichuan Airlines
|
|
A320-200
|
|
Narrow-body
|
|
V2527E-A5
|
|
May 2001
|
|
|
1.70 |
% |
Skymark
|
|
737-800
|
|
Narrow-body
|
|
CFM56-7B26
|
|
December 2005
|
|
|
2.30 |
% |
Sun Express
|
|
737-800
|
|
Narrow-body
|
|
CFM56-7B26
|
|
March 2001
|
|
|
1.80 |
% |
TAM
|
|
A320-200
|
|
Narrow-body
|
|
V2527-A5
|
|
September 2001
|
|
|
1.70 |
% |
Travel Service
|
|
737-800
|
|
Narrow-body
|
|
CFM56-7B26
|
|
April 2000
|
|
|
1.80 |
% |
Travel Service
|
|
737-800
|
|
Narrow-body
|
|
CFM56-7B26
|
|
June 2001
|
|
|
1.80 |
% |
Unidentified(6)
|
|
A320-200
|
|
Narrow-body
|
|
V2527-A5
|
|
July 2007
|
|
|
2.50 |
% |
Unidentified(6)
|
|
A320-200
|
|
Narrow-body
|
|
V2527-A5
|
|
September 2007
|
|
|
2.50 |
% |
Unidentified(6)
|
|
737-800
|
|
Narrow-body
|
|
CFM56-7B26
|
|
May 2000
|
|
|
1.70 |
% |
Unidentified(6)
|
|
737-800
|
|
Narrow-body
|
|
CFM56-7B27
|
|
June 2000
|
|
|
1.70 |
% |
United
|
|
A320-200
|
|
Narrow-body
|
|
V2527-A5
|
|
October 2001
|
|
|
1.70 |
% |
United
|
|
A320-200
|
|
Narrow-body
|
|
V2527-A5
|
|
September 2001
|
|
|
1.70 |
% |
United
|
|
A320-200
|
|
Narrow-body
|
|
V2527-A5
|
|
September 2001
|
|
|
1.70 |
% |
USA 3000
|
|
A320-200
|
|
Narrow-body
|
|
CFM56-5B4/P
|
|
August 2002
|
|
|
1.80 |
% |
UEAir
|
|
A319-100
|
|
Narrow-body
|
|
CFM56-5B6/P
|
|
January 1999
|
|
|
1.30 |
% |
UEAir
|
|
A319-100
|
|
Narrow-body
|
|
CFM56-5B6/P
|
|
January 1999
|
|
|
1.30 |
% |
VRG
|
|
737-700
|
|
Narrow-body
|
|
CFM56-7B26
|
|
November 1999
|
|
|
1.40 |
% |
VRG
|
|
737-700
|
|
Narrow-body
|
|
CFM56-7B26
|
|
September 1999
|
|
|
1.40 |
% |
Vueling
|
|
A320-200
|
|
Narrow-body
|
|
CFM56-5B4/P
|
|
February 2005
|
|
|
2.10 |
% |
|
|
|
(1) |
|
Engine manufacturer key: |
38
|
|
|
CF34/CF6
|
|
General Electric |
|
V
|
|
International Aero Engines |
|
PW
|
|
Pratt & Whitney |
|
|
|
(2) |
|
Converted to cargo in December 2000. However, the aircraft does not have a main deck cargo
door installed as the current lessees operations as a package carrier do not require such
door. |
|
(3) |
|
Converted to cargo in March 2001. However, the aircraft does not have a main deck cargo door
installed as the current lessees operations as a package carrier do not require such door. |
|
(4) |
|
Converted to cargo in June 2006. |
|
(5) |
|
Converted to cargo in September 2006. |
|
|
(6) |
|
These aircraft are subject to contracted
lease agreements with two new customers for delivery in the second quarter
of 2009. However, one of the customers may not be in a position to
take delivery of two of these aircraft. |
|
Our portfolio consists of fuel efficient commercial jet aircraft that were manufactured between
1984 and 2008. As at December 31, 2008, the weighted average age of these aircraft was 6.6 years
(5.7 years excluding cargo aircraft). The following table presents the composition of our portfolio
based on age, as at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Appraised |
Aircraft Age |
|
Number |
|
Value |
Passenger |
|
|
|
|
|
|
|
|
0 to 5 years |
|
|
15 |
|
|
|
37.7 |
% |
5 to 10 years |
|
|
31 |
|
|
|
51.5 |
% |
10 to 15 years |
|
|
2 |
|
|
|
2.3 |
% |
15+ years |
|
|
2 |
|
|
|
1.0 |
% |
Cargo(1) |
|
|
4 |
|
|
|
7.5 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
54 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The cargo aircraft were converted from passenger configuration in December 2000, March 2001,
June 2006 and September 2006. |
The following table presents the years in which the aircraft in our portfolio were manufactured:
|
|
|
(1) |
|
The four cargo aircraft in our portfolio were manufactured in 1984, 1985 and 1991 (two
aircraft). |
39
Our portfolio contains eleven different types of airframes, including a variety of narrow-body,
wide-body, and cargo airframe configurations. Boeing aircraft account for 52.3% of the portfolio,
Airbus aircraft account for 45.5% of the portfolio and Embraer regional jets account for the
remaining 2.2% of the portfolio.
Of the eleven different aircraft types contained in our portfolio, six are passenger narrow-body,
two are passenger wide-body, one is regional passenger jet, and two are cargo wide-body. Although
the Boeing 767-200PC is classified as a cargo wide-body frame, aircraft of this type do not have
main deck cargo doors installed because they were converted for use by the current lessee as
package carriers. The initial leases of these aircraft provide that if the lessee installs main
deck cargo doors on these aircraft, the lessor will contribute an amount equivalent to $1.8 million
(as at December 31, 2008) per aircraft, which reflects a portion of the rent designated and
deferred for this purpose. Although the lessee may not install such doors, GE has transferred to us
the amounts of rent so designated as at the closing of our IPO, and we are obligated to make the
applicable required payments to the lessee if it installs such a cargo door on either of these
aircraft. Approximately 81.1% of the aircraft in our portfolio are members of the narrow-body
Airbus A319, Airbus A320 and Boeing 737 families, all of which enjoy high worldwide demand due to
their fuel-efficient design, relatively low maintenance costs, and an increase in customer demand
for point-to-point destination service. These aircraft are used on more routes around the world
than any other airframe and thus have the largest installed base. As a result, we believe they are
easier to lease and market than wide-body jets or other specialized types of aircraft. The table
below presents the composition of our portfolio based on airframe type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Appraised |
Airframe Type |
|
Number |
|
Value |
Passenger narrow-body |
|
|
|
|
|
|
|
|
A320-200 |
|
|
18 |
|
|
|
34.2 |
% |
737-800 |
|
|
16 |
|
|
|
31.9 |
% |
A319-100 |
|
|
5 |
|
|
|
6.8 |
% |
737-700 |
|
|
4 |
|
|
|
6.3 |
% |
737-400 |
|
|
2 |
|
|
|
1.4 |
% |
737-500 |
|
|
1 |
|
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
Total narrow-body |
|
|
46 |
|
|
|
81.1 |
% |
Passenger wide-body |
|
|
|
|
|
|
|
|
767-300ER |
|
|
1 |
|
|
|
4.7 |
% |
A330-200 |
|
|
1 |
|
|
|
4.5 |
% |
|
|
|
|
|
|
|
|
|
Total wide-body |
|
|
2 |
|
|
|
9.2 |
% |
Regional passenger |
|
|
|
|
|
|
|
|
ERJ-170-100 |
|
|
2 |
|
|
|
2.2 |
% |
|
|
|
|
|
|
|
|
|
Total regional jet |
|
|
2 |
|
|
|
2.2 |
% |
Cargo wide-body |
|
|
|
|
|
|
|
|
747-400SF |
|
|
2 |
|
|
|
7.0 |
% |
767-200PC(1) |
|
|
2 |
|
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
Total cargo |
|
|
4 |
|
|
|
7.5 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
54 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These aircraft do not have main deck cargo doors installed as the current lessees operations
as a package carrier do not require such doors. |
40
The lessees of the aircraft in our portfolio are dispersed across 19 countries. Approximately 32.7%
of our portfolio is leased to European carriers, 35.1% to Asian carriers, and 12.7% to North
American carriers. Aircraft based in China and the United States comprise 15.8% and 11.0% of our
portfolio, respectively. The table below presents the composition of our portfolio based on the
geographic location of our lessees:
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Appraised |
Geographic Profile |
|
Number |
|
Value |
Europe |
|
|
20 |
|
|
|
32.7 |
% |
Asia/Pacific |
|
|
15 |
|
|
|
35.1 |
% |
United States and Canada |
|
|
9 |
|
|
|
12.7 |
% |
Central and South America and Mexico |
|
|
5 |
|
|
|
9.6 |
% |
Africa/Middle East |
|
|
1 |
|
|
|
1.6 |
% |
Undesignated (1) |
|
|
4 |
|
|
|
8.3 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
54 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As at December 31, 2008, four aircraft were non revenue earning and on the ground. |
Our Leases
Lease Terms
As at December 31, 2008, the weighted average remaining lease term of our portfolio was 4.5 years.
Our lease maturities range from 2009 to 2020. The following table presents the scheduled lease
maturities of the aircraft in our portfolio:
|
|
|
(1) |
|
The maturity schedule assumes that neither the lessee nor lessor exercise any extension or
early terminations options. |
|
(2) |
|
New long-term lease agreements are in place with new customers for the two leases expiring in
2009. |
|
|
(3) |
|
As at December 31, 2008, four aircraft were non-revenue
generating but subject to contracted lease agreements with two new
customers for delivery in the second quarter of 2009. Two of these
leases will expire in 2014 and two in 2017. However, one of the
customers may not be in a position to take delivery of two of these
aircraft. |
|
Under our leases, the lessees agree to lease the aircraft for a fixed term, although in some
cases the lessees have purchase options, termination rights or extension rights. Most lease rentals
are payable monthly in advance, but some lease rentals are payable quarterly, in arrears or on an
individually negotiated schedule. Of our leases, forty-five have fixed rental rates and
42
five have floating rental rates based on six-month LIBOR. Twenty-nine of our leases also currently require
the lessees to pay additional rent amounts, monthly or annually in arrears, based on usage. All
leases are on a net basis with the lessee generally responsible for all operating expenses, which
customarily include maintenance, fuel, crews, airport and navigation charges, taxes, licenses,
aircraft registration and insurance premiums.
Most of our leases generally provide that the lessees payment obligations are absolute and
unconditional under any and all circumstances. Lessees are generally required to make payment
without deduction on account of any amounts that we may owe the lessee or any claims that the
lessee may have against us. Most of our leases also require lessees to gross up lease payments
where they are subject to withholdings and other taxes, including withholdings that arise out of
transfers of the aircraft to or by us or due to our corporate structure. In addition, changes in
law may result in the imposition of withholding and other taxes and charges that are not
reimbursable by the lessee under the lease or that cannot be reimbursed under applicable law.
Furthermore, lessees may fail to reimburse us even when obligated under the lease to do so. Our
leases generally require lessees to indemnify us for certain other tax liabilities relating to the
leases and the aircraft, including, in most cases, value added tax and stamp duties.
The cost of an aircraft typically is not fully recovered over the term of the initial lease. We
therefore retain the benefit and assume the risk of the rent at which we can re-lease the aircraft
upon expiration or early termination of the lease and of the ultimate residual value. Operating
leases allow airlines greater fleet and financial flexibility than outright ownership because of
the relatively shorter-term nature of operating leases, the relatively small initial capital outlay
necessary to obtain use of the aircraft and the significant reduction in aircraft residual value
risk.
Purchase Options. Six of the leases in our portfolio provide the lessee with an option to purchase
the aircraft during or at the end of the lease term. Purchase options vary with the individual
leases and include fixed price options to purchase the aircraft at a set period prior to the
expiration of the lease and/or a continuous option to purchase the aircraft upon the occurrence of
certain tax indemnity events.
Extension Options. Eleven of our leases give the lessee an option to extend the term of the
lease. In addition, one of the leases provides us with an extension option, but the lessee is
entitled to buy out our extension option.
Early Termination Rights. Ten of our leases provide the lessees with early termination rights.
Early termination rights generally require the lessee to provide sufficient notice of termination
to enable us to remarket or otherwise dispose of the aircraft before lease expiration. Early
termination may trigger substantial financial penalties payable by the lessee which we believe will
reduce the potential that the lessees will terminate early.
Certain leases with shorter notice periods permit early termination for obsolescence on 90 days
notice, but unless we elect otherwise, the affected aircraft will be sold and the lessee is
obligated to pay an amount by which the net sales proceeds are less than the then-applicable agreed
value.
Certain leases do not have a specified notice period but can be terminated early only upon the
lessees inability to obtain and maintain necessary governmental approvals and only upon payment of
termination compensation equal to the lesser of two years rent or the rent remaining payable under
the lease.
43
Operating Costs and Expenses. The lessee is liable through various operational indemnities for
operating costs and expenses accrued or payable during the term of the relevant lease, which would
normally include costs and expenses associated with the maintenance and operation of the aircraft,
airport and navigation charges, certain taxes, licenses, consents and approvals, aircraft
registration and hull all risk and public liability insurance programs.
Security Deposits and Letters of Credit. Forty five of our leases provide for cash security
deposits and/or letters of credit which may be drawn down in the event that a lessee defaults under
any of these leases. These security deposits and/or letters of credit may mitigate losses we may
incur while attempting to re-lease the aircraft. Under certain circumstances, the lessee may be
required to obtain guarantees or other financial support from an acceptable financial institution
or other third parties.
Maintenance Obligations. Under our leases, the lessee is generally responsible for normal
maintenance and repairs, airframe and engine overhauls, obtaining consents and approvals and
compliance with return conditions of aircraft on lease. In connection with the lease of a used
aircraft we sometimes agree to contribute specific additional amounts to the cost of certain major
overhauls or modifications, which usually reflect the usage of the aircraft prior to the
commencement of the lease. In many cases, we also agree to share with our lessees the cost of
compliance with airworthiness directives.
Our portfolio includes twenty-nine leases pursuant to which we collect additional rent that is
determined based on usage of the aircraft measured by hours flown or cycles operated and we are
obligated to make contributions to the lessee for expenses incurred for certain planned major
maintenance, up to a maximum amount that is typically determined based on additional rent paid by
the lessee. Such major planned maintenance includes heavy airframe, off-wing engine, landing gear
and auxiliary power unit overhauls. We are not obligated to make maintenance contributions under
such leases at any time that a lessee default is continuing.
We are not obligated to make any maintenance contributions under the remaining twenty-one leases in
our portfolio. However, most of these twenty-one leases provide for a lease-end adjustment payment
by the lessee or us at the end of the lease based on the usage of the aircraft during the lease and
its condition upon return.
Compliance with Laws. The lessee is responsible for compliance with all applicable laws and
regulations with respect to the aircraft. We generally require our lessees to comply with the
standards of either the U.S. Federal Aviation Administration or its non-U.S. equivalent. We often
require a deposit as security for the lessees performance of obligations under the lease and the
condition of the aircraft upon return. In addition, the leases contain extensive provisions
regarding our remedies and rights in the event of a default by the lessee and specific provisions
regarding the return condition of the aircraft. Except at the commencement of the term of a lease
of a used aircraft, the lessee generally is required to continue to make lease payments during any
period in which the aircraft is not in operation due to maintenance or grounding.
General. Each aircraft generally must remain in the possession of the applicable lessee and any
sublessees of the aircraft generally must be approved by the lessor unless, in some leases, certain
conditions are met. Under most of our leases, the lessees may enter into charter or wet lease
arrangements in respect of the aircraft (i.e., a lease with crew and services provided by the
lessor under the lease), provided the lessee does not part with operational control of the
aircraft. One of the aircraft is currently subject to a wet lease. Under some of our leases, the
lessee is permitted to enter into subleases with specified operators or types of operators
44
without the lessors consent, provided certain conditions are met. We are aware that seven of the aircraft
are currently subject to subleases. Our leases also generally permit the lessees to subject the
equipment or components to removal or replacement and, in certain cases, to pooling arrangements
(temporary borrowing of equipment), without the lessors consent but subject to conditions and
criteria set forth in the applicable lease. Under our leases, the lessee may deliver possession of
the aircraft, engines and other equipment or components to the relevant manufacturer for testing or
similar purposes, or to a third party for service, maintenance, repair or other work required or
permitted under the lease.
Some foreign countries have currency and exchange laws regulating the international transfer of
currencies. When necessary, we will require as a condition to any foreign transaction, that the
lessee or purchaser in a foreign country obtain the necessary approvals of the appropriate
government agency, finance ministry or central bank for the remittance of all funds contractually
owed in U.S. dollars. We attempt to minimize our currency and exchange risks by negotiating most of
our aircraft leases in U.S. dollars. The terms of the securitization permit Genesis Funding to have
up to 5% of its leases denominated in Euros. All of our leases are currently payable in U.S.
dollars.
Lease Restructurings. During the term of a lease, a lessees business circumstances may change to
the point where it is economically sensible for us to consider restructuring the terms of the
lease. Restructurings may involve the voluntary termination of leases prior to contracted lease
expiration, the arrangement of subleases from the primary lessee to another airline, the rescheduling of lease
payments, the forgiveness and/or reduction of lease obligations and the extension of the lease
terms.
Aircraft Repossessions. If a restructuring is not possible, we may seek to terminate the lease
and gain possession of the aircraft for remarketing. Although the majority of repossessions are
accomplished through negotiation, if we cannot obtain the lessees cooperation we would have to
take legal action in the appropriate jurisdiction. This legal process could delay the ultimate
return of the aircraft. In addition, in connection with the repossession of an aircraft, we may be
required to pay outstanding mechanics, airport, navigation and other liens on the repossessed
aircraft. These charges could relate to other aircraft that we do not own but were operated by the
lessee. In contested repossessions, we likely would incur substantial additional costs for
maintenance, refurbishment and remarketing of the aircraft. We repossessed six aircraft in 2008. Of
those aircraft, two were B737-700 aircraft which were redeployed during the year with a new
customer. The remaining four aircraft (two A320-200 and two B737-800 aircraft) are subject to
contracted lease agreements with two new customers for delivery in
the second quarter of 2009. However, one of the customers may not be
in a position to take delivery of two of these aircraft.
Lease Management and Remarketing
We outsource our lease management and aircraft remarketing activities to GE Commercial Aviation
Services (GECAS), enabling our senior management to focus primarily on sourcing and executing
aircraft acquisitions. Pursuant to our servicing agreements with GECAS, GECAS provides us with most
services related to leasing our fleet, including marketing aircraft for lease and re-lease or sale,
collecting rents and other payments from the lessees of our aircraft, monitoring maintenance,
insurance and other obligations under our leases and
45
enforcing our rights against lessees. See Item
10.C. Additional Information Material Contracts Servicing Agreements.
GECAS, the U.S. and Irish commercial aircraft financing and leasing businesses of GE Capital, is a
leading global player in commercial aircraft leasing and financing, with over 1,800 owned and
managed aircraft, 28 offices, and over 270 customers in 78 countries. GECAS long-term commitment
to the aviation industry extends to the development of necessary infrastructure to foster and
ensure continued growth and extends further to jet engine financing and aircraft parts solutions
We believe GECAS broad regional presence and industry expertise as the owner and servicer of one
of the worlds largest portfolios of commercial aircraft enhance our ability to manage our
portfolio effectively, to acquire and lease additional aircraft and to remarket our aircraft when
leases expire.
From time to time, we may decide to dispose of our leased aircraft at or before the expiration of
their leases. As with acquisitions, our primary objective of growing our distributable cash flow
while maintaining desired portfolio characteristics will guide our analysis of aircraft disposition
opportunities. Although our management will decide whether or not to make any such dispositions,
dispositions will be executed on our behalf by GECAS pursuant to our servicing agreements.
Properties
We lease office space in Shannon, Co. Clare, Ireland. We do not, and do not expect to, incur
significant lease expense.
Item 4A. Unresolved Staff Comments
Not applicable.
Item 5. Operating and Financial Review and Prospects
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with our combined and consolidated financial statements and related notes
included elsewhere in this Annual Report. The combined and consolidated financial statements for
each of the three years ended December 31, 2008 have been prepared in accordance with U.S. GAAP,
and are presented in U.S. dollars. The discussion below contains forward-looking statements that
are based upon our current expectations and are subject to uncertainty and changes in
circumstances. Actual results may differ materially from these expectations due to changes in
global, regional or local political, economic, business, competitive, market, regulatory and other
factors, many of which are beyond our control. See Preliminary Note and Item 3.D.Risk Factors.
A. Results of Operations
History
We are Genesis Lease Limited, a Bermuda exempted company incorporated on July 17, 2006 under
the provisions of Section 14 of the Companies Act 1981 of Bermuda. Our registered office is located
at
46
Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda. Although we are organized under the laws
of Bermuda, we are resident in Ireland for Irish tax purposes and thus are subject to Irish
corporation tax on our income in the same way, and to the same extent, as if we were organized
under the laws of Ireland. Our principal executive offices are located at 4450 Atlantic Avenue,
Westpark, Shannon, Co Clare, Ireland. Our telephone number at that address is +353 61 233 300.
Our aircraft are leased under long-term contracts to a diverse group of airlines throughout the
world. We leverage the worldwide platform of GECAS to service our portfolio of leases, allowing our
management to focus on executing our growth strategy. Our strategy is to grow our portfolio through
acquisitions of aircraft from third parties, such as airlines and financial investors.
We acquired our Initial Portfolio of 41 aircraft pursuant to the asset purchase agreement, dated as
of December 19, 2006 (the Closing Date), between Genesis Funding, GE Capital and certain
affiliates of GE that owned the aircraft (or the equity interests therein) on the Closing Date. We
paid $1,459.4 million as consideration for the 41 aircraft on the Closing Date.
Since our IPO, we have increased our portfolio by 13 aircraft from 41 to 54 aircraft. Twelve
aircraft were purchased during the year ended December 31, 2007, eight from GECAS affiliates and
four from two airlines on a sale and leaseback basis. One further aircraft was purchased from a GE
affiliate during the year ended December 31, 2008.
As at December 31, 2008, the weighted average age of the aircraft in our portfolio was 6.6 years,
and the weighted average remaining lease term of our portfolio was 4.5 years. Fifty of the fifty
four aircraft are subject to net operating leases under which the lessee is responsible for most
operational, maintenance and insurance costs. The terms of our leases provide us with a stable
source of revenues and cash flows.
The table below presents the number of aircraft included in Genesiss financial statements as at
December 31, 2006, 2007 and 2008 and the number of aircraft included in the Predecessors financial
statements as at December 31, 2004 and 2005.
|
|
|
|
|
December 31, |
|
Number of Aircraft |
2004 |
|
|
31 |
|
2005 |
|
|
37 |
|
2006 |
|
|
41 |
|
2007 |
|
|
53 |
|
2008 |
|
|
54 |
|
The combined and consolidated financial statements have been prepared to reflect the combination of
the aircraft and their financial position, results of operations and cash flows pursuant to the
terms of the asset purchase agreement, entered into between Genesis Funding, GE Capital and certain
affiliates of GE that owned the aircraft (or the equity interests therein) at the Closing Date.
The acquisition of our Initial Portfolio was accounted for as a transaction between entities under
common control. The transfer of the aircraft from affiliates of GE to us in substance constituted
an issuance of subsidiary stock, and as such, the transfer was accounted for at historical cost
similar to a transaction between entities under common control. Results for each aircraft in the
Initial Portfolio have been included in the combined and consolidated financial statements from the
dates that such aircraft came under GEs ownership and control. Push down accounting was not
required because no single investor or collaborative group of investors held more than 95% of our
outstanding shares upon completion of our IPO. The
47
excess of the amount paid to GE to transfer the
Initial Portfolio of 41 aircraft over the net book value has been treated as a reduction in equity
(i.e. a special distribution).
Our historical combined financial statements for periods prior to the completion of our IPO on
December 19, 2006, reflect the combination of the aircraft included in our Initial Portfolio and
the related leases as owned and operated by affiliates of GE until December 18, 2006. The
historical combined financial statements have been prepared on a carve out basis derived from
GEs consolidated financial statements. All intercompany transactions have been eliminated in the
combined financial statements included herein. Because a direct ownership relationship did not
exist among the various GE aircraft-owning entities prior to our IPO, GEs interest in the
predecessor, including intercompany debt, was shown in the combined balance sheet and the statement
of shareholders equity in the combined financial statements. The historical combined financial
statements do not reflect the financial condition, results of operations or cash flows that we
would have achieved during the periods presented. GE has not indemnified us for any material
misstatements or omissions in the combined financial statements included within this Annual Report.
Prior to our IPO, certain services had been provided or procured by GE with respect to the aircraft
in the Initial Portfolio. These services include the following:
|
|
|
marketing, technical and operating management services relating to the aircraft; |
|
|
|
|
risk management approvals and services relating to the aircraft; |
|
|
|
|
insurance for general corporate, property, casualty and hull coverage; |
|
|
|
|
information technology services; |
|
|
|
|
human resources, including employee benefit processing and payroll administration; |
|
|
|
|
financial advisory services such as tax consulting, capital markets services and
financial and accounting support services; |
|
|
|
|
legal services; |
|
|
|
|
occupancy costs such as rent and utilities; and |
|
|
|
|
other corporate services. |
The combined financial statements for all periods prior to the completion of our IPO include
allocations of costs for these services based on the cost to GE of providing or procuring such
services. The method used to allocate these costs to our aircraft was a multi-step process, whereby
the costs were first allocated to GECAS as one of GEs divisions based on the relative book values
of net assets, and then further allocated to our predecessor based on the total number of aircraft
owned by our predecessor at a particular time. Costs included in the financial statements for such
services provided to our predecessor are included in Selling, general and administrative
expenses.
In addition, although GE did not allocate any indebtedness to the predecessors aircraft or to the
predecessor, GE did allocate interest cost to each of its divisions, including GECAS. GE made the
interest allocations based upon its net investment in a particular business, the debt-to-equity
ratio for that business and the businesss borrowing costs. The combined financial statements
include an allocation of interest expense using the same methodology as described above. Costs
included in the financial statements for such interest charges are included in interest expense.
48
Our consolidated financial statements for periods since the completion of our IPO on December
19, 2006 include all of our majority-owned subsidiaries, assets and liabilities.
Critical Accounting Policies and Estimates
Our consolidated and combined financial statements have been prepared in accordance with U.S. GAAP,
which requires the application of accounting policies based on assumptions, estimates, judgments
and opinions. Our predecessor applied, and we have applied and will continue to apply, these
policies based on the best information available at the time and on assumptions believed to be
reasonable under the circumstances.
The following is a discussion of the critical accounting policies and the methods of their
application. For a further description of our significant accounting policies, please read note 3
to our combined and consolidated financial statements included at Item 18 of this Annual Report.
Revenue Rental of Flight Equipment
Genesis leases flight equipment (also referred to as aircraft) under operating leases and
records rental income on a straight-line basis over the term of the lease. Rentals received but
unearned under the lease agreements are recorded in Rentals received in advance on the Balance
Sheet and included in other liabilities until earned. In certain cases, leases provide for
additional rentals based on usage, which is recorded as revenue as it is earned under the terms of
the lease. The usage is calculated based on hourly usage or cycles operated, depending on the lease
agreement. Usage is typically reported monthly by the lessee and is non-refundable. Other leases
provide for a lease-end adjustment payment by Genesis or the lessee at the end of the lease based
on usage of the aircraft and its condition upon return. Lease-end adjustment payments received are
included in rental of flight equipment. Lease-end adjustment payments made are capitalized in
Flight equipment under operating leases, net when they relate to planned major maintenance
activities or expensed when they relate to light maintenance activities.
Past-due rentals are recognized on the basis of managements assessment of collectibility. No
revenues are recognized, and no receivable is recorded, from a lessee when collectibility is not
reasonably assured. Estimating whether collectibility is reasonably assured requires some level of
subjectivity and judgment. When collectibility of rental payments is not certain, revenue is
recognized when cash payments are received. Collectibility is evaluated based on factors such as
the lessees credit rating, payment performance, financial condition and requests for modifications
of lease terms and conditions as well as security received from the lessee in the form of
guarantees and/or letters of credit.
Flight Equipment under Operating Leases
Flight equipment under operating leases is recorded at cost less accumulated depreciation and
amortization. Costs related to lessee specific modifications are capitalized as part of Flight
equipment under operating leases, net and amortized over either the term of the lease or the
depreciable life of the aircraft depending upon the nature of the improvement. Pre-delivery
payments made in advance of purchase of flight equipment are included in Other assets and are
reclassified to Flight equipment under operating leases, net when the asset is delivered.
Interest related to pre-delivery deposits on aircraft purchase contracts is capitalized as part of
the aircraft cost.
For planned major maintenance activities, Genesis capitalizes the actual maintenance costs by
applying the deferral method in accordance with the Financial Accounting Standards Board (FASB)
Staff Position (FSP) No. AUG AIR-1, Accounting for Planned Major Maintenance Activities. Genesis
capitalizes the actual cost of major overhauls, which are depreciated on a straight-line basis over
the period until the next overhaul is required.
Depreciation is computed on a straight-line basis to the aircrafts estimated residual value
over a period of up to 20 years from the date of acquisition of the aircraft. Residual values are
determined based on estimated market values at the end of the depreciation period received from
independent appraisers.
49
In accounting for flight equipment under operating lease, management makes estimates on the
estimated residual values. Estimated residual values are determined based on independent appraisals
of the aircrafts estimated market value at the end of the depreciation period. Exceptions may be
made to this policy on a case-by-case basis when, in managements judgment, based on various
factors, the residual value calculated pursuant to this policy does not appear to reflect current
expectations of the residual value of a particular aircraft. Such factors include, but are not
limited to, the extent of cash flows generated from future lease arrangements as a result of
changes in global and regional economic and political conditions resulting in lower demand for our
aircraft, the effect of government regulations including noise or emission standards, which may
make certain aircraft less desirable in the marketplace, incidents of lease restructuring, which
result in lower lease rates for troubled lessees, and other factors, many of which are outside of
managements control.
Flight equipment under operating leases is tested for recoverability whenever events or
changes in circumstances indicate that the related carrying amount may not be recoverable in
accordance with Statement of Financial Accounting Standards (SFAS) 144, Accounting for the
Impairment or Disposal of Long-lived Assets. An impairment loss is recognized when the carrying
amount of the long-lived asset is not recoverable and exceeds its fair value. The carrying amount
of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset. Any required impairment loss
is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value
and is recorded as a reduction in the carrying value of the related asset and a charge to operating
results. Once an impairment results in a reduction in the carrying value of an asset, the carrying
value of such asset cannot thereafter be increased. Fair value is determined based on current
market values received from independent appraisers.
Flight equipment under operating lease includes two aircraft on lease to airlines in Japan in which
Genesis and its subsidiaries, in accordance with local laws, hold beneficial interest but not legal
title. Under Japanese law, legal title to each aircraft registered in Japan must be held by a
Japanese entity. In order to facilitate the lease to the airlines and to meet Japanese registration
requirements, Genesis and its predecessor (the Acquirers), with the cooperation of the airlines
and in accordance with the terms of sales agreements, sold title to these aircraft to two Japanese
entities that are owned and managed by a Japanese corporation. However, beneficial ownership of the
aircraft is effectively held by wholly owned subsidiaries of Genesis. Concurrently with such sale,
the Acquirers and the Japanese entities entered into a conditional sale agreement whereby the
Acquirers repurchased the aircraft from the entities. The Acquirers have paid the entire repurchase
price under the conditional sale agreements except one remaining installment in the amount of one
U.S. dollar. Under the conditional sales agreements, Genesis effectively holds the beneficial
ownership interest of the aircraft, including all of the risks and rewards of ownership.
Because Genesis has not relinquished control over the aircraft upon transfer of the aircrafts
title to the Japanese entities, as evidenced by the one dollar purchase option in the conditional
sale agreements which is exercisable at any time, and has retained all of the risks and rewards of
ownership of the aircraft, Genesis has not recognized either of these transactions as a sale for
accounting purposes and continue to recognize the aircraft as Flight equipment under operating
lease in the financial statements.
Business Combinations and Goodwill
The acquisition of an aircraft under a business combination is accounted for using the
purchase method in accordance with SFAS 141, Business Combinations. Genesis applies the purchase
price of aircraft acquired to the fair value of assets acquired and liabilities assumed by major
balance sheet caption, including identifiable intangible assets and liabilities, as at the
acquisition date. Goodwill represents the excess of the aggregate purchase price over the fair
value of the net assets acquired in a purchase businesses combination. Goodwill is reviewed for
impairment at least annually in accordance with the provisions of
50
SFAS No. 142, Goodwill and Other
Intangible Assets. The goodwill impairment test is a two-step test. Under the first step, the fair
value of the reporting unit is compared with its carrying value (including goodwill). If the fair
value of the reporting unit is less than its carrying value, an indication of goodwill impairment
exists for the reporting unit and the enterprise must perform step two of the impairment test
(measurement). Under step two, an impairment loss is recognized for any excess of the carrying
amount of the reporting units goodwill over the implied fair value of that goodwill. The implied
fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner
similar to a purchase price allocation, in accordance with SFAS 141, Business Combinations. The
residual fair value after this allocation is the implied fair value of the reporting unit goodwill.
Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair
value of the reporting unit exceeds its carrying value, step two does not need to be performed.
During the years ended December 31, 2007 and 2008, Genesis did not record any goodwill on
acquisition of flight equipment accounted for as business combinations, as the purchase price paid
reflected the fair value of the tangible and intangible assets acquired and liabilities assumed.
In accounting for flight equipment acquired under a business combination, management makes
estimates of the fair value of the attached leases separate from the fair value of the underlying
aircraft. Determining the fair value of attached leases requires us to make assumptions regarding
the current fair value of leases attaching to specific aircraft. Management estimates a range of
fair values of similar aircraft in order to determine if the attached lease is within a fair value
range. If a lease is above market terms, the present value of the estimated amount above the fair
value range is calculated over the remaining contractual lease term of the lease. Any resulting
lease premium assets are amortized on a straight line basis as a reduction of rental income over
the remaining useful life of the lease. If a lease is below market terms, the present value of the
estimated amount below the fair value range is calculated over the remaining contractual lease term
of the lease. Related assets and liabilities representing such values are reported in Other assets
and Other liabilities, respectively. Any resulting lease discounts are amortized as an addition to
rental income over the remaining useful life of the lease. Genesis considers lease renewals on a
lease by lease basis.
Maintenance Expense
Genesis records a charge for light maintenance expense when incurred in Maintenance expense
on the Statement of Income. These light maintenance costs relate primarily to those incurred in the
re-leasing of aircraft and during the transition between leases. For planned major maintenance
activities, Genesis capitalizes and depreciates the actual costs by applying the deferral method.
These amounts capitalized are included in Flight Equipment under operating leases, net and are
depreciated over the period until the next overhaul is required. During the year ended December 31,
2008, and as part of on-going periodic reviews, Genesis revised its estimate of the intervals to
the next overhaul.
Income taxes
Genesis applies SFAS 109, Accounting for Income Taxes, which requires the asset and liability
method of accounting for income taxes. Deferred income tax assets and liabilities are recognized
for the future tax consequences attributed to differences between the financial statements and tax
basis of existing assets and liabilities using enacted rates applicable to the periods in which the
differences are expected to affect taxable income. Deferred income tax assets represent amounts
available to reduce income taxes payable on taxable income in future years. The recoverability of
these future tax deductions is evaluated by assessing the adequacy of future taxable income from
all sources, including the reversal of temporary differences and forecasted operating earnings. No
valuation allowance has been provided as it is more likely than not that the deferred tax assets
will be realized. Income taxes have been provided for all items included in the Statements of
Income regardless of when such items were reported for tax purposes or when the taxes were actually
paid or refunded.
51
Beginning with the adoption of FIN 48, Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109 (FIN 48), as at January 1 2007, Genesis recognizes the
effect of income tax positions only if those positions are more likely than not of being
sustained. FIN 48 requires that the company measure the benefit using a cumulative probability
analysis, and requires the measurement to be based on managements best judgment about the amount
the taxpayer would accept to settle the issue. Recognized income tax positions are measured at the
largest amount of benefit that has a greater than 50% likelihood of being realized upon settlement.
Changes in recognition or measurement are reflected in a period in which the change occurs. Prior
to the adoption of FIN 48, Genesis recognized the effect of income tax positions only if such
positions were probable of being sustained.
Genesiss accounting policy for recording interest and penalties associated with the liability
for unrecognized tax benefits is to record such items as a component of other expenses.
Share-based based compensation
Compensation costs relating to share-based payments are recognized based on the fair value of
the equity instruments issued in accordance with SFAS 123(R), Share-Based Payment. Fair value of
the equity instruments are determined based on a valuation using an option pricing model which
takes into account various assumptions that are subjective. Key assumptions used in developing the
valuation include the expected term of the equity award taking into account both the contractual
term of the award, the effects of employees expected exercise and post-vesting termination
behavior, expected volatility, expected dividends and the risk-free interest rate for the expected
term of the award. Key assumptions used in developing valuations are discussed with independent
third party valuation experts.
Derivative financial instruments
Genesis has entered into derivative instruments to hedge the risk of variability in the cash
flows associated with the floating interest rate payments on the borrowings incurred to finance a
portion of the consideration paid for its portfolio of aircraft and also to hedge against the
variability in the U.S. dollar to Euro foreign exchange rates. Genesis accounts for derivative
instruments in accordance with SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, as amended and interpreted. In accordance with SFAS 133, all derivatives are recognized
on the balance sheet at their fair value. Fair value may depend on the credit rating and risk
attaching to the counterparty of the derivative contracts. When cash flow hedge accounting
treatment is achieved under SFAS 133, the changes in fair values related to the effective portion
of the derivatives are recorded in accumulated other comprehensive income, and the ineffective
portion is recognized immediately in income. Changes in fair value related to the effective portion
of the derivatives are reclassified out of accumulated other comprehensive income into income for
any ineffective portion of the derivative contract which is calculated at each quarter end. Amounts
reflected in accumulated other comprehensive income related to the effective portion are
reclassified into earnings in the same period or periods during which the hedged transaction
affects earnings. Changes in the fair value of forward foreign exchange contracts are recognized
immediately in income.
