<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 23, 1999
REGISTRATION STATEMENT NO. 333-56575
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------------------
MORGAN STANLEY AIRCRAFT FINANCE
(Exact name of Registrant as specified in its charter)
DELAWARE
(Jurisdiction of organization)
7359
(Primary Standard Industrial Classification Code Number)
13-3375162
(I.R.S. Employer Identification Number)
MORGAN STANLEY AIRCRAFT FINANCE
C/O WILMINGTON TRUST COMPANY
1100 NORTH MARKET STREET
RODNEY SQUARE NORTH
WILMINGTON, DELAWARE 19890-1000
ATTENTION: CORPORATE TRUST ADMINISTRATION
(302) 651-1000
(Address and telephone number of Registrant's principal executive offices)
------------------------------------
WILMINGTON TRUST COMPANY
1100 NORTH MARKET STREET
RODNEY SQUARE NORTH
WILMINGTON, DELAWARE 19890-1000
ATTENTION: CORPORATE TRUST ADMINISTRATION
(302) 651-1000
(Name, address and telephone number of agent for service)
Copy to:
THOMAS J. REID, ESQ.
DAVIS POLK & WARDWELL
1 FREDERICK'S PLACE
LONDON EC2R 8AB
ENGLAND
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective.
------------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
OF SECURITIES TO BE REGISTERED REGISTERED PER NOTE(1) OFFERING PRICE(1) FEE(2)
- ---------------------------------------------------------------------------------------------------------------------
Notes due March 15, 2023............... $1,050,000,000 100% $1,050,000,000 $309,750
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f) under the Securities Act of 1933.
(2) Previously paid.
------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
The Information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and we are not soliciting offers to buy these
securities in any state where the offer or sale is not permitted.
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED , 1999
$1,050,000,000
INITIAL PRINCIPAL AMOUNT
OF NOTES DUE MARCH 15, 2023
OF
MORGAN STANLEY AIRCRAFT FINANCE
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
INITIAL CURRENTLY EXPECTED FINAL FINAL
NOTES PRINCIPAL AMOUNT OUTSTANDING(1) INTEREST RATE PAYMENT DATE(3) MATURITY DATE
- ----- ---------------- ---------------- ---------------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
Subclass A-1......... $400,000,000 $400,000,000 LIBOR + 0.21%(2) March 15, 2000 March 15, 2023
Subclass A-2......... $340,000,000 $263,569,942 LIBOR + 0.35%(2) September 15, 2005 March 15, 2023
Subclass B-1......... $100,000,000 $ 93,574,523 LIBOR + 0.65%(2) March 15, 2013 March 15, 2023
Subclass C-1......... $100,000,000 $100,000,000 6.90% March 15, 2013 March 15, 2023
Subclass D-1......... $110,000,000 $110,000,000 8.70% March 15, 2014 March 15, 2023
</TABLE>
- ---------------
(1) As of March 15, 1999.
(2) London interbank offered rate for one month U.S. dollar deposits (unless
otherwise specified, "LIBOR") plus the applicable margin.
(3) Based on the Assumptions set forth herein. See "Description of the Notes
-- Assumptions."
------------------------
THE NOTES HAVE BEEN APPROVED FOR LISTING ON THE LUXEMBOURG STOCK EXCHANGE.
------------------------
INVESTING IN THE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 8.
------------------------
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT
APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This prospectus is to be used by Morgan Stanley & Co. Incorporated in connection
with offers and sales of the Notes in market-making transactions at negotiated
prices related to prevailing market prices at the time of sale. Morgan Stanley &
Co. Incorporated may act as principal or agent in such transactions.
, 1999
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary......................................... 1
Summary Description of the Notes................ 1
Risk Factors.................................... 8
No Security Interest in Aircraft.............. 8
No Executive Management -- Reliance on Third
Parties to Manage Our Business.............. 8
Conflicts of Interest of ILFC................. 8
Limitation on ILFC's Liability................ 9
Cyclicality of Supply of and Demand for
Aircraft and Depression of Aircraft
Values...................................... 9
Actual Market Value May Be Less Than Appraised
Value....................................... 10
Future Declines in Appraised Values May Cause
Suspension of Principal Payments on Class B,
Class C and Class D Notes................... 10
Technological Risks........................... 10
Year 2000 Compliance Risks.................... 10
Operational Restrictions May Harm Our Ability
to Compete.................................. 11
Lessee Purchase Options May be Exercised at
Prices Below Assumed Target Price for Such
Aircraft.................................... 12
Risks Relating to Aircraft Liens.............. 12
Failure to Maintain Registration of
Aircraft.................................... 12
Increased Regulation of Aircraft.............. 12
Leasing Risks................................. 12
Lease Termination and Aircraft Repossession... 15
Risks Relating to Payments on the Note........ 15
Capital Markets Risks......................... 16
Bankruptcy Risks.............................. 16
Tax Risks..................................... 16
MSAF Group...................................... 17
The Aircraft and Leases......................... 18
Appraisers' Reports........................... 18
Portfolio Information......................... 18
MSAF Group Portfolio Analysis................. 23
Acquisition of Additional Aircraft............ 23
The Leases.................................... 24
Indemnification and Insurance of the
Aircraft.................................... 26
The Lessees................................... 28
The Commercial Aircraft Industry................
Introduction..................................
Demand for Aircraft...........................
The World Fleet of Commercial Jet Aircraft
(Excluding Aircraft Manufactured in the
CIS)........................................
Supply of Aircraft............................
Operating Leasing.............................
Management of MSAF Group........................ 32
Trustees...................................... 32
Beneficial Ownership of MSAF.................. 33
The Servicer.................................. 34
Corporate Management.......................... 38
Selected Consolidated Financial Data............ 41
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 42
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Introduction.................................. 42
Recent Developments........................... 42
Economic Crises in Emerging Markets........... 42
Results of Operations --
Year Ended November 30, 1998................ 43
Financial Resources and Liquidity............. 45
Interest Rate Sensitivity..................... 51
Interest Rate Risk Management................. 51
Description of the Notes........................ 53
General....................................... 53
Form.......................................... 53
Payments and Distributions.................... 54
Payment of Principal and Interest............. 66
Indenture Covenants........................... 77
Operating Covenants........................... 87
Events of Default and Remedies................ 91
Intercreditor Rights.......................... 94
Modification and Waiver....................... 94
Notices to Noteholders........................ 95
Governing Law and Jurisdiction................ 96
Beneficial Interest........................... 96
The Accounts.................................. 96
Reports to Noteholders.......................... 100
Book-Entry Registration, Global Clearance and
Settlement.................................... 102
Book-Entry Registration....................... 102
Global Clearance and Settlement...............
CUSIP, ISIN and Common Code Numbers........... 105
Taxation........................................ 106
U.S. Federal Income Tax Considerations........ 106
Market-Making Activities of Morgan Stanley & Co.
Incorporated.................................. 108
ERISA Considerations............................ 110
Legal Matters................................... 111
Experts......................................... 111
Index to Consolidated Financial Statements...... F-1
Appendix 1. Index of Defined Terms.............. A-1
Appendix 2. Aircraft Types Data................. A-2
Appendix 3. Monthly Gross Revenues
Based on the Assumptions...................... A-3
Appendix 4. Assumed Portfolio Values for
the Initial Portfolio......................... A-5
Appendix 5. Class A Class Percentages........... A-7
Appendix 6. Class B Class Percentages........... A-10
Appendix 7. Class C Target Principal Balances... A-12
Appendix 8. Class D Target Principal Balances... A-15
Appendix 9. Pool Factors........................ A-18
Appendix 10. Extended Pool Factors.............. A-20
Appendix 11. Appraised Values of Initial
Aircraft at September 30, 1998................ A-23
Appendix 12. Annual Cash Report................. A-24
</TABLE>
i
<PAGE> 4
AVAILABLE INFORMATION
Morgan Stanley Aircraft Finance ("MSAF," and together with its
subsidiaries, "MSAF Group") is currently subject to the information reporting
requirements of the Securities Exchange Act of 1934, as amended and in
accordance therewith will file reports, proxy statements and other information
with the Securities and Exchange Commission. Any reports and other information
filed by MSAF with the Securities and Exchange Commission may be inspected and
copied at the public reference facilities maintained by the Securities and
Exchange Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and will also be available for inspection and copying at
the regional offices of the Securities and Exchange Commission located at 7
World Trade Center, New York, New York 10048 and at Northwestern Atrium Center,
500 West Madison Street (Suite 1400), Chicago, Illinois 60661 at prescribed
rates. The Securities and Exchange Commission maintains a Web site
(http://www.sec.gov) that contains reports and other information, including the
registration statement (of which this prospectus is a part) filed by MSAF.
MSAF has filed with the Securities and Exchange Commission a Registration
Statement on Form S-4 under the Securities Act of 1933, as amended, with respect
to the Notes being offered by this prospectus. This prospectus does not contain
all the information set forth in the Registration Statement and the exhibits and
schedules thereto, certain portions of which have been omitted as permitted by
the rules and regulations of the Securities and Exchange Commission. For further
information with respect to MSAF and the securities offered by this prospectus,
reference is made to the Registration Statement and the exhibits filed or
incorporated as a part thereof, which are on file at the offices of the
Securities and Exchange Commission and may be obtained upon payment of the fee
prescribed by the Securities and Exchange Commission, or may be examined without
charge at the offices of the Securities and Exchange Commission. Statements
contained in this prospectus as to the contents of any documents referred to are
not necessarily complete, and, in each such instance, are qualified in all
respects by reference to the applicable documents filed with the Securities and
Exchange Commission.
The Notes have been approved for listing on the Luxembourg Stock Exchange.
