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BUYING OR SELLING A BUSINESS
JET DELIVERY POSITION

The sale and purchase of a business aircraft delivery “position” is simply the sale (by assignment and assumption) of the right to take ownership of an aircraft manufactured and completed in the future. The ability to buy or sell that contract right requires an understanding of the parties’ motivations and the terms of the contract itself- however.

Buying and selling business aircraft delivery positions remains active in rising and falling economic circumstances. What tends to change is the parties’ motivation. In 2007- the demand for new aircraft was ahead of existing supply and new production- and an approaching delivery position was generally an appreciated asset worth more than the contract price. By 2009- ‘buyer’s remorse’ had many contract holders anxious to sell delivery positions – even at a loss – to avoid upcoming multi-million dollar progress payments. Today- motivations are mixed- depending upon the aircraft classification and manufacturer.

Aircraft manufacturers generally discourage assignment of their purchase contracts. The level of manufacturer resistance to assignment varies widely from a basic requirement that the manufacturer consent to assignments- to an absolute prohibition on assignment. Manufacturers have several valid reasons for resisting sales of delivery positions- including:

Flipping: The first and most commonly cited reason for resisting the assignment of purchase contracts is the manufacturer’s desire to prevent speculative “flipping.” Flipping describes where the original purchaser is not a bona fide purchaser- but someone hoping for a quick- profitable flip of the contract to a bona fide purchaser for an amount higher than the price of the aircraft under contract.

Secondary Market: Similarly- manufacturers do not want to find themselves in competition with their own customers trying to sell their contracts in a secondary market. Often an aircraft delivering in the coming 12 months will be available at a lower price than the current list price for the same aircraft that is scheduled to be delivered in 36 months. In a decliningvalue market- the secondary market would also include positions selling at a discount to current list price and at a loss to the original contract price. In either case- the secondary market will interfere with sales by the manufacturer.

Cutting the Queue: Naturally- manufacturers are hesitant to consent to a contract assignment when doing so breaches their obligation to customers that are waiting further back in the queue for aircraft deliveries and that have rights to move up the line as buyers drop out.

Accounting: In order to quote a book of contracts and backlog of contracts for accounting and financial reporting purposes- manufacturers need to make- and enforce restrictions that ensure that they have “real” buyers in the backlog- not speculators. Antiassignment clauses attempt to ensure that the book of contracts is “real.”

In light of the above- parties to a contract assignment need to have a thorough understanding of the underlying contract. If the contract permits assignment- then that assignment process needs to be followed- and the assignee should avoid making payments to the assignor until the assignment is fully-approved by the manufacturer according to the contract terms.

Negotiated Solutions
Despite the best efforts of manufacturers to limit assignments- it is inevitable that buyers and sellers will pursue transactions using what appear to be loopholes or creative readings of the anti-assignment language in the contracts. Depending on the anti-assignment clause- these circumventions may be easy and low-risk- or quite complex and highrisk. Some circumventions are noncontroversial and can be done with full participation by the manufacturer.

Buyers and sellers considering a circumvention must realize that the success of a prior assignment was heavily dependent upon the circumstances- timing and luck of those parties. You cannot assume that a prior success ensures a subsequent success. If the assigning party is a good- long-term customer of the manufacturer- currently operating their equipment and with future positions- the manufacturer is likely to be more flexible. Risk of failure must be built into the delivery position transfer transaction.

As an alternative to circumvention- the seller of a delivery position should consider a negotiated solution to an anti-assignment clause. Consider the manufacturer’s concerns and liabilities- and offer to indemnify or buy-out those concerns and liabilities.

Of course- if you have unsuccessfully approached the manufacturer seeking a negotiated outcome- you will be on the “hot list” of customers who may be trying a circumvention in the future. Contract holders selling at a loss need to have a “floor” equal to what it would cost them to default on the contract and walk away- although the cost of a default under a jet purchase contract can be negotiated down with the manufacturer.

The risk associated with attempting a “stealth” circumvention of an anti-assignment clause is real- and substantial. At the very least- if discovered and resisted by the manufacturer- the seller of the position may have the deal undone. At the worst- a default may trigger a loss of deposits and a loss of the aircraft delivery position. Most contracts call for arbitration of disputes- and generally in a local forum and format best suited to the manufacturer.

Due Diligence
Any effort to acquire a delivery position requires a reasonable level of due diligence. If possible- a buyer of a delivery position wants a written acknowledgement (as part of the consent) from the manufacturer that: (i) the contract is in full force and not in default; (ii) the required deposits and progress payments have all been made; and (iii) clarifies the status of all binding choices- decisions- waivers- upgrades and change orders that the seller of the contract has made.

Without manufacturer confirmation- the buyer of the delivery position should have alternative protection in the event that the contract is not as presented by the seller (escrow of funds or similar rights).

When the purchase of the delivery position is accomplished by acquiring an entity that holds the contract (a common circumvention method)- then in addition to the contract due diligence described above- the purchaser will need to do traditional due diligence associated with the purchase of an entity to confirm that: (i) the entity holds all necessary contract rights; (ii) the entity has no other assets or liabilities other than the contract; (iii) the change in ownership does not breach the terms of any financing; and (iv) there are no conflicting rights (liens- options- warrants- shareholder agreements) in existence that could give others rights to the entity.

Setting a Purchase Price
We often see fundamental errors made when structuring a Letter of Intent (LOI) to purchase a contract for a new aircraft. The purchaser of the contract is going to pay the seller an amount equal to the seller’s total current investment in the contract- plus the premium (or minus the discount) the seller is seeking- in exchange for assuming the remaining liabilities under the contract.

Consider a $50m aircraft contract. If the seller of the contract has made $3m in deposits and wishes to make a $2m premium- then the price for the contract is $5m - and the purchaser must understand that it takes over a $47m liability to the manufacturer.

We have seen LOIs offering to purchase a position for an amount equal to the full purchase price of the aircraft. Clearly that is not what the purchaser intends- but such misunderstanding can delay the transaction as the parties resolve actual intent and payment.

Practical Limitations
The buyer and seller of a contract position need to talk strategy and have a detailed- mutual plan that addresses key questions: Will the assignment be done with or without full disclosure to the manufacturer? How will the deal be unwound if it encounters resistance from the manufacturer? How far are the parties willing to go to fight the objections of the manufacturer- and who decides on that strategy? Can the buyer obtain financing for the purchase of the position? If it is to be a clandestine operation- how will the contract buyer participate in aircraft completion?

Note: We do not recommend that buyer and seller attempt to deceive a manufacturer or circumvent terms of a contract between manufacturer and the original position holder. The above simply sheds light on a potential dark corner of buying and selling of delivery positions.

Needless to say- the most difficult and risky delivery position transfer transactions are the ones that are played on the fringes of the contract language- without the consent of the manufacturer. In all events- buyers and sellers of contract positions need to fully understand the risks associated with such a transaction- and work with competent- experienced advisors when engaging in a transaction for the transfer of a contract.


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