52
Results of Operations
The following table reflects the combined and consolidated Statement of Income for the year ended
December 31, 2006, and the consolidated Statement of Income for the years ended December 31, 2007
and 2008. The combined and consolidated results do not purport to reflect the results that would
have been obtained had the IPO occurred at the beginning of 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
|
|
|
|
and |
|
|
|
|
|
|
Consolidated |
|
Consolidated |
|
Consolidated |
|
|
Years Ended December 31, |
|
|
2006 |
|
2007 |
|
2008 |
|
|
(USD in thousands, except share and per share data) |
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Rental of Flight Equipment |
|
$ |
153,187 |
|
|
$ |
181,333 |
|
|
$ |
215,985 |
|
Other income |
|
|
|
|
|
|
6,771 |
|
|
|
8,045 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
153,187 |
|
|
|
188,104 |
|
|
|
224,030 |
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
51,398 |
|
|
|
62,259 |
|
|
|
78,690 |
|
Interest |
|
|
46,026 |
|
|
|
55,236 |
|
|
|
70,971 |
|
Maintenance expense |
|
|
2,327 |
|
|
|
1,073 |
|
|
|
3,344 |
|
Selling, general and administrative |
|
|
7,312 |
|
|
|
20,991 |
|
|
|
23,884 |
|
Other expenses |
|
|
|
|
|
|
3,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
107,063 |
|
|
|
142,896 |
|
|
|
176,889 |
|
|
|
|
|
|
|
|
|
|
|
Income Before Taxes |
|
|
46,124 |
|
|
|
45,208 |
|
|
|
47,141 |
|
Provision for income taxes |
|
|
17,367 |
|
|
|
6,053 |
|
|
|
6,224 |
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
28,757 |
|
|
$ |
39,155 |
|
|
$ |
40,917 |
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
The number of aircraft in our fleet increased from 53 as at December 31, 2007 to 54 as at
December 31, 2008.
Rental revenues were $216.0 million for the year ended December 31, 2008, which increased by
19.1% from $181.3 million for the year ended December 31, 2007. This increase was primarily due to
(1) the acquisition of additional aircraft during 2007 that generated $32.0 million of additional
rental revenues (2) the acquisition of an aircraft in 2008 that generated additional rental
revenues of $3.7 million, offset by (1) a net reduction in revenues of $0.4 million related to
lease defaults during 2008 and (2) a reduction of $0.6 million due to reduced LIBOR rates in
respect of floating leases.
Other income was $8.0 million for the year ended December 31, 2008, compared to $6.8 million
for the year ended December 31, 2007. The increase in other income was primarily due to the gain of
$6.0 million on the repurchase of debt securities, offset by a reduction in interest income of $4.8
million due to lower cash balances and a decrease in interest rates. During the year ended December
31, 2008, we repurchased $13.5 million aggregate principal amount of securitization notes for a
total price of $7.5 million. The purchases resulted in the recognition of a realized gain of $6.0
million for the year ended December 31, 2008.
Depreciation of flight equipment was $78.7 million for the year ended December 31, 2008, which
increased by 26.4% from $62.3 million for the year ended December 31, 2007. This increase was
primarily
53
due to (1) an increase of $12.0 million from the acquisition of additional aircraft (2) a
charge of $1.1 million related to the write-off of lessee-specific capital improvements following a
lease termination, and (3) an increase of $3.3 million primarily related to the amortization of
capitalized major maintenance. During the three months ended March 31, 2008, and as part of
on-going periodic reviews, we revised our estimate of the intervals to the next overhaul. The
effects of this change in accounting estimate on our financial statements for the year ended
December 31, 2008, is as follows:
|
|
|
|
|
Increase in: |
|
|
Net income |
|
$3.0 million |
Earnings per share |
|
$ |
0.08 |
|
Interest expense was $71.0 million for the year ended December 31, 2008, which increased by
28.5% from $55.2 million for the year ended December 31, 2007. This increase was primarily due to
(1) $13.2 million of interest expense associated with the financing of additional aircraft acquired
in 2007 and 2008, and (2) a $2.5 million increase in the amortization of deferred financing costs
and commitment fees in connection with new debt and our exercise of the option to increase the
availability under Genesis Acquisitions revolving credit facility.
Maintenance expense was $3.3 million for the year ended December 31, 2008, which increased by
211.6% from $1.0 million for the year ended December 31, 2007. Maintenance expense primarily
reflects costs associated with the repossession and re-marketing of aircraft subject to lease
terminations during 2008 offset by the recognition of security in accordance with those leases.
During 2008, a total of six leases were terminated while in 2007 there were no defaults.
Selling, general and administrative expenses were $23.9 million for the year ended December
31, 2008, which increased by 13.8% from $21.0 million for the year ended December 31, 2007. This
increase was due to (1) increased personnel costs of $0.5 million reflecting the increased costs
associated with additional hires in 2008 (2) $0.9 million in increased servicer fees due to
additional aircraft acquired and (3) a $1.5 million increase in other expenses.
Provision for income taxes was $6.2 million reflecting an actual tax rate of 13.2% for the
year ended December 31, 2008, compared to a charge of $6.1 million reflecting an actual tax rate of
13.4% for the year ended December 31, 2007.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
The number of aircraft in our fleet increased from 41 as at December 31, 2006 to 53 as at
December 31, 2007.
Rental revenues were $181.3 million for the year ended December 31, 2007, which increased
18.4% from $153.2 million for the year end December 31, 2006. This increase was primarily due to
(1) the purchase of four aircraft in 2006 that generated an additional $13.3 million of revenue
during the year ended December 31, 2007 and (2) the purchase of 12 aircraft in 2007 that generated
additional revenue of $15.8 million during the year ended December 31, 2007.
Other income was $6.8 million for the year ended December 31, 2007 compared to nil for the
year ended December 31, 2006. The increase was due to interest income generated on cash
investments.
Depreciation of flight equipment was $62.3 million for the year ended December 31, 2007 which
increased by 21.1% from $51.4 million for the year ended December 31, 2006. This increase was due
primarily to (1) additional depreciation of $4.6 million on the four aircraft acquired during the
year ended December 31, 2006, (2) additional depreciation of $4.6
54
million on the 12 aircraft during
the year ended December 31, 2007 and (3) additional depreciation related to capitalized maintenance
for the year ended December 31, 2007.
Interest expense was $55.2 million for the year ended December 31, 2007, which increased by
20.0% from $46.0 million for the year ended December 31, 2006. The predecessors condensed combined
financial statements for the year ended December 31, 2006 include an allocation from GE of interest
expense of $44.5 million. On December 19, 2006, Genesis issued $810 million of aircraft
lease-backed notes as part of a securitization transaction. The interest expense of $55.2 million
for the year ended December 31, 2007 includes the amortization of financing costs of $3.9 million
and reflects the costs associated with borrowings under the securitization notes and the revolving
credit facility.
Maintenance expense was $1.1 million for the year ended December 31, 2007, which decreased by
53.9% from $2.3 million recorded for the year ended December 31, 2006. The decrease was related to
the reduced expense associated with transitioning aircraft for delivery to new lessees.
Selling, general and administrative expenses were $21.0 million for the year ended December
31, 2007, which increased by 187.1% from $7.3 million for the year ended December 31, 2006. The
predecessors condensed combined financial statements for the year ended December 31, 2006 include
an expense allocation from GE of expense of $3.9 million. This increase of $13.7 million was due to
the additional costs of establishing and operating as an independent standalone company, including
increased employee and facilities expenses as well as public company expenses, as well as costs
associated with servicing the additional aircraft that we acquired during 2006 and 2007.
Other expenses increased by $3.3 million for the year ended December 31, 2007 compared to nil
in the year ended December 31, 2006. These costs relate to a transaction where the likelihood of
proceeding with this transaction within the foreseeable future is considered remote.
Provision for income taxes was $6.1 million for the year ended December 31, 2007, which
decreased by 65.1% from $17.4 million recorded for the year ended December 31, 2006. The
predecessors condensed combined financial statements for the year ended December 31, 2006 reflect
income taxes as if the predecessor had been a separate taxable entity resident in the United States
with an effective tax rate of 37.1%. The provision for income taxes of $6.1 million reported by
Genesis for the year ended December 31, 2007 reflects the fact that Genesis is a separate taxable
entity, resident in Ireland.
B. Liquidity and Capital Resources
Our Cash Flows
Year Ended December 31, 2008 compared to Year Ended December 31, 2007
Cash flows from operations were $120.4 million for the year ended December 31, 2008, compared
with $118.7 million for the year ended December 31, 2007. The increase was primarily the result of
$7.1 million of increased cash flows from leasing activities offset by an increase of $5.4 million
in restricted cash during the year ended December 31, 2008.
Cash flows from investing activities relate primarily to the purchase of fixed assets,
purchase of aircraft, capitalized major maintenance events on the aircraft and the designation of
certain restricted cash balances. Cash used in investing activities in the year ended December 31,
2008, was $98.3 million compared with $405.6 million for the same period in 2007. The decrease in
cash used in investing activities was primarily due to lower acquisitions of aircraft, offset by an
increase in capitalized major maintenance costs and an increase in restricted cash balances for the
year ended December 31, 2008.
Cash flows from financing activities relate primarily to the proceeds from issuance of common
shares, proceeds from financings and the payment of dividends. Cash provided by financing
activities for the year ended December 31, 2008 was $8.0 million relating primarily to proceeds
from borrowings of $338.0 million, offset by (1) amounts repaid on Genesis Acquisitions revolving
credit facility and other debt
55
financings of $247.1 million, (2) payments of $15.3 million for
financing costs associated with borrowings, (3) the payment of $54.5 million in dividends, (4)
payments of $5.6 million for share repurchases, and (5) payments of $7.5 million for the repurchase
of the securitization notes. Cash provided by financing activities for the year ended December 31,
2007 was $290.2 million relating to (1) the proceeds of the sale of common shares in connection
with the underwriters exercise of the over-allotment option and the concurrent private placement
to GE and (2) borrowings under our revolving credit facility, offset by a the payment of $53.0
million in dividends.
Year Ended December 31, 2007 compared to Year Ended December 31, 2006
Cash flows generated from operations were $118.7 million for the year ended December 31, 2007
compared with $89.5 million for the year ended December 31, 2006. The increase in operating cash
flows in 2007 compared with 2006 was primarily the result of (1) $14.2 million of increased cash
flows from leasing activities, (2) $1.6 million of lower cash taxes paid than in 2006 and (3) a
decrease of $13.4 million in restricted cash in the year ended December 31, 2007.
Cash flows from investing activities relate primarily to the acquisition of aircraft and the
designation of certain cash balances as restricted cash. Cash used in investing activities in 2007
was $405.6 million compared with cash used in investing activities of $194.2 million in 2006.
Cash flows from financing activities were $290.2 million for the year ended December 31, 2007
compared with $131.6 million for the year ended December 31, 2006.
Cash flows from financing activities in 2007 primarily relate to (1) aggregate net proceeds of $102.9 million from the sale
of shares pursuant to the underwriters exercise of the over-allotment option in the IPO, (2) the
proceeds raised from borrowings of $241.0 million under our credit facility to fund the acquisition
of additional aircraft and (3) offset by dividends paid of $53.0 million.
Fair Value Measurement
We have entered into interest rate swaps to hedge the risk of variability in the cash flows
associated with the floating interest rate payments on the borrowings incurred to finance a portion
of the consideration paid for our portfolio of aircraft and also to hedge against the variability
in the U.S. dollar to Euro foreign exchange rates.
All derivatives are recognized on the balance sheet at their fair value. Genesis determines
fair value based on the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. Fair value
may depend on the credit rating and risk attaching to the counterparty of the derivative contracts.
Our policy is to maximize the use of observable inputs and minimize the use of unobservable
inputs when developing fair value measurements, in accordance with the fair value hierarchy of SFAS
No. 157, Fair Value Measurements (SFAS 157). The fair values determined by Genesis are derived
principally from or corroborated by observable market data. Inputs include quoted prices for
similar assets, liabilities (risk adjusted) and market-corroborated inputs, such as market
comparables, interest rates, yield curves and other items that allow fair value to be determined.
Due to the prevailing market conditions, Genesis applied additional inputs to the fair value
determination in the form of credit spreads, credit default swaps and an assessment of the
probability of its own non-performance and of default by either of the swap counterparties.
The
fair value of derivatives was $(87.0) million as at December 31, 2008, which increased
168.9% from $(32.4) million as at December 31, 2007. No gains or losses were recognized in income
in respect of changes in the credit risk associated with those derivatives.
56
Our Future Sources of Liquidity
We operate in a capital-intensive industry. We expect to fund our capital needs from retained cash
flow and debt and equity financing, including borrowings under our $1 billion revolving credit
facility (described below).
On September 19, 2008, Genesis Portfolio entered into a 7-year, $241.0 million term loan facility
with a syndicate of lenders. Proceeds from the facility were used to refinance the 11 Airbus A320
family and Boeing 737 aircraft that had been financed under our revolving credit facility, thereby
restoring capacity under the revolver to $1 billion. As at December 31, 2008, Genesis had no
borrowings under the revolving credit facility.
On October 5, 2008, Genesis Acquisition exercised its option to increase the total commitment
amount under the revolving credit facility to $1 billion. The exercise of the option resulted in
the payment of a fee of 1.25% of $750 million or $9.4 million, which will be amortized over the
remaining life of the facility.
Our short-term liquidity needs include working capital for operations associated with our aircraft
and cash to pay dividends to our shareholders. We expect that cash on hand, cash flow provided by
operations and the availability of borrowings under our liquidity facility (described below) will
satisfy our short-term liquidity needs with respect to our business.
Our sole source of operating cash flows is currently from distributions and interest payments made
to us by our subsidiaries, through which we hold all of the aircraft in our portfolio.
Distributions of cash to us by our subsidiaries are subject to compliance with covenants contained
in the agreements governing the securitization, our senior secured revolving credit facility and
other debt facilities described below.
Our liquidity needs also include the financing of acquisitions of additional aircraft and other
aviation assets that we expect will drive our growth. We plan to finance acquisitions through cash
generated by the business, borrowings under our revolving credit facility and additional debt and
equity issuances.
All of our principal debt facilities have financial covenants. If we are unable to comply with
these covenants, then the amounts outstanding under these facilities may become immediately due and
payable, cash generated by our subsidiaries may be unavailable to us and/or we may be unable to draw additional amounts under these facilities. The Initial
Portfolio financed by Genesis Fundings securitization requires that Genesis Funding maintain a
debt service coverage ratio from November 2009 through November 2011 above the threshold specified
under this financing. If lessees of the aircraft held by Genesis Funding default under their
leases, then Genesis Funding may be unable to comply with this covenant and all available cashflow
from the Initial Portfolio will be applied to the repayment of the securitization notes. Genesis Portfolios term loan facility requires that Genesis Portfolio
maintain a loan-to-value ratio (tested annually) below the threshold specified in the facility. If
aircraft values decline, then Genesis Portfolio may be unable to
comply with this covenant and would be required to prepay outstanding
borrowings to restore compliance with this covenant; otherwise, the amounts outstanding under the term loan facility would become immediately due and payable. Genesis Acquisitions revolving credit facility requires that Genesis Acquisition maintain minimum
ratios of earnings before interest, taxes, depreciation and amortization (EBITDA) to interest
expense and a loan-to-value ratio (tested semi-annually) below the
threshold specified in the revolving credit
facility in respect of any aircraft financed through the revolving
credit facility. As
at December 31, 2008 there were no aircraft financed through
Genesis Acquisitions revolving credit facility. However to the extent aircraft
are financed in the future and subsequently aircraft values decline and/or if lessees default
under their leases, then Genesis
57
Acquisition
may be unable to comply with the covenants and could lose the ability
to make further borrowings under the revolving credit facility. The events that could cause our
subsidiaries not to be in compliance with their financial covenants such as a decline in aircraft
values or lessee defaults may be beyond our control, but they nevertheless could have a
substantial adverse impact on the amount of our cash flow available to fund working capital, make
capital expenditures and satisfy other needs, including payments of dividends to shareholders.
In addition, our ability to execute our business strategy to acquire additional aircraft and other
aviation assets depends to a significant degree on our ability to access debt and equity capital
markets. Our access to these markets will depend on a number of factors, such as our historical and
expected performance, compliance with the terms of our debt agreements, industry and market trends,
the availability of capital and the relative attractiveness of alternative investments. If we are
unable to raise funds through debt and equity capital markets on terms that are acceptable to us,
then we may be unable to implement our growth strategy of making acquisitions of additional
aircraft.
Capital Expenditures
Twelve aircraft were purchased during the year ended December 31, 2007, eight from GECAS
affiliates and four from two airlines on a sale and leaseback basis. All of these aircraft were
delivered to Genesis before December 31, 2007. One further aircraft was purchased from a GE
affiliate during the year ended December 31, 2008. This aircraft was delivered to Genesis in June
2008.
The acquisition has been treated as a purchase in conformity with Statement Financial
Accounting Standard SFAS 141, Business Combinations. In connection with the acquisition, the assets
and liabilities relating to the delivered aircraft were stated at fair value upon their respective
acquisition dates. In addition to acquisitions of additional aircraft and other aviation assets, we
expect to make capital expenditures from time to time in connection with improvements to our
aircraft. These expenditures include the cost of major overhauls and modifications. As at December
31, 2008, the weighted average age of the aircraft in our portfolio was 6.6 years. In general, the
costs of operating an aircraft, including capital expenditures, increase with the age of the
aircraft.
Maintenance
Under our leases, the lessee is generally responsible for maintenance and repairs, airframe and
engine overhauls, obtaining consents and approvals and compliance with return conditions of
aircraft on lease. In connection with the lease of a used aircraft, we may agree to contribute
specific additional amounts to the cost of certain planned major overhauls or modifications, which
usually reflect the usage of the aircraft prior to the commencement of the lease. In many cases, we
also agree to share with our lessees the cost of compliance with airworthiness directives.
Our portfolio includes twenty nine leases pursuant to which we collect additional rent that is
determined based on usage of the aircraft measured by hours flown or cycles operated and we are
obligated to make contributions to the lessee for expenses incurred for certain planned major
maintenance, including amounts typically determined based on additional rent paid by the lessee.
Such planned major maintenance includes heavy airframe, off-wing engine, landing gear and auxiliary
power unit overhauls and replacements of engine life limited parts. We are not obligated to make
maintenance contributions under such leases at any time that a lessee default is continuing. While
the costs of future planned major maintenance is difficult to forecast, maintenance contributions
in 2009 are expected to be considerably higher than in 2008 due to the timing of the required
maintenance contributions on these 29 aircraft.
58
Under the remaining 21 leases in our portfolio, we are not obligated to make any maintenance
contributions. However, these 21 leases provide for a lease-end adjustment payment based on the
usage of the aircraft during the lease and its condition upon return. Most such payments are likely
to be made by the lessee to us, although contributions may be required to be made by us for certain
planned major maintenance activities.
Seasonality
Our aircraft are leased under long-term contracts and are not subject to the effect of seasonal
variation in demand.
Securitization
Concurrently with the completion of our IPO, Genesis Funding completed a securitization
transaction that generated net proceeds of approximately $794.3 million after deducting initial
purchasers discounts and fees. Under the terms of the securitization, a single class of notes were
initially issued by Genesis Funding. The notes are direct obligations of Genesis Funding and are
not obligations of, or guaranteed by, GE, any of its affiliates or Genesis Lease Limited. The
proceeds from the sale of the notes, together with the proceeds from the IPO and the private
placement of shares to GE, less certain expenses related to the securitization and the IPO and a
cash balance that we retained, were used by Genesis Funding to finance the acquisition of the
Initial Portfolio of 41 aircraft.
The notes have the benefit of a financial guaranty insurance policy issued by Financial
Guaranty Insurance Company, or FGIC, which has issued a financial guaranty insurance policy to
support the payment of interest when due on the notes and the payment of the outstanding principal
balance of the notes on the final maturity date of the notes and, under certain other
circumstances, prior thereto.
The notes initially were rated Aaa and AAA by Moodys Investors Service, Inc., or Moodys, and
Standard & Poors Rating Services, a division of The McGraw-Hill Companies, Inc., or S&P,
respectively. This rating was based on FGICs rating. FGIC has suffered significant downgrades of
its ratings since the issuance of the notes and is currently rated Ca and CC by Moodys and S&P,
respectively. As a result, Moodys and S&P have published stand-alone ratings of the notes of A3
and A-, respectively
The notes were issued pursuant to the terms of a trust indenture, dated December 19, 2006, the
date of the completion of the IPO, among Genesis Funding, a cash manager, a trustee, an operating
bank, a liquidity facility provider and a policy provider.
Interest Rate
The notes bear interest at one-month LIBOR plus 0.24%. Interest expense for the securitization
also includes amounts payable to the policy provider and the liquidity facility provider
thereunder. Genesis Funding has also entered into an interest rate swap agreement intended to hedge
the interest rate exposure associated with issuing the floating-rate obligations of the notes.
Maturity Date
The final maturity date of the notes is December 19, 2032.
Payment Terms
Interest on the notes are due and payable on a monthly basis. Scheduled monthly principal
payments on the notes commence on December 2009, subject to satisfying certain debt service
coverage ratios and other covenants. Thereafter, if the notes are not refinanced, cash flow
generally will not be available to us for the payment of dividends because principal payments are
not fixed in amount but rather are determined monthly based on revenues collected and costs and
other liabilities incurred prior to the relevant payment date. Effectively, after December 19,
2011, all revenues collected during each monthly period will be applied to repay the outstanding
principal balance of the notes, after the payment of certain expenses and other liabilities,
including the fees of the service providers (including GECAS as servicer and us in our role
59
as manager), the liquidity facility provider and the policy provider, interest on the notes
and interest rate swap payments, all in accordance with the priority of payments set forth in the
indenture.
Redemption
We may, on any payment date, redeem the notes by giving the required notices and depositing
the necessary funds with the trustee. A redemption prior to acceleration of the notes may be of the
whole or any part of the notes. A redemption after acceleration of the notes upon default may only
be for the whole of the notes. We may, on any payment date, redeem the notes in whole or from time
to time in part, at the following redemption prices, expressed as percentages of principal amount,
together with accrued and unpaid interest to, but excluding, the date fixed for redemption, if
redeemed on the dates indicated below:
|
|
|
Redemption Date |
|
Price |
Before December 19, 2009 |
|
101% |
On or after December 19, 2009 |
|
100% |
Collateral
The notes are secured by first priority, perfected security interests in and pledges or
assignments of equity ownership and beneficial interests in the subsidiaries of Genesis Funding,
their interests in the leases of the aircraft they own, cash held by or for them and by their
rights under agreements with GECAS, the initial liquidity facility provider, hedge counterparties
and the policy provider. The notes are also secured by a lien or similar interest in any of the
aircraft in the Initial Portfolio that are registered in the United States or Ireland.
Certain Covenants
Genesis Funding is subject to certain operating covenants including relating to the
maintenance, registration and insurance of the aircraft as set forth in the indenture. The
indenture also contains certain conditions and constraints which relate to the servicing and
management of the Initial Portfolio including covenants relating to the disposition of aircraft,
lease concentration limits, restrictions on the acquisition of additional aircraft and restrictions
on the modification of aircraft and capital expenditures as described below. GECAS has agreed to
use commercially reasonable efforts to perform its services pursuant to the servicing agreement for
our Initial Portfolio, subject to certain provisions of the indenture as they relate to the
services provided by GECAS thereunder. As at December 31, 2008, Genesis Funding is in compliance with the
terms of the covenants under the indenture.
Liquidity Facility
Genesis Funding and Calyon are parties to a revolving credit facility, which is referred to as the
liquidity facility. The aggregate amount available under the liquidity facility is $75 million, $60
million of which may be drawn to cover certain expenses of Genesis Funding, including maintenance
expenses, interest rate swap payments and interest on the notes issued under the indenture and the
remaining $15 million of which is available for three years from the completion of the IPO to cover
any shortfalls in the separate account set aside for overhauls and certain parts replacements.
Genesis Funding is required to reimburse the provider of the liquidity facility for the amount of
such drawing plus accrued interest from funds available as specified in the indenture. Any amounts
under the liquidity facility advanced for overhauls and replacements remaining outstanding after
the third anniversary of the IPO will be due in an amount equal to $625,000 per month. Upon the
occurrence of certain events, including a downgrade of the provider of the liquidity facility below
a certain ratings threshold, the liquidity facility will be drawn in full, and such drawings will
be available for the same purposes as drawings under the liquidity facility.
Drawings under the liquidity facility bear interest at one-month LIBOR plus a spread of 120
basis points. Genesis Funding paid an upfront fee of $450,000 on December 19, 2006 and will pay an
annual
60
commitment fee of 60 basis points on each payment date. As at December 31, 2008, Genesis
Funding had drawn down $5.0 million under the liquidity facility.
Term Loan Facilities
During 2008, Genesis secured new term loans in the aggregate amount of $92 million to finance
the acquisition of a Boeing 767-300ER aircraft and to leverage an Airbus A320-200 aircraft that
Genesis acquired during 2007. These loans bear interest at a fixed and floating rate (based on
LIBOR plus a margin), respectively, are secured with the underlying aircraft and mature in 2018 and
2019. The loans are subject to certain covenants, with which we are in compliance with as at
December 31, 2008.
During 2008, Genesis Portfolio also entered into a 7-year, $241.0 million term loan facility
with a syndicate of lenders. The term loan facility was drawn down in one tranche on September 19,
2008. Proceeds from the drawdown were used to refinance the 11 Airbus A320 family and Boeing 737
aircraft that previously had been owned by Genesis Acquisition and financed through Genesis
Acquisitions revolving credit facility.
The
principal terms of Genesis Portfolios term loan facility are as follows:
Fees. An up-front fee equal to 1.1% of the facility amount of $241.0 million and an upfront
administration fee of $0.4 million was payable upon entry into the facility. In addition, an agency
fee of $55,000 is payable annually.
Interest Rate. Borrowings under the facility bear interest at LIBOR plus an applicable margin
of 1.75% per annum. Under certain circumstances, when LIBOR may not be representative of the
wholesale bank cost of funds or be available as a reference rate, the facility includes provisions
for the negotiation of another basis for the calculation of the interest rate, which requires the
prior consent of all parties to the facility.
Maturity Date; Payment Terms. Borrowings under the facility are required to be repaid in
monthly installments of principal and interest with the balance payable as a balloon payment of
$125.0 million at maturity in September 2015.
Prepayment. Genesis Portfolio has the right to prepay any amounts outstanding under the
facility on any monthly repayment date. There is a prepayment penalty of 2% of the prepayment
amount in the first year and a 1% prepayment penalty in the second year. There are no prepayment
penalties thereafter. In addition, Genesis Portfolio will be required to make partial prepayments
of borrowings under the facility upon the total loss, sale or other disposition of aircraft
financed with borrowings under the facility.
Guarantee. Genesis Lease Limited has guaranteed all payments of principal and interest owed
under the facility.
Collateral. Borrowings under the facility are secured by first priority, perfected security
interests in and pledges or assignments of (1) the equity ownership and beneficial interests of
Genesis Lease Limited in Genesis Portfolio and in each of its aircraft-owning subsidiaries, (2)
leases of the aircraft financed under the facility and mortgages over the aircraft themselves, (3)
Genesis Portfolio interests in the Servicing Agreement in place with GECAS under which those leases
are serviced, and (4) where possible, an international interest under the Cape Town Convention in
each eligible airframe, engine and lease. In addition, Genesis Portfolio is required to hold $5.0
million on deposit in a liquidity reserve account.
Covenants. Genesis Portfolio is subject to certain operating covenants including some relating
to the maintenance, registration and insurance of the aircraft as set forth in the facility and
associated deed of proceeds and priorities (the DPP). The DPP and the facility also contain
certain conditions and constraints which relate to the servicing and management of the aircraft
financed through the facility, including covenants relating to the disposition of aircraft,
restrictions on the acquisition of additional aircraft and restrictions on the modification of
aircraft. In addition, Genesis Portfolio is subject to annual loan-to-value tests of 75% for the
first four years and of 70% thereafter based on its maintenance adjusted current market
61
value on each anniversary of the first drawdown. Genesis Portfolio is in compliance with all
covenants as at December 31, 2008.
Revolving Credit Facility
On April 5, 2007, Genesis Acquisition entered into a $1 billion senior secured revolving
credit facility with a syndicate of lenders. The revolving credit facility provides funding for
65.0-72.5% (depending on aircraft type) of the agreed value of the aircraft that Genesis
Acquisition may acquire.
In connection with the closing of the revolving credit facility, GECAS refunded fees and
related expenses of $7.2 million initially borne by Genesis Acquisition. Genesis recorded this
amount as deferred financing costs with an offsetting credit to Additional paid in capital. An
amount of $3.2 million was amortized for the year ended December 31, 2007 with a further $2.0
million amortized in the year ended December 31, 2008.
On October 5, 2008, Genesis Acquisition exercised its option to increase the total commitment
amount under the revolving credit facility to $1 billion. The exercise of the option resulted in
the payment of $9.4 million, which will be amortized into interest expense over the remaining
expected life of the revolving credit facility. An amount of
$0.7 million was amortized in the year ended December 31,
2008.
On September 19, 2008, Genesis secured a new $241.0 million debt facility, the proceeds of
which were used to refinance Genesis Acquisitions borrowings under the revolving credit facility.
Following the refinancing, Genesis Acquisition owned no aircraft and had no borrowings outstanding
under the credit facility. Some of the lenders under the revolving credit facility took the position that because
Genesis Acquisition generated no income from aircraft leasing activities during the fourth quarter
of 2008, it was unable to comply with an obligation to maintain a minimum ratio of EBITDA to
interest expense. Genesis believed that such test should not apply under these circumstances, and
in any event, to the extent any non-compliance did exist, Genesis firmly believed that it had cured
such non-compliance pursuant to the terms of the revolving credit facility. On March 3, 2009, to overcome
the difference of opinion and to clarify the future application of the EBITDA to interest expense
test, Genesis Acquisition entered into an amendment which resulted in an increase in the commitment
fees and interest rate under the revolving credit facility. A fee of $0.8 million was paid on March
3, 2009 to the lenders in connection with the amendment.
Following this amendment, the principal terms of the revolving credit facility are as follows:
Commitment fees. Commitment fees of 0.375% per annum initially were payable quarterly in
arrears on the unused amount of the revolving credit facility. Following the amendment, the commitment fees
increased to 0.50% per annum from March, 3, 2009, and to the extent borrowings under the revolving credit facility
are less than $200.0 million on September 30, 2009, the commitment fees will increase to 0.75% from
September 30, 2009.
Interest Rate. Borrowings under the revolving credit facility bear interest at one- or
three-month LIBOR plus an applicable margin. Following the amendment, the applicable margin during
the revolving period increased from 1.50% 1.75% to 2.50% 2.75% from March 3, 2009 (the range
depends on Genesis Acquisitions portfolio composition and the principal amount outstanding under
the revolving credit facility). The margin remains at 2.75% during the term loan period from April
5, 2010 to April 4, 2012 (if Genesis Acquisition exercises its option to convert the revolving
credit facility to a term loan).
Maturity Date. The commitments under the revolving credit facility are available until April
2010, at which time Genesis Acquisition will have the option to convert any outstanding amount
under the revolving credit facility to a term loan with a two-year maturity to April 4, 2012. If Genesis Acquisition
does not exercise this option, then the outstanding amount under the revolving credit facility at
such time will be due on such date.
Prepayment. Genesis Acquisition has the right to prepay any amounts outstanding under the
revolving credit facility or to reduce the commitment thereunder. In addition, Genesis Acquisition
will be required to make partial prepayments of borrowings under the revolving credit facility upon
the total loss, sale or other disposition of aircraft financed with borrowings under the revolving
credit facility, or if the aggregate amount of the loans outstanding under the revolving credit
facility exceeds the borrowing base (as defined in the revolving credit facility), including as a
result of a decrease in the value of an aircraft financed with borrowings thereunder as determined
by mandatory periodic appraisals.
Collateral. Pursuant to a security trust agreement, dated as of April 5, 2007, among Genesis
Acquisition, certain affiliates of Genesis Acquisition, Citibank, N.A., as administrative agent,
and Deutsche Bank Trust Company Americas, as security trustee and account bank, borrowings under
the revolving credit facility are secured by first priority, perfected security interests in and
pledges or assignments of (1) the equity ownership and beneficial interests of each subsidiary of
Genesis Acquisition, (2) leases of the aircraft financed under the revolving credit facility, (3)
rights under the casualty insurance on such aircraft, (4) accounts under the sole dominion and
control of the administrative agent under the revolving credit facility into which lease rentals,
insurance proceeds, sale proceeds and other amounts will be paid, and (5) where possible, an
international interest under the Cape Town Convention in each eligible airframe, engine and lease.
62
Covenants. Genesis Acquisition is subject to certain operating covenants including some
relating to the maintenance, registration and insurance of the aircraft as set forth in the
revolving credit facility. The revolving credit facility also contains certain conditions and
constraints which relate to the servicing and management of the aircraft whose acquisition is
financed through the revolving credit facility, including covenants relating to the disposition of
aircraft, lease concentration limits, restrictions on the acquisition of additional aircraft and
restrictions on the modification of aircraft, capital expenditures and the weighted average age of
Genesis Acquisitions aircraft portfolio. In addition, the revolving credit facility contains a
requirement that the ratio of earnings before interest, taxes, depreciation and amortization
(EBITDA) to interest expense for any trailing period of three consecutive months exceeds (i) 1.1
at all times and (ii) 1.5 for advances to be available under the revolving credit facility. Genesis
Acquisition is in compliance with all covenants as at
December 31, 2008. As disclosed in this Annual Report on Form 20-F, a difference of opinion arose between Genesis
Acquisition and some of the lenders under the revolving credit facility with respect to Genesis Acquisitions
obligation to maintain a minimum ratio of EBITDA to interest expense. To overcome the difference
of opinion and to clarify the future application of the EBITDA to interest expense test, Genesis
Acquisition has agreed to the amendment to the revolving credit facility described herein.
C. Research and Development
Not applicable.
D. Trend Information
Our growth strategy contemplates future acquisitions and leasing of additional commercial
aircraft and other aviation assets. The following trends in the aircraft finance and leasing
industries will have an impact on our ability to implement this growth strategy:
|
|
|
General economic conditions. The long-term demand for air travel is expected to
continue to grow. Although the record fuel prices seen in 2008 have materially abated,
the extreme dislocation in the financial markets has continued into 2009 and a number
of major economies have entered recession. These developments contributed to a number
of airline bankruptcies, particularly in the United States and in Europe. While we are
not immune to these developments, we are positioned to address many of these challenges
given our focus on maintaining a young, modern, fuel efficient portfolio of aircraft, a
well diversified global customer base, long term leases and with GECAS as our servicer.
Nevertheless, the aircraft industry continues to be subject to demand shifts, and any
downturn in discretionary business or consumer spending could have a significant impact
on air traffic and aircraft demand. |
|
|
|
|
Large and growing commercial aircraft fleet to meet global demand. The ongoing trend
towards growth in air travel is expected to be adversely affected in the short to
medium term as a result of reduced global economic growth expectations. We do not know
how long this economic downturn may prevail. Nevertheless, over the long term, we
expect that economic development in emerging markets, competitive pricing resulting
from the continued growth of low-cost carriers and relaxation of regulatory constraints
will continue to drive further increases in air travel and aircraft demand. Boeing has
forecasted that by 2027 the fleet will reach 35,800 aircraft, of which 31,910 will be
mainline passenger jets with 90 passenger seats or more. Airbus has estimated that the
commercial jet aircraft fleet will increase to 37,774 aircraft by 2026, of which 28,534
will be mainline passenger jets of more than 100 seats. In dollar terms, the current
global fleet has an estimated value of $350 billion and is estimated to grow by at
least $40 billion per year for the next 20 years. |
|
|
|
|
Continued growth in aircraft leasing with significant consolidation opportunities.
Over the past 20 years, the worlds airlines have leased a growing share of their
aircraft. According to market data, the proportion of the global fleet under operating
lease has increased from 17% in 1990 to approximately 30% in recent years. Lessors are
major providers of liquidity for used aircraft and provide airlines with a valuable
method of fleet management through the use of operating leases, financial leases and
sale/leaseback transactions. The two largest lessors, GECAS and ILFC, own or manage
approximately a combined 41% of the leased aircraft lessor portfolio, while seven other lessors each
controls between 3% and 5% of the lessor market. Beyond that, the operating lessor
market |
63
|
|
|
is quite fragmented. We expect that leased aircraft will continue to comprise an increasing
percentage of total commercial aircraft. However, there may be some short term volatility
given the current credit environment and uncertain economic outlook. In addition,
prospective ownership changes of certain aircraft lessors, including ILFC, may have an
impact on aircraft lease values and values, as well as the aircraft financing market. It is
also quite possible that, given the fragmented nature of the lessor market, consolidation of
some of these companies could occur. |
|
|
|
|
Aircraft values and lease rates. For a number of aircraft types, particularly the
Boeing 737 Next Generation and the Airbus A320 family of aircraft, supply in recent
years has been limited up until 2008. However, the airline industry has been subject to
cyclical demand patterns and the current economic downturn could lead to a reduction in
lease rates and asset values. With the recent airline bankruptcies, some newer Boeing
737 and Airbus A320 family equipment have become available and as a result lease rates
and asset values for these types may suffer some short-term decline. Meanwhile, older
Boeing 737 Classic aircraft (-300, -400 & -500 series) have also become available, and
we expect the lease rates and values on these types may suffer a decline for longer
than the short term. Classic aircraft represent 1.9% of our total portfolio. Demand for
larger aircraft types, such as newer examples of the 767-300ER and A330 continues but
in the medium-term face market risks due to the emergence of newer technology and more
fuel-efficient aircraft, such as the Boeing 787 and the Airbus A350. |
|
|
|
|
Access to capital markets. Our liquidity needs include financings to acquire
additional aircraft and other aviation assets to drive our growth. We plan to finance
acquisitions through borrowings under our revolving credit facility and other sources
including through additional debt and equity issuances. Our ability to execute our
business strategy to acquire these additional aviation assets depends to a significant
degree on our ability to access debt and equity capital markets. Our access to these
markets will depend on a number of factors, such as our historical and expected
performance, compliance with the terms of our existing debt agreements, industry and
market trends, the availability of capital and relative attractiveness of alternative
investments. If we are unable to raise funds through debt and equity capital markets on
terms that are acceptable to us, then we may be unable to implement our growth strategy
of making acquisitions of additional aircraft that are accretive to cash flow. |
E. Off-Balance Sheet Arrangements
Not applicable.