The constitutive documents of MSAF and the legal notice relating to the issuance
of the Notes have been deposited with the Registrar of the District Court in
Luxembourg (Greffier en Chef du Tribunal d'Arrondissement de et a Luxembourg)
where such documents will be available for inspection and where such documents
will be obtainable upon request. Copies of the prospectus, the annual report of
independent public accountants and the reports to noteholders referred to under
"Reports to Noteholders" are available at the office of the listing agent in
Luxembourg: Banque Internationale a Luxembourg, 69, route d'Esch, L-1470
Luxembourg. Financial information regarding MSAF will be included in MSAF's
Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K and will be
available at the office of the listing agent in Luxembourg after the respective
reports are filed with the Securities and Exchange Commission.
ii
<PAGE> 5
SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the Notes and the financial statements
(including the notes to the financial statements) appearing elsewhere in this
prospectus.
On March 3, 1998 MSAF issued $1,050 million of notes due March 15, 2023
(collectively, the "Old Notes") in five subclasses -- subclass A-1, subclass
A-2, subclass B-1, subclass C-1 and subclass D-1. On January 18, 1999, MSAF
consummated an exchange offer whereby MSAF issued five subclasses of notes due
March 15, 2023 (collectively the "New Notes" and together with the Old Notes,
the "Notes") in exchange for each subclass of the issued and outstanding Old
Notes. The terms of the New Notes are identical in all material respects to the
Old Notes, except that the New Notes are registered under the Securities Act of
1933, as amended. MSAF issued the Notes pursuant to an indenture between MSAF
and Bankers Trust Company, as trustee, dated as of March 3, 1998 (the
"Indenture").
SUMMARY DESCRIPTION OF THE NOTES
The following table summarizes certain of the principal terms of the Notes.
<TABLE>
<CAPTION>
SUBCLASS A-1 SUBCLASS A-2 SUBCLASS B-1 SUBCLASS C-1 SUBCLASS D-1
NOTES NOTES NOTES NOTES NOTES
------------- ------------------ ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Aggregate Initial Principal Amount...... $400,000,000 $340,000,000 $100,000,000 $100,000,000 $110,000,000
Ratings
DCR.................................... AA AA A BBB BB
Moody's................................ Aa2 Aa2 A2 Baa2 Ba2
Standard & Poor's...................... AA AA A BBB BB
Interest Rate........................... LIBOR + 0.21% LIBOR + 0.35% LIBOR + 0.65% 6.90% 8.70%
Expected Weighted Average Life
(Years)................................ 2.0 3.8 8.6 10.6 12.1
March 15, March 15,
Expected Final Payment Date............. 2000 September 15, 2005 2013 March 15, 2013 March 15, 2014
March 15, March 15,
Final Maturity Date..................... 2023 March 15, 2023 2023 March 15, 2023 March 15, 2023
</TABLE>
You should not view the ratings on the Notes as a recommendation to buy,
sell or hold the Notes. The ratings only address the likelihood of whether we
will make timely payment of interest on the Notes, as well as the ultimate
payment of principal and any premium.
Payment Dates.............. We must pay interest monthly in arrears on the
fifteenth day of each month. If the fifteenth day
of a month is not a business day, the relevant
payment date will be the next day which is a
business day. By business day, we mean a day on
which a bank may deal in U.S. dollar deposits on
the London inter-bank market and commercial banks
and foreign exchange markets are open in New York
and London.
Calculation of Interest.... For the purpose of calculating the interest rate
payable on the Notes, Bankers Trust Company as
reference agent will determine LIBOR for the
relevant monthly period two business days before
the payment date on which the monthly period
begins.
We will calculate accrued interest on outstanding
principal balances and other amounts on which we
must pay interest as of the fourth business day
before the monthly period begins.
Accrued and Unpaid
Interest................... Any accrued interest that, as a result of the
allocation of our available cash collections, we do
not pay on any payment date will bear interest at
the then current interest rate.
Sources of Note Payments... Our only sources of payments for the Notes and our
other obligations will be:
- the payments made by the lessees under the
leases
1
<PAGE> 6
- amounts drawn under any credit or liquidity
enhancement facility
- proceeds from any sales of our assets
- net payments to us under our swap agreements and
other hedging instruments
- interest earned on investments of our cash
balances and
- net cash proceeds received from the sale of
refinancing notes.
We will make payments on the Notes only to the
extent of our available cash on each payment date
remaining after paying expenses and satisfying
other requirements which are described under
"Description of the Notes -- Payment of Principal
and Interest -- Priority of Payments."
Security for Our
Obligations................ Neither the trustee nor the holders have any
security interest, mortgage, charge or other
similar interest in any of the aircraft. As
security for our obligations under the Notes and to
the servicer, the cash manager and the
administrative agent, Bankers Trust Company, as
security trustee has acquired a security interest
in:
- the capital stock of our subsidiaries
- our interest in the leases
- our intercompany loans to our subsidiaries
- our cash balances
- investments made with our cash balances.
Principal Payments......... We have determined the expected principal payments
on the Notes based on, among other things,
assumptions regarding principally:
- the timing and amount of payments under our
current leases and leases we may enter into in
the future
- the terms of future leases
- our ability to refinance the subclass A-1 Notes
- the amount of operating costs incurred in the
ordinary course of the operating lease business
It is unlikely that actual experience in the future
will correspond to these assumptions, therefore the
timing and amount of our principal payments on each
subclass of Notes will likely vary from the
expected principal payments.
Refinancing of the Notes... We will have the ability to refinance any subclass
of the Notes by issuing refinancing notes. Such
refinancing notes will rank equally with the
subclasses of refinanced notes and will never rank
higher in priority than the class A Notes.
Redemption................. Subject to certain conditions described in
"Description of the Notes -- Payment of Principal
and Interest -- Redemption," we may redeem any
subclass of Notes, in whole or in part, on any
payment date. The redemption price for a subclass
may include a premium over the outstanding
principal balance of the subclass. Whether we must
pay a premium will depend on the source of money we
use to pay the
2
<PAGE> 7
redemption price. The amount of any premium will
also depend on when the redemption occurs. We
describe how the redemption price is determined
under "Description of the Notes -- Payment of
Principal and Interest -- Redemption." If we redeem
any subclass in part, we will apply the redemption
price to that subclass pro rata.
We may also redeem each subclass of Notes on any
payment date, in whole but not in part, if adverse
tax events affecting MSAF occur. In that case, the
redemption price will equal the outstanding
principal balance of the subclass being redeemed,
plus accrued and unpaid interest.
Operating Covenants........ We may not enter into any future lease unless it is
in compliance with geographic and other
concentration limits. This restriction does not
apply to renewals, extensions or restructurings of
existing leases. We may enter into a future lease
not meeting these requirements if the rating
agencies have confirmed that such lease will not
result in the lowering or withdrawal of their
current ratings on any subclass of Notes then
outstanding.
Withholding Tax............ We have no obligation to make any additional
payments on the Notes for any withholding or
deduction from payments on the Notes that must be
made under applicable law. If we are required to
make any withholding or deduction on the Notes and
we do not redeem the Notes, we will reduce the net
amount of interest paid on the Notes by the amount
of such withholding or deduction. Also, none of our
subsidiaries has any obligation under any
intercompany loans to make any additional payments
for any withholding or deduction that they must
make from payments on the intercompany loans under
applicable law.
3
<PAGE> 8
THE AIRCRAFT AND LESSEES
The following pie charts summarize our exposure as of February 1, 1999 to
various types of aircraft, lessees, ages of aircraft, noise restrictions
applying to aircraft and the regions and countries in which lessees are based.
All percentages have been calculated by reference to the appraised value (as of
September 30, 1998) of the aircraft.
EXPOSURE TO TYPE OF AIRCRAFT
<TABLE>
<S> <C>
MD82.................................... 1.77%
B737-500................................ 2.03%
B767-200ER.............................. 3.53%
MD83.................................... 3.87%
A321-100................................ 4.33%
A300-600R............................... 4.93%
F-70.................................... 4.71%
B747-300B............................... 6.09%
A310-300................................ 7.85%
B737-400................................ 7.55%
Engine.................................. 0.54%
B767-300ER.............................. 18.73%
B737-300................................ 14.17%
B757-200ER.............................. 10.84%
A320-200................................ 9.06%
</TABLE>
Total Number of Aircraft: 32 + spare engine
Narrowbody Aircraft: 23 (58.33%)
Widebody Aircraft: 9 (41.1%)
Spare engine: 1 (0.5%)
EXPOSURE TO YEAR OF AIRCRAFT MANUFACTURE
<TABLE>
<S> <C>
1985.................................... 4.91%
1986.................................... 2.93%
1987.................................... 7.70%
1988.................................... 15.52%
1989.................................... 7.15%
1990.................................... 10.38%
1992.................................... 8.03%
1993.................................... 20.05%
1994.................................... 10.84%
1995.................................... 4.96%
1996.................................... 7.53%
</TABLE>
Weighted average age from manufacture: approximately 7.5 years
EXPOSURE TO REGION IN WHICH LESSEES ARE BASED(1)
<TABLE>
<S> <C>
North America........................... 6.50%
Emerging Asia........................... 12.98%
Other................................... 8.77%
Latin America........................... 17.42%
Developed Europe........................ 41.99%
Emerging Europe and Middle East......... 9.04%
</TABLE>
(1) MSCI designated regions.
EXPOSURE TO COUNTRIES IN WHICH LESSEES ARE BASED
<TABLE>
<S> <C>
Netherlands............................. 3.44%
France.................................. 3.97%
Mexico.................................. 6.32%
Switzerland............................. 4.91%
Taiwan.................................. 4.93%
Hungary................................. 4.71%
South Korea............................. 5.45%
Fiji.................................... 6.69%
Turkey.................................. 4.33%
Brazil.................................. 11.10%
Other................................... 18.14%
UK...................................... 19.51%
USA..................................... 6.50%
</TABLE>
Total Number of Countries: 20
EXPOSURE TO INDIVIDUAL LESSEES
<TABLE>
<S> <C>
Flying Colours.......................... 3.39%
Britannia............................... 3.53%
Aero Mexico............................. 4.15%
Onur Air................................ 4.33%
Flightlease............................. 4.91%
China Airlines.......................... 4.93%
Malev................................... 4.71%
Asiana.................................. 5.45%
Varig................................... 6.09%
Unijet.................................. 6.58%
Air Pacific............................. 6.69%
TWA..................................... 3.76%
Other................................... 45.81%
</TABLE>
Total Number of Lessees: 28
EXPOSURE OF AIRCRAFT TO NOISE RESTRICTIONS
<TABLE>
<S> <C>
Stage 3 Aircraft........................ 100%
</TABLE>
<PAGE> 9
PAYMENT FLOWS(1)
Noteholders
Payments to Noteholders
Payments on Beneficial Interest
MSAF
Morgan Stanley
Payments of Interest and Principal on Intercompany Loans
MSA I(2)(3) (owns 31 aircraft and one spare engine)
SPC-5(2)(3) (owns 1 aircraft)
Lease Payments
32 aircraft and one spare engine
- ---------------
(1) Assumes that MSAF Group does not acquire any additional aircraft.
(2) MSAF may also establish additional direct and indirect subsidiaries from
time to time for the purpose of directly or indirectly leasing Aircraft
from other MSAF subsidiaries and sub-leasing them to operators where
commercial, tax or other reasons make it desirable to do so.
(3) MSAF may from time to time establish or acquire additional subsidiaries in
connection with the acquisition of additional aircraft from various
sellers. The acquisition of additional aircraft may take the form of (i)
the acquisition of individual additional aircraft directly by MSAF or
indirectly by one or more existing or newly-formed subsidiaries or (ii) the
acquisition by MSAF or one of its subsidiaries of the shares or other
beneficial ownership interests in one or more aircraft-owning subsidiaries
of various sellers.
5
<PAGE> 10
OVERVIEW OF PRIORITY OF PAYMENTS
The following chart summarizes the order of priority of payments on the
Notes, the Beneficial Interest and other obligations of MSAF Group as described
in more detail in "Description of the Notes -- Priority of Payments".
Collections
Required Expense Amount (i)
Class A Interest and Swap Payments (ii)
First Collection Account Top-Up and Primary Drawn Amounts (iii)
Class A Minimum Principal (iv)
Class B Interest (v)
Class B Minimum Principal (vi)
Class C Interest (vii)
Class C Minimum Principal (viii)
Class D Interest (ix)
Class D Minimum Principal (x)
Second Collection Account Top-Up and Other Drawn Amounts (xi)
Class A Scheduled Principal (xii)
Class B Scheduled Principal (xiii)
Class C Scheduled Principal (xiv)
Class D Scheduled Principal (xv)
Modification Payments (xvi)
Step-Up Interest (xvii)
Beneficial Interest Distribution (xviii)
Class A Supplemental Principal (xix)
Class B Supplemental Principal (xx)
Class D Remaining Principal (xxi)
Class C Remaining Principal (xxii)
Class B Remaining Principal (xxiii)
Class A Remaining Principal (xxiv)
Subordinated Swap Payments (xxv)
Beneficial Interest (xxvi)
6
<PAGE> 11
OWNERSHIP STRUCTURE(1)
MSAF
100% Share Capital
100% Beneficial Interest
SPC-5 (Owns 1 aircraft)
MSA I (Owns 31 aircraft and one spare engine)
MSA II
MSA III
Aircraft Ownership
aircraft
additional aircraft (3)
additional aircraft (3)
- ---------------
(1) MSAF may also establish additional direct and indirect subsidiaries from
time to time for the purpose of directly or indirectly leasing aircraft
from other MSAF subsidiaries and sub-leasing them to operators where
commercial, tax or other reasons make it desirable to do so.
(2) All of the beneficial interest in MSAF (the "Beneficial Interest") is
currently held by Morgan Stanley Financing Inc. ("MSF"), a wholly-owned
subsidiary of Morgan Stanley Dean Witter & Co. ("MSDW"). The Notes are
solely obligations of MSAF and are not obligations of, or guaranteed by
MSDW, MSF or any other affiliate of MSAF. MSF may dispose of all or a
portion of such Beneficial Interest in the future to related or unrelated
persons.
(3) MSAF may from time to time establish or acquire additional subsidiaries in
connection with the acquisition of additional aircraft from various
sellers. The acquisition of additional aircraft may take the form of (i)
the acquisition of individual additional aircraft directly by MSAF or
indirectly by one or more existing or newly-formed subsidiaries or (ii) the
acquisition by MSAF or one of its subsidiaries of the shares or other
beneficial ownership interests in one or more aircraft-owning subsidiaries
of various sellers.
7
<PAGE> 12
RISK FACTORS
The risks and uncertainties described below are not the only ones facing
MSAF. Additional risks and uncertainties not known to us at present, or that we
believe are immaterial today, may also impair our business operations.
If any of the following risks actually occur, we may not be able to make
the required payments on the Notes. In addition, it is possible that the rental
payments under the leases may not be adequate to make the required payments on
the Notes.
This information statement also contains forward-looking statements that
involve risks and uncertainties. In most cases, you can identify forward-looking
statements by terminology such as "may," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of such terms or similar terminology. Our actual results could
differ materially from those anticipated in these forward-looking statements. In
evaluating these statements, you should specifically consider various factors,
including the risks outlined below.
NO SECURITY INTEREST IN AIRCRAFT
Neither the Trustee, the security trustee acting on behalf of the holders
of the Notes (the "Noteholders") and each other secured creditor nor any
Noteholder has any security interest, mortgage, charge or other similar interest
in any aircraft. If there is an event of default, they will not be able to sell
the aircraft to repay the Notes or exercise similar remedies which they would
have if they had a security interest in the aircraft. MSAF Group has, however,
pledged to the security trustee as security for MSAF's obligations under the
Notes, 100% of the beneficial interest in MSA I, 100% of the share capital of
SPC-5, all of MSAF's ownership interest in MSAF's other subsidiaries, the
respective interests of each MSAF Group member in the leases and in leases
within MSAF Group relating to the aircraft, any intercompany loans from MSAF to
the aircraft-owning subsidiaries and any cash contained in the accounts.
NO EXECUTIVE MANAGEMENT -- RELIANCE ON THIRD PARTIES TO MANAGE OUR BUSINESS
We have no executive management resources of our own. We therefore rely on
several service providers for the leasing and re-leasing of the aircraft and all
other executive and administrative responsibilities. If these service providers
do not perform their contractual obligations to us, our operations may suffer
and we may not be able to repay the Notes. We can give no assurance that we will
continue our arrangements with these service providers or that the service
providers will continue their relationship with us until the Notes are paid in
full. If a service provider resigns or we terminate its appointment, we may be
unable to find suitable replacement service providers that we can engage on
suitable terms. Additionally, our appointment of replacement service providers
may cause a lowering or withdrawal of the ratings on the Notes. You should refer
to "Management of MSAF Group -- The Servicer"; and "Management of MSAF Group --
Corporate Management" for detailed information on the responsibilities delegated
to service providers.
CONFLICTS OF INTEREST OF ILFC
ILFC acts as servicer with respect to MSAF's aircraft and as such performs
certain services including marketing our current portfolio of aircraft for lease
or sale and monitoring lessee compliance with lease terms. ILFC, however,
manages a large aircraft portfolio for itself and others and for that reason, it
may face conflicts of interest in managing and marketing our aircraft for
re-lease or sale. The aircraft it manages for others may compete with our
aircraft when they are being marketed for re-lease or sale. ILFC also arranges
aircraft financings and lease transactions and advises many airlines (including
some lessees and potential lessees). If ILFC cannot resolve a conflict of
interest, the conflict could have an adverse effect on our ability to manage,
re-lease or sell the aircraft. In that case, we may be unable to make the
required payments on the Notes.
For a description of ILFC's aircraft management and advisory business, you
should refer to "Management of MSAF Group -- The Servicer."
8
<PAGE> 13
LIMITATION ON ILFC'S LIABILITY
Our servicing agreement with ILFC contains limitations on its liability for
losses caused by its services. There is a risk that we may be unable to recover
from ILFC the amount of any losses they cause in performing the services.
Additionally, ILFC will not be liable to you for any losses caused by its
services.
We describe the liability and other provisions of the servicing agreement
under "Management of MSAF Group -- The Servicer."
CYCLICALITY OF SUPPLY OF AND DEMAND FOR AIRCRAFT AND DEPRESSION OF AIRCRAFT
VALUES
The market for commercial jet aircraft is very cyclical and can produce
sharp increases and decreases in aircraft values and lease rates. The aircraft
leasing market may have recently peaked and may be declining in the near future.
Decreases in aircraft values or lease rates may cause a decrease in our cash
flows. Depending on market conditions, we may be unable to sell or re-lease
aircraft on terms that allow us to make payments on the Notes.
Aircraft values and lease rates depend on various factors that are outside
our control. Such factors include, but are not limited to:
- general economic conditions affecting lessee operations;
- used aircraft supply;
- interest rates and credit availability;
- fuel and other operating costs;
- manufacturer production levels and prices for new aircraft;
- passenger demand;
- retirement and obsolescence of aircraft models;
- manufacturers merging or leaving the aircraft industry;
- re-introduction into service of aircraft previously in storage;
- governmental regulations; and
- lack of capacity in the air traffic control system.