F. Contractual Obligations
Our long-term contractual obligations as at December 31, 2008, consist of the following:
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
Thereafter |
|
Total |
Principal payments
under
securitization
notes (1) |
|
$ |
1,000 |
|
|
$ |
12,000 |
|
|
$ |
14,615 |
|
|
$ |
70,206 |
|
|
$ |
68,351 |
|
|
$ |
630,328 |
|
|
$ |
796,500 |
|
Interest payments
under
securitization
notes (2) |
|
|
45,266 |
|
|
|
45,321 |
|
|
|
45,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135,975 |
|
Principal payments
under debt
facilities (3) |
|
|
24,893 |
|
|
|
20,746 |
|
|
|
21,639 |
|
|
|
22,551 |
|
|
|
23,553 |
|
|
|
218,511 |
|
|
|
331,893 |
|
Interest payments
under debt
facilities (4) |
|
|
18,074 |
|
|
|
16,569 |
|
|
|
12,502 |
|
|
|
9,702 |
|
|
|
3,059 |
|
|
|
9,906 |
|
|
|
69,812 |
|
Commitment fees
payable under
credit facility (5) |
|
|
5,497 |
|
|
|
1,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,476 |
|
Fixed payments to
GECAS under our
servicing
agreements (6) |
|
|
2,305 |
|
|
|
2,305 |
|
|
|
2,305 |
|
|
|
2,305 |
|
|
|
2,305 |
|
|
|
18,436 |
|
|
|
29,961 |
|
|
|
|
Total |
|
$ |
97,035 |
|
|
$ |
98,920 |
|
|
$ |
96,449 |
|
|
$ |
104,764 |
|
|
$ |
97,268 |
|
|
$ |
877,181 |
|
|
$ |
1,371,617 |
|
|
|
|
|
|
|
(1) |
|
The indenture that governs the notes issued in the securitization provides that beginning
December 19, 2011 (the fifth anniversary of the securitization), all base lease cash flows
received on the Initial Portfolio are applied to repay the outstanding principal balances of
those notes, after payment of certain expenses and other payments pursuant to the priorities
set forth in the indenture. Accordingly, because there are no specific repayment requirements,
the principal maturities shown in this table for periods after December 19, 2011 reflect an
estimate of the cash flows that would be required for payments on the notes based upon
estimates of (i) base lease cash flows and (ii) expenses and other payments specified in the
indenture. The maturities of the debt as presented in this table do not assume any
prepayments, defaults, aircraft sales, eligible extensions or potential refinancings. |
|
(2) |
|
The interest payable under our securitization notes will vary based on LIBOR. Interest
payments reflect amounts we expect to pay after giving effect to the interest rate swap we
have entered into during the period from 2007 to 2011. We have not entered into interest rate
swaps with respect to the securitization notes for periods after December 19, 2011. In
addition, as described in (1) above principal payments are not fixed in amount after December
19, 2011. Therefore, we cannot determine the amounts of our interest payments for the full
2011 period or for periods beyond 2011. |
|
(3) |
|
During 2008, Genesis entered into 3 term loans to refinance the 11 Airbus A320 and Boeing 737
aircraft previously financed through Genesis Acquisitions revolving credit facility and to
finance a Boeing 737-300ER aircraft and an A320-200 aircraft. The term loans mature in 2015,
2018 and 2019 respectively. |
|
(4) |
|
Interest payments on one of our debt facilities are charged at fixed rates, while interest
payments on the remaining facilities will vary based on LIBOR. Interest payments reflect only
amounts we expect to pay on fixed rate debt or fixed amounts we expect to pay after giving
effect to the interest rate swap we have entered into during the period from 2007 to 2012;
they do not reflect debt subject to floating interest rate charges. As at December 31, 2008
$273.9 million of the total principal outstanding of $331.9 million is the subject of fixed
rates (either directly or through the interest rate swap) however, |
65
|
|
|
|
|
the notional amount of the interest rate swap is subject to predetermined reductions over the
life of the swap. |
|
|
(5) |
|
Genesis Acquisition initially was required to pay commitment fees of 0.375% per annum on the unused
amount of the facility. Following the amendment to the revolving credit facility, the commitment
fees increased to 0.50% per annum from March, 3, 2009 and to the extent borrowings under the
facility are less than $200 million on September 30, 2009, the commitment fees will increase to
0.75% from September 30, 2009. Amounts in the table assume no borrowings under the facility after
December 31, 2008.
|
|
|
(6) |
|
Pursuant to our servicing agreements, GECAS provides us with most services related to leasing
our fleet of aircraft, including marketing aircraft for lease and re-lease, collecting rents
and other payments from lessees, monitoring maintenance, insurance and other obligations under
leases and enforcing rights against lessees. Our servicing agreements with GECAS provide that
we will pay to GECAS a base fee of $150,000 per month for servicing the aircraft in our
Initial Portfolio, which increases by an additional monthly base fee of 0.01% of the
maintenance-adjusted base value (at the time of acquisition) for additional aircraft outside
of our Initial Portfolio serviced by GECAS. Under the servicing agreements, we are required to
pay GECAS additional servicing fees based on rents due and paid under aircraft leases and
proceeds of dispositions of aircraft and certain other fees for additional services. The
amounts presented in this table represent base fees only and assume no acquisitions or
dispositions of aircraft during any of these periods. |
G. Safe Harbor
See Preliminary Note in the introduction to this Annual Report.
66
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
The following table presents information about our directors and executive officers. The business
address of each of our directors and executive officers listed below is 4450 Atlantic Avenue,
Westpark, Shannon, Co Clare, Ireland. Our telephone number at that address is +353 61 233 300.
|
|
|
|
|
|
|
Name |
|
Age |
|
Position |
John McMahon |
|
|
47 |
|
|
Chairman, Chief Executive Officer and President |
Alan Jenkins |
|
|
36 |
|
|
Chief Financial Officer |
Cian Dooley |
|
|
42 |
|
|
Chief Commercial Officer |
Paul T. Dacier |
|
|
51 |
|
|
Director |
Michael Gradon |
|
|
49 |
|
|
Director |
Niall Greene |
|
|
65 |
|
|
Director |
Brian Hayden |
|
|
61 |
|
|
Director |
David C. Hurley |
|
|
68 |
|
|
Director |
Declan McSweeney |
|
|
55 |
|
|
Director |
Andrew L. Wallace
|
|
|
65 |
|
|
Director |
John McMahon has been our Chairman, Chief Executive Officer and President since our formation in
July 2006. Mr. McMahon has 22 years of global experience in the aviation industry. Immediately
prior to joining our company, Mr. McMahon was founder and managing director of an aviation
investment consulting firm that was engaged by GECAS to assist with our formation
and our IPO. He began his aviation career in 1986 at Irelands national airline, Aer Lingus, where
his experience included responsibility for fleet planning and route planning. In 1990, he joined
GPA Group, then the worlds leading aircraft lessor, to develop and market investment products
based on operating leases, with a particular focus on Japan. He transferred to GECAS upon its
formation in 1993 when it assumed management responsibility for GPAs aircraft lease portfolio. In
1995, Mr. McMahon joined the Daimler-Benz (now Daimler) project team to establish its associated
aircraft leasing company, debis AirFinance (now AerCap) in Amsterdam. He was instrumental in
growing the company from a start-up into a major global player. In 2003, he moved from his position
as Managing Director of debis AirFinance to become Deputy Director of Structured Asset Finance at
Lloyds TSB Bank plc in London. He founded Aviation Investment Management Company in 2004, through
which he acted as consultant on a number of large-scale aircraft leasing-related private equity
projects. Mr. McMahon received a Bachelor of Engineering degree from the National University of
Ireland and graduate diplomas in accounting and finance (Association of Chartered Certified
Accountants), management (University of Dublin, Trinity College) and computer modeling & simulation
(University of Dublin, Trinity College). He has also completed the Advanced Management Program at
Harvard Business School.
Alan Jenkins has been our Chief Financial Officer since October 2006. Mr. Jenkins has a substantial
background in the aircraft leasing and financial services sectors. Prior to joining us, from March
2001 through to September 2006, Mr. Jenkins worked with AWAS, a leading aircraft leasing company
which was owned by Morgan Stanley until the sale of the business in March 2006 to Terra Firma
Capital Partners. He was based in Sydney, Australia and held the position of Vice President,
Commercial from mid-2002 until joining us in October 2006 and
67
was responsible for the creation and development of the commercial operations of the company. The
role involved structuring transactions, evaluating risks, negotiating restructurings and other
amendments to contracts and advising the company on all lease and trading related decisions. Prior
to AWAS, Mr. Jenkins held the position of audit manager with KPMG in Dublin, Ireland. He worked in
KPMGs financial services division for three years with responsibility for a number of aircraft
leasing clients, including GPA Group (subsequently renamed AerFi Group) and the Airbus leasing
operations in Dublin. Mr. Jenkins is a Fellow of The Association of Chartered Certified Accountants
(ACCA) having qualified in 1995 from Accountancy and Business College Dublin.
Cian Dooley has been our Chief Commercial Officer since January 2007. Mr. Dooley has more than 19
years of experience in the aviation and financial services industries, most recently at Boeing
Capital Corporation, which he joined in 2001. From 2003 until the end of 2006, he was Managing
Director, Aircraft Financial Services based in Seattle, where he was responsible for capital
markets and customer financing activities related to the Boeing 787 Dreamliner and the Boeing 747-8
Programs. Prior to this, Mr. Dooley worked for Boeing in Dublin, Ireland and was responsible for
conducting financing transactions for Boeings European customer base. Before joining Boeing, Mr.
Dooley spent five years at Rabobank, where he originated, structured and executed financing
transactions. Prior thereto, Mr. Dooley worked at GE Commercial Aviation Services and debis
AirFinance (now Aercap), where he held responsibility for negotiating many aircraft acquisition,
financing and leasing transactions. Mr. Dooley received a BSc degree in experimental physics from
University College Galway.
Paul T. Dacier has been a member of our board of directors since November 2007. Mr. Dacier is
Executive Vice President and General Counsel of EMC Corporation, an information infrastructure
technology and solutions company. Mr. Dacier joined EMC as Corporate Counsel in 1990 and was
promoted to General Counsel in 1992, Vice President in 1993, Senior Vice President in 2000 and
Executive Vice President in 2006. Prior to joining EMC, he was an attorney with Apollo Computer,
Inc., a computer work station company, from 1984 to 1990. Mr. Dacier served as a commissioner of
the Massachusetts Judicial Nominating Commission from 2003 to 2006. He also is a past Chair and
remains on the Board of Directors of the New England Legal Foundation, a business appellate
advocacy group. Mr. Dacier received a B.A. in History and a J.D. from Marquette University. He is
admitted to practice law in the Commonwealth of Massachusetts and the State of Wisconsin.
Michael Gradon has been a member of our board of directors since November 2007. Mr. Gradon was an
executive and attorney with The Peninsular and Oriental Steam Navigation Company (P&O) for more
than 20 years. He retired from P&O in June 2006 following its takeover by Dubai Ports World. He was
P&Os Executive Director for Commercial and Legal Affairs from 2001 until June 2006 and a main
board director of P&O from 1998 until 2006. Other roles at P&O included being Chairman of P&Os
real estate business, Chairman of La Manga Club, a leading European leisure resort, and Chief
Executive of the London Gateway infrastructure project. Prior to joining P&O in 1986, Mr. Gradon
was a solicitor with Slaughter & May in London. Mr. Gradon is currently senior independent director
of Modern Water plc, an independent director of Grosvenor Limited and a member of the Committee of
the All England Lawn Tennis Club, which operates the business and events of the Wimbledon Tennis
Championships. He received an MA degree in Law from Cambridge University.
68
Niall Greene has been a member of our board of directors since October 2006. He is the vice chair
of the board of Aviareto Limited, a company that holds the contract from the International Civil
Aviation Organization for the management of the International Registry of Mobile Assets and is
chair of the board of Blade Engine Securitization Limited. He has more than 40 years of experience
working in the aviation industry, including with Aer Lingus, GPA Group and GECAS. At GPA Group and
GECAS, he held various senior management positions in marketing, corporate communications and
business development. Mr. Greene received a law degree from the University of Limerick.
Brian Hayden has been a member of our board of directors since February 2008. Mr. Hayden was
employed by General Electric Commercial Aviation Services (GECAS) from 1993 until his retirement at
the end of 2008. During his tenure with GECAS, he served as Executive Vice President and the Head
of GECAS office in Shannon, Ireland, as well as the GE National Executive Director for the
Republic of Ireland. He also served as Chairman of the Board and President of GECAT, then a pilot
training subsidiary of GECAS. From 1989 to 1993, he was Senior Vice President of the technical
division of GPA Group, a commercial aircraft leasing company based in Shannon. Mr. Hayden began his
career with Aer Lingus in 1970 where he held various management positions. Mr. Hayden graduated as
a Chartered Mechanical Engineer and is a Fellow of the Institution of Engineers of Ireland. He was
awarded an MSc by Trinity College Dublin and subsequently earned an MBA from University College
Dublin. He is a director of Airplanes Limited.
David C. Hurley has been a member of our board of directors since October 2006. Mr. Hurley is the
Vice Chairman of PrivatAir of Geneva, Switzerland, a company with significant business aviation
services in the United States and Europe. Prior to his appointment with PrivatAir in 2001, Mr.
Hurley was the Chief Executive Officer of Flight Services Group, a company he founded in 1984,
which he grew into one of the worlds largest providers of corporate aircraft management, executive
charter and aircraft sales and acquisitions in the United States. Mr. Hurley currently also serves
on the boards of directors of Genesee & Wyoming Inc., Hexcel, Inc., Aviation Partners Boeing,
ExelTech Aerospace, Inc., The Smithsonian Institutions National Air and Space Museum, Corporate
Angel Network and CAMP Systems.
Declan McSweeney has been a member of our board of directors since November 2007. He has over 30
years of experience in banking, including 28 years with Allied Irish Banks plc, where he was Chief
Financial Officer from 1997 to 2005. Prior to joining Allied Irish Banks, Mr. McSweeney worked with
KPMG in Ireland and the United States from 1973 to 1978. In 2007-08, he was the Chief
Financial Officer of Home Credit Group and a member of the Board of Directors of Home Credit B.V.,
a provider of consumer finance products in Central Europe, Eastern Europe and Asia. Mr. McSweeney
is a Chartered Accountant by profession and is a graduate in Commerce from University College
Dublin.
Andrew L. Wallace has been a member of our board of directors since October 2006. Mr. Wallace had
40 years of experience at Deloitte & Touche LLP before retiring in June 2006. Mr. Wallace served as
an audit partner at Deloitte for 27 years, primarily serving large multi-national public companies.
His broad industry experience includes large public company clients in the manufacturing,
retail/distribution, commodities and satellite services industries. He also served as a member of
Deloittes Tri-State Management Committee. Mr. Wallace received a BS in Accounting from Kent State
University.
69
B. Compensation
Compensation of Directors and Officers
Each non-executive member of our board of directors receives an annual cash retainer of $100,000
payable in equal quarterly installments and pro rated for the initial
quarter. The lead independent director (currently Mr. Greene)
and the Audit Committee chairman receive an additional
$25,000 per year, and the chairman of each other standing
committee receives an additional $10,000 per year. In addition, each
member of a committee who is not the chairman of that committee receives $5,000 per year. Each
director is also reimbursed for out-of-pocket expenses incurred while attending any meeting of the
board of directors or any board committee. Company employees who also serve as directors do not
receive compensation for their services as directors.
During the year ended December 31, 2008, we paid to our directors and officers aggregate cash
compensation of $3.5 million. In addition, our directors and officers were granted an aggregate of
47,180 restricted shares. The fair value attributable to the restricted shares was $0.7 million.
For further information regarding our restricted shares, see Note 14, Share-Based Compensation,
in the notes to the financial statements.
We have entered into directors service agreements with our directors, pursuant to which we have
agreed to indemnify them against any liability brought against them by reason of their service as
directors, except in cases where such liability arises from fraud, dishonesty, bad faith, gross
negligence, willful default or willful misfeasance.
Change of Control Benefits
We believe the best time to consider the appropriateness of change of control provisions is when a
change of control is not imminent and before the lack of such a plan poses a risk to the
effectiveness of our employees. We seek to balance the potential costs of change of control
provisions with the costs that would arise from fear of job loss and other distractions that may
result from potential, rumored or actual changes of control. As a result, after careful evaluation
of the implications and economics of a change of control plan, on February 24, 2009, we adopted the
Genesis Lease Limited Change of Control Plan (the Change of Control Plan). Pursuant to the
Change of Control Plan, if, within the one-year period following a change of control of Genesis, an
employees employment is terminated for any reason other than cause or is terminated by the
employee for good reason (each as defined in the Change of Control Plan), (a) each employee who has
been employed for at least one year prior to the date of termination will be paid a lump-sum amount
equal to the employees then-current annual base salary (or, if greater, the annual base salary as
of the date of the change of control), and (b) each employee who has been employed for less than
one year prior to the date of termination will be paid a lump-sum amount equal to the greater of
(i) such employees then-current annual base salary (or, if greater, the annual base salary as of
the date of the change of control) pro-rated to the amount of time the employee has been employed
with Genesis, or (ii) one-quarter of such employees then-current annual base salary (or, if
greater, one-quarter of the annual base salary as of the date of the change of control). To the extent that an employee has a separate employment agreement, the payment provided for under
the Change of Control Plan will be in addition to any payments to which such employee is entitled
under such employment agreement, including change of control payments, but excluding payments in
respect of notice periods (with the exception of benefits in kind, such as pension payments, health
coverage, etc., which would be available during such notice periods).
Equity Incentive Plan
We have adopted a share incentive plan for our employees and directors. The purpose of the plan is
to promote our interests and the interests of our shareholders by (1) attracting and retaining
exceptional officers, directors and other key employees; (2) motivating such individuals by means
of performance-related incentives to achieve long-range performance
70
goals; and (3) enabling such individuals to participate in our long-term growth and financial
success.
The plan is administered by the compensation committee of our board of directors. The committee is
authorized to interpret the plan, to establish, amend and rescind any rules and regulations
relating to the plan, and to make any other determinations that it deems necessary or desirable for
the administration of the plan. The committee will select, in its sole discretion, the participants
to whom awards shall be granted under the plan and will have full power and authority to establish
the terms and conditions of any award, consistent with the provisions of the plan and to waive any
such terms and conditions at any time (including, without limitation, accelerating or waiving any
vesting conditions).
Awards granted under the plan may be made in the form of (1) options, (2) share appreciation
rights, including limited share appreciation rights and (3) other share-based awards. The maximum
number of our common shares that may be issued for awards under the plan is 3,000,000, subject to
adjustments. Unless otherwise determined by the committee, any of the shares issued in respect of
any award granted under the plan will be in the form of ADSs. If, after the effective date of the
plan, any share covered by an award granted under the plan, or to which such an award relates, is
forfeited, or if an award has expired, terminated or been canceled for any reason whatsoever
without consideration therefore, then the shares covered by such award shall again be, or shall
become, shares with respect to which awards may be granted under the plan. Any shares delivered to
us as part or full payment for the purchase price of an award granted under the plan or to satisfy
our withholding obligation with respect to an award granted under the plan, shall again be
available for awards under the Plan.
Awards may be made under the plan in assumption of, or in substitution for, outstanding awards
previously granted by us or our affiliates or a company acquired by us or with which we combine.
The number of shares underlying any such assumed or substitute awards shall be counted against the
aggregate number of shares which are available for grant under awards made under the plan. No award
may be granted under the plan after the tenth anniversary of the plans effective date, but awards
granted under the plan prior to such date may extend beyond that date.
Awards granted under the plan shall be evidenced by award agreements (which need not be identical)
that provide additional terms and conditions associated with such awards, as determined by the
committee in its sole discretion; provided, however, that in the event of any conflict between the
provisions of the plan and any such agreement, the provisions of the plan shall prevail.
Options granted under the plan are subject to such terms, including exercise price (which will not
be less than the greater of the fair market value or the par value of the shares on the date of the
option grant) and conditions and timing of exercise, as may be determined by the committee. Payment
in respect of the exercise of an option granted under the plan may be made in cash or, if and to
the extent permitted by the committee, (1) in shares having a fair market value equal to the
aggregate exercise price for the shares being purchased and satisfying such other requirements as
may be imposed by the committee, (2) partly in cash and, to the extent permitted by the committee,
partly in such shares or (3) if there is a public market for the shares at such time, through the
delivery of irrevocable instructions to a broker to sell shares obtained upon the exercise of the
option and to deliver promptly to us an amount out of the proceeds of such sale equal to the
aggregate exercise price for the shares being
71
purchased; provided, in each case, that such method results in the shares being
issued as fully paid under Bermuda law.
The committee also may grant share appreciation rights (including limited share appreciation
rights). Each share appreciation right shall entitle a participant upon exercise to an amount equal
to the product of (1) the excess of (A) the fair market value on the exercise date of one share
over (B) the per share exercise price of the share appreciation right and (2) the number of shares
covered by the share appreciation right. The exercise price of a share appreciation right shall be
an amount determined by the committee, but in no event shall such amount be less than the greater
of the fair market value or the par value of a share on the date such share appreciation right is
granted. The share appreciation right shall be evidenced by an award agreement which shall specify
the terms and conditions of such award, as determined by the committee in its sole discretion,
including the number of shares covered by the share appreciation right, the period over which the
share appreciation right may be exercised and such other terms and conditions not inconsistent with
the plan. The committee shall determine whether a share appreciation right shall be settled in
cash,
shares or a combination of cash and shares. The committee may impose, in its discretion, such
conditions upon the exercisability or transferability of share appreciation rights as it may deem
fit.
Shares, restricted shares and awards that are valued in whole or in part by reference to, or are
otherwise based on the fair market value of, shares (other share-based awards) granted under the
plan shall be in such form, and dependent on such conditions, as the committee shall determine,
including, without limitation, the right to receive, or vest with respect to, one or more shares
(or the equivalent cash value of such shares) upon the completion of a specified period of service,
the occurrence of an event and/or the attainment of performance objectives. Subject to the terms of
the plan, the committee shall determine the number of shares to be awarded under (or otherwise
related to) the other share-based awards, whether such awards are to be settled in cash, shares or
a combination of cash and shares and all other terms and conditions of such other share-based
awards.
Unless otherwise determined by the committee, an award shall not be transferable or assignable by
the participant except in the event of his death (subject to the applicable laws of descent and
distribution). An award exercisable after the death of a participant may be exercised by the
legatees, personal representatives or distributees of the participant.
In the event of any change in our outstanding shares after the effective date of the plan by reason
of any share dividend or split, reorganization, recapitalization, merger, amalgamation,
consolidation, spin-off, combination or transaction or exchange of shares or other corporate
exchange, or any distribution to our shareholders of shares other than regular cash dividends or
any transaction similar to the foregoing, the committee in its sole discretion and without
liability to any person shall make such substitution or adjustment, if any, as it deems to be
equitable, as to (1) the number or kind of shares or other securities issued or reserved for
issuance pursuant to the plan or pursuant to outstanding awards, (2) the exercise price of any
option or share appreciation right and/or (3) any other affected terms of such awards.
In the event of our change in control after the effective date of the plan, the committee is
authorized (but not obligated) to make adjustments in the terms and conditions of outstanding
awards, including without limitation: (1) continuation or assumption of such outstanding awards
under the plan by us (if we are the surviving corporation) or by the surviving corporation or its
parent; (2) substitution by the surviving corporation or its parent of awards
72
with substantially the same terms for such outstanding awards; (3) accelerated exercisability or vesting of and/or
lapse of restrictions under all then outstanding awards immediately prior to the occurrence of such
event; (4) upon written notice, provide that any outstanding awards must be exercised, to the
extent then exercisable, within 15 days immediately prior to the scheduled consummation of the
event, or such other period as determined by the committee (in either case contingent upon the
consummation of the event), at the end of which period such awards shall terminate to the extent
not so exercised within the relevant period; and (5) cancellation of all or any portion of
outstanding awards by cash payment of the excess, if any, of the fair market value of the shares
subject to such outstanding awards or portion thereof being canceled over the purchase price, if
any, with respect to such awards or portion thereof being canceled.
The board may amend, alter, suspend, discontinue, or terminate the plan or any portion thereof, or
any award (or award agreement) thereunder, at any time; provided that no such amendment,
alteration, suspension, discontinuation or termination shall be made (1) without our shareholder
approval if such approval is necessary to comply with any tax or regulatory requirement applicable
to the plan and (2) without the consent of the participant, if such action would materially
diminish any of the rights of any participant under any award theretofore granted to such
participant under the plan; provided, however, the committee may amend the plan in such manner as it deems necessary to permit the granting of awards
meeting the requirements of applicable laws.
C. Board Practices
Board of Directors
Our board of directors currently consists of eight members. Our bye-laws provide that the board of
directors is to consist of a minimum of two and a maximum of nine directors as the board of
directors may from time to time determine.
Committees of the Board
The standing committees of our board of directors consist of an audit committee, a compensation
committee and a nominating and corporate governance committee. These committees are described
below. Our board of directors may also establish various other committees to assist it in its
responsibilities.
Audit Committee. Our Audit Committee is concerned primarily with the (1) oversight of the financial
reporting process on behalf of the board and (2) the accuracy and effectiveness of the audits of
our financial statements by our independent auditors. Its duties include:
|
|
|
selecting independent auditors for approval by our shareholders; |
|
|
|
|
reviewing the scope of the audit to be conducted by our independent auditors, as well
as the results of their audit; |
|
|
|
|
approving audit and non-audit services provided to us by the independent auditors; |
|
|
|
|
reviewing the organization and scope of our internal system of audit, financial and
disclosure controls; |
|
|
|
|
overseeing our financial reporting activities, including our annual report, and the
accounting standards and principles followed; |
|
|
|
|
reviewing and approving related-party transactions and preparing reports for the
board of directors on such related-party transactions; and |
|
|
|
|
conducting other reviews relating to compliance by our employees with our policies
and applicable laws. |
73
Each of the members of the Audit Committee is an independent director as defined under the
applicable rules of the NYSE. Mr. Wallace, Mr. Greene and Mr. Hurley have served on the Audit
Committee since October 2006, and Mr. Mc Sweeney has served since November 2007. Mr. Wallace serves
as chairperson.
Compensation
Committee. Our Compensation Committee has two primary responsibilities: (1) to monitor
our management resources, structure, succession planning, development and selection process as well
as the performance of key executives; and (2) to review and approve executive compensation and
broad-based and incentive compensation plans. Each of the members of the Compensation Committee is
an independent director as defined under the applicable rules of the NYSE. Mr. Hurley has served
on the Compensation Committee since October 2006, Mr. Gradon has served since November 2007, and
Mr. Dacier and Mr. McSweeney have served since June 2008. Mr. Gradon serves as chairperson.
Nominating
and Corporate Governance Committee. Our Nominating and Corporate Governance Committees
responsibilities include the selection of potential candidates for our board of directors and the
development and annual review of our governance principles. This committee also annually reviews
director compensation and benefits and makes recommendations to our board of directors concerning
the structure and membership of the other board committees. Mr. Greene has served on the Nominating
and Corporate Governance Committee since October 2006, Mr. Dacier has served since November 2007,
and Mr. Gradon and Mr. Wallace have served since June 2008. Mr. Dacier serves as chairperson.
D. Employees
We operate in a business that is capital-intensive, rather than labor-intensive. As at December 31,
2008, our only employees were our chief executive officer, our chief financial officer, our chief
commercial officer and eighteen other direct employees, as well as two consultants who work with us
on a contract basis. Management and administrative personnel will expand, as necessary, to meet our
future growth needs.
E. Share Ownership
Each of our directors and officers owns less than one percent of our outstanding common shares.
74
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
The following table sets forth certain information regarding the beneficial ownership of our
ADSs by each person known by us to be a beneficial owner of more than
5% of our ADSs as at March 5, 2009:
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially Owned |
Name |
|
Number |
|
Percent |
GE |
|
|
3,967,500 |
|
|
|
11.6 |
% |
Rivanna Capital, LLC (1) |
|
|
1,821,753 |
|
|
|
5.3 |
% |
|
|
|
(1) |
|
Information obtained solely by reference to the Schedule 13G filed with the SEC on
February 5, 2009 by Rivanna Capital, LLC and certain of its affiliates. |
As at
March 5, 2009, 4,002,397 of our ADSs were held by 26 holders of record in the United
States, not including ADSs held of record by Depository Trust and Clearance Corporation, or DTC. As
at March 5, 2009, DTC was the holder of record of 30,220,426 ADSs.
We are not aware of any arrangements, the operation of which may at a subsequent date result in a
change of control.
B. Related Party Transactions
Servicing Agreements
Pursuant to six servicing agreements, GECAS provides Genesis with most services related to
leasing its fleet of aircraft, including marketing aircraft for lease and re-lease, collecting
rents and other payments from lessees, monitoring maintenance, insurance and other obligations
under leases and enforcing rights against lessees. Under the servicing agreements, Genesis is
required to pay GECAS a base fee of $150,000 per month for servicing the aircraft in the Initial
Portfolio. Genesis is also required to pay GECAS a base fee of 0.01% per month of the purchase
price of the additional aircraft acquired during 2007 and 2008. In addition, Genesis is required to
pay GECAS additional servicing fees based on rents due and paid under aircraft leases and proceeds
of dispositions of aircraft and certain other fees for additional services.
Asset Purchase Agreements
On June 26, 2008, Genesis signed an asset purchase agreement to acquire a modern, wide-body
commercial aircraft from an affiliate of GE. The aircraft delivered to Genesis on June 26, 2008.
Expense Agreement
In connection with the closing of the revolving credit facility on April 5, 2007, GECAS
reimbursed fees and related expenses of $7.2 million that were originally paid by Genesis
Acquisition. We had recorded this amount as deferred financing costs with an offsetting credit to
additional paid-in capital. Of this amount, $3.2 million was amortized to interest expense in the
year ended December 31, 2007. A further amount of $2.0 million was amortized in the year ended
December 31, 2008.
C. Interest of Experts and Counsel
Not applicable.
75
Item 8. Financial Information
A. Combined and Consolidated Financial Statements and Other Financial Information
Please see Item 18 below for additional information required to be disclosed under this Item 8.
Legal Proceedings
We have not been involved in any legal proceedings that may have, or have had, a significant effect
on our business, financial position, results of operations or liquidity, and we are not aware of
any proceedings that are pending or threatened that may have a material effect on our business,
financial position, results of operations or liquidity. From time to time, we may be subject to
legal proceedings and claims in the ordinary course of business, principally claims relating to
incidents involving aircraft and claims involving the existence or breach of a lease, sale or
purchase contract. We expect that claims related to incidents involving our aircraft would be
covered by insurance, subject to customary deductions. However, these claims could result in the
expenditure of significant financial and managerial resources, even if they lack merit and if
determined adversely to us and not covered by insurance could result in significant uninsured
losses.
Dividend Policy
Overview
We generate significant cash flow from leases with a diversified group of commercial aviation
customers. The distributable cash flow on which we focus is derived principally from our minimum
contracted lease rentals, reduced by our net cash interest expenses, cash selling, general and
administrative expenses, maintenance and cash taxes.
We intend to distribute a portion of our cash flow to our shareholders, while retaining cash
flow for reinvestment in our business. Retained cash flow may be used to fund acquisitions of
aircraft and other aviation assets, make debt repayments, repurchase common shares and for other
purposes, as determined by our management and board of directors. The declaration and payment of
future dividends to holders of our common shares will be at the discretion of our board of
directors and will depend on many factors, including our financial condition, cash flows, legal
requirements and other factors as our board of directors deems relevant.
Possible Changes in Quarterly Dividends
There are a number of factors that could affect our ability to pay dividends. For example, if
we are not able to refinance the notes issued in the securitization before the principal thereof
begins to amortize, our ability to pay dividends will be adversely affected if we have not
developed sufficient additional sources of cash flow by then to replace the cash flows that will be
applied to such principal payments. Commencing from December 19, 2011, we will be required to apply
all available cash flow from our Initial Portfolio to repay the principal amount thereof on a
monthly basis, and commencing on December 19, 2009, we will be required to repay $1,000,000 of the
principal of the notes on a monthly basis. Other factors that may cause us not to pay dividends in
the expected amounts or at all, include, but are not limited to, the following:
|
|
|
lack of availability of cash to pay dividends due to changes in our operating cash
flow, capital expenditure requirements, working capital requirements and other cash needs; |
|
|
|
|
our inability to refinance the notes that we have issued in the securitization before
December 2011, when we will be required to apply all available cash flow from our Initial
Portfolio to repay the principal amount thereof on a monthly basis; |
|
|
|
|
our inability to renew, extend or repay our debt facilities when due, which could
prevent our subsidiaries from making any distributions to us; |
76
|
|
|
restrictions imposed by our financing arrangements, including under the notes issued
in the securitization, our debt facilities and any indebtedness incurred in the future to
refinance our existing debt or to expand our aircraft portfolio; |
|
|
|
|
application of funds to make and finance acquisitions of aircraft and other aviation
assets; |
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|
|
|
reduced levels of demand for, or value of, our aircraft; |
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|
|
increased supply of aircraft; |
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|
obsolescence of aircraft; |
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|
|
lower lease rates on new aircraft and re-leased aircraft; |
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|
delays in re-leasing our aircraft after the expiration or early termination of
existing leases; |
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|
|
impaired financial condition and liquidity of our lessees; |
|
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|
|
deterioration of economic conditions in the commercial aviation industry generally; |
|
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|
|
unexpected or increased fees and expenses payable under our agreements with GECAS and
its affiliates and other service providers; |
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|
poor performance by GECAS and its affiliates and other service providers and our
limited rights to terminate them; |
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|
unexpected or increased maintenance, operating or other expenses or changes in the
timing thereof; |
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|
|
a decision by our board of directors to modify or revoke its policy to distribute a
portion of our cash flow available for distribution; |
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|
changes in Irish tax law, the tax treaty between the United States and Ireland (the
Irish Treaty) or our ability to qualify for the benefits of such treaty; and |
|
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|
restrictions under Bermuda law on the amount of dividends that we may pay. |
Our growth strategy contemplates that we will fund the acquisition of additional aircraft and
other aviation assets through a combination of retained cash flow and debt and equity financing. If
financing is not available to us on acceptable terms, our board of directors may determine to
finance or refinance acquisitions solely with cash from operations, which would reduce or even
eliminate the amount of cash available for dividends.
We are a passive foreign investment company (PFIC) under U.S. federal income tax rules, and
our dividends will not be eligible for either the dividends-received deduction for corporate U.S.
holders or treatment as qualified dividend income (which is taxable at the rates generally
applicable to long-term capital gains) for U.S. holders taxed as individuals. U.S. holders that
elect to treat us as a qualified electing fund (a QEF election) will not be subject to U.S.
federal income tax on dividends and will instead be taxed currently on their pro rata share of our
ordinary earnings as ordinary income and a pro rata share of our net capital gain as long-term
capital gain, and generally capital gain from the sale, exchange or other disposition of shares
held more than one year will be long-term capital gain eligible for a maximum 15% rate of taxation
for non-corporate holders. U.S. holders who make a QEF election may be required to include amounts
in income for U.S. federal income tax purposes in excess of amounts distributed by us.
As a Bermuda company, our ability to pay dividends is subject to certain restrictions imposed
by Bermuda law.
B. Significant Changes
Not applicable.
Item 9. The Offer and Listing
Our ADSs, each representing one common share, are listed for trading on the NYSE under the
symbol GLS.