In addition to values for aircraft generally, the value of specific
aircraft may increase or decrease sharply depending on factors that are not
within our control. Such factors include, but are not limited to:
- manufacturers merging or leaving the aircraft industry;
- maintenance and operating history of the aircraft;
- number of operators using a type of aircraft;
- legal or regulatory requirements that prevent an aircraft from being
re-leased or sold in the condition that it is in; and
- the discovery of manufacturing defects in an aircraft model.
There currently exists an oversupply of certain types of used Stage 3
aircraft, especially certain older widebody aircraft. There is one A300-600R,
one B747-300B and three A310-300 aircraft in our portfolio representing
approximately 4.93%, 6.09% and 7.85% respectively of the aircraft in our
portfolio by appraised value as of September 30, 1998.
The value of specific aircraft may also depend on the condition of the
manufacturer. For example, since Fokker N.V. ceased operations in 1996, there
have been significant reductions in values and lease rates for Fokker aircraft.
We expect these reductions will continue. We have three Fokker 70s (4.71% of the
portfolio
9
<PAGE> 14
by appraised value at September 30, 1998.) Likewise, because of its merger with
McDonnell Douglas Corporation, Boeing has announced that it will discontinue
production of various McDonnell Douglas aircraft types, including the MD-83 and
MD-82. This development has decreased and is likely to continue to decrease
values and rental rates for these aircraft. We have two MD-83s and one MD-82
(5.64% of the portfolio by appraised value at September 30, 1998).
Current competition between Boeing and Airbus is also a threat to aircraft
values. Because Airbus and Boeing have decreased new aircraft prices when
adjusted for inflation, orders for their aircraft have recently increased.
Boeing and Airbus have announced production increases to 900 newly delivered
aircraft in 1999. This amount is above the long-term requirement implied by
industry forecasts, including forecasts published by Boeing and Airbus. If most
of these aircraft are delivered, the increased supply of new aircraft may
depress used aircraft values and lease rates (especially in regions like Asia
where there is already oversupply of aircraft). This development could cause a
decrease in our cash flows and adversely affect our ability to make payments on
the Notes.
ACTUAL MARKET VALUE MAY BE LESS THAN APPRAISED VALUE
Appraised values for aircraft (also known as base values) do not
necessarily reflect the market value we could obtain for aircraft at a specific
time. Appraised values are based on the assumption that there is an "open,
unrestricted stable market environment with a reasonable balance of supply and
demand". As we describe above, the aircraft market is not always stable and
there may be supply and demand imbalances at any one time, especially for
specific aircraft types. At the high point in a cycle, the current market value
of some aircraft may be close to their appraised value while the current market
value of others (such as Fokker and older Airbus aircraft) may be significantly
less than appraised values. At a low point in the industry cycle, the current
market value of most aircraft types is likely to be less (and in many cases,
much less) than appraised base values. For these reasons, you should not rely
only on appraised values as an indication of the market value we could obtain
for the aircraft.
FUTURE DECLINES IN APPRAISED VALUES MAY CAUSE SUSPENSION OF PRINCIPAL PAYMENTS
ON CLASS B, CLASS C AND CLASS D NOTES
Because of the market factors described above, aircraft appraisers have
recently reduced appraised values for aircraft, especially Fokker aircraft and
older widebody aircraft. If future appraised values for the aircraft decline at
a greater rate than we have assumed for purposes of the principal payment
provisions of the Notes, the terms of the Notes require us to accelerate the
scheduled principal payments on the class A Notes. In that case, principal
payments on the class B, class C and class D Notes may be suspended because of
the increased principal amounts we must pay on the class A Notes.
TECHNOLOGICAL RISKS
The availability of newer, more technologically advanced aircraft or the
introduction of increasingly stringent noise or emissions regulations may make
it more difficult for us to re-lease or sell aircraft. This risk is particularly
significant for us given our need to repay principal and interest on the Notes
over a relatively long period. This will require that many of the aircraft are
leased or sold close to the end of their useful economic life. We expect that
the extent to which we are able to manage these technological risks through
modifications to aircraft and sale of aircraft will be limited.
YEAR 2000 COMPLIANCE RISK
We may suffer a material and adverse impact on our business and results of
operations if information technology relied upon by our service providers,
lessees and others with which we conduct business are not year 2000 compliant.
Many existing computer systems use only two digits to identify a year in the
date field. These systems were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results around the year 2000.
Aircraft systems (such as on-board aircraft management and navigation systems)
and air traffic
10
<PAGE> 15
control systems depend heavily on microprocessors and software technology. If
any of these systems malfunction because operators (including lessees) or air
traffic control authorities do not make them year 2000 compliant, our lessees
may be unable to operate their aircraft and generate the revenues necessary to
make lease payments to us. MSAF is currently not able to make any estimate of
the amount, if any, it may be required to spend to remediate year 2000 problems
associated with the aircraft. Such expenditures could, however, have a material
adverse impact on the ability of MSAF to make payments on the Notes.
Since all of our operational functions have been delegated to outside
service providers, we have no information systems of our own but instead rely on
the systems of our service providers, principally ILFC. The discussion of ILFC's
year 2000 issues in this prospectus is based solely on information provided to
us by ILFC.
The administrative agent, cash manager and financial advisor each are
reviewing their year 2000 exposure and identifying the steps that will need to
be taken to ensure that their systems are year 2000 compliant. If the
administrative agent's, cash manager's or financial advisor's systems are not
fully year 2000 compliant, we do not expect the consequences of such
noncompliance to have a material adverse effect on our business.
ILFC has assessed its computer and information systems to determine the
extent of its exposure to year 2000 risks. ILFC believes that all of its
critical computer and information systems were year 2000 compliant as of
September 30, 1998. ILFC is also conducting a survey of the critical third
parties with which it conducts business on our behalf to determine the extent of
their exposure to year 2000 risks and the status of their year 2000 compliance
efforts. Significant uncertainties remain regarding the status of year 2000
compliance efforts of critical third parties and the risks to MSAF of
noncompliance by such third parties.
Noncompliance by a lessee could result in lost revenue for the lessee and
an inability to make lease payments to MSAF. Noncompliance by the lessee's
financial institutions could also adversely affect the ability to process lease
payments.
Our worst case scenario would be that a large number of lessees are unable
to operate their aircraft and generate revenues and as a result are unable to
make lease payments to MSAF. We are unable to determine at this time the
likelihood or magnitude of any resulting lost revenue or whether the
consequences of year 2000 failures will have a material impact on our business
or financial position.
If a noncompliant lessee cannot operate its aircraft and cannot make
contractual lease payments, our contingency plans may include for ILFC to
repossess aircraft from lessees in default and ILFC would then attempt to
re-lease the aircraft to a year 2000 compliant lessee. We cannot assure that
ILFC would be able to repossess any such aircraft or re-lease such aircraft at
favorable terms or at all or that there may not be a significant delay in
re-leasing. If a significant number of aircraft could not be re-leased at
favorable terms or at all, it may have a material adverse effect on our
business.
Any losses that we may incur because of year 2000 problems may not be
covered under existing insurance, because some insurers have taken the position
that year 2000 losses may be denied under existing policies. In addition,
insurers in the London market have recently adopted recommendations to exclude
year 2000 losses from future aviation policies, unless a specific endorsement is
purchased.
You should refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Financial Resources and Liquidity -- Year
2000 Readiness Disclosure" for a detailed discussion of the year 2000 compliance
issues that we face.
OPERATIONAL RESTRICTIONS MAY HARM OUR ABILITY TO COMPETE
The Indenture and our governing corporate documents impose restrictions on
how we operate our business. These restrictions limit our ability to compete
effectively in the aircraft leasing market. For example, we cannot grant
privileged rental rates to airlines in return for equity investments in such
airlines. There are also restrictions on persons to whom we may lease aircraft
to and limits on leasing to lessees in specific geographical regions. Most
competing aircraft lessors do not operate under similar restrictions.
11
<PAGE> 16
LESSEE PURCHASE OPTIONS MAY BE EXERCISED AT PRICES BELOW ASSUMED TARGET PRICE
FOR SUCH AIRCRAFT
As of February 1, 1999, six lessees had outstanding options to purchase a
total of eight aircraft (representing 27.79% of the portfolio by appraised value
at September 30, 1998). There is a risk that lessees could exercise these
options in the future at a time when the exercise prices are below the pro rata
portion of the unpaid Note principal represented by the aircraft being
purchased. If that happens, it may reduce the amount, or delay the timing, of
principal payments on the Notes.
RISKS RELATING TO AIRCRAFT LIENS
Liens may attach to the aircraft in the course of their operation. These
liens may impair our ability to repossess, re-lease or sell the aircraft. Liens
which secure the payment of airport taxes, customs duties, air navigation
charges (including charges imposed by Eurocontrol), landing charges, crew wages,
repairer's charges or salvage attach to the aircraft in the normal course of
operation. The amounts which the liens secure may be substantial and may exceed
the value of the aircraft against which the lien is asserted. In some
jurisdictions, a holder of aircraft liens may have the right to detain, sell or
cause the forfeiture of the aircraft. The lessees may not comply with their
obligations under the leases to discharge liens arising during the terms of the
leases.
FAILURE TO MAINTAIN REGISTRATION OF AIRCRAFT
All of the aircraft which are or will be operated must be registered with
an appropriate aviation authority. If an aircraft is operated without a valid
registration, the lessee operator or, in some cases, the owner or lessor, may be
subject to penalties which may result in a lien being placed on the aircraft.
Loss of registration could have other adverse effects, including grounding of
the aircraft and loss of insurance, which may have an adverse effect on our
ability to make payments on the Notes.
INCREASED REGULATION OF AIRCRAFT
The aircraft industry is heavily regulated and aviation authorities may
adopt additional regulations in jurisdictions where our aircraft are registered
or operated. Any additional regulations (especially relating to aircraft noise
and emissions) may cause us to incur significant costs, depress the value of the
aircraft and impair our ability to re-lease the aircraft.
LEASING RISKS
WE MAY NOT BE ABLE TO RE-LEASE AIRCRAFT QUICKLY OR ON FAVORABLE TERMS
We may not be able to re-lease the aircraft upon expiration of the leases
without incurring significant downtime. If we cannot re-lease the aircraft we
may not have enough cash to make payments on the Notes. Even if we can re-lease
the aircraft we may be unable to receive favorable rental rates, especially if
there is reduced demand for aircraft on operating lease. Our ability to re-lease
aircraft and obtain acceptable lease payments and terms may suffer because of:
- economic conditions affecting the airline industry,
- the supply of competing aircraft and demand for particular types,
- lessor competition, and
- restrictions on our re-leasing flexibility under the Indenture.
The leases for eight of the aircraft, representing approximately 23.6% of
the portfolio by appraised value at September 30, 1998, are scheduled to expire
before December 31, 2000. The leases for 16 of the aircraft and the spare
engine, representing approximately 45.0% of the portfolio by appraised value at
September 30, 1998, are scheduled to expire before December 31, 2002. One of the
aircraft is not presently leased, although a letter of intent was signed in
February 1999.
12
<PAGE> 17
LESSEES MAY NOT PERFORM REQUIRED MAINTENANCE
The standards of maintenance observed by our lessees and the condition of
the aircraft at the time of sale or lease may affect future values and rental
rates from our aircraft. Under the leases, the lessee has the main
responsibility to maintain the aircraft and to comply with all applicable
governmental requirements. Some lessees may experience periodic difficulties in
meeting their maintenance obligations resulting from adverse environmental
conditions or financial and labor difficulties. If a lessee fails to perform
required or recommended maintenance on an aircraft during the term of such
lease, the aircraft may be grounded and we may incur substantial costs to
restore the aircraft to an acceptable maintenance condition before sale or re-
lease. If our lessees do not perform their obligation to maintain the aircraft,
we may have to fund maintenance work on the aircraft. Because our maintenance
costs are expenses that rank senior to payments on the Notes, we may be unable
to make payments on the Notes if our maintenance costs were to become
sufficiently large. In some cases, we may have an obligation to reimburse the
lessee or pay some or all of the cost of aircraft maintenance. Our cash
resources may not be sufficient both to fund maintenance requirements and make
payments on the Notes, especially as the aircraft age.
AIRCRAFT INSURANCE MAY NOT BE ADEQUATE
Our lessees have an obligation under the leases to maintain property and
liability insurance covering their operation of the aircraft. We can give no
assurance that this insurance will be adequate to cover any losses or
liabilities that we may incur in our business. For example, the loss or
liability from an aviation accident or other catastrophic event may exceed the
coverage limits in the policy. Other losses may not be covered by the insurance.
There is also a risk that our lessees will not perform their insurance
obligations to us, which may mean that insurance will not be available to us. In
either case, we may be unable to make payments on the Notes if insurance
proceeds do not cover losses or liabilities we may incur.
WE MAY BE UNABLE TO OBTAIN REQUIRED LICENSES AND APPROVALS
If we cannot obtain required government licenses and approvals, we may be
unable to re-lease or sell aircraft. In that case, our cash flows may be
insufficient to make payments on the Notes. Several leases require specific
licenses, consents or approvals. These include consents from governmental or
regulatory authorities to certain lease payments and to the import, re-export or
de-registration of the aircraft. There is a significant risk that subsequent
legal and administrative changes will increase such requirements or that a
consent, once given, will be withdrawn. We may not receive consents needed in
connection with future re-leasing or sale of an aircraft.
RISK OF LESSEES IN WEAK FINANCIAL CONDITION
There is a significant risk that the lessees may default on their
obligations under the leases. If lessees do not make rent and maintenance
payments or are significantly in arrears, we will be unable to make payments on
the Notes. The ability of each lessee to perform its obligations under its lease
will depend primarily on its financial condition. A lessee's financial condition
may be affected by various factors beyond their control, including competition,
fare levels, passenger demand, operating costs, the cost and availability of
finance, economic conditions in the countries where the lessees operate and
environmental and other governmental regulation of the air transportation
business. Many of our lessees are in a weak financial position. You should
expect this to be the case with future lessees. As a result, a large proportion
of lessees may consistently be significantly in arrears in their rental payments
or maintenance payments.
As of February 1, 1999, two lessees were in arrears. The aircraft on lease
to the two lessees in arrears represent approximately 7.3% of the appraised
value of the portfolio at September 30, 1998. The amounts outstanding and
overdue in respect of rental payments, maintenance reserves, and other
miscellaneous amounts due (net of default interest and certain cash in transit)
with respect to these two lessees amounted to approximately $3.4 million. The
weighted average number of days past due of such arrears was 70 days.
The current level of defaults and lessee arrears should not be seen as
representative of future defaults and arrears as economic conditions
deteriorate. Defaults and amounts in arrears may increase as the market for
13
<PAGE> 18
aircraft on operating lease experiences further cyclical downturns, particularly
in regions such as Asia, Russia and Latin America which are experiencing acute
economic difficulties.
RISK OF REGIONAL ECONOMIC DOWNTURNS AFFECTING LESSEES' FINANCIAL CONDITION
There is a significant risk that the economic conditions in the regions
where our lessees operate will affect their ability to meet their lease
obligations. Below is a discussion of the regional concentrations of our lessees
and the economic characteristics of the various regions that may impact the
lessees' financial condition.
European Concentration
At February 1, 1999, the lessees of 51.03% of the aircraft by appraised
value at September 30, 1998 were operators based in Europe with 41.99% based in
"developed" European markets and 9.04% based in "emerging" European and Middle
East markets (using Capital International Perspective S.A. designations).
The commercial aviation industry in Europe is very sensitive to general
economic conditions. Since air travel is largely discretionary, the industry
tends to suffer severe financial difficulties during slow economic periods. As a
result, the financial prospects for European lessees will depend on the level of
economic activity in Europe and in the specific countries where they operate. A
recession or other worsening of economic conditions in any European country may
adversely affect the European lessees' ability to meet their financial and other
obligations. Competitive pressures from continuing deregulation of the airline
industry by the EU may also adversely affect European lessees' operations and
their ability to meet their obligations under the leases.
Latin American Concentration
At February 1, 1999, five lessees with respect to 17.42% of the aircraft by
appraised value at September 30, 1998 were based in Latin America.
The financial prospects for lessees in Latin America will depend on the
level of political stability and economic activity and policies in the region.
Developments in other "emerging markets" may also affect the economies of
Latin American countries and the entire region.
Brazil has experienced significant downturns in its economy and financial
markets, with large decreases in financial asset prices and, since it devalued
its currency on January 13, 1999, dramatic decreases in the value of its
currency. As of February 1, 1999 three lessees representing 11.10% of the
aircraft by appraised value at September 30, 1998 operate in Brazil.
One of our Brazilian lessees (whose aircraft represents 6.09% of the
aircraft by appraised value at September 30, 1998) has recently requested a
short-term stay in lease payments during the current period of exchange rate
volatility. ILFC recently agreed to restructure the rental arrearages of another
Brazilian lessee (whose aircraft represents 2.93% of the aircraft by appraised
value at September 30, 1998), and this lessee continues to be in arrears on the
restructured payments as well as subsequent lease payments. Continued weakness
in the value of the Brazilian real, as well as general deterioration in the
Brazilian economy, will mean that lessees may be unable to generate sufficient
revenues in Brazilian currency to pay the U.S. dollar-denominated rental
payments under the lease. More importantly, financial and economic problems in
Brazil could spread throughout Latin America and other "emerging" economies,
having a similar effect on many of our other lessees.
Asia Pacific Concentration
At February 1, 1999, the lessees of 12.98% of the aircraft by appraised
value at September 30, 1998 were based in the Asia Pacific region, including
South Korea, China and Taiwan, all of which are in "emerging" markets (using
Capital International Perspective S.A. designations).
14
<PAGE> 19
Trading conditions in Asia's civil aviation industry have been adversely
affected by the severe economic and financial difficulties experienced recently
in the region. The economies of the region have experienced acute difficulties
resulting in many business failures, significant depreciation of local
currencies against the U.S. dollar, downgrading of sovereign and corporate
credit ratings and internationally organized financial stability measures.
Several airlines in the region, including one lessee, recently announced their
intention to reschedule their aircraft purchase obligations, eliminate certain
routes and reduce employees. This downturn in the region's economies may
undermine business confidence, reduce demand for air travel and adversely affect
the Asian lessees' operations and their ability to meet their obligations.
North American Concentration
At February 1, 1999, the lessees with respect to 6.50% of the aircraft by
appraised value at September 30, 1998 were based in North America. As in Europe,
the commercial aviation industry in North America is highly sensitive to general
economic conditions. Over the last several years, a large number of North
American passenger airlines have filed Chapter 11 bankruptcy proceedings and
several major U.S. airlines have ceased operations altogether, including a
recent former lessee of MSAF Group. While airline profitability in the region
has improved, increasing competition from low-cost, low-fare air carriers, in
conjunction with an inability to reduce labor and other costs to sustainable
levels, continues to put pressure on North American airline profit margins and,
in some cases, financial viability.