77
The following table sets forth the annual high and low sale prices of our ADSs on the NYSE for
the periods indicated since our ADSs began trading on the NYSE.
|
|
|
|
|
|
|
|
|
|
|
High |
|
Low |
Year Ended December 31, 2006 |
|
$ |
23.75 |
|
|
$ |
23.00 |
|
Year Ended December 31, 2007 |
|
$ |
28.61 |
|
|
$ |
17.00 |
|
Year Ended December 31, 2008 |
|
$ |
21.29 |
|
|
$ |
2.33 |
|
The following table sets forth the quarterly high and low sale prices of our ADSs on the NYSE
for the periods indicated since our ADSs began trading on the NYSE.
|
|
|
|
|
|
|
|
|
|
|
High |
|
Low |
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
Fourth Quarter (from December 14, 2006) |
|
$ |
23.75 |
|
|
$ |
23.00 |
|
Year Ended December 31, 2007 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
26.80 |
|
|
$ |
22.65 |
|
Second Quarter |
|
$ |
28.61 |
|
|
$ |
25.61 |
|
Third Quarter |
|
$ |
28.25 |
|
|
$ |
17.92 |
|
Fourth Quarter |
|
$ |
25.38 |
|
|
$ |
17.00 |
|
Year Ended December 31, 2008 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
21.29 |
|
|
$ |
14.21 |
|
Second Quarter |
|
$ |
16.49 |
|
|
$ |
9.93 |
|
Third Quarter |
|
$ |
14.18 |
|
|
$ |
8.60 |
|
Fourth Quarter |
|
$ |
9.09 |
|
|
$ |
2.33 |
|
The following table sets forth the monthly high and low sale prices of our ADSs on the NYSE
for the most recent six months.
|
|
|
|
|
|
|
|
|
|
|
High |
|
Low |
Month ended September 30, 2008 |
|
$ |
12.20 |
|
|
$ |
8.60 |
|
Month ended October 31, 2008 |
|
$ |
9.09 |
|
|
$ |
3.86 |
|
Month ended November 30, 2008 |
|
$ |
5.68 |
|
|
$ |
2.39 |
|
Month ended December 31, 2008 |
|
$ |
3.75 |
|
|
$ |
2.33 |
|
Month ended January 31, 2009 |
|
$ |
4.25 |
|
|
$ |
2.50 |
|
Month ended February 28, 2009 |
|
$ |
2.62 |
|
|
$ |
2.40 |
|
Item 10. Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Pursuant to the instructions to Form 20-F, the information called for by this Item 10.B is
contained in our Registration Statement on Form F-1, as filed with the SEC on November 27, 2006, as
subsequently amended, under the heading Description of Share Capital, and is hereby incorporated
by reference.
C. Material Contracts
The following is a summary of each material contract, other than material contracts entered into in
the ordinary course of business, to which we are a party, for the two years immediately preceding
the date of this Annual Report.
78
Servicing Agreements
We entered into a master servicing agreement with GECAS on December 19, 2006, which we refer to as
the Master Servicing Agreement. Genesis Funding also entered into a servicing agreement with GECAS
on December 19, 2006 specifically relating to the aircraft in our Initial Portfolio, which we refer
to as the Initial Portfolio Servicing Agreement, and other subsidiaries have entered into
additional servicing agreements with GECAS, specifically relating to the aircraft owned, directly
or indirectly, by those subsidiaries. We refer to these servicing agreements as the Subsidiary
Servicing Agreements. We believe GECASs broad industry expertise as the manager of a fleet of
approximately 1,800 aircraft owned by its affiliates and by other entities, 28 offices, its
relationships with 270 passenger and cargo airline customers in 78 countries around the world and
involvement in the market for aircraft acquisitions and dispositions enhance our ability to manage
our portfolio effectively, to complete the acquisition and leasing of additional aircraft and to
remarket aircraft as they come off lease.
The principal services being provided by GECAS under the servicing agreements are:
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lease marketing and remarketing, including lease negotiation; |
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|
|
collecting rental payments and other amounts due under leases, collecting additional
rent and maintenance payments where applicable, lease compliance and enforcement and
accepting delivery and redelivery of aircraft under lease; |
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|
aircraft dispositions; |
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|
monitoring the performance of maintenance obligations of lessees under the leases in
a manner consistent with the practices employed from time to time by GECAS with respect to
its own aircraft; |
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|
|
limited assistance with any financing or refinancing of our indebtedness subject to
agreement or additional fees for such service; |
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|
procuring legal and other professional services with respect to the lease, sale or
financing of the aircraft, any amendment or modification of any lease, the enforcement of
our rights under any lease, disputes that arise as to any aircraft or for any other
purpose that GECAS reasonably determines is necessary in connection with the performance
of its services; |
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|
|
periodic reporting of operational information relating to the aircraft, including
providing certain reports to the policy provider; and |
|
|
|
|
certain aviation insurance related services. |
The servicing agreements provide that GECAS act in accordance with laws applicable to it, in
certain cases with directions given by us or a manager, a cash manager or an administrative agent
on behalf of us, with the specified standard of care described below and with the specified
conflicts standard described below. GECAS does not have any fiduciary or other implied duties or
obligations to us, our shareholders or any other person. GECAS and its respective subsidiaries
cannot be held responsible for any liabilities of ours, including any payment of any dividends to
our shareholders or payments due in respect of any financing.
Aircraft Agreed to be Serviced
GECAS currently services all of our aircraft. Pursuant to the Master Servicing Agreement, GECAS
will service all additional aircraft that we acquire, including aircraft acquired by our
79
subsidiaries, except for aircraft that GECAS does not accept for servicing for one of the
following reasons:
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|
|
GECAS believes that the provision of any of the services or any actions, inactions or
consequences related thereto or arising therefrom, or any conditions, events or
circumstances existing at any time of determination, may directly or indirectly lead to or
create: |
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|
|
a violation of any applicable law with respect to GECAS or its affiliates or
of any GE policies; |
|
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|
|
an investigation by any governmental authority of or relating to GECAS or any
of its affiliates; |
|
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|
|
a conflict of interest with respect to any person that is unacceptable to
GECAS; |
|
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|
|
a requirement of resources being allocated to, or expenses being incurred in
connection with, the servicing of one or more of such aircraft, individually or in the
aggregate with respect to any group thereof, which will be materially different from
those being allocated to, or incurred in connection with, other aircraft which are
serviced by GECAS; |
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|
|
an aircraft we wish to acquire is more than 20 years old when we acquire it or is not
manufactured by manufacturers based in North America, South America, Asia or Europe; or
such aircraft is of a model or type not then currently in the fleet owned by GECAS and its
affiliates or is of a model or type of which GECAS has decided to phase out of its owned
fleet; |
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|
|
an aircraft we wish to acquire is on lease to or otherwise involves a person with
whom GECAS or any of its affiliates is involved in a legal proceeding or otherwise with
which GECAS or any of its affiliates has a material dispute; |
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any default or event of default, or certain potential events of default, by us exists
under the Master Servicing Agreement or any other servicing agreement we have entered into
with GECAS, or any guarantees or any related or other agreements with GECAS or any of its
affiliates, which has not been or will not reasonably be expected to be cured on or before
the date that services in respect of any such additional aircraft are expected to
commence; or |
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as we and GECAS so mutually agree (although neither party has any obligation to do
so). |
Operating Guidelines
Under the servicing agreements, GECAS is entitled to exercise such authority as is necessary to
give it practical and working autonomy in performing its services. The servicing agreements provide
that GECAS give us and our agents access to records related to the aircraft under specified
circumstances to enable us to monitor the performance by GECAS, except for internal correspondence,
approval materials, internal evaluations and similar documents or other records developed by GECAS
and its affiliates for their own use. GECAS also does not commingle any funds of ours with its own
funds.
The following transactions entered into by GECAS on our behalf require our prior written approval:
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sales of our aircraft (other than sales made in accordance with the terms of any
lease in existence on the date of acquisition of the relevant aircraft); |
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entering into or renewing leases or extending most leases if the resulting lease does
not comply with any applicable operating covenants set forth under our financing
agreements or if a new lease grants a purchase option in favor of the lessee; |
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terminating any lease or leases to any single lessee for aircraft then having an
aggregate depreciated net book value in excess of $100 million unless such lease or leases
are substituted or replaced by other substantially similar lease or leases; |
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unless provided for in our budget, entering into any contract for certain major
modification or maintenance of aircraft costing in excess of specified amounts; |
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issuing any guarantee on our behalf, or otherwise pledging our credit, with certain
exceptions related to trade payables, bonds and similar instruments obtained to repossess
an aircraft, removing a lien or similar actions not involving payments or cash collateral
deposits on our behalf in excess of $3 million and issuing guarantees related to our other
obligations; |
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except in limited circumstances, entering into, amending or granting a waiver with
respect to, any transaction between us and GE Capital or any of its affiliates not
contemplated in the servicing agreement including for the acquisition, sale or lease of
any aircraft assets from or to, or the obtaining of services by any such person (except
for the acquisition, sale, exchange or lease of or services in respect of any engine,
parts or components thereof, or aircraft spare parts or engine spare parts, components or
ancillary equipment or devices furnished therewith); |
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incurring any actual or contingent liability unless (1) contemplated in our budget,
(2) incurred in entering into a lease or sale or performing any obligation under a lease
or sale contract or (3) incurred in the ordinary course of business and so long as such
individual liability does not result in a net out-of-pocket cash expenditure of more than
$3 million; and |
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entering into any order or commitment to acquire, or acquiring, aircraft or, so long
as no individual net (after credit for exchanges, replacements or similar items)
out-of-pocket cash purchase price exceeds $3 million, aircraft engines unless, in the case
of aircraft engines, provided for in a lease or as provided for in our budget or if GECAS
determines the acquisition of the engine is necessary or appropriate. |
The servicing agreements require all transactions entered into by GECAS on behalf of us other than
intracompany transactions among us and our subsidiaries to be at arms length and on market terms
unless otherwise agreed or directed by us.
Budgets
The servicing agreements call for us to prepare each year a single lease operating budget for each
of our aircraft and a single budget for the aircraft expenses related to all such aircraft.
Standard of Care
GECAS has agreed to perform the services required by the servicing agreements with reasonable care
and diligence at all times.
Term and Termination
The Master Servicing Agreement expires in 2021. The Initial Portfolio Servicing Agreement expires
on the later of (1) the maturity date of the notes issued in the securitization and (2) the date of
repayment of all principal and other amounts due under the securitization (including any amounts
owed to the policy provider). The Subsidiary Servicing Agreements expire at various dates, none of
which is before 2021.
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We have the right to terminate any servicing agreement (except, in the case of the Initial
Portfolio Servicing Agreement, which also requires the prior written consent of the policy
provider) if, among other things,
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GECAS ceases to be at least majority-owned directly or indirectly by GE Capital, or
its ultimate parent, GE; |
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GECAS fails in any material respect to perform any material services under the
servicing agreement which results in liability of GECAS due to its gross negligence or
willful misconduct (including willful misconduct constituting fraud) in respect of its
obligation to apply the standard of care or conflicts standard in respect of performance
of the services in a manner that is materially adverse to us and our applicable
subsidiaries taken as a whole; |
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GECAS fails in any material respect to perform any material services under the
servicing agreement in accordance with the standard of care or the conflicts standard in a
manner that is materially adverse to us and our applicable subsidiaries taken as a whole; |
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GECAS, GE Capital or GE becomes subject to bankruptcy or insolvency proceedings; |
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with respect to the Master Servicing Agreement and the GAL Servicing Agreement, we
have insufficient funds for the payment of certain dividends while a significant portion
of our available aircraft remain off-lease for a specified period; |
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with respect to the Initial Portfolio Servicing Agreement, we have insufficient funds
for the payment of interest on the notes for a period of at least 60 days; |
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with respect to the Initial Portfolio Servicing Agreement, at least 15% of the number
of aircraft assets remain off-lease but available for re-lease for a period of at least
three months following specified events set forth in the indenture; or |
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with respect to the Initial Portfolio Servicing Agreement, without limiting GECASs
rights under the security trust agreement, GECAS takes any steps for the purpose of
processing the appointment of an administrative receiver or the making of any
administrative order or for instituting a bankruptcy, reorganization, arrangement,
insolvency, winding up, liquidation, composition or any similar proceeding under the laws
of any jurisdiction with respect to any person in the Genesis Funding, and any of its
subsidiaries, or any of the aircraft assets. |
In addition, in the case of the Initial Portfolio Servicing Agreement, the policy provider also has
the right to terminate such servicing agreement under the circumstances described above.
GECAS is entitled to terminate a servicing agreement if, among other things, we default in our
payment and other obligations thereunder, any material representation or warranty made by us
or our subsidiaries is false or misleading in a manner material to GECAS, we or our subsidiaries
become subject to bankruptcy or other insolvency proceedings, we or any of our applicable
subsidiaries no longer hold any aircraft, or any guarantee of obligations under the servicing
agreement in favor of GECAS ceases to be in effect.
Under the Initial Portfolio Servicing Agreement, we represented and warranted to GECAS that, in the
event that any competitor of GECAS controls or becomes the beneficial owner, directly or
indirectly, of more than 50% of any class of our securities or obtains director appointment rights,
we will automatically be replaced as manager of our Initial Portfolio under the management
agreement.
Under the Master Servicing Agreement and the Subsidiary Servicing Agreement, GECAS is entitled to
terminate the agreement, subject to certain notice periods described below, if any
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competitor to GECAS controls or becomes the beneficial owner, directly or indirectly, of more than
10% of any class of our securities or obtains director appointment rights and we are unable to
restructure the Master Servicing Agreement (or are otherwise unwilling to restructure the Master
Servicing Agreement) and the services provided thereunder in a manner acceptable to GECAS. Under
our servicing agreements, a competitor is defined by reference to certain named aircraft leasing
companies and their successors and more generally as any other company that has consolidated annual
aircraft leasing or aircraft or engine manufacturing revenues of in excess of $200 million.
To mitigate the risk of these potential terminations by GECAS, we have included certain provisions
in our bye-laws applicable to the acquisition by a competitor of GECAS of a beneficial interest in
10% or more of our voting securities. Our bye-laws provide that if a competitor of GECAS acquires
beneficial ownership of 10% or more of our shares, then we have the option, but not the obligation,
within 90 days of the acquisition of such threshold beneficial ownership, to require that
shareholder to tender for all of our remaining ADSs, or to sell such number of shares to us or to
third parties at fair market value as would reduce its beneficial ownership to less than 10%. In
addition, our bye-laws provide that the vote of each share held by a competitor of GECAS who
beneficially holds 10% or more, but less than 50%, of our shares will be reduced to one-fifth of a
vote per share on all matters upon which our shareholders may vote.
GECAS may also resign under any servicing agreement with respect to all aircraft serviced
thereunder or any affected aircraft, as the case may be, if it reasonably determines that
directions given, or services required, would, if carried out, be unlawful under applicable law, be
in violation of any GE corporate policy regarding business practices or legal, ethical or social
matters, be likely to lead to an investigation by any governmental authority of GECAS or its
affiliates, expose GECAS to liabilities for which, in GECASs good faith opinion, adequate bond or
indemnity has not been provided or place GECAS in a conflict of interest with respect to which, in
GECASs good faith opinion, GECAS could not continue to perform its obligations under the servicing
agreement with respect to all serviced aircraft or any affected aircraft, as the case may be.
Whether or not it resigns, GECAS is not required to take any action of the foregoing kind. GECAS
may also resign in certain circumstances if it becomes subject to taxes for which we do not
indemnify GECAS.
Under the Master Servicing Agreement, GECASs resignation or removal as servicer, and any
termination of the Master Servicing Agreement as provided above, will be effective immediately
after a five-day cure period in the case of a termination because we have failed to pay amounts
owing to GECAS when due, immediately in the case of an acquisition by a competitor of GECAS of
beneficial ownership of 50% or more of our shares, and otherwise 120 days (or in the event a tender
for our shares is made by a competitor of GECAS as described above, such longer period ending on
the earlier of 180 days after notice of resignation or the date the tender is consummated) after
the notice of any resignation or removal, or termination.
The Initial Portfolio Servicing Agreement provides that GECAS may not resign or be removed as
servicer, and such servicing agreement may not be terminated as provided above, unless a
replacement servicer has been appointed and Genesis Funding has obtained a confirmation from the
rating agencies rating its notes that they will not lower, qualify or withdraw any rating as a
result, as well as the consent of the policy provider. If a replacement servicer has not been
appointed within 90 days after notice of any termination, resignation or removal, the
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servicer may petition any court of competent jurisdiction to appoint a replacement servicer,
provided that GECAS may terminate this servicing agreement immediately after a five-day cure period
if Genesis Funding fails to pay GECAS any amount due to GECAS.
None of Genesis Lease, Genesis Funding or our other subsidiaries, as the case may be, nor the
servicer may assign its rights and obligations under any servicing agreement without the other
partys prior consent. The servicer may, however, delegate some, but not all, of its duties to its
affiliates.
Competitors
Pursuant to the Master Servicing Agreement, we will not sell Genesis Funding or any of its
subsidiaries, or any of our other subsidiaries being serviced by GECAS to a competitor of GECAS
pursuant to an arrangement that requires GECAS to continue to provide services following a sale of
such subsidiary, and we will not permit competitively sensitive information obtained from GECAS to
be provided to any such competitor even if such competitor is a shareholder or has the right to
elect a member of our board of directors. Furthermore, if a competitor of GECAS acquires control of
more than 10% of our voting securities or obtains director appointment rights, we will no longer be
able to appoint our representatives as directors on the board of directors or similar group of any
securitization or similar subsidiary sponsored by us, including Genesis Funding, and instead such
directors will be appointed by the existing directors of such securitization or similar subsidiary
and a representative of a competitor of GECAS may not be appointed. We may also be required to
screen off certain of our directors and employees from competitively sensitive information provided
by GECAS.
Servicing Fees
The Initial Portfolio Servicing Agreement provides that we pay to GECAS a base fee of $150,000 per
month, which increases by 0.01% of the maintenance-adjusted base value (at the time of acquisition)
of each aircraft acquired into Genesis Funding that is not an aircraft in our Initial Portfolio.
Genesis Acquisitions servicing agreement provides that Genesis Acquisition will pay to GECAS a
monthly base fee of 0.01% of the purchase price of each aircraft acquired by Genesis Acquisition.
Each servicing agreement also provides that we will pay to GECAS a rent fee equal to 1.0% of the
aggregate amount of basic rent due for all or any part of a month for any aircraft serviced under
such agreement plus 1.0% of the aggregate amount of basic rent actually paid for all or any part of
a month for any aircraft serviced under such agreement. GECAS is also entitled to additional
servicing fees consisting of a sales fee for each sale of an aircraft equal to 1.5% of the
aggregate gross proceeds in respect of dispositions of aircraft assets. In addition, we will pay a
fee to GECAS in connection with GECASs involvement with lessee consents and/or novations that may
be required for any aircraft that we acquire or refinance. Such fees will be $6,000 per applicable
aircraft. Fees for additional services will be as mutually agreed.
Conflicts of Interest
In addition to servicing our aircraft, GECAS currently manages and remarkets for lease or sale
other aircraft and will continue to market for sale or lease other aircraft for third parties
(including other aircraft owned by GE Capital and its affiliates). In the course of conducting such
activities, GECAS will from time to time have conflicts of interest in performing its obligations
on our behalf. See Item 3.D. Risk FactorsRisks Related to Our Relationships with GECAS, Its
Affiliates and Other Service ProvidersGECAS and its affiliates will have conflicts of interest
with us, and their limited contractual or other duties may not restrict them
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from favoring their own business interests to our detriment. If a conflict of interest arises as
to one of our aircraft and other aircraft managed by GECAS, GECAS must perform the services in good
faith, and, to the extent that either two or more of our particular aircraft or one of our aircraft
and other aircraft managed by GECAS have substantially similar objectively identifiable
characteristics that are relevant for purposes of the particular services to be performed, GECAS
has agreed not to discriminate among our aircraft or between any of our aircraft and any other
managed aircraft on an unreasonable basis.
If GECAS in good faith determines that circumstances as to a particular aircraft or lease require
an arms-length negotiation between GECAS or any of its affiliates and us and GECAS believes it
would not be appropriate for it to act on behalf of us, GECAS has agreed to notify us promptly and
to withdraw from acting as the servicer with respect to the matter and we have agreed to appoint an
independent representative (which may be us or any of our affiliates or subsidiaries, but not a
competitor to GECAS) to act on our behalf. GECAS is entitled to act on its own or its affiliates
behalf in those negotiations. In most cases we will continue to be liable for the fees of GECAS and
if we elect to engage an independent representative other than ourselves we will be liable for such
independent representatives fees as well.
Indemnification
We assume liability for, and have agreed to indemnify GECAS on an after-tax basis against, any
losses that arise as a result of or in connection with the aircraft or GECASs performance of its
obligations under the servicing agreement or from errors in judgment or omissions by GECAS under
the servicing agreement, except for any loss that is finally adjudicated to have been caused
directly by GECAS from gross negligence or willful misconduct (including willful misconduct
constituting fraud) in respect of its obligation to apply its standard of care or conflicts
standard described above in the performance of its services. We have likewise agreed that GECAS and
its affiliates have no liability to us or any other person for any losses in any way arising out of
the services except as provided in the foregoing sentence (also referred to as GECASs standard of
liability). We have also generally agreed to indemnify GECAS and its affiliates as to losses
arising out of our IPO and the disclosure in our IPO prospectus, except certain disclosures
provided by GECAS.
Facility Agreement
Please see Item 5.B. Liquidity and Capital ResourcesDebt Facilities for description of (i) the
Facility Agreement, dated as of September 19, 2008, among Genesis Portfolio Funding I Limited, as
Borrower; Genesis Lease Limited, as principal guarantor and as manager of the Borrower; DVB Bank
AG, HSH Nordbank AG and KFW IPEX-Bank GmbH, as joint arrangers and underwriters; HSH Nordbank AG,
as the facility agent and security trustee; and the other parties named therein.
Revolving Credit Agreement
Please see Item 5.B. Liquidity and Capital ResourcesCredit Agreement for description of the
Credit Agreement, dated as of April 5, 2007, and as subsequently
amended, among Genesis Acquisition, as borrower, Genesis, as
Manager, the financial institutions party thereto as lenders, Citibank, N.A., as administrative
agent, and Deutsche Bank Trust Company Americas, as security trustee and account bank.
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D. Exchange Controls
We are not aware of any governmental laws, decrees or regulations in Bermuda that restrict the
export or import of capital, including foreign exchange controls, or that affect the remittance of
dividends, interest or other payments to non-resident holders of our securities.
We are not aware of any limitation of non-resident or foreign owners to hold or vote our securities
imposed by the laws of Bermuda of our memorandum of association or bye-laws.
E. Taxation
The following discussion is a summary of certain of the tax implications of an investment in our
shares. You should consult your tax advisor prior to investing regarding all Irish, U.S. federal,
U.S. state, U.S. local, Bermuda and other country income and other tax consequences of an
investment in our shares, with specific reference to your own particular tax situation and recent
changes in applicable law.
Irish Tax Considerations
The following discussion reflects the material Irish tax consequences applicable to both Irish and
Non-Irish Holders (as defined below) of the acquisition, ownership and disposition of our shares.
This discussion is based on Irish tax law, statutes, treaties, regulations, rulings and decisions
all as at the date of this Annual Report. Taxation laws are subject to change, from time to time,
and no representation is or can be made as to whether such laws will change, to what impact, if
any, such changes will have on the summary contained in this Annual Report. Proposed amendments may
not be enacted as proposed, and legislative or judicial changes, as well as changes in
administrative practice, may modify or change statements expressed herein.
This summary is of a general nature only. It does not constitute legal or tax advice nor does it
discuss all aspects of Irish taxation that may be relevant to any particular holder of our shares.
The Irish tax treatment of a holder of our shares may vary depending upon such holders particular
situation, and holders or prospective purchasers of our shares are advised to consult their own tax
advisors as to the Irish or other tax consequences of the purchase, ownership and disposition of
our shares. You should consult your tax advisor prior to investing regarding all Irish, U.S.
federal, U.S. state, U.S. local, Bermuda and other country income and other tax consequences of an
investment in our shares, with specific reference to your own particular tax situation and recent
changes in applicable law.
For the purposes of this summary of Irish tax considerations:
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An Irish Holder is a holder of our shares that (1) beneficially owns our shares by
virtue of holding the related ADSs evidenced by the relevant ADR; (2) in the case of
individual holders, is resident or ordinarily resident in Ireland under Irish taxation
laws; and (3) in the case of a holder that is a company, is resident in Ireland under Irish
taxation laws and is not also a resident of any other country under any double taxation
agreement entered into by Ireland. |
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A Non-Irish Holder is a Holder of our shares that is not an Irish Holder and has
never been an Irish Holder. |
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A US Holder is a holder of our shares that: (1) beneficially owns our shares by
virtue of holding the related ADSs evidenced by the relevant ADR; (2) is a resident of the
United States for the purposes of the Ireland/United States Double Taxation Convention;
(3) in the case of an individual holder, is not also resident or ordinarily resident in
Ireland for Irish tax purposes; (4) in the case of a corporate holder, is not resident in
Ireland for Irish tax purposes and is not ultimately controlled by persons |
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resident in Ireland; and (5) is not engaged in any trade or business and does not perform
independent personal services through a permanent establishment or fixed base in
Ireland. |
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Relevant Territory is defined as a country with which Ireland has a double tax
treaty, (which includes the United States), or a member state of the European Union other
than Ireland. |
Irish Dividend Withholding Tax
Dividends that we pay on our shares generally are subject to a 20% dividend withholding tax, or
DWT. DWT may not apply where an exemption is permitted by legislation or treaty and where we have
received all necessary documentation prior to the payment of the dividend.
Irish Holders. Individual Irish Holders are subject to DWT on any dividend payments that we make.
DWT is currently applied at a rate of 20%. Corporate Irish Holders will generally be entitled to
claim an exemption from DWT by delivering a declaration to us in the form prescribed by the Irish
Revenue Commissioners.
Non-Irish Holders. Shareholders who are individuals resident in a Relevant Territory and who are
not resident or ordinarily resident in Ireland may receive dividends free from DWT where the
shareholder has provided us with the relevant declaration and residency certificate required by
Irish legislation. Corporate shareholders that are not resident in Ireland and
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who are ultimately controlled by persons resident in a Relevant Territory and who are
not ultimately controlled by persons not resident in a Relevant Territory; or |
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who are resident in a Relevant Territory and not controlled by Irish residents; or |
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whose principal class of shares or the principal class of shares of its 75% or
greater parents are substantially and regularly traded on a recognized stock exchange in a
Relevant Territory; or |
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which are wholly owned by two or more companies, each of whose principal class of
shares are substantially and regularly traded on a recognized stock exchange in a Relevant
Territory |
may receive dividends free from DWT where they provide us with the relevant declaration, auditors
certificate and Irish Revenue Commissioners certificate required by Irish law.
U.S. Holders. Qualifying American depositary banks that receive dividends from Irish companies and
transmit those dividends to U.S. Holders of ADSs are permitted to transmit those dividends on a
gross basis (without any withholding) in the following circumstances:
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where the depositary banks ADS register shows that the direct beneficial owner has a
U.S. address on the register; or |
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if there is a further intermediary between the depositary bank and the beneficial
shareholder, where the depositary bank received confirmation from the intermediary that
the beneficial shareholders address in the intermediarys records is in the United
States. |
Consequently, we expect that U.S. Holders of ADSs will receive dividends that we pay free of DWT.
U.S. Holders that do not comply with the documentation requirements or otherwise do not receive the
dividend gross of Irish withholding taxes may be entitled to claim a refund of the 20% withholding
tax from the Irish Revenue Commissioners.
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Income Tax
Irish Holders. Individual Irish Holders are subject to income tax on the gross amount of any
dividend (i.e., the amount of the dividend received plus any DWT withheld), at their marginal rate
of tax (currently either 20% or 41% depending on the individuals circumstances). Individual Irish
Holders will be able to claim a credit against their resulting income tax liability in respect of
any DWT. Social charges and levies might also apply depending on the particular circumstances of
the individual Irish holder.
Corporate Irish Holders generally will not be subject to Irish tax in respect of dividends
received.
Non-Irish Holders and U.S. Holders. Under the Irish Taxes Consolidation Act, 1997, non-Irish
Holders and U.S. Holders will not have an Irish income tax liability on dividends from us if the
shareholder is neither resident nor ordinarily resident in Ireland and is:
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an individual resident in a Relevant Territory; or |
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a corporation that is ultimately controlled by persons resident in a Relevant
Territory; or |
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a corporation whose principal class of shares (or its 75% or greater parents
principal class of shares) are substantially and regularly traded on a recognized stock
exchange in a Relevant Territory; or |
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a corporation that is wholly owned by two or more corporations each of whose
principal class of shares is substantially and regularly traded on a recognized stock
exchange in a Relevant Territory; or |
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otherwise entitled to an exemption from DWT. |
If a Non-Irish Holder or U.S. Holder is not so exempted, such shareholder will be liable for Irish
income tax (currently 20%) on dividends received from us, but will be entitled to a credit for DWT
withheld.
Taxation of Capital Gains
Irish Holders. Irish Holders that acquire shares will generally be considered, for Irish tax
purposes, to have acquired their shares at a base cost equal to the amount paid for shares. On
subsequent dispositions, shares acquired at an earlier time will generally be deemed, for Irish tax
purposes, to be disposed of on a first in first out basis before shares acquired at a later time.
Irish Holders that dispose of their shares will be subject to Irish capital gains tax (CGT) to the
extent that the proceeds realized from such disposition exceed the base cost of the common shares
or ADSs disposed of and any incidental expenses. The current rate of CGT is
22%. Irish Holders that have unutilized capital losses from other sources in the current, or any
previous, tax year generally can apply such losses to reduce gains realized on the disposal of our
shares.
An annual exemption allows individuals to realize chargeable gains of up to 1,270 in each tax year
without giving rise to CGT. This exemption is specific to the individual and cannot be transferred
between spouses. Irish Holders are required, under Irelands self-assessment system, to file a tax
return reporting any chargeable gains arising to them in a particular tax year. When disposal
proceeds are received in a currency other than euro they must be translated into euro amounts to
calculate the amount of any chargeable gain or loss. Similarly, acquisition costs denominated in a
currency other than the euro must be translated at the date of acquisition to euro amounts. Irish
Holders that realize a loss on the disposition of our shares generally will be entitled to offset
such allowable losses against capital gains realized from
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other sources in determining their CGT liability in a year. Allowable losses which remain
unrelieved in a year generally may be carried forward indefinitely for CGT purposes and applied
against capital gains in future years. Transfers between spouses will not give rise to any
chargeable gain or loss for CGT purposes with the acquiring spouse acquiring the same pro rata base
cost and acquisition date as that of the transferring spouse.
Non-Irish Holders and U.S. Holders. A non-Irish Holder or U.S. Holder is not subject to Irish
capital gains tax on the disposal of our shares provided that our shares are quoted on a recognized
stock exchange at the time of disposition or do not derive their value from land, buildings,
minerals or exploration rights in Ireland.
Irish Capital Acquisitions Tax
A gift or inheritance of our shares will be within the charge to capital acquisitions tax (CAT)
where the donor or the beneficiary in relation to the gift/inheritance is resident or ordinarily
resident in Ireland at the date of the gift/inheritance. Special rules with regard to residence
apply where an individual is not domiciled in Ireland. CAT is charged at a rate of 22% on the
taxable value of the gift or inheritance above a tax-free threshold. This tax-free threshold is
determined by the amount of the current benefit and of previous benefits, received within the group
threshold since December 5, 1991, which are within the charge to capital acquisitions tax and the
relationship between the former holder and the beneficiary. Gifts and inheritances between spouses
are not subject to capital acquisitions tax. Gifts of up to 3,000 can be received each year from
any given individual without triggering a charge to capital acquisitions tax. The beneficiary is
primarily liable to pay CAT. Persons who are secondarily liable include the donor, in the case of a
gift, or the personal representatives, in the case of an inheritance.
The Estate Tax Convention between Ireland and the United States generally provides for Irish CAT
paid on inheritances in Ireland to be credited, in whole or in part, against tax payable in the
United States, in the case where an inheritance of shares is subject to both Irish CAT and US
federal estate tax. The Estate Tax Convention does not apply to Irish CAT paid on gifts.
Irish Stamp Duty
No Irish stamp duty is imposed on the issuance of the common shares. Transfers of the common shares
would not ordinarily be subject to Irish stamp duty, unless the transfer was related to Irish
property. Transfers of ADSs are exempt from Irish stamp duty when the ADSs are dealt in on the
NYSE, NASDAQ National Market or any recognized stock exchange in the United States or Canada.
U.S. Federal Income Tax Considerations
The following is a general discussion of the U.S. federal income tax rules to which we are subject;
of certain U.S. federal income tax consequences of acquiring, holding or disposing of our shares by
U.S. Holders (as defined below); and of information reporting and backup withholding rules
applicable to both U.S. and Non-U.S. Holders (as defined below). It is based upon the U.S. Internal
Revenue Code, the U.S. Treasury regulations (Treasury Regulations) promulgated thereunder,
published rulings, court decisions and other applicable authorities, all as in effect on the date
hereof and all of which are subject to change or differing interpretations (possibly with
retroactive effect). This summary does not purport to address all of the U.S. federal income tax
consequences applicable to us or to all categories of investors, some of whom may be subject to
special rules including, without limitation, dealers in securities or currencies, financial
institutions or financial services entities, life insurance
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companies, holders of shares held as part of a straddle, hedge, constructive sale or
conversion transaction with other investments, U.S. persons whose functional currency is not
the U.S. dollar, persons who have elected mark-to-market accounting, persons who hold their
share through a partnership or other entity which is a pass-through entity for U.S. federal income
tax purposes, or persons for whom a share is not a capital asset, and persons holding, directly,
indirectly or constructively, 10% or more of our shares or underlying shares. The tax consequences
of an investment in our shares will depend not only on the nature of our operations and the
then-applicable U.S. federal tax principles, but also on certain factual determinations that cannot
be made at this time, and upon a particular investors individual circumstances. No advance rulings
have been or will be sought from the Internal Revenue Service (the IRS) regarding any matter
discussed herein.
For purposes of this discussion, a U.S. Holder is (1) a citizen or resident of the United States;
(2) a corporation, or other entity treated as a corporation for U.S. federal income tax purposes,
created or organized under the laws of the United States or any political subdivision thereof; (3)
an estate the income of which is subject to U.S. federal income taxation regardless of its source;
or (4) a trust which (a) is subject to the primary supervision of a court within the United States
and one or more U.S. persons all of whose substantial decisions have the authority to control or
(b) has a valid election in effect under applicable Treasury Regulations to be treated as a U.S.
person. A Non-U.S. Holder is a beneficial owner of our shares that is not a U.S. Holder and who,
in addition, is not (1) a partnership or other fiscally transparent entity; (2) an individual
present in the United States for 183 days or more in a taxable year who meets certain other
conditions; or (3) subject to rules applicable to certain expatriates or former long-term residents
of the United States. This summary does not purport to be a comprehensive description of all of the
U.S. federal income tax considerations that may be relevant to a decision to purchase the shares.
This summary does not describe any tax consequences arising under the laws of any state, locality
or taxing jurisdiction other than the United States. For U.S. tax purposes holders of our ADSs are
treated as if they hold the underlying common shares represented by the ADSs.
Taxation of U.S. Holders of Shares
U.S. holders of shares are subject to U.S. tax under either the passive foreign investment
companies (PFIC) rules or the controlled foreign corporation (CFC) rules.
Tax Consequences of Passive Foreign Investment Company (PFIC) Status. We will be deemed a PFIC if
75% or more of our gross income, including our pro rata share of the gross income of any company,
U.S. or foreign, in which we are considered to own 25% or more of the shares by value, in a taxable
year is passive income. Alternatively, we will be deemed to be a PFIC if at least 50% of our assets
in a taxable year, averaged over the year and ordinarily determined based on fair market value and
including our pro rata share of the assets of any company in which we are considered to own 25% or
more of the shares by value, are held for the production of, or produce, passive income. Passive
income may include, among other things, amounts derived by reason of the temporary investment of
funds raised in offerings of our securities and rent paid pursuant to the existing leases of our
aircraft. We were a PFIC for 2007 and expect to remain a PFIC for the foreseeable future. U.S. holders that make a QEF election
will not be subject to U.S. federal income tax on dividends and will instead be taxed currently on
their pro rata share of our ordinary earnings as ordinary income and a pro rata share of our net
capital gain as long-term capital gain, and generally capital gain from the sale,
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exchange or other disposition of shares held more than one year will be long-term capital gain
eligible for a maximum 15% rate of taxation for non-corporate holders that make a QEF election.
Because we are a non-U.S. corporation, our dividends will not qualify for the dividends received
deduction generally available to corporate U.S. Holders.
Because we are a PFIC, U.S. Holders of our shares will be subject to different taxation rules with
respect to an investment in our shares if they elect to treat us as a qualified electing fund (a
QEF) with respect to their investment in our shares. If a U.S. Holder makes a QEF election in the
first taxable year in which the U.S. Holder owns our shares (and if we comply with certain
reporting requirements, which we intend to continue to do), then such U.S. Holder will be required
for each taxable year to include in income a pro rata share of our ordinary earnings as ordinary
income and a pro rata share of our net capital gain as capital gain, subject to a separate election
to defer payment of taxes, which deferral is subject to an interest charge and to certain other
conditions. A QEF election may cause a U.S. Holder to recognize taxable income in excess of, or in
the absence of, any distributions. If a QEF election is made, U.S. Holders will not be taxed again
on our distributions attributable to QEF inclusions. Distributions in excess of QEF inclusions will
be applied against and will reduce the U.S. Holders basis in our shares and, to the extent in
excess of such basis, will be treated as gain from the sale or exchange of a capital asset.
Because we are a PFIC, if a U.S. Holder does not make a QEF election, then the following special
rules will apply:
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Excess distributions by us to a U.S. Holder would be taxed in a special way. Excess
distributions are amounts received by a U.S. Holder with respect to our shares in any
taxable year that exceed 125% of the average distributions received by such U.S. Holder
from us in the shorter of either the three previous years or such U.S. Holders holding
period for shares before the present taxable year. Excess distributions must be allocated
ratably to each day that a U.S. Holder has held our shares. A U.S. Holder must include
amounts allocated to the current taxable year in its gross income as ordinary income for
that year. A U.S. Holder must pay tax on amounts allocated to each prior taxable year in
which we were a PFIC at the highest rate in effect for that year on ordinary income and
the tax is subject to an interest charge at the rate applicable to deficiencies for income
tax. |
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The entire amount of gain realized by a U.S. Holder upon the sale or other
disposition of shares will also be treated as an excess distribution and will be subject
to tax as described above. |
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The tax basis in shares that were acquired from a decedent who was a U.S. Holder
would not receive a step-up to fair market value as at the date of the decedents death
but would instead be equal to the decedents basis, if lower than fair market value. |
The QEF election is made on a shareholder-by-shareholder basis and can be revoked only with the
consent of the IRS. A shareholder makes a QEF election by attaching a completed IRS Form 8621,
including the PFIC annual information statement, upon which we expect to
continue to report our ordinary earnings and net capital gain on a per share basis to a timely
filed United States federal income tax return or, if not required to file an income tax return, by
filing such form with the IRS. Even if a QEF election is not made, a shareholder in a PFIC who is a
U.S. Holder must file a completed IRS Form 8621 every year. We have provided and continue to intend
to provide U.S. Holders with all necessary information to enable them to make QEF elections as
described above. If any subsidiary is not subject to an election to be
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treated as a disregarded entity or partnership for U.S. tax purposes then a QEF election would have
to be made for each such subsidiary. We intend to maintain such elections for all of our
subsidiaries.