LEASE TERMINATION AND AIRCRAFT REPOSSESSION
If a lessee defaults, we have the right to terminate the lease and
repossess the aircraft under the terms of each lease. However, it may be
difficult, expensive and time-consuming to enforce our rights if the lessee
contests such termination or is bankrupt or under court protection. We may incur
significant costs in trying to repossess an aircraft and in performing
maintenance work necessary to make the aircraft available for re-lease or sale.
Further, our efforts to repossess an aircraft may be limited by the laws of the
local jurisdiction which may delay or prevent us from repossessing an aircraft
following a lessee's default.
RISKS RELATING TO PAYMENTS ON THE NOTES
ACTUAL EXPERIENCE MAY NOT MATCH OUR ASSUMPTIONS
We have determined the expected final payment dates for the Notes based on
assumptions about our future cash flows and interest and operating costs and
possible future economic conditions. The purpose of these assumptions is to
illustrate the payment provisions of the Notes. Many of these assumptions relate
to future political, economic and market conditions (for example, interest
rates) that are outside our control and are difficult or impossible to predict.
Other assumptions relate to future events (for example, insurance recoveries and
maintenance payments) that depend on the actions of lessees or others with whom
we conduct business. For this reason, it is highly unlikely that our experience
in the future will be consistent with these assumptions. As a result, we are
highly likely to be unable to make payments on the Notes at the times and in the
amounts that the assumptions indicate.
SUBORDINATION PROVISIONS
Expenses and certain other payments are senior in priority of payment to
the Notes and are paid out before any payments are made on the Notes. Under
certain circumstances, the rights of the Noteholders, as holders of each
subclass of Notes, to receive payments of principal in respect of such subclass
of Notes and to exercise remedies upon default will be subordinated to the
rights of the Noteholders with respect to the most senior subclass of Notes then
outstanding. If an event of default with respect to any subclass of Notes occurs
under the Indenture, the security trustee has the exclusive right to exercise
and enforce any and all remedies with respect to the collateral held by MSAF
Group. Therefore, if an event of default occurs, the holders of each subclass of
Notes will not be permitted to enforce certain rights until all amounts owing
under any more senior Notes outstanding and certain other amounts have been paid
in full.
15
<PAGE> 20
CAPITAL MARKETS RISKS
WE MAY BE UNABLE TO REFINANCE THE SUBCLASS A-1 NOTES
The subclass A-1 Notes may reach their expected final payment date in March
2000 before we have received sufficient cash flows to repay them. In that case,
we plan to refinance the subclass A-1 Notes by issuing refinancing notes. The
refinancing notes will rank equally with the other class A Notes but the
interest rate, principal payment provisions and other terms will be different.
Our ability to refinance the subclass A-1 Notes will depend on many factors
outside our control. These factors include general conditions in the capital
markets and the markets' perception of the commercial aviation industry, the
aircraft leasing business generally or our own performance. If we cannot
refinance the subclass A-1 Notes on acceptable terms, we may not be able to
repay the subclass A-1 Notes by their expected final payment date. This may also
delay repayment of principal on the class B, class C and class D Notes and may
result in lower market prices for the Notes.
TRADING MARKET FOR THE NOTES
Morgan Stanley & Co. Incorporated currently makes a market in the Notes.
However, it is not obligated to do so, and any such market making may be
discontinued at any time without notice, in its sole discretion. Therefore, no
assurance can be given as to the liquidity of, or the trading market for, the
Notes.
BANKRUPTCY RISKS
We have taken steps to structure MSAF to ensure that our assets are not
consolidated with MSDW's or any of its affiliates' assets or otherwise become
available to MSDW's or any of its affiliates' creditors in any bankruptcy or
insolvency proceeding involving MSDW.
If MSDW or any of its affiliates becomes bankrupt or insolvent, there is a
legal risk that a court or other authority could decide that these steps were
not effective to insulate our assets from MSDW's assets. As a result, the
aircraft and our other assets could become available to repay both MSDW's
creditors and our creditors, including you. We could also lose all of our rights
in the aircraft and our other assets. In either case, it may be impossible to
repay amounts outstanding under the Notes.
TAX RISKS
Neither the Trustee nor MSAF will make any additional payments to
Noteholders in respect of any withholding or deduction required to be made by
applicable law with respect to payments made on the Notes. In the event that
MSAF is or will be required to make a withholding or deduction, it will use
reasonable efforts to avoid the application of such withholding taxes and may in
certain circumstances redeem the Notes in the event such withholding taxes
cannot be avoided. In the event any withholding taxes are imposed with respect
to the Notes and MSAF does not redeem the Notes, the net amount of interest
received by Noteholders will be reduced by the amount of the withholding or
deduction.
MSAF believes that it will not become subject to any material taxes in any
of the jurisdictions in which any of the lessees are organized or operate under
the present tax laws of such jurisdictions. However, there can be no assurance
that other leases to which MSAF Group may become a party as a result of the
re-leasing of the aircraft or acquisition of additional aircraft will not result
in the imposition of withholding or other taxes.
16
<PAGE> 21
MSAF GROUP
MSAF is a special-purpose statutory business trust formed on October 30,
1997 under the laws of Delaware for an unlimited duration for certain limited
purposes. These limited purposes include (1) owning all of the equity interest
in MSA I, which owns 31 aircraft and a spare engine and SPC-5 which owns one
aircraft (the "Aircraft-Owning Subsidiaries") and (2) acquiring, financing,
re-financing, owning, leasing, re-leasing, selling, maintaining and modifying
the aircraft and any additional aircraft MSAF acquires in the future. MSAF Group
may also enter into certain hedging contracts as described under "Interest Rate
Risk Management," and establish and provide loans or guarantees to, or in
respect of, its subsidiaries and any entities that may be established or
acquired in the future in connection with acquisitions of additional aircraft.
MSAF's initial portfolio of aircraft assets consists of 32 aircraft and one
spare engine purchased from International Lease Finance Corporation ("ILFC") and
the related leases. As of February 1, 1999, 31 of the MSAF's aircraft were
subject to lease contracts (or in one case, a conditional sale agreement) with
28 lessees based in 18 countries. One aircraft was available for lease.
All of the beneficial interest in MSAF is currently owned by MSF, a
wholly-owned subsidiary of MSDW. MSF may transfer all or a portion of such
beneficial interest to related or unrelated third parties in the future.
On March 3, 1998, MSAF issued $1,050 million of Old Notes. On January 18,
1999, MSAF consummated an exchange offer whereby MSAF issued the New Notes in
exchange for the Old Notes. Prior to the issuance of the Old Notes, MSAF Group
received approximately $920 million in non-interest bearing loans from MSF which
were utilized to purchase 31 of MSAF's 32 aircraft. At the time of the issuance
of the Old Notes, the loans were automatically converted into a beneficial
interest and a beneficial interest distribution of approximately $976 million
was paid to MSF. This beneficial interest distribution included repayment of the
interest free loans and a distribution of approximately $56 million (comprising
$21 million in lease rentals accrued to the date of issuance of the Old Notes
with the balance representing finance and other charges paid to MSF).
In connection with the offering and sale of the Old Notes, MSAF paid
approximately $7.1 million in subscription discounts and commissions to
subsidiaries of MSDW.
There are six trustees of MSAF (the "Trustees"). One trustee of MSAF is
Wilmington Trust Company, the Delaware trustee (the "Delaware Trustee"). Three
of the six trustees of MSAF and one alternate trustee (the "Controlling
Trustees") are officers of affiliates of MSDW. Two trustees (the "Independent
Trustees") are independent from MSDW and are only permitted to vote in trustee
meetings on certain significant decisions relating to insolvency proceedings.
One of the Independent Trustees is a partner of Shearman & Sterling, a law firm
that regularly provides legal services to MSDW and its affiliates. The
controlling or independent trustees or directors, as applicable, of each
Aircraft-Owning Subsidiary are the same persons as the Controlling Trustees and
the Independent Trustees, unless otherwise required by any provisions of local
law mandating a particular citizenship for trustees or directors. Neither MSAF
nor any of the Aircraft-Owning Subsidiaries has any employees or executive
officers. Accordingly, the Trustees rely upon various service providers,
including affiliates of MSDW, for all asset servicing, executive and
administrative functions pursuant to the respective service provider agreements.
Transactions or proceedings relating to certain insolvency proceedings of MSAF
may only be approved by a unanimous vote of all the Controlling Trustees and
Independent Trustees.
MSAF's registered office is located at 1100 North Market Street, Rodney
Square North, Wilmington, Delaware 19890-0001 care of Wilmington Trust Company,
attention: Corporate Trust Administration and its telephone number is
1-302-651-1000.
17
<PAGE> 22
THE AIRCRAFT AND LEASES
Substantially all of the assets of MSAF consist of 100% of the beneficial
interest in MSA I, 100% of the issued and outstanding capital stock of SPC-5 and
certain leasing subsidiaries and certain loans made to MSA I and SPC-5. MSAF
indirectly owns (i) the aircraft, (ii) the rights under the related leases, and
(iii) cash and cash equivalents on deposit.
APPRAISERS' REPORTS
As of September 30, 1998, our aircraft had an appraised value of $1,029.4
million. The appraised value is equal to the average of the opinions of three
appraisers, Aircraft Information Services, Inc., BK Associates, Inc. and
Airclaims Limited as to the value of each of our aircraft as of September 30,
1998 without taking into account the value of related leases, maintenance
reserves or security deposits.
The appraisers have provided appraisals of the value of each of our
aircraft at normal utilization rates in an open, unrestricted and stable market
as of September 30, 1998, adjusted to account for the reported maintenance
standard of the aircraft. The appraisals were not based on a physical inspection
of the aircraft. The appraisals explain the methodology used to determine the
values for the aircraft. See "Risk Factors -- Actual Market Value May Be Less
Than Appraised Value." Based on the appraisals, the aggregate values calculated
by each of the three appraisers for the aircraft are $1,053.8 million in the
case of BK Associates, Inc., $1,079.12 million in the case of Aircraft
Information Services, Inc. and $955.34 million in the case of Airclaims Limited.
The appraised values as of September 30, 1998 for the aircraft by type and class
are set out below. These appraised values should not be relied upon as a measure
of the market or realizable value of any aircraft. See "Risk Factors --
Cyclicality of Supply of and Demand for Aircraft and Depression of Aircraft
Values" and "-- Actual Market Value May Be Less Than Appraised Value."
PORTFOLIO INFORMATION
THE AIRCRAFT
All of the aircraft hold or are capable of holding a noise certificate
issued under Chapter 3 of Volume 1, Part II of Annex 16 of the Chicago
Convention or have been shown to comply with the Stage 3 noise levels set out in
Section 36.5 of Appendix C of Part 36 of the United States Federal Aviation
Regulations ("Stage 3 aircraft").
18
<PAGE> 23
The following table sets forth the exposure as of February 1, 1999 of our
aircraft by type of aircraft calculated by reference to the number of aircraft
and their appraised value as of September 30, 1998.
<TABLE>
<CAPTION>
% OF CURRENT
PORTFOLIO BY
APPRAISED VALUE
AS OF
NUMBER OF ENGINE SEPTEMBER 30,
MANUFACTURER TYPE OF AIRCRAFT AIRCRAFT BODY TYPE STAGE 1998
- ------------ ---------------- ----------- ---------- ------ --------------------
<S> <C> <C> <C> <C> <C>
Boeing (62.94%)................ 767-200ER 1 Widebody 3 3.53%
767-300ER(1) 3 Widebody 3 18.73
757-200ER 3 Narrowbody 3 10.84
747-300B 1 Widebody 3 6.09
737-300 6 Narrowbody 3 14.17
737-400 3 Narrowbody 3 7.55
737-500 1 Narrowbody 3 2.03
Airbus (26.17%)................ A321-100 1 Narrowbody 3 4.33
A320-200 3 Narrowbody 3 9.06
A310-300 3 Widebody 3 7.85
A300-600R 1 Widebody 3 4.93
McDonnell Douglas
Corporation (5.64%).......... MD82 1 Narrowbody 3 1.77
MD83 2 Narrowbody 3 3.87
Fokker N.V.(4.71%)............. F70 3 Narrowbody 3 4.71
General Electric
Company (0.54%).............. CF6-80C2B6F engine -- 3 .54
----------- ------
Total........................ 32 + engine 100.00%
=========== ======
</TABLE>
- ---------------
(1) One of these aircraft is not currently capable of extended range missions
but ILFC has agreed to pay for the cost of an extended range modification to
such aircraft upon MSAF's request at any time following the termination or
expiration of the lease for such aircraft. The appraisals of such aircraft
assume that such extended range modification has been carried out.
19
<PAGE> 24
The following table sets forth the exposure as of February 1, 1999 of our
aircraft to the lessees calculated by reference to the appraised value as of
September 30, 1998 of the aircraft.
<TABLE>
<CAPTION>
% OF CURRENT
PORTFOLIO BY
APPRAISED VALUE
AS OF
NUMBER OF SEPTEMBER 30,
LESSEE(1) AIRCRAFT 1998
- --------- ----------- ---------------
<S> <C> <C>
Air Pacific Limited......................................... 1 6.69%
Unijet Leisure Limited(2)................................... 1 6.58
"VARIG," S.A. (Viacao Aerea Rio-Grandense).................. 1 6.09
TransAer International Airlines Limited..................... 1 3.06
Asiana Airlines, Inc........................................ 1 5.45
Malev Hungarian Airlines, PLC............................... 3 4.71
China Airlines, Ltd......................................... 1 4.93
Flightlease AG(3)........................................... 2 4.91
Alaska Airlines, Inc........................................ 1 2.74
Onur Air Tasimacilik A.S.................................... 1 4.33
Aerovias de Mexico, S.A. de C.V............................. 1 4.15
Britannia Airways Limited(4)................................ 1 3.53
Flying Colours Airlines Limited............................. 1 3.39
Passaredo, Transportes Aeros(5)............................. 1 2.93
Monarch Airlines Limited.................................... 1 2.96
Transavia Airlines C.V...................................... 1 2.90
China Hainan Airlines....................................... 1 2.60
Transportes Aereos Portugueses, S.A......................... 1 2.43
Flugleidir H.F.(6).......................................... 1 2.08
Societe D'Exploitation Aeropostale S.A...................... 1 2.08
Trans World Airlines, Inc................................... 2 3.76
Air Liberte, S.A............................................ 1 1.89
Caledonian Airways Limited(2)............................... 1 3.04
Olympic Airways............................................. 1 2.64
Transportes Aereos Ejecutivos S.A. de C.V................... 1 2.17
Viasao Aerea Sao Paulo S.A., Brazilian Airlines............. 1 2.08
Braathens Sverige AB........................................ 1 2.03
Koninklijke Luchtvaart Maatschappij N.V..................... engine 0.55
Aircraft available for lease(7)............................. 1 3.30
----------- ------
Total..................................................... 32 + engine 100.00%
=========== ======
</TABLE>
- ---------------
(1) Total number of lessees = 28.
(2) Unijet recently acquired AIR 2000 which is owned by Thomas Cook. Thomas Cook
and Carlson Group (which owns Caledonian) are in the process of merging
their businesses which means that Unijet and Caledonian will be owned by the
same company.
(3) As part of the restructuring in 1997 of its business by SAir Group Ltd.
(formerly Swiss Air, Swiss Air Transport Company Ltd.), the leasehold
interest in all of the aircraft previously leased by Swiss Air has been
transferred to its wholly owned subsidiary Flightlease. The applicable
aircraft will continue to be operated by an airline affiliate of Swiss Air.
(4) The aircraft leased to Britannia is subleased to Ansett Australia Limited.
(5) Passaredo leases the applicable aircraft from Navasota, which is party to a
conditional sale agreement with MSAF Group. See "-- The Leases --
Conditional Sale Agreement."
(6) The aircraft leased to Icelandair is subleased to Falcon Air AB.
(7) A letter of intent with a new lessee based in the United States was signed
in February 1999.
20
<PAGE> 25
The following table sets forth the exposure as of February 1, 1999 of our
aircraft to countries in which the lessees are domiciled calculated by reference
to the appraised value as of September 30, 1998 of the aircraft.
<TABLE>
<CAPTION>
% OF CURRENT
PORTFOLIO BY
APPRAISED VALUE
AS OF
NUMBER OF SEPTEMBER 30,
COUNTRY(1) AIRCRAFT 1998
- ---------- ----------- ---------------
<S> <C> <C>
United Kingdom.............................................. 5 19.51%
Brazil...................................................... 3 11.10
Fiji........................................................ 1 6.69
United States............................................... 3 6.50
Mexico...................................................... 2 6.32
South Korea................................................. 1 5.45
Taiwan...................................................... 1 4.93
Switzerland................................................. 2 4.91
Hungary..................................................... 3 4.71
Turkey...................................................... 1 4.33
France...................................................... 2 3.97
The Netherlands............................................. 1 + engine 3.44
Ireland..................................................... 1 3.06
Greece...................................................... 1 2.64
China....................................................... 1 2.60
Portugal.................................................... 1 2.43
Iceland..................................................... 1 2.08
Sweden...................................................... 1 2.03
Aircraft available for lease................................ 1 3.30
----------- ------
Total..................................................... 32 + engine 100.00%
=========== ======
</TABLE>
- ---------------
(1) Total number of countries = 18.
The following table sets forth the exposure as of February 1, 1999 of our
aircraft by regions in which the lessees are domiciled calculated by reference
to number of aircraft and their appraised value as of September 30, 1998.
<TABLE>
<CAPTION>
% OF CURRENT
PORTFOLIO BY
APPRAISED VALUE
AS OF
NUMBER OF SEPTEMBER 30,
REGION(1) AIRCRAFT 1998
- --------- ----------- ---------------
<S> <C> <C>
Developed Markets
Europe.................................................... 14 + engine 41.99%
North America............................................. 3 6.50
Emerging Markets
Europe and Middle East.................................... 4 9.04
Latin America............................................. 5 17.42
Asia...................................................... 3 12.98
Other....................................................... 2 8.77
Aircraft available for lease................................ 1 3.30
----------- ------
Total..................................................... 32 + engine 100.00%
=========== ======
</TABLE>
- ---------------
(1) Regions are defined according to designations published by Capital
International Perspective S.A.
21
<PAGE> 26
The following table sets forth the exposure as of February 1, 1999 of our
aircraft by year of aircraft manufacture calculated by reference to the
appraised value as of September 30, 1998 of the aircraft. The weighted average
age of the fleet as of November 30, 1998 is approximately 7.5 years.