U.S. Holders may, instead of making a QEF election, elect to mark our shares to market annually,
recognizing as ordinary income or loss each year an amount equal to the difference, as at the close
of the taxable year, between the fair market value of the shares and the U.S. Holders adjusted tax
basis in the shares. Losses would be allowed only to the extent of net mark-to-market gain
previously included by the U.S. Holder under the election for prior taxable years. If the
mark-to-market election were made, then the rules set forth above would not apply for periods
covered by the election. A mark-to-market election is only available if our shares meet trading
volume requirements on a qualifying exchange and will only be effective if we make an election to
treat each of our subsidiaries that would be PFICs as disregarded entities or partnerships for U.S.
tax purposes. We intend to maintain such elections for all of our subsidiaries.
U.S. Holders who hold shares during a period when we are a PFIC will continue to be subject to the
foregoing rules, even if we cease to be a PFIC, subject to certain exceptions for U.S. Holders who
made a QEF election.
You should consult your tax advisor about the PFIC rules, including the advisability of making a
QEF election or mark-to-market election.
Tax Consequences of CFC Status. It is possible that we will be a controlled foreign corporation, (a
CFC) for U.S. federal income tax purposes. We will be a CFC for any year in which U.S. Holders
that each owns (directly, indirectly or by attribution) at least 10% of our voting shares (each a
10% U.S. Holder), together own more than 50% of the total combined voting power of all classes of
our voting shares or more than 50% of the total value of our shares. Classification as a CFC has
many complex results, one of which is that if you are a 10% U.S. Holder on the last day of our
taxable year, you will be required to recognize as ordinary income a subpart F inclusion
consisting of your pro rata share of certain items of our income for the taxable year, whether or
not you receive any distributions on your shares during that taxable year. In addition, special
foreign tax credit rules would apply. Your adjusted tax basis in your shares would be increased to
reflect any taxed but undistributed earnings and profits. Any distribution of earnings and profits
that previously had been taxed would result in a corresponding reduction in your adjusted tax basis
in your shares and would not be taxed again when you receive such distribution. Subject to a
special limitation in the case of individual 10% U.S. Holders that have held their shares for more
than one year, if you are a 10% U.S. Holder, any gain from disposition of your shares will be
treated as dividend income to the extent of accumulated earnings attributable to such shares during
the time you held such shares.
For any year in which we are both a PFIC and a CFC, if you are a 10% U.S. Holder, you would be
subject to the CFC rules and not the PFIC rules with respect to your investment in shares.
You should consult your tax advisor about the application of the CFC rules to your particular
situation.
Taxation of the Disposition of Shares. A U.S. Holder that has made a QEF election for the first
year of its holding period will recognize capital gain or loss in an amount equal to the difference
between such U.S. Holders basis in the shares, which is usually the cost of such shares (as
adjusted to take into account any QEF or subpart F inclusion and any related
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distribution) and the amount realized on a sale or other taxable disposition of the shares. If, as
anticipated, the shares are publicly traded (as they are now), a disposition of shares will be
considered to occur on the trade date, regardless of the holders method of accounting. If a QEF
election has been made, capital gain from the sale, exchange or other disposition of shares held
more than one year is long-term capital gain and is generally eligible for a maximum 15% rate of
taxation for non-corporate holders. The deductibility of a capital loss recognized on the sale,
exchange or other disposition of shares is subject to limitations. Gain or loss recognized by a
U.S. Holder on a sale, exchange or other disposition of shares generally will be treated as United
States source income or loss for United States foreign tax credit purposes.
Information Reporting and Backup Withholding for U.S. Holders
Dividend payments made within the United States with respect to the shares, and proceeds from the
sale, exchange or redemption of shares, may be subject to information reporting to the IRS and
possible U.S. backup withholding. Backup withholding will not apply, however, to a U.S. Holder who
furnishes a correct taxpayer identification number and makes any other required certification or
who is otherwise exempt from backup withholding. Generally, a U.S. Holder will provide such
certification on IRS Form W-9 (Request for Taxpayer Identification Number and Certification).
Amounts withheld under the backup withholding rules may be credited against a U.S. Holders tax
liability, and a U.S. Holder may obtain a refund of any excess amount withheld under the backup
withholding rules by timely filing the appropriate claim for refund with the IRS.
Information Reporting and Backup Withholding for Non-U.S. Holders
Information reporting to the United States and backup withholding to the IRS generally would not be
required for dividends paid on our shares or proceeds received upon the sale, exchange or
redemption of our shares to Non-U.S. Holders who hold or sell our shares through the non-U.S.
office of a non-U.S. related broker or financial institution. Information reporting and backup
withholding may apply if shares are held by a Non-U.S. Holder through a U.S., or U.S.-related,
broker or financial institution, or the U.S. office of a non-U.S. broker or financial institution
and the Non-U.S. Holder fails to establish an exemption from information reporting and backup
withholding by certifying such holders status on IRS Form W-8BEN, W-8ECI or W-8IMY, as applicable.
The IRS may make information reported to you and the IRS available under the provisions of an
applicable income tax treaty to the tax authorities in the country in which you reside. Any amounts
withheld under the backup withholding rules will be allowed as a refund or a credit against your
U.S. federal income tax liability, if any, provided the required information is timely furnished by
you to the IRS. You should consult your own tax advisors regarding the filing of a U.S. tax return
for claiming a refund of any such backup withholding. Non-U.S. Holders should consult their tax
advisors regarding the application of these rules.
Taxation of Genesis Lease Limited and Our Subsidiaries
For U.S. federal income tax purposes, we are treated as a non-U.S. corporation and each other
member of our group is treated as a disregarded entity, a grantor trust or a partnership, for U.S.
tax purposes. Accordingly, it is anticipated that any U.S. federal income tax payable by reason of
the activities of the members of our group will be payable by us. Unless otherwise exempted by an
applicable income tax treaty, a non-U.S. corporation that is directly or through
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agents engaged in a trade or business in the U.S. is generally subject to U.S. federal income
taxation, at the graduated tax rates applicable to U.S. corporations, on the portion of such
non-U.S. corporations income that is effectively connected with such trade or business. In
addition, such a non-U.S. corporation may be subject to the U.S. federal branch profits tax on the
portions of its effectively connected earnings and profits constituting dividend equivalent
amounts at a rate of 30%, or at such lower rate as may be specified by an applicable income tax
treaty. In addition non-U.S. corporations that earn certain U.S. source income not connected with a
U.S. trade or business can be subject to a 30% withholding tax on such gross income unless they are
entitled to a reduction or elimination of such tax by an applicable treaty. Furthermore, even if a
non-U.S. corporation is not engaged in business in the United States, certain U.S. source gross
transportation income (which includes rental income from aircraft that fly to and from the United
States) is subject to a 4% tax on gross transportation income in the United States unless a
statutory or treaty exemption applies.
We expect that we and our Irish tax resident subsidiaries will be entitled to claim the benefits of
the Irish Treaty. Accordingly, even if we earn income that otherwise would be treated as subject to
tax in the United States, such income is expected to be exempt from U.S. tax under the Irish Treaty
to the extent that it is (1) rental income attributable to aircraft used in international traffic;
(2) gain from the sale of aircraft used in international traffic; or (3) U.S. source business
profits (which includes rental income from, and gains attributable to, aircraft operated in U.S.
domestic service) not connected with a U.S. permanent establishment. For this purpose,
international traffic means transportation except where flights are solely between places within
the United States. We also expect that we will not be treated as having a U.S. permanent
establishment. Thus we do not believe that we will be subject to taxation in the United States on
any of our aircraft rental income or gains from the sale of aircraft.
No assurances can be given, however, that we will continue to qualify each year for the benefits of
the Irish Treaty or that we will not in the future be treated as maintaining a permanent
establishment in the U.S. In order for us and our subsidiaries to be eligible for the benefits of
the Irish Treaty for a particular fiscal year, we must each satisfy the requirements of Article 23
(Limitation on Benefits) of the Irish Treaty for that fiscal year. We will be eligible for the
benefits of the Irish Treaty if the principal class of our shares is substantially and regularly
traded on one or more recognized stock exchanges. Our shares will be substantially and regularly
traded on one or more recognized stock exchanges in a fiscal year if: (1) trades in such shares are
effected on such stock exchanges in more than de minimis quantities during every quarter; and (2)
the aggregate number of shares traded on such stock exchanges during the previous fiscal year is at
least 6% of the average number of shares outstanding during that taxable year. In particular, if
our shares cease to be treated as regularly traded, then we may no longer be eligible for the
benefits of the Irish Treaty. Our subsidiaries that are Irish tax-resident will be eligible for
benefits under the Irish Treaty if we hold, directly or indirectly, 50% or more of the vote and
value of the subsidiary and we meet the substantially and regularly traded test described above.
If we or any subsidiary were not entitled to the benefits of the Irish Treaty, any income that we
or that subsidiary earns that is treated as effectively connected with a trade or business in the
United States, either directly or through agents, would be subject to tax in the United States at
a rate of 35%. In addition, we or that subsidiary could be subject to the U.S. federal branch
profits tax on its effectively connected earnings and profits at a rate of 30%, considered
distributed from the U.S. business. However, rental income from the lease of aircraft used in
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international traffic will only be effectively connected with a trade or business in the United
States if the income is considered attributable to a fixed place of business in the United States.
In addition, if we did not qualify for Irish Treaty benefits, certain U.S. source rental income not
connected with a U.S. trade or business could be subject to withholding tax of 30% and certain U.S.
source gross transportation income could be subject to a 4% tax on gross transportation income.
However even if we were not entitled to the benefits of the Irish Treaty, we would be exempt from
the U.S. tax on certain income if we qualify for an exemption under section 883 of the Code.
Section 883 provides an exemption from U.S. federal income taxation for income derived from
aircraft used in international traffic by certain foreign corporations. To qualify for this
exemption in respect of rental income derived from international traffic, the lessor of the
aircraft must be organized in a country that grants a comparable exemption to U.S. lessors (Ireland
and Bermuda each does), and the direct and indirect shareholders of the lessor must satisfy certain
residency requirements. We and our majority-owned subsidiaries can satisfy these residency
requirements in any year our shares are primarily and regularly traded on a recognized exchange for
more than half the days of such year. Our shares will be considered to be primarily and regularly
traded on a recognized exchange in any year if: (1) the number of trades in our shares effected on
such recognized stock exchanges (which include the New York Stock Exchange, on which our shares are
now traded) exceed the number of our shares (or direct interests in our shares) that are traded
during the year on all securities markets; (2) trades in our shares are effected on such stock
exchanges in more than de minimis quantities on at least 60 days during every calendar quarter in
the year; and (3) the aggregate number of our shares traded on such stock exchanges during the
previous year is at least 10% of the average number of our shares outstanding in that class during
that year. In particular, if our shares cease to be treated as regularly traded, then we may no
longer be eligible for the section 883 exemption.
Bermuda Tax Considerations
We are incorporated under the laws of Bermuda. At the present time, there is no Bermuda income or
profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance
tax payable by us or by our shareholders in respect of our shares. We have obtained an assurance
from the Minister of Finance of Bermuda under the Exempted Undertakings Tax Protection Act 1966
that, in the event that any legislation is enacted in Bermuda imposing any tax computed on profits
or income, or computed on any capital asset, gain or appreciation or any tax in the nature of
estate duty or inheritance tax, such tax shall not, until March 28, 2016, be applicable to us or to
any of our operations or to our shares, debentures or other obligations except insofar as such tax
applies to persons ordinarily resident in Bermuda or is payable by us in respect of real property
owned or leased by us in Bermuda.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
Documents concerning us that are referred to herein may be inspected at our principal executive
headquarters at 4450 Atlantic Avenue, Westpark, Shannon, Co Clare, Ireland. Those documents
electronically filed via the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system may
also be obtained from the SECs website at www.sec.gov or from the SEC public reference room at 100
F Street, N.E., Washington, D.C. 20549. Further information on the operation of the public
reference rooms may be obtained by calling the SEC at 1-800-SEC-0330. Copies of documents can be
requested from the SEC public
95
reference rooms for a copying fee. Our internet address is www.genesislease.com. However, the
information on our website is not a part of this annual report.
I. Subsidiary Information
Not applicable.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Interest rate risk is the exposure to loss resulting from changes in the level of interest
rates and the spread between different interest rates. Interest rate risk is highly sensitive to
many factors, including U.S. monetary and tax policies, U.S. and international economic factors and
other factors beyond our control. We are exposed to changes in the level of interest rates and to
changes in the relationship or spread between interest rates. Our primary interest rate exposures
relate to our lease agreements and our floating rate debt obligations such as the notes issued in
the securitization and borrowings under our debt facilities. Forty-five out of fifty of our lease
agreements require the payment of a fixed amount of rent during the term of the lease, with rent
under the remaining five leases adjusting bi-annually based on six-month LIBOR. Our indebtedness
requires payments based on a variable interest rate index such as LIBOR. The majority of our lease
agreements require the payment of a fixed amount of rent. Accordingly, we have entered into
interest rate swaps to fix the cost associated with the majority of our financings to hedge against
exposure arising from any interest rate fluctuations.
Sensitivity Analysis
The following discussion about the potential effects of changes in interest rates is based on
a sensitivity analysis, which models the effects of hypothetical interest rate shifts on our
financial condition and results of operations. Although we believe a sensitivity analysis provides
the most meaningful analysis permitted by the rules and regulations of the SEC, it is constrained
by several factors, including the necessity to conduct the analysis based on a single point in time
and by the inability to include the extraordinarily complex market reactions that normally would
arise from the market shifts modelled. Although the following results of a sensitivity analysis for
changes in interest rates may have some limited use as a benchmark, they should not be viewed as a
forecast. This forward-looking disclosure also is selective in nature and addresses only the
potential impacts on our financial instruments and our five variable rate leases. It does not
include a variety of other potential factors that could affect our business as a result of changes
in interest rates.
A hypothetical 100-basis point increase / decrease in our variable interest rates would
increase / decrease the minimum contracted rentals on our portfolio for the year ended December 31,
2009 by $1.2 million. A hypothetical 100-basis point increase / decrease in our variable interest
rate on our borrowings would result in an interest expense increase / decrease of $0.4 million for
the year ended December 31, 2009.
Foreign Currency Exchange Risk
We currently receive all of our revenue in U.S. dollars, and we pay substantially all of our
expenses in U.S. dollars. However, we incur some of our expenses in other currencies, primarily the
euro, and we may enter into leases under which we receive revenue in other currencies, primarily
the euro. During the past several years, the U.S. dollar has generally depreciated against the
euro. Depreciation in the value of the U.S. dollar relative to other currencies increases the U.S.
dollar cost to us of paying such expenses. The portion of our business conducted in other
currencies could increase in the future, which could expand our exposure to losses arising from
currency fluctuations. During the year ended December 31, 2008, we entered into foreign currency
hedging transactions to hedge our exposure to currency fluctuations. As we currently receive all of
our revenue in U.S. dollars and pay substantially all of our expenses in U.S. dollars, a change in
foreign exchange rates would not have a material impact on our results of operations.
Item 12. Description of Securities Other than Equity Securities
Not applicable.
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PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
None.
Item 15. Controls and Procedures
(a) Disclosure Controls and Procedures
As at December 31, 2008, an evaluation was conducted under the supervision and with the
participation of our management, including our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on this evaluation,
our Chief Executive Officer and our Chief Financial Officer concluded that the design and operation
of these disclosure controls and procedures were effective.
(b) Managements Annual Report on Internal Control over Financial Reporting
Management of Genesis Lease Limited is responsible for establishing and maintaining adequate
internal control over financial reporting for our company. A companys internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles. A companys internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with U.S. generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
With the participation of our Chief Executive Officer and our Chief Financial Officer, our
management conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework and criteria established in Internal ControlIntegrated
Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
this evaluation, our management has concluded that our internal control over financial reporting
was effective as at December 31, 2008.
Our independent auditor, KPMG, a registered public accounting firm, has issued an attestation
report on our managements assessment of our internal control over financial reporting. This
attestation report appears below.
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(c) Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Genesis Lease Limited
We have audited Genesis Lease Limiteds (the Company) internal control over financial reporting
as of December 31, 2008, based on criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Companys management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Managements Annual Report. Our responsibility is to express an
opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2008, based on criteria established in Internal Control
Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of the Company as of December 31, 2007and
2008, and the related combined and consolidated statements of operations, shareholders equity and
comprehensive income, and cash flows for each of the years in the three-year period ended December
31, 2008, and our report dated March 6, 2009 expressed an unqualified opinion on those consolidated
financial statements.
/s/ KPMG
Dublin, Ireland
March 6, 2009
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(d) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during
the year ended December 31, 2008 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Item 16A. Audit Committee Financial Expert
The Board has determined that Andrew L. Wallace, the Chairman of our Audit Committee of the Board
of Directors, qualifies as an audit committee financial expert and is independent under applicable
NYSE and SEC standards.
Item 16B. Code of Ethics
We have adopted our Corporate Governance Guidelines and Principles, a Code of Business Conduct and
Ethics and a Supplemental Code of Ethics for the CEO and Senior Officers. These documents are
available under Corporate Governance in the Investor Relations section of our website
(www.genesislease.com).
Item 16C. Principal Accountant Fees and Services
Our principal accountants for the year ended December 31, 2008 were KPMG.
The table below summarizes the fees for professional services rendered by KPMG for the audit of our
annual financial statements for the year ended December 31, 2008 and fees billed for other services
rendered by KPMG.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
December 31, 2008 |
|
|
|
(USD in |
|
|
|
|
|
|
(USD in |
|
|
|
|
|
|
thousands) |
|
|
% |
|
|
thousands) |
|
|
% |
|
Audit fees(1) |
|
$ |
876 |
|
|
|
40.83 |
% |
|
$ |
566 |
|
|
|
50.14 |
% |
Audit related fees(2) |
|
|
529 |
|
|
|
24.65 |
% |
|
|
86 |
|
|
|
7.62 |
% |
Tax fees(3) |
|
|
741 |
|
|
|
34.52 |
% |
|
|
477 |
|
|
|
42.24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,146 |
|
|
|
100.0 |
% |
|
$ |
1,129 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Audit fees relate to annual audit fees for Genesis Lease Limited and its subsidiaries. |
|
(2) |
|
Audit-related fees include general audit related accounting advice and fees charged in
respect of a potential transaction that was not consummated during the year ended December 31,
2008. |
|
(3) |
|
Tax fees relate to annual tax compliance fees for Genesis Lease Limited and its subsidiaries. |
The Audit Committee pre-approves all audit and non-audit services provided to Genesis Lease Limited
by its auditors.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On October 28, 2008, the Board of Directors approved a share repurchase program. Under the
program, Genesis is authorized to repurchase up to $20 million of its common shares over 12 months.
Genesis expects the purchases to be made from time to time in the open market or in privately
negotiated transactions, and will be funded from the companys available cash.
99
We repurchased the following shares during the year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Average |
|
|
Total Number of Shares |
|
|
Approximate Dollar Value of |
|
|
Number |
|
|
Price |
|
|
Purchased as Part of |
|
|
Shares that May Yet Be |
|
|
of Shares |
|
|
Paid per |
|
|
Publicly Announced |
|
|
Purchased Under the Plans or |
Period |
|
Purchased |
|
|
Share |
|
|
Program |
|
|
Programs |
November |
|
|
1,298,504 |
|
|
$ |
3.0805 |
|
|
|
1,298,504 |
|
|
$ |
15,999,958 |
|
December |
|
|
492,900 |
|
|
$ |
3.2380 |
|
|
|
1,791,404 |
|
|
$ |
14,403,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,791,404 |
|
|
$ |
3.1238 |
|
|
|
1,791,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 16G. Corporate Governance
The New York Stock Exchange requires companies with listed shares to comply with its corporate
governance standards. As a foreign private issuer, we are not required to comply with all of the
rules that apply to listed U.S. companies. However, we have generally chosen to comply with the
New York Stock Exchanges corporate governance rules as though we were a U.S. company.
Accordingly, we do not believe there are any significant differences between our corporate
governance practices and those that would typically apply to a U.S. domestic issuer under the New
York Stock Exchange corporate governance rules.
100
PART III
Item 17. Financial Statements
Not applicable.
Item 18. Financial Statements
See pages beginning on page F-1 following Item 19.
Item 19. Exhibits
Each of the following exhibits is incorporated into this Annual Report by reference:
|
|
|
|
|
|
|
|
|
|
1.1 |
|
|
Memorandum of Association. (filed as Exhibit 3.1 to our Registration
Statement on Form F-1 filed on November 27, 2006) (SEC File No.
333-138967) |
|
|
|
|
|
|
|
|
|
|
1.2 |
|
|
Bye-laws. (filed as Exhibit 3.2 to our Registration Statement on Form
F-1 filed on November 27, 2006) (SEC File No. 333-138967) |
|
|
|
|
|
|
|
|
|
|
2.1 |
|
|
Form of Common Share Certificate. (filed as Exhibit 4.1 to our
Registration Statement on Form F-1 filed on November 27, 2006) (SEC
File No. 333-138967) |
|
|
|
|
|
|
|
|
|
|
2.2 |
|
|
Deposit Agreement, between Deutsche Bank Trust Company Americas and
Genesis Lease Limited. (filed as Exhibit 4.2 to our Registration
Statement on Form F-1 filed on November 27, 2006) (SEC File No.
333-138967) |
|
|
|
|
|
|
|
|
|
|
2.3 |
|
|
Form of American Depositary Receipt (included in Exhibit 2.2) |
|
|
|
|
|
|
|
|
|
|
4.1 |
|
|
Private Placement Agreement, dated November 26, 2006, between GE
Capital Equity Investment, Inc. and Genesis Lease Limited. (filed as
Exhibit 10.1 to our Registration Statement on Form F-1 filed on
November 27, 2006) (SEC File No. 333-138967) |
|
|
|
|
|
|
|
|
|
|
4.2 |
|
|
Registration Rights Agreement, dated December 19, 2006, between GE
Capital Equity Investment, Inc. and Genesis Lease Limited. (filed as
Exhibit 10.2 to our Registration Statement on Form F-1 filed on
November 27, 2006) (SEC File No. 333-138967) |
|
|
|
|
|
|
|
|
|
|
4.3 |
|
|
Asset Purchase Agreement, dated December 19, 2006, between General
Electric Capital Corporation and Genesis Funding Limited. (filed as
Exhibit 10.3 to our Registration Statement on Form F-1 filed on
November 27, 2006) (SEC File No. 333-138967) |
|
|
|
|
|
|
|
|
|
|
4.4 |
|
|
Master Servicing Agreement, dated December 19, 2006, between GE
Commercial Aviation Services Limited and Genesis Lease Limited.
(filed as Exhibit 10.4 to our Registration Statement on Form F-1
filed on November 27, 2006) (SEC File No. 333-138967) |
|
|
|
|
|
|
|
|
|
|
4.5 |
|
|
Servicing Agreement, dated December 19, 2006, among GE Commercial
Aviation Services Limited, Financial Guaranty Insurance Company and
Genesis Funding Limited. (filed as Exhibit 10.5 to our Registration
Statement on Form F-1 filed on November 27, 2006) (SEC File No.
333-138967) |
|
|
|
|
|
|
|
|
|
|
4.6 |
|
|
Business Opportunities Agreement, dated December 19, 2006, between GE
Commercial Aviation Services Limited and Genesis Lease Limited.
(filed as Exhibit 10.6 to our Registration Statement on Form F-1
filed on November 27, 2006) (SEC File No. 333-138967) |
|
|
|
|
|
|
|
|
|
|
4.7 |
|
|
Transitional Support Agreement, dated December 19, 2006, between GE
Commercial Aviation Services Limited and Genesis Lease Limited.
(filed as Exhibit 10.7 to Amendment No. 1 to our Registration
Statement on Form F-1/A filed on December 7, 2006) (SEC File No.
333-138967) |
|
|
|
|
|
|
|
|
|
|
4.8 |
|
|
Corporate Services Agreement, dated December 19, 2006, between AIB
International Financial Services Limited and Genesis Lease Limited.
(filed as Exhibit 10.8 to our Registration Statement on Form F-1
filed on November 27, 2006) (SEC File No. 333-138967) |
101
|
|
|
|
|
|
|
|
|
|
4.9 |
|
|
Corporate Services Agreement, dated December 19, 2006, between AIB
International Financial Services Limited and Genesis Lease Limited.
(filed as Exhibit 10.9 to our Registration Statement on Form F-1
filed on November 27, 2006) (SEC FileNo. 333-138967) |
|
|
|
|
|
|
|
|
|
|
4.10 |
|
|
Expense Agreement, dated December 19, 2006, between GE Commercial
Aviation Services Limited and Genesis Lease Limited. (filed as
Exhibit 10.10 to our Amendment No. 1 to our Registration Statement on
Form F-1/A filed on December 7, 2006) (SEC File No. 333-138967) |
|
|
|
|
|
|
|
|
|
|
4.11 |
|
|
Indenture, dated December 19, 2006, among Deutsche Bank Trust Company
Americas, PK AirFinance US Inc., Financial Guaranty Insurance Company
and Genesis Funding Limited. (filed as Exhibit 10.11 to our
Registration Statement on Form F-1 filed on November 27, 2006) (SEC
File No. 333-138967) |
|
|
|
|
|
|
|
|
|
|
4.12 |
|
|
Security Trust Agreement, dated December 19, 2006, between Deutsche
Bank Trust Company Americas and Genesis Funding Limited. (filed as
Exhibit 10.12 to our Registration Statement on Form F-1 filed on
November 27, 2006) (SEC File No. 333-138967) |
|
|
|
|
|
|
|
|
|
|
4.13 |
|
|
Management Agreement, dated December 19, 2006, among Genesis Funding
Limited, Deutsche Bank Trust Company Americas, Financial Guaranty
Insurance Company, Phoenix American Financial Services, Inc. and
Genesis Lease Limited. (filed as Exhibit 10.13 to our Registration
Statement on Form F-1 filed on November 27, 2006) (SEC File No.
333-138967) |
|
|
|
|
|
|
|
|
|
|
4.14 |
|
|
Cash Management Agreement, dated December 19, 2006, between Deutsche
Bank Trust Company Americas and Genesis Funding Limited. (filed as
Exhibit 10.14 to our Registration Statement on Form F-1 filed on
November 27, 2006) (SEC File No. 333-138967) |
|
|
|
|
|
|
|
|
|
|
4.15 |
|
|
Liquidity Facility Agreement, dated December 19, 2006, among Deutsche
Bank Trust Company Americas, PK AirFinance US Inc. and Genesis
Funding Limited. (filed as Exhibit 10.15 to our Registration
Statement on Form F-1 filed on November 27, 2006) (SEC File No.
333-138967) |
|
|
|
|
|
|
|
|
|
|
4.16 |
|
|
Policy Provider Indemnification Agreement, dated December 19, 2006,
among Deutsche Bank Trust Company Americas, Financial Guaranty
Insurance Company and Genesis Funding Limited. (filed as Exhibit
10.16 to our Registration Statement on Form F-1 filed on November 27,
2006) (SEC File No. 333-138967) |
|
|
|
|
|
|
|
|
|
|
4.17 |
|
|
Schedule to the ISDA 2002 Master Agreement, dated December 19, 2006,
between Citibank, N.A. and Genesis Funding Limited. (filed as Exhibit
10.17 to our Registration Statement on Form F-1 filed on November 27,
2006) (SEC File No. 333-138967) |
|
|
|
|
|
|
|
|
|
|
4.18 |
|
|
Commitment Letter, dated November 27, 2006, to Genesis Lease Limited
from Citigroup Global Markets Inc. and Wachovia Capital Markets, LLC.
(filed as Exhibit 10.18 to Amendment No. 1 to our Registration
Statement on Form F-1/A filed on December 7, 2006) (SEC File No.
333-138967) |
|
|
|
|
|
|
|
|
|
|
4.19 |
|
|
Genesis Lease Limited Equity Incentive Plan. (filed as Exhibit 10.19
to our Registration Statement on Form F-1 filed on November 27, 2006)
(SEC File No. 333-138967) |
|
|
|
|
|
|
|
|
|
|
4.20 |
|
|
Form of Director Service Agreement, between Genesis Lease Limited and
each director thereof. (filed as Exhibit 10.20 to our Registration
Statement on Form F-1 filed on November 27, 2006) (SEC File No.
333-138967) |
|
|
|
|
|
|
|
|
|
|
4.21 |
|
|
Form of Share Option Award. (filed as Exhibit 10.23 to our
Registration Statement on Form F-1 filed on November 27, 2006) (SEC
File No. 333-138967) |
|
|
|
|
|
|
|
|
|
|
4.22 |
|
|
Form of Restricted Share Award for Directors. (filed as Exhibit 10.24
to our Registration Statement on Form F-1 filed on November 27, 2006)
(SEC File No. 333-138967) |
|
|
|
|
|
|
|
|
|
|
4.23 |
|
|
Form of Restricted Share Award for Executive Officers. (filed as
Exhibit 10.25 to our Registration Statement on Form F-1 filed on
November 27, 2006) (SEC File No. 333-138967) |
102
|
|
|
|
|
|
|
|
|
|
4.24 |
|
|
Credit Agreement, dated as of April 5, 2007, among Genesis
Acquisition Limited, as borrower, Genesis Lease Limited, as Manager,
the financial institutions party thereto as lenders, Citibank, N.A.,
as administrative agent, and Deutsche Bank Trust Company Americas, as
security trustee and account bank. (filed as Exhibit 10.1 to our
Current Report on Form 6-K filed on April 12, 2007 (SEC File No.
001-33200) |
|
|
|
|
|
|
|
|
|
|
4.25 |
|
|
Security Trust Agreement, dated as of April 5, 2007, among Genesis
Acquisition Limited, certain affiliates of Genesis Acquisition
Limited, Citibank, N.A., as administrative agent, and Deutsche Bank
Trust Company Americas, as security trustee and account bank. (filed
as Exhibit 10.2 to our Current Report on Form 6-K filed on April 12,
2007) (SEC File No. 001-33200) |
|
|
|
|
|
|
|
|
|
|
4.26 |
|
|
Servicing Agreement, dated as of April 5, 2007, between Genesis
Acquisition Limited and GE Commercial Aviation Services Limited.
(filed as Exhibit 10.3 to our Current Report on Form 6-K filed on
April 12, 2007) (SEC File No. 001-33200) |
|
|
|
|
|
|
|
|
|
|
4.27 |
|
|
Asset Purchase Agreement, dated as of September 26, 2007, among
Genesis Acquisition Limited, General Electric Capital Corporation and
the other sellers listed on Schedule I thereto. (filed as Exhibit
10.1 to our Current Report on Form 6-K filed on October 5, 2007) (SEC
File No. 001-33200) |
|
|
|
|
|
|
|
|
|
|
4.28 |
|
|
Facility Agreement, dated as of September 15, 2008, among Genesis
Portfolio Funding I Limited, as Borrower; Genesis Lease Limited, as
principal guarantor and as manager of the Borrower; DVB Bank AG, HSH
Nordbank AG and KFW IPEX-Bank GmbH, as joint arrangers and
underwriters; HSH Nordbank AG, as the facility agent and security
trustee; and the other parties named therein. (filed as Exhibit 10.1
to our Current Report on Form 6-K filed on November 10, 2008) (SEC
File No. 001-33200) |
|
|
|
|
|
|
|
|
|
|
4.29 |
|
|
Deed of Proceeds and Priorities, dated as of September 15, 2008,
among Genesis Portfolio Funding I Limited, as Borrower; Genesis Lease
Limited, as principal guarantor and as manager of the Borrower; DVB
Bank AG, HSH Nordbank AG and KFW IPEX-Bank GmbH, as joint arrangers
and underwriters; HSH Nordbank AG, as the facility agent, security
trustee and hedging provider; and the other parties named therein.
(filed as Exhibit 10.2 to our Current Report on Form 6-K filed on
November 10, 2008) (SEC File No. 001-33200) |
Each of the following exhibits is filed herewith:
|
|
|
|
|
|
|
|
|
|
|
4.24.1 |
|
|
Amendment No. 1, dated as of
July 11, 2007, to the Credit Agreement, dated as of April
5, 2007, among Genesis Acquisition Limited, as borrower, Genesis Lease Limited, as
Manager, the financial institutions party thereto as lenders, Citibank, N.A., as
administrative agent, and Deutsche Bank Trust Company Americas, as security trustee
and account bank |
|
|
|
|
|
|
|
|
|
|
|
|
4.24.2 |
|
|
Amendment No. 2, dated as of
August 3, 2007, to the Credit Agreement, dated as of April
5, 2007, among Genesis Acquisition Limited, as borrower, Genesis Lease Limited, as
Manager, the financial institutions party thereto as lenders, Citibank, N.A., as
administrative agent, and Deutsche Bank Trust Company Americas, as security trustee
and account bank |
|
|
|
|
|
|
|
|
|
|
|
|
4.24.3 |
|
|
Amendment No. 3, dated as of
December 21, 2007, to the Credit Agreement, dated as of April
5, 2007, among Genesis Acquisition Limited, as borrower, Genesis Lease Limited, as
Manager, the financial institutions party thereto as lenders, Citibank, N.A., as
administrative agent, and Deutsche Bank Trust Company Americas, as security trustee
and account bank |
|
|
|
|
|
|
|
|
|
|
|
|
4.24.4 |
|
|
Amendment No. 4, dated as of
March 3, 2009, to the Credit Agreement, dated as of April
5, 2007, among Genesis Acquisition Limited, as borrower, Genesis Lease Limited, as
Manager, the financial institutions party thereto as lenders, Citibank, N.A., as
administrative agent, and Deutsche Bank Trust Company Americas, as security trustee
and account bank |
|
|
|
|
|
|
|
|
|
|
|
|
4.30 |
|
|
Change of Control Plan of Genesis Lease Limited, dated as of February 24, 2009 |
|
|
|
|
|
|
|
|
|
|
|
8.1 |
|
|
List of Subsidiaries of Genesis Lease Limited |
|
|
|
|
|
|
|
|
|
|
12.1 |
|
|
Certification of John McMahon pursuant to Section 302 of the Sarbanes Oxley Act of 2002 |
|
|
|
|
|
|
|
|
|
|
12.2 |
|
|
Certification of Alan Jenkins pursuant to Section 302 of the Sarbanes Oxley Act of 2002 |
103
|
|
|
|
|
|
|
|
|
|
13.1 |
|
|
Certification of John McMahon pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes Oxley Act of 2002 |
|
|
|
|
|
|
|
|
|
|
13.2 |
|
|
Certification of Alan Jenkins pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes Oxley Act of 2002 |
104
Combined and Consolidated Financial statements of Genesis Lease Limited
|
|
|
|
|
Report of Independent Registered Public Accounting Firm |
|
|
F-2 |
|
Consolidated Balance Sheets as at December 31, 2007 and 2008 |
|
|
F-3 |
|
Combined and Consolidated Statements of Income for the years ended
December 31, 2006, 2007 and 2008 |
|
|
F-4 |
|
Combined and Consolidated Statements of Shareholders Equity and
Accumulated Other Comprehensive Income for the years ended December
31, 2006, 2007 and 2008 |
|
|
F-5 |
|
Combined and Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2007 and 2008 |
|
|
F-6 |
|
Notes to the Combined and Consolidated Financial Statements |
|
|
F-8 |
|
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Genesis Lease Limited
We have audited the accompanying consolidated balance sheets of Genesis Lease Limited (the
Company) and subsidiaries as of December 31, 2007 and 2008, and the related combined and
consolidated statements of income, shareholders equity and comprehensive income, and cash flows
for each of the years in the three-year period ended December 31, 2008 (the consolidated financial
statements). These consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company and subsidiaries as of December 31, 2007
and 2008, and the results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Companys internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)), and our report
dated March 6, 2009 expressed an unqualified opinion on the effectiveness of the Companys internal
control over financial reporting.
/s/ KPMG
Dublin, Ireland
March 6, 2009
F-2
GENESIS LEASE LIMITED
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
|
|
2007 |
|
|
2008 |
|
|
|
(USD in thousands) |
|
ASSETS
|
Cash and cash equivalents (Note 4) |
|
$ |
30,101 |
|
|
$ |
60,206 |
|
Restricted cash (Note 4) |
|
|
32,982 |
|
|
|
33,718 |
|
Accounts receivable |
|
|
3,911 |
|
|
|
548 |
|
Other assets (Note 5) |
|
|
22,555 |
|
|
|
34,761 |
|
Flight equipment under operating leases, net (Note 6) |
|
|
1,555,809 |
|
|
|
1,597,604 |
|
Fixed assets, net (Note 7 & 8) |
|
|
1,024 |
|
|
|
2,224 |
|
Deferred income taxes (Note 10) |
|
|
28,787 |
|
|
|
28,634 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
1,675,169 |
|
|
$ |
1,757,695 |
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Accounts payable (Note 11) |
|
$ |
17,207 |
|
|
$ |
35,445 |
|
Other liabilities (Note 12) |
|
|
64,662 |
|
|
|
118,420 |
|
Debt (Note 13) |
|
|
|
|
|
|
|
|
Securitization notes |
|
|
810,000 |
|
|
|
796,500 |
|
Debt facilities |
|
|
|
|
|
|
331,893 |
|
Revolving credit facility |
|
|
240,961 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
1,132,830 |
|
|
|
1,282,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 23) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Par value 0.001 U.S. dollars per share;
500,000,000 shares authorized: 36,069,069 and
34,341,095 shares issued and outstanding at
December 31, 2007 and December 31, 2008
respectively (Note 20) |
|
|
36 |
|
|
|
34 |
|
Additional paid-in capital |
|
|
585,411 |
|
|
|
579,971 |
|
Accumulated other comprehensive loss |
|
|
(28,325 |
) |
|
|
(76,191 |
) |
Accumulated deficit (Note 22) |
|
|
(14,783 |
) |
|
|
(28,377 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
542,339 |
|
|
|
475,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
1,675,169 |
|
|
$ |
1,757,695 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these combined and consolidated financial statements.
F-3
GENESIS LEASE LIMITED
COMBINED AND CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
|
|
|
|
|
|
|
and |
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
Consolidated |
|
|
Consolidated |
|
|
|
Years Ended December 31 |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
(USD in thousands, except share and per share data) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Rental of flight equipment |
|
$ |
153,187 |
|
|
$ |
181,333 |
|
|
$ |
215,985 |
|
Other income (Note 16) |
|
|
|
|
|
|
6,771 |
|
|
|
8,045 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
153,187 |
|
|
|
188,104 |
|
|
|
224,030 |
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
51,398 |
|
|
|
62,259 |
|
|
|
78,690 |
|
Interest (Note 17) |
|
|
46,026 |
|
|
|
55,236 |
|
|
|
70,971 |
|
Maintenance expense |
|
|
2,327 |
|
|
|
1,073 |
|
|
|
3,344 |
|
Selling, general and administrative (Note 18) |
|
|
7,312 |
|
|
|
20,991 |
|
|
|
23,884 |
|
Other expenses (Note 19) |
|
|
|
|
|
|
3,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
107,063 |
|
|
|
142,896 |
|
|
|
176,889 |
|
|
|
|
|
|
|
|
|
|
|
Income Before Taxes |
|
|
46,124 |
|
|
|
45,208 |
|
|
|
47,141 |
|
Provision for income taxes (Note 10) |
|
|
17,367 |
|
|
|
6,053 |
|
|
|
6,224 |
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
28,757 |
|
|
$ |
39,155 |
|
|
$ |
40,917 |
|
|
|
|
|
|
|
|
|
|
|
The following table presents the net income per share calculated for the year ended December
31, 2006, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
25.76 |
|
|
$ |
1.09 |
|
|
$ |
1.14 |
|
Diluted |
|
$ |
25.72 |
|
|
$ |
1.09 |
|
|
$ |
1.14 |
|
The Company has presented pro forma basic and diluted net earnings per share amounts for the
year ended December 31, 2006 as if the IPO and the exercise of the over-allotment option had
occurred on January 1, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per share |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.80 |
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.80 |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these combined and consolidated financial statements.
F-4
GENESIS LEASE LIMITED
COMBINED AND CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND
ACCUMULATED OTHER COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Shares |
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Comprehensive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in |
|
|
GE Net |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Income / |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Investment |
|
|
Deficit |
|
|
Income / (loss) |
|
|
(loss) |
|
|
Total |
|
|
|
(USD in thousands, except share data) |
|
Balance at January 1, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
981,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
981,991 |
|
Contributions for purchase of flight equipment and
pre-delivery payments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194,272 |
|
Contributions for cost allocations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,079 |
|
Net income / (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,690 |
|
|
|
(933 |
) |
|
|
|
|
|
|
28,757 |
|
|
|
28,757 |
|
Distributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150,484 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150,484 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of GE Net Investment on December 19, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,105,548 |
) |
|
|
|
|
|
|
|
|
|
|
(29,690 |
) |
|
|
(1,105,548 |
) |
Special distribution to GE on December 19, 2006 |
|
|
|
|
|
|
|
|
|
|
(335,990 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(335,990 |
) |
Income tax effect of the transaction with GE on
December 19, 2006 |
|
|
|
|
|
|
|
|
|
|
124,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124,556 |
|
Proceeds of initial public offering, net |
|
|
31,310,000 |
|
|
|
31 |
|
|
|
684,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
684,968 |
|
Employee stock awards |
|
|
32,176 |
|
|
|
|
|
|
|
699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
699 |
|
Other comprehensive income (Note 21) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,375 |
|
|
|
3,375 |
|
|
|
3,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
31,342,176 |
|
|
|
31 |
|
|
|
474,202 |
|
|
|
|
|
|
|
(933 |
) |
|
|
3,375 |
|
|
|
|
|
|
|
476,675 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,155 |
|
|
|
|
|
|
|
39,155 |
|
|
|
39,155 |
|
Dividends paid ($1.47 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53,005 |
) |
|
|
|
|
|
|
|
|
|
|
(53,005 |
) |
Proceeds from the issue of common shares, net |
|
|
4,696,500 |
|
|
|
5 |
|
|
|
102,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,853 |
|
Capital Contribution by GECAS |
|
|
|
|
|
|
|
|
|
|
7,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,251 |
|
Employee stock awards |
|
|
30,393 |
|
|
|
|
|
|
|
1,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,110 |
|
Other comprehensive loss (Note 21) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,700 |
) |
|
|
(31,700 |
) |
|
|
(31,700 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
|
36,069,069 |
|
|
|
36 |
|
|
|
585,411 |
|
|
|
|
|
|
|
(14,783 |
) |
|
|
(28,325 |
) |
|
|
|
|
|
$ |
542,339 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,917 |
|
|
|
|
|
|
|
40,917 |
|
|
|
40,917 |
|
Dividends paid ($1.51 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54,511 |
) |
|
|
|
|
|
|
|
|
|
|
(54,511 |
) |
Employee stock awards |
|
|
63,430 |
|
|
|
|
|
|
|
1,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,104 |
|
Tax effect of Capital Contribution by GECAS |
|
|
|
|
|
|
|
|
|
|
(906 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(906 |
) |
Other comprehensive loss (Note 21) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47,866 |
) |
|
|
(47,866 |
) |
|
|
(47,866 |
) |
Repurchased shares |
|
|
(1,791,404 |
) |
|
|
(2 |
) |
|
|
(5,638 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,640 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(6,949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
34,341,095 |
|
|
$ |
34 |
|
|
$ |
579,971 |
|
|
$ |
|
|
|
$ |
(28,377 |
) |
|
$ |
(76,191 |
) |
|
|
|
|
|
$ |
475,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these combined and consolidated financial statements.
F-5
GENESIS LEASE LIMITED
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
and |
|
|
|
|
|
|
|
|
|
Combined |
|
|
Consolidated |
|
|
Consolidated |
|
|
|
Years Ended December 31 |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
(USD in thousands) |
|
Cash flows provided by operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
28,757 |
|
|
$ |
39,155 |
|
|
$ |
40,917 |
|
Adjustments to reconcile net income to net cash provided
by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
52,062 |
|
|
|
66,589 |
|
|
|
83,378 |
|
Realized gain on repurchase of Notes |
|
|
|
|
|
|
|
|
|
|
(6,039 |
) |
Deferred income taxes |
|
|
15,789 |
|
|
|
6,053 |
|
|
|
6,151 |
|
Non-cash operating expenses, excluding depreciation and
amortization |
|
|
699 |
|
|
|
1,110 |
|
|
|
1,062 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease/(increase) in accounts receivable |
|
|
1,541 |
|
|
|
(2,545 |
) |
|
|
3,363 |
|
Increase in restricted cash |
|
|
(15,471 |
) |
|
|
(2,121 |
) |
|
|
(7,480 |
) |
Increase in other assets |
|
|
(208 |
) |
|
|
(269 |
) |
|
|
(1,110 |
) |
Increase in accounts payable |
|
|
382 |
|
|
|
8,557 |
|
|
|
1,850 |
|
Increase/(decrease) in other liabilities |
|
|
5,967 |
|
|
|
2,134 |
|
|
|
(1,731 |
) |
|
|
|
Net cash provided by operating activities |
|
|
89,518 |
|
|
|
118,663 |
|
|
|
120,361 |
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of flight equipment and capitalized
maintenance |
|
|
(194,272 |
) |
|
|
(167,933 |
) |
|
|
(36,300 |
) |
Purchase of business |
|
|
|
|
|
|
(221,097 |
) |
|
|
(66,874 |
) |
Change in restricted cash |
|
|
|
|
|
|
(15,390 |
) |
|
|
6,744 |
|
Purchases of fixed assets |
|
|
|
|
|
|
(1,166 |
) |
|
|
(1,848 |
) |
|
|
|
Net cash used in investing activities |
|
|
(194,272 |
) |
|
|
(405,586 |
) |
|
|
(98,278 |
) |
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from GE for flight equipment |
|
|
194,272 |
|
|
|
|
|
|
|
|
|
GE Net Investment and capital contribution |
|
|
(100,405 |
) |
|
|
7,251 |
|
|
|
|
|
Repayment of GE Net Investment on December 19, 2006 |
|
|
(1,105,548 |
) |
|
|
|
|
|
|
|
|
Special distribution to GE on December 19, 2006 |
|
|
(335,990 |
) |
|
|
|
|
|
|
|
|
Proceeds from issuance of common shares |
|
|
720,419 |
|
|
|
108,020 |
|
|
|
|
|
Payments for costs arising on issuance of common shares |
|
|
(35,451 |
) |
|
|
(5,167 |
) |
|
|
|
|
Proceeds from debt issuance |
|
|
810,000 |
|
|
|
240,961 |
|
|
|
338,000 |
|
Repayment of debt |
|
|
|
|
|
|
|
|
|
|
(247,068 |
) |
Payments for deferred financing costs and discounts |
|
|
(15,688 |
) |
|
|
(7,891 |
) |
|
|
(15,298 |
) |
Share repurchases |
|
|
|
|
|
|
|
|
|
|
(5,640 |
) |
Debt repurchases |
|
|
|
|
|
|
|
|
|
|
(7,461 |
) |
Dividends paid |
|
|
|
|
|
|
(53,005 |
) |
|
|
(54,511 |
) |
|
|
|
Net cash provided by financing activities |
|
|
131,609 |
|
|
|
290,169 |
|
|
|
8,022 |
|
|
|
|
Net change in cash and cash equivalents |
|
|
26,855 |
|
|
|
3,246 |
|
|
|
30,105 |
|
Cash and cash equivalents at beginning of year |
|
|
|
|
|
|
26,855 |
|
|
|
30,101 |
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
26,855 |
|
|
$ |
30,101 |
|
|
$ |
60,206 |
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net of amounts capitalized |
|
$ |
44,490 |
|
|
$ |
51,045 |
|
|
$ |
65,996 |
|
Interest capitalized |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Income taxes |
|
$ |
1,578 |
|
|
$ |
|
|
|
$ |
73 |
|
Non-cash addition to flight equipment excluded from
investing activities (primarily capitalized
accruals) |
|
$ |
|
|
|
$ |
5,864 |
|
|
$ |
16,631 |
|
F-6
1. Description of business
Genesis Lease Limited (the Company, and together with its consolidated subsidiaries,
Genesis), was incorporated in Bermuda on July 17, 2006 for the purpose of acquiring 41 commercial
jet aircraft (the Initial Portfolio) and related operations from affiliates of General Electric
Company (GE) and to conduct an initial public offering (IPO) of the Companys common shares.
Genesis is operated and managed as a single operating segment and is primarily engaged in the
acquisition and leasing of commercial jet aircraft to airlines throughout the world. A full
unaudited listing of subsidiaries is shown in Exhibit 8.1 to this annual report.
On December 19, 2006, (1) the Company completed its IPO and issued 27,860,000 shares at a
public offering price of $23.00 per share (2) the Company issued 3,450,000 shares to an affiliate
of GE, in a private placement, for a price of $23.00 per share, (3) the Company, through its
subsidiary, Genesis Funding Limited (Genesis Funding) issued $810.0 million of aircraft
lease-backed Class G-1 notes (the Notes) as part of a securitization transaction (the
Securitization) and (4) Genesis used the net proceeds of the IPO, the private placement and the
securitization to finance the transfer of the Initial Portfolio of 41 aircraft from affiliates of
GE.
The purchase price for the Initial Portfolio was $1,459.4 million, which was the sum of the
net proceeds of the IPO, the private placement and the securitization, less the portion of such
proceeds that was used to fund Genesiss formation and offering-related expenses, up-front costs
and expenses related to the securitization, and a cash balance of $20.0 million that Genesis
retained for general corporate purposes.
On January 16, 2007, the Company sold 4,179,000 additional shares at a public offering price
of $23.00 per share after the underwriters of the IPO exercised their over-allotment option in
full, as well as 517,500 additional shares at a price of $23.00 per share in a private placement to
GE, raising $102.8 million net of costs of $5.16 million.
Since our IPO, Genesis increased its portfolio by 13 aircraft from 41 to 54 aircraft. Twelve
aircraft were purchased during the year ended December 31, 2007, eight from GECAS affiliates and
four from two airlines on a sale and leaseback basis. One further aircraft was purchased from a GE
affiliate during the year ended December 31, 2008.
2. Basis of Presentation
These combined and consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America (U.S. GAAP).
Genesis acquired its Initial Portfolio of 41 aircraft pursuant to the asset purchase agreement
(the APA), dated as of December 19, 2006 (the Closing Date), between Genesis Funding, GE
Capital and certain affiliates of GE that owned the aircraft (or the equity interests therein) on
the Closing Date. Genesis paid $1,459.4 million as consideration for the 41 aircraft (or the
beneficial interest in those aircraft) on the Closing Date. The combined financial statements
reflect the combination of the aircraft included in the Initial Portfolio and the related leases as
owned and operated by affiliates of GE to December 18, 2006. The combined financial statements have
been prepared on a carve out basis derived from GEs consolidated financial statements. Because a
direct ownership relationship did not exist among the various GE aircraft owning entities prior to
the IPO, GEs interest in the Predecessor, including intercompany debt, was shown as GE Net
Investment in the Balance Sheet and the Statement of Shareholders Equity in the combined financial
statements. The combined financial statements do not reflect the financial condition, results of
operations or cash flows that Genesis would have achieved during the periods presented. On December
19, 2006, Genesis completed the IPO, the private placement of shares to GE and the securitization
and recognized the par value and the additional paid-in value in connection with the issuance and
sale of the shares.
F-7
2. Basis of Presentation (continued)
The combined and consolidated financial statements have been prepared to reflect the
combination of the aircraft and their financial position, results of operations and cash flows
pursuant to the terms of the APA. The acquisition of the Initial Portfolio was accounted for as a
transaction between entities under common control. The transfer of the aircraft from affiliates of
GE to Genesis in substance constitutes an issuance of subsidiary stock, and as such, the transfer
is accounted for at historical cost similar to a transaction between entities under common control.
Results for each aircraft in the Initial Portfolio have been included in the combined financial
statements from the dates that such aircraft came under GEs ownership and control. Push down
accounting is not required because no single investor or collaborative group of investors held more
than 95% of the Companys outstanding shares upon completion of the IPO. The excess of the amount
paid to GE to transfer the portfolio of 41 aircraft over the net book value has been treated as a
reduction in equity (i.e. a special distribution).
The combined financial statements for all periods prior to the completion of the IPO include
allocations of costs for these services based on the cost to GE of providing or procuring such
services. The method used to allocate these costs to the aircraft was a multi-step process, whereby
the costs were first allocated to GECAS (as one of GEs divisions) based on the relative book
values of net assets, and then further allocated to the Predecessor based on the total number of
aircraft owned by the Predecessor at a particular time. Costs included in the financial statements
for such services provided to the Predecessor are included in Selling, general and administrative
expenses.
Prior to the IPO, certain services had been provided or procured by GE with respect to the
aircraft in the Initial Portfolio. These services include the following:
|
|
|
marketing, technical and operating management services relating to the aircraft; |
|
|
|
|
risk management approvals and services relating to the aircraft; |
|
|
|
|
insurance for general corporate, property, casualty and hull coverage; |
|
|
|
|
information technology services; human resources, including employee benefit processing
and payroll administration; |
|
|
|
|
financial advisory services such as tax consulting, capital markets services and
financial and accounting support services; |
|
|
|
|
legal services; |
|
|
|
|
occupancy costs such as rent and utilities; and |
|
|
|
|
other corporate services. |
In addition, although GE did not allocate any indebtedness to the Predecessors aircraft or to
the Predecessor, GE did allocate interest cost to each of its divisions, including GECAS. GE made
the interest allocations based upon its net investment in a particular business, the debt-to-equity
ratio for that business and the businesss borrowing costs. The combined financial statements
include an allocation of interest expense using the same methodology as described above. Costs
included in the financial statements for such interest charges are included in interest expense.
The consolidated financial statements include all majority owned subsidiaries assets and
liabilities of Genesis and amounts subsequent to the IPO.
F-8
2. Basis of Presentation (continued)
Since the IPO, Genesis has increased its portfolio from 41 to 54 aircraft through the
following acquisitions:
|
|
|
On April 20, 2007 and June 12, 2007, Genesis signed agreements to purchase four new
Airbus A320 aircraft, two each from two airlines in India. Two of these aircraft were
delivered in July 2007 and the other two aircraft were delivered in September 2007. The
aircraft were leased back to the airlines. As the acquisition of the four aircraft did not
meet the definition of a business under Statement Financial Accounting Standard (SFAS)
141 Business Combinations, the transactions were accounted for as the acquisition of
assets. |
|
|
|
|
On September 26, 2007, Genesis signed an asset purchase agreement to acquire a portfolio
of eight modern, narrow-body commercial aircraft from affiliates of GECAS, which were
subject to leases with six airlines in three countries. Seven of the aircraft delivered in
September 2007 and one in November 2007. This acquisition has been treated as a purchase in
conformity with SFAS 141, Business Combinations. In connection with the acquisition, the
assets and liabilities relating to the delivered aircraft were accounting for using
purchase method and were stated at fair value upon their respective acquisition dates. |
|
|
|
|
On June 26, 2008, Genesis signed an asset purchase agreement to acquire a new Boeing
767-300ER wide-body commercial aircraft from a GE affiliate. This aircraft was delivered on
June 26, 2008. This acquisition has been treated as a purchase in conformity with SFAS 141,
Business Combinations. In connection with the acquisition, the assets and liabilities
relating to the delivered aircraft were accounted for using the purchase method and were
stated at fair value upon its acquisition date. |
3. Significant Accounting Policies
These combined and consolidated financial statements have been prepared in accordance with
U.S. GAAP which requires the application of accounting policies based on assumptions, estimates,
judgments and opinions. The Predecessor applied, and Genesis has applied and will continue to
apply, these policies based on the best information available at the time and on assumptions
believed to be reasonable under the circumstances.
The following is a discussion of the significant accounting policies and the methods of their
application.
(a) Basis of consolidation
The consolidated financial statements include the financial statements of the Company and all
of its subsidiaries. All significant intercompany profits, transactions and account balances have
been eliminated.
(b) Use of estimates
The preparation of financial statements in conformity with U.S.GAAP requires management to
make estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. These estimates and the underlying assumptions affect the amounts of assets and
liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of
revenues and expenses. For Genesis, the use of estimates is or could be a significant factor
affecting the reported carrying values of flight equipment, accounts receivable, deferred tax
assets and accruals and reserves. Management utilize professional appraisers and valuation
specialists, where possible, to support estimates, particularly with respect to flight equipment.
Despite managements best efforts to accurately estimate such amounts, actual results could differ
from those estimates. Management evaluates its estimates and assumptions on an ongoing basis using
historical experience and other factors, including the current economic environment, which
management believes to be reasonable under the circumstances. Management adjusts such estimates
F-9
3. Significant Accounting Policies (continued)
and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile
equity, foreign currency, and energy markets, and declines in consumer spending have combined to
increase the uncertainty inherent in such estimates and assumptions. As future events and their
effects cannot be determined with precision, actual results could differ significantly from these
estimates. Changes in those estimates resulting from continuing changes in the economic environment
will be reflected in the financial statements in future periods.
(c) RevenueRental of Flight Equipment
Genesis leases flight equipment (also referred to as aircraft) under operating leases and
records rental income on a straight-line basis over the term of the lease. Rentals received but
unearned under the lease agreements are recorded in Rentals received in advance on the Balance
Sheet and included in other liabilities until earned. In certain cases, leases provide for
additional rentals based on usage, which is recorded as revenue as it is earned under the terms of
the lease. The usage is calculated based on hourly usage or cycles operated, depending on the lease
agreement. Usage is typically reported monthly by the lessee and is non-refundable. Other leases
provide for a lease-end adjustment payment by Genesis or the lessee at the end of the lease based
on usage of the aircraft and its condition upon return. Lease-end adjustment payments received are
included in rental of flight equipment. Lease-end adjustment payments made are capitalized in
Flight equipment under operating leases, net when they relate to planned major maintenance
activities or expensed when they relate to light maintenance activities.
Past-due rentals are recognized on the basis of managements assessment of collectibility. No
revenues are recognized, and no receivable is recorded, from a lessee when collectibility is not
reasonably assured. Estimating whether collectibility is reasonably assured requires some level of
subjectivity and judgment. When collectibility of rental payments is not certain, revenue is
recognized when cash payments are received. Collectibility is evaluated based on factors such as
the lessees credit rating, payment performance, financial condition and requests for modifications
of lease terms and conditions as well as security received from the lessee in the form of
guarantees and/or letters of credit.
(d) Accounts Receivable
Accounts receivable represent unpaid, current lease obligations of lessees under existing
lease contracts and other amounts receivable. Genesis provides an allowance for doubtful accounts
when necessary based upon a review of outstanding receivables and security held by Genesis,
historical collection information, credit rating of the customer, probability of default, and
existing economic conditions. There were no allowances for doubtful accounts as at December 31,
2007 and 2008.
(e) Flight Equipment under Operating Leases, net
Flight equipment under operating leases is recorded at cost less accumulated depreciation and
amortization. Costs related to lessee specific modifications are capitalized as part of Flight
equipment under operating leases, net and amortized over either the term of the lease or the
depreciable life of the aircraft depending upon the nature of the improvement. Pre-delivery
payments made in advance of purchase of flight equipment are included in Other assets and are
reclassified to Flight equipment under operating leases, net when the asset is delivered.
Interest related to pre-delivery deposits on aircraft purchase contracts is capitalized as part of
the aircraft cost.
For planned major maintenance activities, Genesis capitalizes the actual maintenance costs by
applying the deferral method in accordance with the Financial Accounting Standards Board (FASB)
Staff Position (FSP) No. AUG AIR-1, Accounting for Planned Major Maintenance Activities. Genesis
capitalizes the actual cost of major overhauls, which are depreciated on a straight-line basis over
the period until the next overhaul is required.
Depreciation is computed on a straight-line basis to the aircrafts estimated residual value
over a period of up to 20 years from the date of acquisition of the aircraft. Residual values are
determined based on estimated market values at the end of the depreciation period received from
independent appraisers.
F-10
3. Significant Accounting Policies (continued)
In accounting for flight equipment under operating lease, management makes estimates on the
estimated residual values. Estimated residual values are determined based on independent appraisals
of the aircrafts estimated market value at the end of the depreciation period. Exceptions may be
made to this policy on a case-by-case basis when, in managements judgment, based on various
factors, the residual value calculated pursuant to this policy does not appear to reflect current
expectations of the residual value of a particular aircraft. Such factors include, but are not
limited to, the extent of cash flows generated from future lease arrangements as a result of
changes in global and regional economic and political conditions resulting in lower demand for our
aircraft, the effect of government regulations including noise or emission standards, which may
make certain aircraft less desirable in the marketplace, incidents of lease restructuring, which
result in lower lease rates for troubled lessees, and other factors, many of which are outside of
managements control.
Flight equipment under operating leases is tested for recoverability whenever events or
changes in circumstances indicate that the related carrying amount may not be recoverable in
accordance with Statement of Financial Accounting Standards (SFAS) 144, Accounting for the
Impairment or Disposal of Long-lived Assets. An impairment loss is recognized when the carrying
amount of the long-lived asset is not recoverable and exceeds its fair value. The carrying amount
of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset. Any required impairment loss
is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value
and is recorded as a reduction in the carrying value of the related asset and a charge to operating
results. Once an impairment results in a reduction in the carrying value of an asset, the carrying
value of such asset cannot thereafter be increased. Fair value is determined based on current
market values received from independent appraisers.
Flight equipment under operating lease includes two aircraft on lease to airlines in Japan in which
Genesis and its subsidiaries, in accordance with local laws, hold beneficial interest but not legal
title. Under Japanese law, legal title to each aircraft registered in Japan must be held by a
Japanese entity. In order to facilitate the lease to the airlines and to meet Japanese registration
requirements, Genesis and its predecessor (the Acquirers), with the cooperation of the airlines
and in accordance with the terms of sales agreements, sold title to these aircraft to two Japanese
entities that are owned and managed by a Japanese corporation. However, beneficial ownership of the
aircraft is effectively held by wholly owned subsidiaries of Genesis. Concurrently with such sale,
the Acquirers and the Japanese entities entered into a conditional sale agreement whereby the
Acquirers repurchased the aircraft from the entities. The Acquirers have paid the entire repurchase
price under the conditional sale agreements except one remaining installment in the amount of one
U.S. dollar. Under the conditional sales agreements, Genesis effectively holds the beneficial
ownership interest of the aircraft, including all of the risks and rewards of ownership.
Because Genesis has not relinquished control over the aircraft upon transfer of the aircrafts
title to the Japanese entities, as evidenced by the one dollar purchase option in the conditional
sale agreements which is exercisable at any time, and has retained all of the risks and rewards of
ownership of the aircraft, Genesis has not recognized either of these transactions as a sale for
accounting purposes and continue to recognize the aircraft as Flight equipment under operating
lease in the financial statements.
(f) Fixed Assets
Fixed assets comprise computer software, office equipment and leasehold improvements and are
recorded at cost less accumulated depreciation. Fixed assets are depreciated on a straight-line
basis over the estimated useful lives of the assets, which are as follows:
|
|
|
|
|
Computer software |
|
3 years |
Office equipment |
|
5 years |
Leasehold improvements |
|
10 years |
F-11
3. Significant Accounting Policies (continued)
(g) Initial Direct Costs
Specifically identifiable amounts paid by Genesis to lessees or other third parties in
connection with lease transactions are capitalized and amortized against revenue on the Statement
of Income over the initial non-cancelable term of the related lease. The initial direct costs are
capitalized and included in the caption Other Assets in the Balance Sheets (see Note 5).
(h) Business Combinations and Goodwill
The acquisition of an aircraft under a business combination is accounted for using the
purchase method in accordance with SFAS 141, Business Combinations. Genesis applies the purchase
price of aircraft acquired to the fair value of assets acquired and liabilities assumed by major
balance sheet caption, including identifiable intangible assets and liabilities, as at the
acquisition date. Goodwill represents the excess of the aggregate purchase price over the fair
value of the net assets acquired in a purchase businesses combination. Goodwill is reviewed for
impairment at least annually in accordance with the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets. The goodwill impairment test is a two-step test. Under the first step, the fair
value of the reporting unit is compared with its carrying value (including goodwill). If the fair
value of the reporting unit is less than its carrying value, an indication of goodwill impairment
exists for the reporting unit and the enterprise must perform step two of the impairment test
(measurement). Under step two, an impairment loss is recognized for any excess of the carrying
amount of the reporting units goodwill over the implied fair value of that goodwill. The implied
fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner
similar to a purchase price allocation, in accordance with SFAS 141, Business Combinations. The
residual fair value after this allocation is the implied fair value of the reporting units goodwill.
Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair
value of the reporting unit exceeds its carrying value, step two does not need to be performed.
During the years ended December 31, 2007 and 2008, Genesis did not record any goodwill on
acquisition of flight equipment accounted for as business combinations, as the purchase price paid
reflected the fair value of the tangible and intangible assets acquired and liabilities assumed.
In accounting for flight equipment acquired under a business combination, management makes
estimates of the fair value of the attached leases separate from the fair value of the underlying
aircraft. Determining the fair value of attached leases requires us to make assumptions regarding
the current fair value of leases attaching to specific aircraft. Management estimates a range of
fair values of similar aircraft in order to determine if the attached lease is within a fair value
range. If a lease is above market terms, the present value of the estimated amount above the fair
value range is recorded over the remaining contractual term of the lease. Any resulting lease
premium assets are amortized on a straight line basis as a reduction of rental income over the
remaining useful life of the lease. If a lease is below market terms, the present value of the
estimated amount below the fair value range is calculated over the remaining contractual lease term
of the lease. Related assets and liabilities representing such values are reported in Other Assets
and Other Liabilities, respectively. Any resulting lease discounts are amortized as an addition to
rental income over the remaining useful life of the lease. Genesis considers lease renewals on a
lease by lease basis.
(i) Maintenance Expense
Genesis records a charge for light maintenance expense when incurred in Maintenance expense
on the Statement of Income. These light maintenance costs relate primarily to those incurred in the
re-leasing of aircraft and during the transition between leases. For planned major maintenance
activities, Genesis capitalizes and depreciates the actual costs by applying the deferral method. These amounts
capitalized are included in Flight Equipment under operating leases, net and are depreciated over
the period until the next overhaul is required.
F-12
3. Significant Accounting Policies (continued)
(j) Security Deposits on Flight Equipment
Security deposits on flight equipment are made by the lessee on the execution of the lease and
are non-refundable during the term of the lease. The amounts are held as a security for the timely
and faithful performance by the lessee of its obligations during the lease. The deposit may be
applied against amounts owing from the lessee for rent or returned to the lessee on the termination
of the lease.
(k) Commitments and Contingencies
Claims, suits and complaints arise in the ordinary course of the Genesiss business.
Currently, management is not aware of any such claims or contingent liabilities, which should be
disclosed, or for which a provision should be established in the accompanying financial statements.
Under the Companys lease agreements the lessee is generally responsible for normal
maintenance and repairs, airframe and engine overhauls, consents and approvals, and compliance with
return conditions of aircraft on lease. In certain cases, Genesis may be obligated to make
contributions to the lessee for expenses related to planned maintenance including the amount of
additional rent paid by the lessee under the lease based on current estimates of usage and future
maintenance costs of the aircraft.
Obligations for contingencies are recognized where such items are probable and amounts are
reasonably estimable.
(l) Foreign currencies and translation of subsidiaries
Genesiss functional currency is the United States dollar. Transactions in currencies other
than United States dollars are recorded at the rate in effect at the date of the transactions.
Monetary assets and liabilities denominated in currencies other than United States dollars are
translated into United States dollars at exchange rates prevailing at the balance sheet date.
Adjustments resulting from these translations are charged or credited to income.
(m) Disclosure about fair value of financial instruments
The following methods and assumptions were used to estimate the fair value of each material
class of financial instrument:
Cash and cash equivalents, prepayments, other assets, accounts receivable, accounts payable
and payments received on account have carrying amounts that approximate fair value due to the short
term maturities of these instruments. Derivative instruments are carried at mark to market which is
equal to their fair value. Due to the prevailing market conditions, Genesis applied additional
inputs to the fair value determination in the form of credit spreads, credit default swaps and an
assessment of the probability of its own non-performance and of default by either of the swap
counterparties. The carrying value of Genesiss other liabilities, recalculated at current interest
rates, approximates their carrying value. The estimated fair value of debt instruments approximates
their carrying amounts, as these debt instruments have variable interest rates.
(n) Cash and cash equivalents and restricted cash
Cash and cash equivalents include cash and highly liquid investments with initial maturities
of three months or less and are stated at cost, which approximates market value.
Restricted cash represents (1) amounts received from lessees in respect of additional rentals
required to be held in segregated accounts to support certain maintenance-related payments
including major airframe overhauls, engine overhauls, engine life limited parts replacements,
auxiliary power unit overhauls and landing gear overhauls; (2) amounts received from lessees in
respect of cash security deposits required to be held in segregated accounts, (3) certain operating expenses and (4) legally secured deposits,
all in accordance with underlying financing requirements.
F-13
3. Significant Accounting Policies (continued)
(o) Income taxes
Genesis applies SFAS 109, Accounting for Income Taxes, which requires the asset and liability
method of accounting for income taxes. Deferred income tax assets and liabilities are recognized
for the future tax consequences attributed to differences between the financial statements and tax
basis of existing assets and liabilities using enacted rates applicable to the periods in which the
differences are expected to affect taxable income. Deferred income tax assets represent amounts
available to reduce income taxes payable on taxable income in future years. The recoverability of
these future tax deductions is evaluated by assessing the adequacy of future taxable income from
all sources, including the reversal of temporary differences and forecasted operating earnings.
Income taxes have been provided for all items included in the Statements of Income regardless of
when such items were reported for tax purposes or when the taxes were actually paid or refunded.
Beginning with the adoption, on January 1, 2007, of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FIN 48), Genesis
recognizes the effect of income tax positions only if those positions are more likely than not of
being sustained based on the technical merits upon examination. In accordance with FIN 48, Genesis
measures the benefit using a cumulative probability analysis where the measurement is based on
managements best judgment about the amount that will be realized upon settlement. Recognized
income tax positions are measured at the largest amount of benefit that has a greater than 50%
likelihood of being realized upon settlement. Changes in recognition or measurement are reflected
in a period in which the change occurs. Prior to the adoption of FIN 48 on January 1, 2007, Genesis
recognized the effect of income tax positions only if such positions were probable of being
sustained.
Genesiss accounting policy for recording interest and penalties associated with the liability
for unrecognized tax benefits is to record such items as a component of other expenses.
(p) Net income per share
Earnings per share is presented in accordance with SFAS 128, Earnings Per Share, which
requires the presentation of basic earnings per share and diluted earnings per share. Basic net
earnings per share has been computed by dividing net income available to common shareholders by the
weighted average number of shares outstanding during the period including restricted share awards.
Diluted net earnings per share is computed by adjusting the weighted average number of shares
outstanding during the period for all potentially dilutive shares outstanding during the period and
adjusting net income for any changes in income or loss that would result from the conversion of
such potential shares. For the purposes of calculating diluted earnings per share, the denominator
includes both the weighted average number of shares of stock outstanding during the period
including restricted share awards and the weighted average number of potential shares of stock such
as stock options, using the treasury stock method.
(q) Share-based compensation
Compensation costs relating to share-based payments are recognized based on the fair value of
the equity instruments issued in accordance with SFAS 123(R), Share-Based Payment. Fair value of
the equity instruments are determined based on a valuation using an option pricing model which
takes into account various assumptions that are subjective. Key assumptions used in developing the
valuation include the expected term of the equity award taking into account both the contractual
term of the award, the effects of employees expected exercise and post-vesting termination
behavior, expected volatility, expected dividends and the risk-free interest rate for the expected term of the award. Key assumptions
used in developing valuations are discussed with independent third party valuation experts.
F-14
3. Significant Accounting Policies (continued)
(r) Derivative financial instruments.
Genesis has entered into derivative instruments to hedge the risk of variability in the cash
flows associated with the floating interest rate payments on the borrowings incurred to finance a
portion of the consideration paid for its portfolio of aircraft and also to hedge against the
variability in the U.S. dollar to Euro foreign exchange rates. Genesis accounts for derivative
instruments in accordance with SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, as amended and interpreted. In accordance with SFAS 133, all derivatives are recognized
on the balance sheet at their fair value. Fair value may depend on the credit rating and risk
attaching to the counterparty of the derivative contracts. When cash flow hedge accounting
treatment is achieved under SFAS 133, the changes in fair values related to the effective portion
of the derivatives are recorded in accumulated other comprehensive income, and the ineffective
portion is recognized immediately in income. Changes in fair value related to the effective portion
of the derivatives are reclassified out of accumulated other comprehensive income into income for
any ineffective portion of the derivative contract which is calculated at each quarter end. Amounts
reflected in accumulated other comprehensive income related to the effective portion are
reclassified into earnings in the same period or periods during which the hedged transaction
affects earnings. Changes in the fair value of forward foreign exchange contracts are recognized
immediately in income.
(s) Debt Issuance costs
Deferred financing costs are capitalized and are being amortized on an effective yield or
straight line basis (depending on the nature of the cost) over the associated life of the related
debt.
(t) Reclassifications
Certain items in the combined and consolidated financial statements for prior periods have
been reclassified to conform to current classifications.
(u) Repurchase of Common Shares
The Company repurchases its common shares in the form of ADSs from time to time on the open
market. Repurchased ADSs and their underlying ordinary shares are cancelled, reducing the number of
issued and outstanding shares. Costs in excess of par value and other transaction costs associated
with the repurchase of ADSs are shown as a reduction in Additional Paid in Capital.
(v) Extinguishment of debt
Genesis applies APB No. 26, Early Extinguishment of Debt, to record the repurchase of debt.
Extinguished debt which is not legally retired (and therefore may be subsequently reissued or sold
in the open market), is referred to as treasury notes. The difference between the consideration
paid to purchase any debt, including any transaction and professional fees, less the carrying value
of the debt, is recognized as a gain or loss and recorded within Other income in accordance with
SFAS No. 145, Rescission of FASB Statements Nos. 4, 44 and 62, Amendment of FASB Statement No. 13,
and Technical Corrections.
F-15
4. Cash and Cash Equivalents and Restricted Cash
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
Consolidated |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2007 |
|
2008 |
|
|
|
(USD in thousands) |
|
|
(USD in thousands) |
|
Cash and cash equivalents |
|
$ |
30,101 |
|
|
$ |
60,206 |
|
|
|
|
|
|
|
|
Restricted cash: |
|
|
|
|
|
|
|
|
Current |
|
|
19,742 |
|
|
|
14,582 |
|
Due greater than 12 months |
|
|
13,240 |
|
|
|
19,136 |
|
|
|
|
|
|
|
|
Total |
|
$ |
32,982 |
|
|
$ |
33,718 |
|
|
|
|
|
|
|
|
Cash and cash equivalents include cash and highly liquid investments with initial maturities
of three months or less and are stated at cost, which approximates market value.
Restricted cash represents (1) amounts received from lessees in respect of additional rentals
required to be held in segregated accounts to support certain maintenance related payments
including major airframe overhauls, engine overhauls, engine life limited parts replacements,
auxiliary power unit overhauls and landing gear overhauls; (2) amounts received from lessees in
respect of cash security deposits required to be held in segregated accounts, (3) certain operating
expenses and (4) legally secured deposits, all in accordance with underlying financing
requirements.
5. Other assets
Other assets primarily comprise (1) deferred financing costs, net of amortization, (2) the
positive fair value of derivatives, (3) capitalized initial direct costs, net of amortization, (4)
in-the-money lease contracts, net of amortization and (5) other costs. An analysis of the movement
for the years ended December 31, 2007 and 2008 is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-the- |
|
|
|
|
|
|
|
|
|
Deferred |
|
|
Fair |
|
|
Initial |
|
|
money |
|
|
|
|
|
|
|
|
|
financing |
|
|
value of |
|
|
direct |
|
|
lease |
|
|
|
|
|
|
|
|
|
costs |
|
|
derivatives |
|
|
costs |
|
|
contract |
|
|
Other Costs |
|
|
Total |
|
|
|
(USD in thousands) |
|
January 1, 2007 |
|
$ |
15,666 |
|
|
$ |
3,857 |
|
|
$ |
2,652 |
|
|
$ |
|
|
|
$ |
140 |
|
|
$ |
22,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase /(decrease) for year |
|
|
7,891 |
|
|
|
(3,857 |
) |
|
|
325 |
|
|
|
389 |
|
|
|
(56 |
) |
|
|
4,692 |
|
Amortization |
|
|
(3,923 |
) |
|
|
|
|
|
|
(512 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
(4,452 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
19,634 |
|
|
|
|
|
|
|
2,465 |
|
|
|
372 |
|
|
|
84 |
|
|
|
22,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase for year |
|
|
16,347 |
|
|
|
|
|
|
|
85 |
|
|
|
|
|
|
|
955 |
|
|
|
17,387 |
|
Amortization |
|
|
(4,465 |
) |
|
|
|
|
|
|
(645 |
) |
|
|
(71 |
) |
|
|
|
|
|
|
(5,181 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
$ |
31,516 |
|
|
$ |
|
|
|
$ |
1,905 |
|
|
$ |
301 |
|
|
$ |
1,039 |
|
|
$ |
34,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred financing costs of $39.9 million have been capitalized and are being amortized over
the associated life of the related debt. The increase for the year ended December 31, 2007 includes
$7.2 million of costs borne by GE in respect of the credit facility. The increase for the year
ended December 31, 2008 includes $9.4 million of costs incurred on the option to increase the
available borrowing amount under Genesis Acquisitions revolving credit facility and $6.9 million
incurred in respect of additional borrowings.
6. Flight Equipment under Operating Leases, net
Flight equipment under operating leases, net consisted of the following as at December 31,
2007 and 2008:
F-16
6. Flight Equipment under Operating Leases, net (continued)
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
Consolidated |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
|
(USD in |
|
|
(USD in |
|
|
|
thousands) |
|
|
thousands) |
|
Flight equipment under operating leases : |
|
$ |
1,818,802 |
|
|
$ |
1,938,639 |
|
Less: |
|
|
|
|
|
|
|
|
Accumulated depreciation |
|
|
(262,993 |
) |
|
|
(341,035 |
) |
|
|
|
|
|
|
|
Flight equipment under operating leases, net |
|
$ |
1,555,809 |
|
|
$ |
1,597,604 |
|
|
|
|
|
|
|
|
Capitalized additions primarily relate to the acquisition of one aircraft and capitalized
planned major maintenance costs on the portfolio of aircraft.
Flight equipment under operating lease includes two aircraft on lease to airlines in Japan in which
Genesis and its subsidiaries, in accordance with local laws, hold beneficial interest but not legal
title. Under Japanese law, legal title to each aircraft registered in Japan must be held by a
Japanese entity. In order to facilitate the lease to the airlines and to meet Japanese registration
requirements, Genesis and its predecessor (the Acquirers), with the cooperation of the airlines
and in accordance with the terms of sales agreements, sold title to these aircraft to two Japanese
entities that are owned and managed by a Japanese corporation. However, beneficial ownership of the
aircraft is effectively held by wholly owned subsidiaries of Genesis. Concurrently with such sale,
the Acquirers and the Japanese entities entered into a conditional sale agreement whereby the
Acquirers repurchased the aircraft from the entities. The Acquirers have paid the entire repurchase
price under the conditional sale agreements except one remaining installment in the amount of one
U.S. dollar. Under the conditional sales agreements, Genesis effectively holds the beneficial
ownership interest of the aircraft, including all of the risks and rewards of ownership.
Genesis assessed the recoverability of aircraft during the fourth quarter of 2008. Management
utilized current market values from independent appraisers as at December 31, 2008 to determine
whether further assessment of impairment is required. On any asset where book value was lower than
the current market value, a comparison of undiscounted future cashflows to the carrying amount of
the asset was carried out by management. Estimated undiscounted future cashflows are based on
remaining contracted rentals and, in the case of assumed future re-leases of aircraft, current
lease rate factors as determined by independent appraisers.
Genesis recorded no impairment charges on aircraft in 2006, 2007 and 2008. However, it is
reasonably possible that Genesiss determination that the aircraft are not impaired could change in
the near term should the demand for aircraft continue to decrease.
Maintenance costs related to planned major maintenance activities are capitalized and
depreciated on a straight-line basis over the period until the next overhaul is required. During
the three months ended March 31, 2008, and as part of on-going periodic reviews, Genesis revised
its estimate of the intervals to the next overhaul. The effects of this change in accounting
estimate on the financial statements for the year ended December 31, 2008 is as follows:
|
|
|
|
|
Increase in: |
|
|
|
|
Net income |
|
$3.0 million |
Earnings per share |
|
$ |
0.08 |
|
F-17
7. Fixed Assets, net
Fixed assets, net, consisted of the following as at December 31, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
|
(USD in thousands) |
|
Cost: |
|
|
|
|
|
|
|
|
Computer software |
|
$ |
718 |
|
|
$ |
1,686 |
|
Office equipment |
|
|
202 |
|
|
|
385 |
|
Leasehold improvements |
|
|
246 |
|
|
|
943 |
|
|
|
|
|
|
|
|
|
|
|
1,166 |
|
|
|
3,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Depreciation: |
|
|
|
|
|
|
|
|
Computer software |
|
|
106 |
|
|
|
641 |
|
Office equipment |
|
|
22 |
|
|
|
85 |
|
Leasehold improvements |
|
|
14 |
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
142 |
|
|
|
790 |
|
|
|
|
|
|
|
|
Net Book Value |
|
$ |
1,024 |
|
|
$ |
2,224 |
|
|
|
|
|
|
|
|
8. Business Combinations
On September 26, 2007, Genesis signed an asset purchase agreement to acquire a portfolio of
eight modern, narrow-body commercial aircraft from affiliates of GECAS, which were on lease to six
airlines in three countries. The acquisition has been treated as a purchase in conformity with
Statement Financial Accounting Standard SFAS 141, Business Combinations. In connection with the
acquisition, the assets and liabilities relating to the delivered aircraft were stated at fair
value upon their respective acquisition dates.
The sources and uses of funds in connection with the delivered aircraft are summarized below:
|
|
|
|
|
|
|
Consolidated |
|
|
|
December 31, 2007 |
|
|
|
(USD in thousands) |
|
Sources: |
|
|
|
|
Cash on hand |
|
$ |
65,686 |
|
Borrowings under the Credit Facility |
|
|
155,411 |
|
|
|
|
|
|
|
$ |
221,097 |
|
|
|
|
|
Uses: |
|
|
|
|
Net cash consideration |
|
$ |
219,934 |
|
Acquisition costs |
|
|
1,163 |
|
|
|
|
|
|
|
$ |
221,097 |
|
|
|
|
|
The acquisition cost of $221.1 million has been allocated to the acquired assets and
liabilities on their acquisition date, based on their fair values in accordance with SFAS 141, as
follows:
F-18
8. Business Combinations (continued)
|
|
|
|
|
|
|
Consolidated |
|
|
|
December 31, 2007 |
|
|
|
(USD in thousands) |
|
Flight equipment purchased under business combinations |
|
$ |
226,884 |
|
In-the-money lease contracts |
|
|
389 |
|
Out of-the-money lease contracts |
|
|
(3,683 |
) |
Rentals received in advance |
|
|
(1,802 |
) |
Security deposits |
|
|
(691 |
) |
|
|
|
|
Net assets acquired |
|
$ |
221,097 |
|
|
|
|
|
On June 26, 2008, Genesis acquired one Boeing 767-300ER aircraft from an affiliate of GE. This
acquisition was financed by a combination of debt and cash and has been treated as a purchase in
conformity with SFAS 141. In connection with the purchase, the assets and liabilities relating to
the delivered aircraft were stated at fair value upon their respective acquisition dates.
Management has made a tentative allocation of the acquisition cost using values that have been
determined, and preliminary estimates of the values not yet determined, relating to lease
contracts, aircraft valuation and other assets. No goodwill arose on this acquisition.
9. Rental of Flight Equipment
Rental of flight equipment includes additional rent of $20.5 million, $23.5 million and $31.8
million for the years ended December 31, 2006, 2007 and 2008, respectively.
Minimum future rental income on non-cancelable operating leases as at December 31, 2008 is
shown below. The minimum future rental income assumes no extension or termination options are
exercised on any leases and does not include any estimated additional rentals receivable under
certain leases. Additional rentals are based on hourly usage or cycles operated, depending on the
lease agreement.
|
|
|
|
|
|
|
Consolidated |
|
|
|
December 31, |
|
|
|
2008 |
|
|
|
(USD in thousands) |
|
Year Ended December 31 |
|
|
|
|
2009 |
|
$ |
188,014 |
|
2010 |
|
|
186,929 |
|
2011 |
|
|
152,686 |
|
2012 |
|
|
138,045 |
|
2013 |
|
|
116,040 |
|
Thereafter |
|
|
189,482 |
|
|
|
|
|
|
|
$ |
971,196 |
|
|
|
|
|
10. Income Taxes (including deferred taxes)
The combined financial statements, prior to the IPO on December 19, 2006 have been prepared on
a carve out basis and reflect income taxes as if the Predecessor had been a separate taxable
entity, resident in the United States.
F-19
10. Income Taxes (including deferred taxes) (continued)
The consolidated financial statements for the period from December 19, 2006 through December
31, 2006 and the consolidated financial statements for the years ended December 31, 2007 and 2008,
reflect the fact that the Company is a separate taxable entity, resident for tax purposes in
Ireland.
The provision for income taxes
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
Consolidated |
|
|
Consolidated |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
(USD in thousands) |
|
Deferred tax (benefit) /expense
Ireland |
|
$ |
(133 |
) |
|
$ |
6,053 |
|
|
$ |
6,151 |
|
Current tax expense |
|
|
1,578 |
|
|
|
|
|
|
|
73 |
|
Deferred tax expense United States |
|
|
15,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax expense |
|
$ |
17,367 |
|
|
$ |
6,053 |
|
|
$ |
6,224 |
|
|
|
|
|
|
|
|
|
|
|
Current tax expense includes an amount related to U.S. federal income taxes of $1.5 million in
2006. Deferred income tax expense related to U.S. federal income taxes was $15.0 million in 2006.
The net deferred tax (asset) / liability consists of the following deferred tax (assets) /
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated |
|
|
|
|
|
|
Realized gain on |
|
|
|
|
|
|
|
|
|
depreciation |
|
|
Taxable |
|
|
repurchase of |
|
|
Unrealized |
|
|
|
|
|
|
on flight |
|
|
operating |
|
|
securitization |
|
|
gain/(loss) on |
|
|
|
|
|
|
equipment |
|
|
losses (i) |
|
|
notes (ii) |
|
|
derivative (iii) |
|
|
Total |
|
|
|
(USD in thousands) |
|
Balance at January 1, 2007 |
|
$ |
(30,107 |
) |
|
$ |
(688 |
) |
|
$ |
|
|
|
$ |
482 |
|
|
$ |
(30,313 |
) |
Deferred tax expense /
(benefit) from temporary
differences |
|
|
19,526 |
|
|
|
(13,472 |
) |
|
|
|
|
|
|
(4,528 |
) |
|
|
1,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
|
(10,581 |
) |
|
|
(14,160 |
) |
|
|
|
|
|
|
(4,046 |
) |
|
|
(28,787 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax effect of
Capital Contribution from
GECAS (iv) |
|
|
|
|
|
|
906 |
|
|
|
|
|
|
|
|
|
|
|
906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax expense /
(benefit) from temporary
differences |
|
|
23,098 |
|
|
|
(17,768 |
) |
|
|
755 |
|
|
|
(6,838 |
) |
|
|
(753 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
12,517 |
|
|
$ |
(31,022 |
) |
|
$ |
755 |
|
|
$ |
(10,884 |
) |
|
$ |
(28,634 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) Gross tax loss carry forward.
(ii) Relates to the tax effect of the realized gain on the repurchase of Genesis Funding
securitization notes.
(iii) Relates to the tax expense / (benefit) on unrealized loss on derivatives, which is recorded
in Accumulated other comprehensive income.
(iv) Relates to the tax effect on the GECAS capital contribution. (See Note 25).
F-20
10. Income Taxes (including deferred taxes) (continued)
|
|
|
|
|
|
|
Consolidated |
|
|
|
December 31, |
|
Expiration of the tax loss carry forward |
|
2008 |
|
|
|
(USD in thousands) |
|
2009 |
|
|
|
|
2010 |
|
|
|
|
2011 |
|
|
|
|
2012 |
|
|
|
|
2013 |
|
|
|
|
Indefinite |
|
|
248,176 |
|
|
|
|
|
Total |
|
$ |
248,176 |
|
|
|
|
|
The acquisition of the Initial Portfolio was accounted for as a transaction between entities
under common control. The transfer of the aircraft from affiliates of GE in substance constitutes
an issuance of subsidiary stock. In accordance with the provisions of EITF 94-10, Accounting by a
Company for the Income Tax Effects of Transactions among or with its shareholders under Financial
Accounting Standards Board (FASB) 109, the Company has reflected the changes in the tax basis of
assets and liabilities and the resulting changes to deferred tax balances arising from the IPO and
related transactions in equity.
In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future taxable income and
tax planning strategies in making this assessment. In order to fully realize the deferred tax
asset, the Company will need to generate future taxable income of approximately $229.1 million.
Based upon projections for future taxable income over the periods in which the deferred tax assets
are deductible, management believes it is more likely than not that the Company will realize the
benefits of these deductible differences. The amount of the deferred tax asset considered
realizable, however, could be significantly reduced in the near term if estimates of future taxable
income during the carryforward period are reduced due to further decreases in revenues as the
result of current market conditions.
Beginning with the adoption of FIN 48 on January 1, 2007, Genesis has reviewed all of its tax
positions taken and believes that the positions taken and deductions therein would be sustained on
audit and does not anticipate any adjustments that could result in a material adverse effect on its
financial condition, results of operations, or cash flow. Therefore, no liability for unrecognized
tax benefits has been recorded pursuant to FIN 48 as of December 31, 2007 and 2008 and for the
years ended December 31, 2007 and 2008. Genesis has identified Ireland to be its only major tax
jurisdiction. The Irish income tax returns for Genesis remain subject to examination by the Irish
Revenue Commissioners for the tax periods beginning in 2006.
A reconciliation of the Irish corporation tax rate to the actual income tax rate for the years
ended December 31, 2006, 2007 and 2008 is outlined in the following table.
F-21
10. Income Taxes (including deferred taxes) (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined and |
|
|
|
|
|
|
Consolidated |
|
Consolidated |
|
Consolidated |
|
|
December 31, |
|
December 31, |
|
December 31, |
|
|
2006 |
|
2007 |
|
2008 |
Irish corporation tax rate |
|
|
12.50 |
% |
|
|
12.50 |
% |
|
|
12.50 |
% |
Increase in rate resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
State income tax, net of U.S. Federal benefit |
|
|
2.08 |
% |
|
|
|
|
|
|
|
|
Effect of U.S. Federal income tax rate |
|
|
23.07 |
% |
|
|
|
|
|
|
|
|
Other expenses not deductible for tax |
|
|
|
|
|
|
0.84 |
% |
|
|
0.70 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate U.S. / Irish |
|
|
37.65 |
% |
|
|
13.34 |
% |
|
|
13.20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
11. Accounts payable
Accounts payable as at December 31, 2007 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
Consolidated |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
|
(USD in thousands) |
|
Accrued maintenance costs |
|
$ |
5,730 |
|
|
$ |
21,204 |
|
Other expenses |
|
|
2,667 |
|
|
|
|
|
Operational expenses |
|
|
8,810 |
|
|
|
14,241 |
|
|
|
|
|
|
|
|
Total |
|
$ |
17,207 |
|
|
$ |
35,445 |
|
|
|
|
|
|
|
|
12. Other Liabilities
Other liabilities as at December 31, 2007 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Out-of- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the- |
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
Fair |
|
|
|
|
|
|
Rentals |
|
|
money |
|
|
|
|
|
|
payable |
|
|
|
|
|
|
value of |
|
|
Security |
|
|
received |
|
|
lease |
|
|
Accrued |
|
|
on debt, |
|
|
|
|
|
|
derivatives |
|
|
deposits |
|
|
in advance |
|
|
contract |
|
|
interest |
|
|
net |
|
|
Total |
|
|
|
(USD in thousands) |
|
January 1, 2007 |
|
$ |
|
|
|
$ |
14,809 |
|
|
$ |
8,810 |
|
|
$ |
|
|
|
$ |
1,430 |
|
|
$ |
1,547 |
|
|
$ |
26,596 |
|
Increase / (decrease) for
period |
|
|
32,371 |
|
|
|
(771 |
) |
|
|
1,601 |
|
|
|
3,682 |
|
|
|
785 |
|
|
|
520 |
|
|
|
38,188 |
|
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(122 |
) |
|
|
|
|
|
|
|
|
|
|
(122 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
32,371 |
|
|
|
14,038 |
|
|
|
10,411 |
|
|
|
3,560 |
|
|
|
2,215 |
|
|
|
2,067 |
|
|
|
64,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase /
(decrease) for
period |
|
|
54,659 |
|
|
|
1,640 |
|
|
|
(1,164 |
) |
|
|
|
|
|
|
(1,394 |
) |
|
|
510 |
|
|
|
54,251 |
|
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(493 |
) |
|
|
|
|
|
|
|
|
|
|
(493 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
$ |
87,030 |
|
|
$ |
15,678 |
|
|
$ |
9,247 |
|
|
$ |
3,067 |
|
|
$ |
821 |
|
|
$ |
2,577 |
|
|
$ |
118,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 157, Fair Value Measurements (SFAS 157), establishes a framework for measuring fair
value under US GAAP, clarifies the definition of fair value within that framework, and expands
disclosures about the use of fair value measurements. SFAS 157 was issued in September 2006 and is
effective for
fiscal years beginning after November 15, 2007. For non-financial assets and liabilities which
are not periodically recognized or disclosed at fair value, SFAS 157 has been deferred one year.
F-22
12. Other Liabilities (continued)
Under SFAS No. 157, the Company determines fair value based on the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. It is the Companys policy to maximize the use of observable
inputs and minimize the use of unobservable inputs when developing fair value measurements, in
accordance with the fair value hierarchy as described below. Where limited or no observable market
data exists, fair value measurements for assets and liabilities are based primarily on managements
own estimates and are calculated based upon the Companys pricing policy, the economic and
competitive environment, the characteristics of the asset or liability and other such factors.
Therefore, the results may not be realized in actual sale or immediate settlement of the asset or
liability.
The Company adopted SFAS 157 for all financial assets and liabilities required to be measured
at fair value on a recurring basis, prospectively from January 1, 2008. The application of SFAS 157
for financial instruments which are periodically measured at fair value did not have a material
effect on the Companys results of operations or financial position.
Under SFAS 157, there is a hierarchal disclosure framework associated with the level of
pricing observability utilized in measuring assets and liabilities at fair value. The three broad
levels defined by the SFAS 157 hierarchy are as follows:
Level 1 Quoted prices are available in active markets for identical assets or liabilities as
at the reported date.
Level 2 The fair values determined through Level 2 of the fair value hierarchy are derived
principally from or corroborated by observable market data. Inputs include quoted prices for
similar assets, liabilities (risk adjusted) and market-corroborated inputs, such as market
comparables, interest rates, yield curves and other items that allow value to be determined.
Level 3 The fair values pertaining to Level 3 of the fair value hierarchy are derived
principally from unobservable inputs from the Companys own assumptions about market risk
developed based on the best information available, subject to cost benefit analysis, and may
include the Companys own data.
When there are no observable comparables, inputs used to determine value are derived through
extrapolation and interpolation and other Company-specific inputs such as projected financial data
and the Companys own views about the assumptions that market participants would use.
In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active (FSP 157-3). FSP 157-3
clarifies the application of SFAS No. 157, Fair Value Measurements, in a market that is not
active and is intended to address the following application issues:
|
- |
|
How the reporting entitys own assumptions (that is, expected cash flows and
appropriately risk-adjusted discount rates) should be considered when measuring fair value
when relevant observable inputs do not exist. |
|
|
- |
|
How available observable inputs in a market that is not active should be considered
when measuring fair value. |
|
|
- |
|
How the use of market quotes (for example, broker quotes or pricing services for the
same or similar financial assets) should be considered when assessing the relevance of
observable and unobservable inputs available to measure fair value. |
F-23
12. Other Liabilities (continued)
FSP 157-3 is effective on issuance, including prior periods for which financial statements
have not been issued. As such, the FSP 157-3 is effective for the Company for the year ended
December 31, 2008. Adoption of FSP 157-3 did not have a significant impact on the Companys
financial statements.
The Companys policy is to maximize the use of observable inputs and minimize the use of
unobservable inputs when developing fair value measurements, in accordance with the fair value
hierarchy of SFAS No. 157, Fair Value Measurements (SFAS 157). The fair values determined by
Genesis are derived principally from or corroborated by observable market data. Inputs include
quoted prices for similar assets, liabilities (risk adjusted) and market-corroborated inputs, such
as market comparables, interest rates, yield curves and other items that allow fair value to be
determined. Due to the prevailing market conditions, Genesis applied additional inputs to the fair
value determination in the form of credit spreads, credit default swaps and an assessment of the
probability of its own non-performance and of default by either of the swap counterparties.
The following table summarizes the valuation of the Companys derivatives by the above SFAS
157 pricing observability levels:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Using |
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
for Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
December 31, |
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
2008 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
(USD in thousands) |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
87,075 |
|
|
$ |
|
|
|
$ |
87,075 |
|
|
$ |
|
|
Forward
foreign exchange contracts |
|
|
(45 |
) |
|
|
|
|
|
|
(45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
87,030 |
|
|
$ |
|
|
|
$ |
87,030 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Genesis expects $36.9 million of the gross fair value of the derivatives to be recognized
within one year.
In accordance with SFAS 133 Accounting for Derivative Instruments and Hedging Activities,
changes in fair value related to the effective portion of the interest rate swaps are recorded in
accumulated other comprehensive income, and changes related to any ineffective portion are
recognized immediately in income. Changes in the fair values of the forward foreign exchange
contracts are recognized immediately in income.
13. Debt
The following table summarizes debt as at December 31, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
Consolidated |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
|
(USD in thousands) |
|
Securitization notes |
|
$ |
810,000 |
|
|
$ |
796,500 |
|
Debt facilities |
|
|
|
|
|
|
331,893 |
|
Revolving credit facility |
|
|
240,961 |
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
$ |
1,050,961 |
|
|
$ |
1,128,393 |
|
|
|
|
|
|
|
|
F-24
13. Debt (continued)
Aggregate maturities of principal payments during the next five years and thereafter are as
follows:
|
|
|
|
|
|
|
Consolidated |
|
|
|
December 31, 2008 |
|
|
|
(USD in thousands) |
|
Within one year |
|
$ |
25,893 |
|
Two years |
|
|
32,746 |
|
Three years (1) |
|
|
36,254 |
|
Four years (1) |
|
|
92,757 |
|
Five years (1) |
|
|
91,904 |
|
Thereafter (1) |
|
|
848,839 |
|
|
|
|
|
Total |
|
$ |
1,128,393 |
|
|
|
|
|
|
|
|
(1) |
|
The indenture that governs the notes issued in the securitization provides that beginning
December 19, 2011 (the fifth anniversary of the securitization), all base lease cash flows
received on the Initial Portfolio of 41 aircraft are applied to repay the outstanding
principal balances of those notes, after payment of certain expenses and other payments
pursuant to the priorities set forth in the indenture. Accordingly, because there are no
specific repayment requirements, the principal maturities shown in this table for periods
after December 19, 2011 reflect an estimate of the cash flows that would be required for
payments on the notes based upon estimates of (i) base lease cash flows and (ii) expenses and
other payments specified in the indenture. The maturities of the debt as presented in this
table do not assume any defaults, aircraft sales, eligible extensions or potential
refinancings. |
Securitization Notes
Concurrently with the completion of our IPO, Genesis Funding completed a securitization
transaction that generated net proceeds of approximately $794.3 million after deducting initial
purchasers discounts and fees. Under the terms of the securitization, a single class of notes were
initially issued by Genesis Funding. The notes are direct obligations of Genesis Funding and are
not obligations of, or guaranteed by, GE, any of its affiliates or Genesis Lease Limited. The
proceeds from the sale of the notes, together with the proceeds from the IPO and the private
placement of shares to GE, less certain expenses related to the securitization and the IPO and a
cash balance that the Company retained, were used by Genesis Funding to finance the acquisition of
the Initial Portfolio of 41 aircraft.
The notes have the benefit of a financial guaranty insurance policy issued by Financial
Guaranty Insurance Company, or FGIC, which has issued a financial guaranty insurance policy to
support the payment of interest when due on the notes and the payment of the outstanding principal
balance of the notes on the final maturity date of the notes and, under certain other
circumstances, prior thereto.
The notes initially were rated Aaa and AAA by Moodys Investors Service, Inc., or Moodys, and
Standard & Poors Rating Services, a division of The McGraw-Hill Companies, Inc., or S&P,
respectively. This rating was based on FGICs rating. FGIC has suffered significant downgrades of
its ratings since the issuance of the notes and is currently rated Ca and CC by Moodys and S&P,
respectively. As a result, Moodys and S&P have published stand-alone ratings of the notes of A3
and A-, respectively.
The notes were issued pursuant to the terms of a trust indenture, dated December 19, 2006, the
date of the completion of the IPO, among Genesis Funding, a cash manager, a trustee, an operating
bank, a liquidity facility provider and a policy provider.
F-25
13. Debt (continued)
Interest Rate
The notes bear interest at one-month LIBOR plus 0.24%. Interest expense for the securitization
will also include amounts payable to the policy provider and the liquidity facility provider
thereunder. Genesis Funding has also entered into an interest rate swap agreement intended to hedge
the interest rate exposure associated with issuing the floating-rate obligations of the notes.
Maturity Date
The final maturity date of the notes is December 19, 2032.
Payment Terms
Interest on the notes are due and payable on a monthly basis. Scheduled monthly principal
payments on the notes commence on December 2009, subject to satisfying certain debt service
coverage ratios and other covenants. Thereafter, if the notes are not refinanced, cash flow
generally will not be available to the Company for the payment of dividends because principal
payments are not fixed in amount but rather are determined monthly based on revenues collected and
costs and other liabilities incurred prior to the relevant payment date. Effectively, after
December 19, 2011, all revenues collected during each monthly period will be applied to repay the
outstanding principal balance of the notes, after the payment of certain expenses and other
liabilities, including the fees of the service providers (including GECAS as servicer and the
Company in its role as manager), the liquidity facility provider and the policy provider, interest
on the notes and interest rate swap payments, all in accordance with the priority of payments set
forth in the indenture.
Redemption
Genesis may, on any payment date, redeem the notes by giving the required notices and
depositing the necessary funds with the trustee. A redemption prior to acceleration of the notes
may be of the whole or any part of the notes. A redemption after acceleration of the notes upon
default may only be for the whole of the notes.
Genesis may, on any payment date, redeem the notes in whole or from time to time in part, at
the following redemption prices, expressed as percentages of principal amount, together with
accrued and unpaid interest to, but excluding, the date fixed for redemption, if redeemed on the
dates indicated below:
|
|
|
|
|
Redemption Date |
|
Price |
Before December 19, 2009 |
|
|
101 |
% |
On or after December 19, 2009 |
|
|
100 |
% |
Collateral
The notes are secured by first priority, perfected security interests in and pledges or
assignments of equity ownership and beneficial interests in the subsidiaries of Genesis Funding,
their interests in the leases of the aircraft they own, cash held by or for them and by their
rights under agreements with GECAS, the initial liquidity facility provider, hedge counterparties
and the policy provider. The notes are also secured by a lien or similar interest in any of the
aircraft in the Initial Portfolio that are registered in the United States or Ireland.
F-26
13. Debt (continued)
Certain Covenants
Genesis Funding is subject to certain operating covenants including relating to the
maintenance, registration and insurance of the aircraft as set forth in the indenture. The
indenture also contains certain conditions and constraints which relate to the servicing and
management of the Initial Portfolio including covenants relating to the disposition of aircraft,
lease concentration limits, restrictions on the acquisition of additional aircraft and restrictions
on the modification of aircraft and capital expenditures as described below. GECAS has agreed to
use commercially reasonable efforts to perform its services pursuant to the servicing agreement for
our Initial Portfolio, subject to certain provisions of the indenture as they relate to the
services provided by GECAS thereunder. As at December 31, 2008,
Genesis Funding is in compliance with the
terms of the covenants under the indenture.
Term Loan Facilities
During
2008, Genesis secured new term loans in the aggregate amount of $92 million to finance
the acquisition of a Boeing 767-300ER aircraft and to leverage an Airbus A320-200 aircraft that
Genesis acquired during 2007. These loans bear interest at a fixed and floating rate (based on
LIBOR plus a margin) respectively, are secured with the underlying aircraft and mature in 2018 and
2019. The loans are subject to certain covenants, with which Genesis Portfolio is in compliance
with as at December 31, 2008.
During 2008, Genesis Portfolio also entered into a 7-year, $241.0 million term loan facility
with a syndicate of lenders. The term loan facility was drawn down in one tranche on September 19,
2008. Proceeds from the drawdown were used to refinance the 11 Airbus A320 family and Boeing 737
aircraft that previously had been owned by Genesis Acquisition and financed through Genesis
Acquisitions revolving credit facility.
The
principal terms of Genesis Portfolios term loan facility are as follows:
Fees. An up-front fee equal to 1.1% of the facility amount of $241.0 million and an upfront
administration fee of $0.4 million was payable upon entry into the facility. In addition, an agency
fee of $55,000 is payable annually.
Interest Rate. Borrowings under the facility bear interest at LIBOR plus an applicable margin
of 1.75% per annum. Under certain circumstances, when LIBOR may not be representative of the
wholesale bank cost of funds or be available as a reference rate, the facility includes provisions
for the negotiation of another basis for the calculation of the interest rate, which requires the
prior consent of all parties to the facility.
Maturity Date; Payment Terms. Borrowings under the facility are required to be repaid in
monthly installments of principal and interest with the balance payable as a balloon payment of
$125.0 million at maturity in September 2015.
Prepayment. Genesis Portfolio has the right to prepay any amounts outstanding under the
facility on any monthly repayment date. There is a prepayment penalty of 2% of the prepayment
amount in the first year and a 1% prepayment penalty in the second year. There are no prepayment
penalties thereafter. In addition, Genesis Portfolio will be required to make partial prepayments
of borrowings under the facility upon the total loss, sale or other disposition of aircraft
financed with borrowings under the facility.
Guarantee. Genesis Lease Limited has guaranteed all payments of principal and interest owed
under the facility.
Collateral. Borrowings under the facility are secured by first priority, perfected security
interests in and pledges or assignments of (1) the equity ownership and beneficial interests of
Genesis Lease Limited in
F-27
13. Debt (continued)
Genesis Portfolio and in each of its aircraft-owning subsidiaries, (2) leases of the aircraft
financed under the facility and mortgages over the aircraft themselves, (3) Genesis Portfolio
interests in the Servicing Agreement in place with GECAS under which those leases are serviced, and
(4) where possible, an international interest under the Cape Town Convention in each eligible
airframe, engine and lease. In addition, Genesis Portfolio is required to hold $5.0 million on
deposit in a liquidity reserve account.
Covenants. Genesis Portfolio is subject to certain operating covenants including some relating
to the maintenance, registration and insurance of the aircraft as set forth in the facility and
associated deed of proceeds and priorities (the DPP). The DPP and the facility also contain
certain conditions and constraints which relate to the servicing and management of the aircraft
financed through the facility, including covenants relating to the disposition of aircraft,
restrictions on the acquisition of additional aircraft and restrictions on the modification of
aircraft. In addition, Genesis Portfolio is subject to annual loan-to-value tests of 75% for the
first four years and of 70% thereafter based on its maintenance adjusted current market value on
each anniversary of the first drawdown. Genesis Portfolio is in compliance with all covenants as at
December 31, 2008.
Liquidity Facility
Genesis Funding and Calyon are parties to a revolving credit facility, which is referred to as
the liquidity facility. The aggregate amount available under the liquidity facility is $75 million,
$60 million of which may be drawn to cover certain expenses of Genesis Funding, including
maintenance expenses, interest rate swap payments and interest on the notes issued under the
indenture and the remaining $15 million of which is available for three years from the completion
of the IPO to cover any shortfalls in the separate account set aside for overhauls and certain
parts replacements. Genesis Funding is required to reimburse the provider of the liquidity
facility for the amount of such drawing plus accrued interest from funds available as specified in
the indenture. Any amounts under the liquidity facility advanced for overhauls and replacements
remaining outstanding after the third anniversary of the IPO will be due in an amount equal to
$625,000 per month. Upon the occurrence of certain events, including a downgrade of the provider of
the liquidity facility below a certain ratings threshold, the liquidity facility will be drawn in
full, and such drawings will be available for the same purposes as drawings under the liquidity
facility.
Drawings under the liquidity facility bear interest at one-month LIBOR plus a spread of 120
basis points. Genesis Funding paid an upfront fee of $450,000 on December 19, 2006 and will pay an
annual commitment fee of 60 basis points on each payment date. As at December 31, 2008, Genesis
Funding had drawn down $5.0 million under the liquidity facility.
Revolving Credit Facility
On April 5, 2007, Genesis Acquisition entered into a $1 billion senior secured revolving
credit facility with a syndicate of lenders. The revolving credit facility provides funding for
65.0-72.5% (depending on aircraft type) of the agreed value of the aircraft that Genesis
Acquisition may acquire.
In connection with the closing of the revolving credit facility, GECAS refunded fees and
related expenses of $7.2 million initially borne by Genesis Acquisition. Genesis recorded this
amount as deferred financing costs with an offsetting credit to Additional paid in capital. An
amount of $3.2 million was amortized for the year ended December 31, 2007 with a further $2.0
million amortized in the year ended December 31, 2008.
On October 5, 2008, Genesis Acquisition exercised its option to increase the total commitment
amount under the revolving credit facility to $1 billion. The exercise of the option resulted in
the payment of $9.4 million, which will be amortized into interest expense over the remaining
expected life of the revolving credit facility. An amount of
$0.7 million was amortized in the year ended December 31,
2008.
On September 19, 2008, Genesis secured a new $241.0 million debt facility, the proceeds of
which were used to refinance Genesis Acquisitions borrowings under the revolving credit facility.
Following the refinancing, Genesis Acquisition owned no aircraft and had no borrowings outstanding
under the revolving credit facility. Some of the lenders under the
revolving credit facility took the position that because
Genesis Acquisition generated no income from aircraft leasing activities during the fourth quarter
of 2008, it was unable to comply with an obligation to maintain a minimum ratio of EBITDA to
interest expense. Genesis believed that such test should not apply under these circumstances, and
in any event, to the extent any non-compliance did exist, Genesis firmly believed that it had cured
such non-compliance pursuant to the terms of the revolving credit facility. On March 3, 2009, to overcome
the difference of opinion and to clarify the future application of the EBITDA to interest expense
test, Genesis Acquisition entered into an amendment which resulted in an increase in the commitment
fees and interest rate under the revolving credit facility. A fee of $0.8 million was paid on March
3, 2009 to the lenders in connection with the amendment.
Following this amendment, the principal terms of the revolving credit facility are as follows:
Commitment fees. Commitment fees of 0.375% per annum initially were payable quarterly in
arrears on the unused amount of the revolving credit facility. Following the amendment, the commitment fees
increased to 0.50% per annum from March, 3, 2009, and to the extent
borrowings under the revolving credit facility
are less than $200.0 million on September 30, 2009, the commitment fees will increase to 0.75% from
September 30, 2009.
Interest Rate. Borrowings under the revolving credit facility bear interest at one- or
three-month LIBOR plus an applicable margin. Following the amendment, the applicable margin during
the revolving period increased from 1.50% 1.75% to 2.50% 2.75% from March 3, 2009 (the range
depends on Genesis Acquisitions portfolio composition and the principal amount outstanding under
the revolving credit facility). The margin remains at 2.75% during the term loan period from April
5, 2010 to April 4, 2012 (if Genesis Acquisition exercises its option to convert the revolving
credit facility to a term loan).
F-28
13. Debt (continued)
Maturity Date. The commitments under the revolving credit facility are available until April
2010, at which time Genesis Acquisition will have the option to convert any outstanding amount
under the revolving credit facility to a term loan with a two-year
maturity to April 4, 2012. If Genesis Acquisition
does not exercise this option, then the outstanding amount under the revolving credit facility at
such time will be due on such date.
Prepayment. Genesis Acquisition has the right to prepay any amounts outstanding under the
revolving credit facility or to reduce the commitment thereunder. In addition, Genesis Acquisition
will be required to make partial prepayments of borrowings under the revolving credit facility upon
the total loss, sale or other disposition of aircraft financed with borrowings under the revolving
credit facility, or if the aggregate amount of the loans outstanding under the revolving credit
facility exceeds the borrowing base (as defined in the revolving credit facility), including as a
result of a decrease in the value of an aircraft financed with borrowings thereunder as determined
by mandatory periodic appraisals.
Collateral. Pursuant to a security trust agreement, dated as of April 5, 2007, among Genesis
Acquisition, certain affiliates of Genesis Acquisition, Citibank, N.A., as administrative agent,
and Deutsche Bank Trust Company Americas, as security trustee and account bank, borrowings under
the revolving credit facility are secured by first priority, perfected security interests in and
pledges or assignments of (1) the equity ownership and beneficial interests of each subsidiary of
Genesis Acquisition, (2) leases of the aircraft financed under the revolving credit facility, (3)
rights under the casualty insurance on such aircraft, (4) accounts under the sole dominion and
control of the administrative agent under the revolving credit facility into which lease rentals,
insurance proceeds, sale proceeds and other amounts will be paid, and (5) where possible, an
international interest under the Cape Town Convention in each eligible airframe, engine and lease.
Covenants. Genesis Acquisition is subject to certain operating covenants including some
relating to the maintenance, registration and insurance of the aircraft as set forth in the
revolving credit facility. The revolving credit facility also contains certain conditions and
constraints which relate to the servicing and management of the aircraft whose acquisition is
financed through the revolving credit facility, including covenants relating to the disposition of
aircraft, lease concentration limits, restrictions on the acquisition of additional aircraft and
restrictions on the modification of aircraft, capital expenditures and the weighted average age of
Genesis Acquisitions aircraft portfolio. In addition, the revolving credit facility contains a
requirement that the ratio of earnings before interest, taxes, depreciation and amortization
(EBITDA) to interest expense for any trailing period of three consecutive months exceeds (i) 1.1
at all times and (ii) 1.5 for advances to be available under the revolving credit facility. Genesis
Acquisition is in compliance with all covenants as at
December 31, 2008. As disclosed in this Annual Report on Form 20-F, a difference of opinion arose between Genesis
Acquisition and some of the lenders under the revolving credit facility with respect to Genesis Acquisitions
obligation to maintain a minimum ratio of EBITDA to interest expense. To overcome the difference
of opinion and to clarify the future application of the EBITDA to interest expense test, Genesis
Acquisition has agreed to the amendment to the revolving credit facility described herein.
14. Share-Based Compensation
Equity Plan
The Company has adopted a share incentive plan (the Plan) for employees and directors. The
Plan is administered by the compensation committee of the board of directors. Awards granted under
the Plan may be made in the form of (1) options, (2) share appreciation rights, including limited
share appreciation rights
F-29
14. Share-Based Compensation (continued)
and (3) other share-based awards. The maximum number of the Companys common shares that may
be issued for awards under the Plan is 3,000,000, subject to adjustments. Unless otherwise
determined by the committee, any of the shares issued in respect of any award granted under the
Plan will be in the form of ADSs. Awards granted under the Plan shall be evidenced by award
agreements (which need not be identical) that provide additional terms and conditions associated
with such awards, as determined by the Compensation Committee of the board of directors in its sole
discretion.
Restricted Shares
SFAS 123(R) defines employees to include non-employee directors of the Companys board of
directors, i.e., those elected by the shareholders of the Company. The cost of an award granted to
such non-employees is measured on the grant date.
During the year ended December 31, 2007, the Company granted a total of 39,070 restricted
shares which vested immediately. The aggregate fair value of these restricted shares was
approximately $0.8 million. During the year ended December 31, 2007, 30,393 of these shares were
issued. The remaining 8,677 will be issued in equal installments over 3 years.
During
the year ended December 31, 2008, the Company granted and issued
a total of 63,430 restricted shares.
These shares were issued at a weighted average fair value of $15.34 per share.
Restricted shares granted to employees and non-employee directors have a three-year graded
restriction on transferability but are non-forfeitable in any and all circumstances including the
termination of employment or board membership. Accordingly, as there is no future service condition
associated with these restricted share awards, the Company has recorded compensation expense based
on the fair value of the awards at the grant date of $0.8 million and $1.0 million for the years
ended December 31, 2007 and 2008 respectively.
A summary of the status of Genesiss nonvested shares as at December 31, 2008 and changes
during the year ended December 31, 2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
Number of |
|
|
Grant-Date |
|
|
|
Shares |
|
|
Fair Value |
|
Nonvested at January 1, 2008 |
|
|
|
|
|
|
|
|
Granted |
|
|
63,430 |
|
|
$ |
18.57 |
|
Vested |
|
|
(63,430 |
) |
|
$ |
18.57 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2008 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
As at December 31, 2008, there was no unrecognized compensation cost related to nonvested
share-based compensation arrangements granted under the Plan.
Share Options
During the year ended December 31, 2007, the Company granted to its employees options to
purchase a total of 20,970 shares. The exercise price range of these options was $20.25 $26.34.
During the year ended December 31, 2008, the Company granted to its employees options to
purchase a total of 2,000 shares at an exercise price of $15.51. The aggregate fair value of these
options was $4,100 calculated using the Black-Scholes option pricing model and is being amortized
on a straight line basis over the vesting period.
Options vest in equal annual installments over a period of three years from the date of grant
and have an expiry of ten years after the grant date.
F-30
14. Share-Based Compensation (continued)
The Company has determined the grant-date fair value of stock options using the Black-Scholes
option pricing model, which has been applied using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2007 |
|
2008 |
Expected volatility |
|
|
32.4 |
% |
|
|
36.44 |
% |
Expected dividend yield |
|
|
9.6 |
% |
|
|
11.4 |
% |
Risk-free rate |
|
|
3.5 |
% |
|
|
3.3 |
% |
Expected term (in years) |
|
|
6.0 |
|
|
|
6.0 |
|
Genesis derived its volatility assumptions by reviewing the returns on Genesis stock
considering historical volatility and current and implied historical volatility. The expected life
represents the period of time the options are expected to be outstanding. Continuous risk free
rates have been used. The expected dividend yield is based on the historical dividend payments and
dividend yields of Genesis.
The aggregate grant date fair value of options granted are amortized on a straight line basis
over the three-year vesting period from the date of grant. The Company has recorded compensation
expense of $0.3 million and $0.1 million for the year ended December 31, 2007 and 2008
respectively. As at December 31, 2008, there was $0.1 million of total unrecognized compensation
costs relating to share options.
The following table summarizes information concerning outstanding and exercisable share
options as at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Aggregate |
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
Intrinsic |
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Value |
|
|
|
Number of |
|
|
Exercise |
|
|
Contractual |
|
|
(USD in |
|
|
|
Shares |
|
|
Price |
|
|
Term |
|
|
thousands) |
|
Outstanding at January 1, 2008 |
|
|
297,754 |
|
|
$ |
23.06 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
2,000 |
|
|
|
15.51 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
299,754 |
|
|
$ |
23.01 |
|
|
|
7.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008 |
|
|
191,512 |
|
|
$ |
23.04 |
|
|
|
7.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of options granted during the years ended December
31, 2007 and 2008 was $2.05 and $1.55 respectively. No options were exercised or forfeited during
the year ended December 31, 2008.
15. Net income per share
The Company calculates its net income per share in accordance with SFAS 128, Earnings per
Share. Basic net income per share is computed based on the weighted average number of shares
outstanding during the year, which includes the restricted share awards issued to the Companys
employees and non-employee directors.
Diluted net earnings per share reflects the dilution potential that could occur if securities
or other contracts to issue shares were exercised resulting in the issuance of stock that then
shared in the net income of the company. Diluted net income per share is computed by taking the
weighted average number of shares for the year and adjusting for the dilutive effect of the options
granted to employees.
For the year ended December 31, 2006 basic net earnings per share is calculated by annualizing
the weighted average number of shares of 31,310,000 which includes the 32,176 restricted share
awards to the
F-31
15. Net income per share (continued)
Companys employees and non-employee directors for the 13-day period from December 19, 2006 to
December 31, 2006.
The following table presents the net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined and |
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
Consolidated |
|
|
Consolidated |
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
(USD in thousands, except share and per share data) |
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
28,757 |
|
|
$ |
39,155 |
|
|
$ |
40,917 |
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
No. of shares outstanding at beginning of period |
|
|
1,116,296 |
|
|
|
31,342,176 |
|
|
|
36,069,069 |
|
Underwriters exercise of over allotment option |
|
|
|
|
|
|
4,503,478 |
|
|
|
|
|
Restricted shares granted |
|
|
|
|
|
|
13,510 |
|
|
|
53,840 |
|
Repurchased shares |
|
|
|
|
|
|
|
|
|
|
(154,781 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted
average shares for basic earnings per share |
|
|
1,116,296 |
|
|
|
35,859,164 |
|
|
|
35,968,128 |
|
Effect of dilutive share options |
|
|
1,754 |
|
|
|
7,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares for diluted earnings per share |
|
|
1,118,050 |
|
|
|
35,867,105 |
|
|
|
35,968,128 |
|
|
|
|
|
|
|
|
|
|
|
Net income per share |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
25.76 |
|
|
$ |
1.09 |
|
|
$ |
1.14 |
|
Diluted |
|
$ |
25.72 |
|
|
$ |
1.09 |
|
|
$ |
1.14 |
|
Options to purchase 14,031 common shares at an exercise price between $23.81 and $26.34 per
share were outstanding as at December 31, 2007, but were not included in the computation of diluted
EPS because the options exercise price was greater than the average market price of the common
shares.
Options to purchase 299,754 common shares at an exercise price between $15.51 and $26.34 per
share were outstanding as at December 31, 2008, but were not included in the computation of diluted
EPS because the options exercise price was greater than the average market price of the common
shares. The options expire between December 19, 2017 and May 6, 2021.
The
Company has also presented pro forma basic and diluted net earnings per share amounts for the
year ended December 31, 2006 as if the IPO and the exercise of the over-allotment option had occurred on January 1, 2006.
Pro
forma basic net earnings per share for the year ended December 31, 2006 is computed by taking
the weighted average number of shares of 31,310,000 together with the exercise of the full
over-allotment shares of 4,696,500 shares and the 32,176 restricted share awards to the Companys
employees and non-employee directors. Diluted net earnings per share is computed by taking the weighted average number of shares of
36,038,676 together with dilutive effect of the options granted to employees.
The
following table presents the number of shares used in the computation of pro forma basic and
diluted net income per share:
F-32
15. Net income per share (continued)
|
|
|
|
|
|
|
Combined and |
|
|
|
Consolidated |
|
|
|
Year ended
December 31, |
|
|
2006 |
|
No. of shares outstanding at beginning of period |
|
|
31,342,176 |
|
Underwriters exercise of over allotment option |
|
|
4,696,500 |
|
|
|
|
|
Weighted average shares for basic earnings per share |
|
|
36,038,676 |
|
Effect of dilutive share options |
|
|
2,740 |
|
|
|
|
|
Weighted average shares for diluted earnings per share |
|
|
36,041,416 |
|
|
|
|
|
|
|
|
|
|
Pro forma net income per share |
|
|
|
|
Basic |
|
$ |
0.80 |
|
Diluted |
|
$ |
0.80 |
|
16. Other Income
The following table summarizes other income for the years ended December 31, 2006, 2007 and
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined and |
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
Consolidated |
|
|
Consolidated |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
(USD in thousands) |
|
Interest income |
|
$ |
|
|
|
$ |
6,771 |
|
|
$ |
2,006 |
|
Realized gains on repurchase of securitization notes (i) |
|
|
|
|
|
|
|
|
|
|
6,039 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
6,771 |
|
|
$ |
8,045 |
|
|
|
|
|
|
|
|
|
|
|
(i) During the year ended December 31, 2008, the Company repurchased $13.5 million aggregate
principal amount of securitization notes issued by Genesis Funding for a total price of $7.5
million, including transaction costs payable to unaffiliated financial institutions. The purchases
resulted in the recognition of a realized gain of $6.0 million for the year ended December 31,
2008.
F-33
17. Interest Expense
The following table summarizes interest expense for the years ended December 31, 2006, 2007
and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined and |
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
Consolidated |
|
|
Consolidated |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
(USD in thousands) |
|
GE allocated costs |
|
$ |
44,490 |
|
|
$ |
|
|
|
$ |
|
|
Interest on long term debt, net |
|
|
1,514 |
|
|
|
51,313 |
|
|
|
66,506 |
|
Amortization of deferred financing costs |
|
|
22 |
|
|
|
3,923 |
|
|
|
4,465 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
46,026 |
|
|
$ |
55,236 |
|
|
$ |
70,971 |
|
|
|
|
|
|
|
|
|
|
|
The Company has entered into interest rate swaps to hedge the risk of variability in the cash
flows associated with the floating interest rate payments on the borrowings incurred to finance a
portion of the consideration paid for its portfolio of aircraft and also to hedge against the
variability in the U.S. dollar to Euro foreign exchange rates. Interest rate risk is the exposure
to loss resulting from changes in the level of interest rates and the spread between different
interest rates. Interest rate risk is highly sensitive to many factors, including U.S. monetary and
tax policies, U.S. and international economic factors and other factors beyond the Companys
control. The Company is exposed to changes in the level of interest rates and to changes in the
relationship or spread between interest rates. The Companys primary interest rate exposures relate
to its lease agreements and floating rate debt obligations. Forty-five out of the Companys 50
lease agreements require the payment of a fixed amount of rent during the term of the lease, with
rent under the remaining five leases adjusts bi-annually based on six-month LIBOR. The Companys
indebtedness requires payments based on a variable interest rate index such as LIBOR.
Derivative instruments are accounted for in accordance with SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, as amended and interpreted. In accordance with SFAS
133, all derivatives are recognized on the balance sheet at their fair value. Fair value may depend
on the credit rating and risk attaching to the counterparty of the derivative contracts. When
cashflow hedge accounting treatment is achieved under SFAS 133, the changes in fair values related
to the effective portion of the derivatives are recorded in accumulated other comprehensive income
and ineffective portion is recognized immediately in income, depending on the designation of the
derivative as a cash flow hedge or a fair value hedge, respectively. Changes in fair value related
to the effective portion of the derivatives are reclassified out of accumulated other comprehensive
income into income for any ineffective portion of the derivative contract which is calculated at
each quarter end. Amounts reflected in accumulated other comprehensive income related to the
effective portion are reclassified into earnings in the same period or periods during which the
hedged forecasted transaction affects earnings.
For the year ended December 31, 2008, interest rates on the Companys swaps varied as follows.
|
|
|
|
|
Consolidated |
|
|
December 31, |
|
|
2008 |
Fixed |
|
From 4.62% to 4.95% |
|
|
|
Variable |
|
From 0.58% to 4.97% |
|
|
|
F-34
17. Interest Expense (continued)
The notional principal amounts, fair value and carrying amounts of our outstanding interest
rate swaps at December 31, 2008 are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
|
|
|
|
|
|
|
Principal |
|
|
Net Fair Value |
|
|
Carrying |
|
|
|
Amount |
|
|
(a) |
|
|
amount (b) |
|
|
|
(USD in |
|
|
(USD in |
|
|
(USD in |
|
|
|
thousands) |
|
|
thousands) |
|
|
thousands) |
|
Current portion |
|
$ |
15,768 |
|
|
$ |
(35,538 |
) |
|
$ |
1,561 |
|
Due greater than 12 months |
|
|
1,005,874 |
|
|
|
(51,537 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,021,642 |
|
|
$ |
(87,075 |
) |
|
$ |
1,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Genesis Funding has entered into an interest rate swap contract with an initial and current
notional amount totaling $810.0 million. The fair value of the interest rate swap contract was
$(71.1) million as at December 31, 2008. The deferred tax benefit attributable to the change
in fair value was $(8.9) million and the net amount of $(62.2) million is reflected in
Accumulated other comprehensive loss. |
|
|
|
On September 19, 2008, Genesis Portfolio assumed Genesis Acquisitions interest rate swap
contract with an initial and current notional amount totaling $211.6 million. The fair
value of the interest rate swap contract was $(16.0) million as at December 31, 2008. The
deferred tax benefit attributable to the changes in fair value was $(2.0) million and the
net amount of $(14.0) million is reflected in Accumulated other comprehensive loss. |
|
(b) |
|
The carrying amount represents the accrued interest payable on interest rate swaps which is
included in other liabilities. |
Hedge effectiveness on the interest rate swaps was tested on a quarterly basis for the year
ended December 31, 2008 and was considered fully effective.
18. Selling, general and administrative expenses
The following table summarizes selling, general and administrative expenses for the years
ended December 31, 2006, 2007 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined and |
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
Consolidated |
|
|
Consolidated |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
(USD in thousands) |
|
Salaries and benefits |
|
$ |
1,380 |
|
|
$ |
5,446 |
|
|
$ |
7,012 |
|
Servicer fees |
|
|
155 |
|
|
|
5,124 |
|
|
|
6,035 |
|
Professional fees |
|
|
882 |
|
|
|
5,077 |
|
|
|
5,255 |
|
GE allocated costs |
|
|
3,917 |
|
|
|
|
|
|
|
|
|
Share based compensation (note 14) |
|
|
699 |
|
|
|
1,110 |
|
|
|
1,104 |
|
Consultancy costs |
|
|
|
|
|
|
1,949 |
|
|
|
835 |
|
Other |
|
|
279 |
|
|
|
2,285 |
|
|
|
3,643 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,312 |
|
|
$ |
20,991 |
|
|
$ |
23,884 |
|
|
|
|
|
|
|
|
|
|
|
F-35
19. Other expenses
The following table summarizes other expenses for the years ended December 31, 2006, 2007 and
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined and |
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
Consolidated |
|
|
Consolidated |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
|
|
|
|
(USD in thousands) |
|
|
|
|
|
Transaction costs |
|
$ |
|
|
|
$ |
3,337 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
3,337 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses incurred of $3.3 million in 2007 relate to costs associated with a transaction
where the likelihood of proceeding with this transaction within the foreseeable future was
considered remote.
20. Share Capital
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
Consolidated |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
|
(USD in thousands) |
|
Authorized share capital |
|
|
|
|
|
|
|
|
Common shares at par value of $0.001
(500,000,000 authorized) |
|
$ |
500 |
|
|
$ |
500 |
|
|
|
|
|
|
|
|
Issued share capital |
|
|
|
|
|
|
|
|
|
Common shares at par value of $0.001
(36,069,069 as at December 31, 2007;
34,341,095 as at December 31, 2008) |
|
$ |
36 |
|
|
$ |
34 |
|
|
|
|
|
|
|
|
The Companys authorized share capital consists of US$500,000 divided into 500,000,000 common
shares, par value US $0.001 each. Holders of common shares have no pre-emptive, redemption,
conversion or sinking fund rights. Holders of common shares are entitled to one vote per share on
all matters submitted to a vote of holders of common shares. Unless a different majority is
required by law or by the Companys bye-laws, resolutions to be approved by holders of common
shares require approval by a simple majority of votes cast at a meeting at which a quorum is
present. There are no limitations on the right of non-Bermudians or non-residents of Bermuda to
hold or vote shares.
In the event of a liquidation, dissolution or winding up, holders of the Companys common
shares are entitled to share equally and ratably in the Companys assets, if any, remaining after
the payment of all debts and liabilities, subject to any liquidation preference on any issued and
outstanding preference shares.
Pursuant to Bermuda law, the Company is restricted from declaring or paying a dividend if
there are reasonable grounds for believing that (1) the Company is, or would after the payment be,
unable to pay its liabilities as they become due, or (2) the realizable value of the Companys
assets would thereby be less than the aggregate of its liabilities, its issued share capital (the
aggregate par value of its issued and outstanding common shares) and its share premium account (the
aggregate amount paid for its common shares in excess of their par value).
Under Bermuda law, the voting rights of the Companys shareholders are regulated by its
bye-laws and, in certain circumstances, the Companies Act 1981 of Bermuda (the Companies Act).
Under the Companys bye-laws, at any general meeting, two or more persons present in person at the
start of the
F-36
20. Share Capital (continued)
meeting and representing in person or by proxy shareholders holding shares carrying more than
50% of the votes of all shares entitled to vote on the resolution shall constitute a quorum for the
transaction of business. Generally, except as otherwise provided in the bye-laws, or the Companies
Act, any action or resolution requiring approval of the shareholders may be passed by a simple
majority of votes cast except for the election of directors which requires only a plurality of the
votes cast.
Any individual who is a shareholder of the Company and who is present at a meeting may vote in
person, as may any corporate shareholder that is represented by a duly authorized representative at
a meeting of shareholders. The Companys bye-laws also permit attendance at general meetings by
proxy, provided the instrument appointing the proxy is in the form specified in the bye-laws or
such other form as the board may determine. Under the bye-laws, each holder of common shares is
entitled to one vote per common share held.
All of the Companys common shares are issued in the form of American Depositary Shares, each
representing one common share.
On October 28, 2008, the Board of Directors approved a share repurchase program. Under the
program, Genesis is authorized to repurchase up to $20 million of its shares over 12 months.
Genesis expects the purchases to be made from time to time in the open market or in privately
negotiated transactions, and will be funded from the companys available cash. During the year
ended December 31, 2008 the Company repurchased ADSs representing 1,791,404 shares in the open
market at an average price of US$3.12 per share. The repurchased ADSs and their underlying ordinary
shares have been cancelled and thereby reduced the number of issued and outstanding shares.
21. Other Comprehensive Income / (Loss)
Other comprehensive income/(loss) at December 31, 2006, 2007 and 2008 includes changes in the
fair value of derivatives, net of tax. Other comprehensive income / (loss) was as follows:
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
Consolidated |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
|
(USD in thousands) |
|
Change in fair value of derivatives |
|
$ |
(36,228 |
) |
|
$ |
(54,704 |
) |
Deferred tax (expense) / benefit on fair
value of derivative |
|
|
4,528 |
|
|
|
6,838 |
|
|
|
|
|
|
|
|
Other comprehensive income / (loss) |
|
$ |
(31,700 |
) |
|
$ |
(47,866 |
) |
|
|
|
|
|
|
|
Genesis expects $(35.5) million of the gross fair value of the derivatives to be realized in
2009 and $(51.5) million to be realized thereafter. An amount of $(24.4) million was realized in
2008, which related to the year ended December 31, 2007. An amount of $3.2 million was realized in
2007 which related to the year ended December 31, 2006.
22. Accumulated Deficit
An analysis of the movement for the years ended December 31, 2007 and 2008 is shown below:
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
Consolidated |
|
|
|
December 31, 2007 |
|
|
December 31, 2008 |
|
|
|
(USD in thousands) |
|
Accumulated deficit as at beginning of year |
|
$ |
(933 |
) |
|
$ |
(14,783 |
) |
Net income for the period |
|
|
39,155 |
|
|
|
40,917 |
|
Dividends paid during the year |
|
|
(53,005 |
) |
|
|
(54,511 |
) |
|
|
|
|
|
|
|
Accumulated deficit as at end of year |
|
$ |
(14,783 |
) |
|
$ |
(28,377 |
) |
|
|
|
|
|
|
|
F-37
23. Commitments and Contingencies
Claims, suits and complaints arise in the ordinary course of Genesiss business. Currently,
the Company does not believe any claims or contingent liabilities would be material to its
financial position or results of operations.
During the year ended December 31, 2006, Genesis entered into three Servicing Agreements with
GECAS, each for a 15 year-term, and on April 5, 2007, Genesis entered into a fourth Servicing
Agreement with GECAS for a 14-year term in respect of services related to its subsidiary, Genesis
Acquisition. During the year ended December 31, 2008, Genesis entered into three separate
Servicing Agreements with
GECAS, one for a 13-year term in respect of services to its subsidiary, Westpark 1 Aircraft
Leasing Limited, one for a 13-year term in respect of services to its subsidiary, GLS Atlantic
Alpha Limited and one for a 13-year term in respect of services to its subsidiary, Genesis
Portfolio.
Pursuant to these Servicing Agreements, GECAS provides Genesis with most services related to
leasing its fleet of aircraft, including marketing aircraft for lease and re-lease, collecting
rents and other payments from lessees, monitoring maintenance, insurance and other obligations
under leases and enforcing rights against lessees. Genesis is obligated to pay a minimum of $2.3
million to GECAS under the Servicing Agreements for the year ending December 31, 2009.
Under the Companys lease agreements, the lessee is generally responsible for normal
maintenance and repairs, airframe and engine overhauls, consents and approvals, and compliance with
return conditions of aircraft on lease. In certain cases, Genesis may be obligated to make
contributions to the lessee for planned maintenance expenses including an amount of additional rent
paid by the lessee under the lease based on current estimates of usage and future maintenance costs
of the aircraft.
The international nature of Genesiss operations may expose it to taxation in certain
countries. The position is kept under continuous review and provision is made for any known
liabilities.
Indemnifications
Genesis has agreed to indemnify GECAS and its affiliates for broad categories of losses
arising out of the performance of services for its aircraft and leases, unless they are finally
adjudicated to have been caused directly by GECASs gross negligence or wilful misconduct
(including wilful misconduct that constitutes fraud) in respect of GECASs obligation to apply its
standard of care or conflicts standard in the performance of its services. Genesis has likewise
agreed that GECAS and its affiliates have no liability to Genesis or any other person for any
losses in any way arising out of the services except as provided in the foregoing sentence (also
referred to as GECASs standard of liability).
Genesis has also agreed to indemnify GECAS and its affiliates for losses arising out of the
disclosures in its Annual Report on Form 20-F (except certain disclosures provided to Genesis by
GECAS and losses arising out of Genesiss compliance with its obligations to any holders of any
securities issued by Genesis or with any governmental regulations).
Genesis has also generally agreed to indemnify GECAS and its affiliates as to losses arising
out of the IPO and the disclosure in the IPO prospectus, except certain disclosures provided by
GECAS.
24. Geographic Information
The following table presents the amount and percentage of revenues from rental of flight
equipment attributable to the indicated geographic areas based on each airlines principal place of
business for the years indicated:
F-38
24. Geographic Information (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined and |
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
Consolidated |
|
|
Consolidated |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
(USD in |
|
|
|
|
|
|
(USD in |
|
|
|
|
|
|
(USD in |
|
|
|
|
|
|
thousands) |
|
|
% |
|
|
thousands) |
|
|
% |
|
|
thousands) |
|
|
% |
|
Europe |
|
$ |
55,563 |
|
|
|
36 |
% |
|
$ |
60,574 |
|
|
|
33 |
% |
|
$ |
83,105 |
|
|
|
38 |
% |
Asia/Pacific |
|
|
48,508 |
|
|
|
32 |
% |
|
|
66,114 |
|
|
|
37 |
% |
|
|
79,114 |
|
|
|
37 |
% |
United States and Canada |
|
|
28,217 |
|
|
|
18 |
% |
|
|
29,496 |
|
|
|
16 |
% |
|
|
29,879 |
|
|
|
14 |
% |
Africa and the Middle East |
|
|
13,453 |
|
|
|
9 |
% |
|
|
13,323 |
|
|
|
7 |
% |
|
|
10,200 |
|
|
|
5 |
% |
Central, South America and Mexico |
|
|
7,446 |
|
|
|
5 |
% |
|
|
11,826 |
|
|
|
7 |
% |
|
|
13,687 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
153,187 |
|
|
|
100 |
% |
|
$ |
181,333 |
|
|
|
100 |
% |
|
$ |
215,985 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents revenues from rental of flight equipment attributable to
individual countries that represent at least 10% of total rental revenue based on each airlines
principal place of business for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined and |
|
|
|
|
|
|
Consolidated |
|
Consolidated |
|
Consolidated |
|
|
December 31, |
|
December 31, |
|
December 31, |
|
|
2006 |
|
2007 |
|
2008 |
|
|
(USD in |
|
|
|
|
|
(USD in |
|
|
|
|
|
(USD in |
|
|
|
|
thousands) |
|
% |
|
thousands) |
|
% |
|
thousands) |
|
% |
China |
|
$ |
25,087 |
|
|
|
17 |
% |
|
$ |
33,780 |
|
|
|
19 |
% |
|
$ |
33,319 |
|
|
|
15 |
% |
United States |
|
$ |
24,863 |
|
|
|
16 |
% |
|
$ |
26,145 |
|
|
|
14 |
% |
|
$ |
26,501 |
|
|
|
12 |
% |
Germany |
|
$ |
|
|
|
|
|
% |
|
$ |
|
|
|
|
|
% |
|
$ |
24,504 |
|
|
|
11 |
% |
Spain |
|
$ |
21,523 |
|
|
|
14 |
% |
|
$ |
21,176 |
|
|
|
12 |
% |
|
$ |
22,350 |
|
|
|
10 |
% |
Genesis leases aircraft to airlines and others throughout the world and accordingly the lease
receivables are due from entities located throughout the world. Genesis manages its exposure to
credit risks through obtaining from lessees either deposits, letters of credit or guarantees.
Genesis continually evaluates the financial statement positions of its lessees. Based on that
evaluation, as well as the amounts outstanding and the availability of security Genesis makes
appropriate provisions for doubtful accounts. No single customer accounted for more than 10% of
total revenues in the years ended December 31, 2006, 2007 or 2008.
During the year ended December 31, 2008, all revenues were derived from activities carried out
in Ireland.
Unscheduled Lease Terminations During Year Ended December 31, 2008
On March 21, 2008, Aloha Airlines (Aloha) filed for protection under U.S. bankruptcy laws
and ceased passenger operations on March 31, 2008. The Company had two B737-700 aircraft on lease
to Aloha. Both of these leases have been terminated. The two B737-800 aircraft repossessed from
Aloha have been re-leased to VRG Linhas Aereas S.A.
On September 8, 2008, Futura International (Futura) filed for bankruptcy protection in Spain
and ceased operations on September 22, 2008. Genesis had two B737-800 aircraft on lease to Futura.
Both of these leases have been terminated. The two B737-800 aircraft repossessed from Futura are
currently non-revenue generating and on the ground. On October 2, 2008, GECAS terminated the leases
of two aircraft previously on lease to Deccan Aviation (Deccan). Genesis had two A320-200
aircraft on lease to Deccan. The two A320-200 aircraft repossessed from Deccan are currently
non-revenue generating and on the
F-39
24. Geographic Information (continued)
ground.
The four aircraft are subject to contracted lease agreements with two
new customers for delivery in the second quarter of 2009. However,
one of the customers may not be in a position to take delivery of
two of these aircraft.
In the year ended December 31, 2008, the Company incurred a pre-tax impact of $8.7 million
related to the unscheduled lease terminations, primarily consisting of (1) $4.4 million relating to
an estimated reduction in rental revenue offset by security and the release of certain
lease-related liabilities and, (2) a charge to maintenance expense of $3.2 million relating to the
costs associated with repossession and re-marketing of the aircraft offset by security, and (3) a
write-off of $1.1 million related to lessee-specific capital improvements on one aircraft, which
were capitalized by GECAS on commencement of the lease in 2002.
25. Related Party Transactions
An affiliate of GE continues to hold approximately 11% of the issued and outstanding shares of
Genesis.
Aircraft Purchase Agreement
On June 26, 2008, Genesis signed an asset purchase agreement to acquire a modern, wide-body
commercial aircraft from an affiliate of GE. The aircraft delivered to Genesis on June 26, 2008.
Servicing Agreements
Pursuant to servicing agreements, GECAS provides Genesis with most services related to leasing
its fleet of aircraft, including marketing aircraft for lease and re-lease, collecting rents and
other payments from lessees, monitoring maintenance, insurance and other obligations under leases
and enforcing rights against lessees. Under the servicing agreements, Genesis is required to pay
GECAS a base fee of $150,000 per month for servicing the aircraft in the Initial Portfolio. Genesis
is also required to pay GECAS a base fee of 0.01% per month of the purchase price of the additional
aircraft acquired during 2007 and 2008. In addition, Genesis is required to pay GECAS additional
servicing fees based on rents due and paid under aircraft leases and proceeds of dispositions of
aircraft and certain other fees for additional services. As at December 31, 2007 and 2008, Genesis
had an accrual for $0.2 million and $0.2 million respectively relating to the servicing of its
aircraft portfolio for the years ended December 31, 2007 and 2008.
Expense Agreement
In connection with the closing of the revolving credit facility on April 5, 2007, GECAS
reimbursed fees and related expenses of $7.2 million that were originally paid by Genesis
Acquisition. The Company had recorded this amount as deferred financing costs with an offsetting
credit to additional paid-in capital. Of this amount, $3.2 million was amortized to interest
expense in the year ended December 31, 2007. A further amount of $2.0 million was amortized in the
year ended December 31, 2008.
26. New Accounting Pronouncements
In December 2007, the FASB issued Statement No.141R, Business Combinations (SFAS 141R). SFAS
141R requires most identifiable assets, liabilities, non controlling interests, and goodwill
acquired in a business combination to be recorded at full fair value. Under SFAS 141R, an
acquiring entity should recognize and measure the fair value of the underlying transaction to
establish a new accounting basis of the acquired entity as a whole and the assets acquired and the
liabilities assumed at their full fair value as at the date control is obtained regardless of the
percentage ownership in the acquired company or how the acquisition was achieved. The acquirer
should also recognize and expense acquisition related transaction costs. SFAS 141R refers to this
method as the acquisition method. SFAS141R is required to be adopted concurrently with SFAS 160 and
is effective for business combinations transactions for which the acquisition is on or after the
beginning of the first annual reporting period beginning on or after December
F-40
26. New Accounting Pronouncements (continued)
15, 2008. Genesis management has concluded that, depending on the nature and size of any
acquisition, the adoption of SFAS 141R may have a material impact on its financial position or
results of operations.
In December 2007, the FASB issued Statement No. 160, Accounting and reporting on
Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB No.51 (SFAS
160). SFAS 160 requires a reporting entity to provide in its consolidated financial statements
that the ownership interests in subsidiaries held by parties other than the parent (non controlling
or minority interest) be clearly identified, labeled, and presented in the consolidated statement
of financial position within equity, but separate from the parents equity, and not as previously
shown as a liability or other item outside of permanent equity. SFAS 160 is effective for business
combinations transactions for which the acquisition is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008. Genesis management has concluded
that the adoption of FASB 160 will not have a significant impact on Genesiss financial position or
results of operation.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133 (SFAS 161), which requires additional
disclosures about the objectives of derivative instruments and hedging activities, the method of
accounting for such instruments under SFAS No. 133 and its related interpretations, and a tabular
disclosure of the effects of such instruments and related hedged items on financial position,
financial performance, and cash flows. SFAS 161 is effective on or after the beginning of the first
annual reporting period beginning on or after January 1, 2009 and early adoption is encouraged.
Genesis management has concluded that the adoption of SFAS 161 will not have a material impact on
the Companys financial position or results of operation.
In May 2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting
Procedures (SFAS 162), detailing a hierarchy of authoritative accounting guidance for
nongovernmental entities, an action that is not expected to change existing practice, but is
expected to facilitate designating the coming codification of accounting standards as
authoritative. SFAS 162 makes the hierarchy explicitly and directly applicable to preparers of
financial statements. The effective date of SFAS 162 is 60 days following the SECs approval of the
Public Company Accounting Oversight Boards related amendments to remove the GAAP hierarchy from
auditing standards. Management has concluded that the adoption of SFAS 162 does not have a material
impact on the Companys financial position or results of operation.
In December 2008, the FASB issued Statement No. 157-1, Application of FASB Statement No. 157
to FASB Statement No. 13 and Other Accounting Pronouncements that Address Fair Value Measurements
for Purposes of Lease Classification or Measurement under Statement 13, which amends the scope of
FASB Statement No. 157, Fair Value Measurements, to exclude FASB Statement No. 13, Accounting for
Leases, and other accounting standards that address fair value measurements for purposes of lease
classification or measurement under Statement 13. The FSP is effective on initial adoption of
Statement No. 157. The scope exception does not apply to assets acquired and liabilities assumed in
a business combination that are required to be measured at fair value under FASB Statement No.
141.(revised 2007), Business Combinations, regardless of whether those assets and liabilities are
related to leases. Management has concluded that the adoption of FASB 157-1 does not have a
material impact on the Companys financial position or results of operation.
F-41
27. Subsequent Events
In January 2009, the Company repurchased $10 million aggregate principal amount of
securitization notes issued by Genesis Funding at an aggregate price of $5.6 million, including
transaction costs payable to unaffiliated financial institutions. The repurchases will result in
the recognition of a realized gain of $4.4 million for the three months ended March 31, 2009.
On
February 24, 2009, the Board of Directors declared a dividend of
$0.10 per share, in the aggregate amount of $3.4 million. The
dividend will be paid on March 23, 2009 to shareholders of record as
at the close of business on March 11, 2008.
On March 3, 2009, Genesis Acquisition entered into an amendment which resulted in an increase in
the commitment fees and interest rate under the revolving credit facility. A fee of $0.8 million
was paid on March 3, 2009 to the lenders in connection with the amendment to the revolving credit
facility.
F-42
SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and
that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
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GENESIS LEASE LIMITED
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By: |
/s/ John McMahon
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John McMahon |
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President and Chief Executive Officer |
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Dated: March 6, 2009