<TABLE>
<CAPTION>
% OF CURRENT
PORTFOLIO BY
APPRAISED VALUE
NUMBER OF AS OF SEPTEMBER 30,
YEAR OF MANUFACTURE AIRCRAFT 1998
- ------------------- ----------- ----------------------
<S> <C> <C>
1985...................................................... 2 4.91%
1986...................................................... 1 2.93
1987...................................................... 3 7.70
1988...................................................... 5 15.52
1989...................................................... 3 7.15
1990...................................................... 2 10.38
1992...................................................... 3 8.03
1993...................................................... 6 20.05
1994...................................................... 2 10.84
1995...................................................... 2 + engine 4.96
1996...................................................... 3 7.53
----------- ------
Total................................................... 32 + engine 100.00%
=========== ======
</TABLE>
The following table sets forth the exposure as of February 1, 1999 of our
aircraft by seat category calculated by reference to the appraised value as of
September 30, 1998 of our aircraft, excluding the spare engine and one aircraft
which is a freighter aircraft.
<TABLE>
<CAPTION>
% OF CURRENT
PORTFOLIO BY
APPRAISED VALUE
NUMBER OF AS OF SEPTEMBER 30,
SEAT CATEGORY AIRCRAFT TYPES AIRCRAFT 1998
------------- -------------- --------- ----------------------
<S> <C> <C> <C>
51-120................ F-70, B737-500 4 6.74%
121-170............... B737-300/300QC/400, A320-200, MD82/83 15 36.42
171-240............... B757-200, A321-100, B767-200ER,
B767-300ER, A300-600R, A310-300 12 50.21
351+.................. B747-300 1 6.09
-- -----
Total............... 32 99.46%
== =====
</TABLE>
22
<PAGE> 27
MSAF GROUP PORTFOLIO ANALYSIS
Further particulars of our aircraft as of February 1, 1999 (except for
appraised values, which are as of September 30, 1998) are contained in the table
below.
<TABLE>
<CAPTION>
COUNTRY ENGINE SERIAL DATE OF
REGION(1) OF LESSEE LESSEE TYPE CONFIGURATION NUMBER MANUFACTURE
--------- --------- ------ ---- ------------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Europe.................. France Aeropostale B737-300QC CFM 56-3C1 23788 5/87
(Developed) France Air Liberte MD83 JT8D-219 49822 12/88
Greece Olympic B737-400 CFM 56-3C1 25371 1/92
Portugal TAP B737-300 CFM 56-3B2 25161 2/92
Sweden Transwede B737-500 CFM 56-3B1 25165 4/93
Switzerland Flightlease A310-300 JT9D-7R4E1 410 11/85
Switzerland Flightlease A310-300 JT9D-7R4E1 409 11/85
The Netherlands Transavia B737-300 CFM 56-3C1 27635 5/95
The Netherlands KLM engine CF6-80C2B6F 704279 6/95
United Kingdom Britannia B767-200ER CF6-80A 23807 8/87
United Kingdom Caledonian A320-200 V2500-Al 393 2/93
United Kingdom Monarch A320-200 CFM 56-5A3 279 2/92
United Kingdom Unijet B767-300ER CF6-80C2B6F 26256 4/93
United Kingdom Flying Colours B757-200ER RB211-535-E4-37 24367 2/89
Ireland TransAer A320-200 V2500-A1 414 5/93
North America........... United States Alaska Airlines B737-400 CFM 56-3C1 25104 5/93
(Developed) United States TWA MD-83 JT8D-219 49824 3/89
United States TWA MD-82 JT8D-217C 49825 3/89
Europe and
Middle East............. Hungary Malev F-70 TAY MK620-15 11569 3/96
(Emerging) Hungary Malev F-70 TAY MK620-15 11565 2/96
Hungary Malev F-70 TAY MK620-15 11564 12/95
Turkey Onur Air A321-100 V2530-A5 597 5/96
Asia.................... China China Hainan B737-300 CFM 56-3C1 26295 12/93
(Emerging) Korea Asiana B767-300 CF6-80C2B6F 24798 10/90
Taiwan China Airlines A300-600R PW 4158 555 3/90
Latin America........... Brazil Varig B747-300B CF6-80C2 24106 4/88
(Emerging) Brazil Passaredo A310-300 JT9D-7R4E1 437 11/86
Brazil VASP B737-300 CFM 56-3B2 24299 11/88
Mexico Aero Mexico B757-200ER PW 2037 26272 3/94
Mexico TAESA B737-400 CFM 56-3B2 24234 10/88
Other................... Fiji Air Pacific B767-300ER CF6-80C2B4 26260 9/94
Iceland Icelandair B737-300F CFM 56-3B2 23811 10/87
Aircraft available for
lease -- -- B757-200ER RB211-535-E4 24260 12/88
Total
<CAPTION>
APPRAISED
VALUE AS OF
SEPTEMBER 30,
1998
REGION(1) ($000'S)
--------- -------------
<S> <C>
Europe.................. $ 21,420
(Developed) 19,433
27,137
25,020
20,860
25,377
25,210
29,863
5,593
36,390
31,310
30,467
67,767
34,870
31,503
North America........... 28,210
(Developed) 20,423
18,270
Europe and
Middle East............. 16,460
(Emerging) 16,353
15,627
44,623
Asia.................... 26,783
(Emerging) 56,127
50,720
Latin America........... 62,673
(Emerging) 30,183
21,407
42,727
22,340
Other................... 68,913
21,423
Aircraft available for
lease 33,953(2)
----------
Total $1,029,437
==========
</TABLE>
- ---------------
(1) Regions are defined according to Capital International Perspective S.A.
designations.
(2) The previous lease relating to this B757 aircraft was terminated with the
agreement of the lessee. The aircraft has been repossessed by ILFC and a
letter of intent was signed with a new lessee based in the United States in
February 1999.
ACQUISITION OF ADDITIONAL AIRCRAFT
MSAF Group may acquire additional commercial passenger or freight aircraft
from various sellers. Cash flows derived from any additional aircraft and the
related leases will be available to satisfy MSAF's payment obligations,
including payments of interest, principal and premium, if any, on the Notes and
any additional notes. There is no limit on the aggregate value of additional
aircraft that may be acquired or on the period in which such additional aircraft
must be acquired. Any acquisition of additional aircraft and related issuance of
additional notes will be subject to certain conditions under the Indenture.
23
<PAGE> 28
THE LEASES
GENERAL
All leases of our aircraft are managed by ILFC pursuant to an incentive fee
based servicing agreement among MSAF, Bankers Trust Company, as cash manager,
Cabot, as administrative agent, and ILFC dated as of November 10, 1997.
The following description relates only to leases in effect as of February
1, 1999 related to the 32 aircraft and one spare engine in MSAF Group's initial
portfolio (other than one A310 aircraft which is the subject of a conditional
sale agreement. See "-- Conditional Sale Agreement" below). As of February 1,
1999, leases covering 31 aircraft and the spare engine were in effect. Any
additional leases acquired in connection with the acquisition of additional
aircraft and any future leases entered into in connection with the re-lease of
any aircraft may differ from the description of the leases set forth below.
However, any additional leases or future leases will be required to comply with
the operating covenants under the Indenture.
Except for the conditional sale agreement, the leases are all fixed-term
operating leases under which MSAF generally will retain the benefit, and bear
the risk, of the residual value of the aircraft upon expiry or early termination
of the lease (although in the case of certain aircraft MSAF has granted an
option to purchase the aircraft to the lessee or an affiliate and/or to extend
or shorten the term of the related lease. See "-- Lessees' Options" below).
Although the lease documentation is fairly standardized in many respects,
significant variations do exist as a result of negotiation with each lessee.
LEASE PAYMENTS AND SECURITY
Each lease requires the lessee to pay periodic rentals during the lease
term. Certain of the leases require the lessee to pay periodic amounts by way of
maintenance reserves. See "-- Maintenance and Maintenance Reserves" below.
The lessees are required to make payments to the lessor without set-off or
counterclaim, and each lease includes an obligation of the lessee to gross-up
payments under the lease where payments are subject to certain withholding and
other taxes, although, in certain cases, such amount will be limited to the
extent of the amount that would have been payable, if any, if the lease had
never been transferred from ILFC to MSAF Group. The leases also contain
indemnification of the lessor for certain taxation liabilities (including, in
some leases, value added tax and stamp duties, but generally excluding net
income tax or its equivalent imposed on the lessor) and taxation of indemnity
payments. The lessees also are obliged to pay default interest on any overdue
amounts. In some cases, the lessee may exercise certain remedies if the lessor
breaches its covenant of quiet enjoyment.
Under the leases, the lessees are liable through various operational
indemnities for operating expenses accrued or payable during the term of the
respective lease, which would normally include maintenance, operating, overhaul,
airport and navigation charges, certain taxes, licenses, consents and approvals,
aircraft registration and hull all risks and public liability insurance
premiums. The lessees are obliged to remove liens on the aircraft other than
certain liens permitted under the leases.
Under 30 of the 32 leases, the lessee has provided security for its
obligations. This security is, in the case of 29 leases, in the form of cash
security deposits and, in the case of the remaining lease, in the form of a
letter of credit. In two of the 29 leases where the lessee has provided cash
security deposits, there is also additional security: under one, the lessee has
provided a letter of credit to secure payments to certain aviation authorities
and Eurocontrol; in the other, the lessee has procured the issuance to the
lessor of a general guarantee by its parent company in respect of its payment
and performance obligations. You should refer to "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial Resources
and Liquidity -- ILFC Facility" for a discussion of cash security deposits that
are held by ILFC.
24
<PAGE> 29
RENTALS
All of the rental payments are payable on a fixed rate basis and are not
adjustable by reference to market interest rate changes. Rentals under most of
the leases are payable monthly in advance. Rentals under the balance of the
leases are payable quarterly in advance. All lease payments are currently
payable in U.S. dollars although in the future lease rentals may be payable in
other currencies.
OPERATION OF THE AIRCRAFT
The leases require the lessees to operate the aircraft in compliance with
all laws and regulations applicable to the aircraft. The aircraft generally must
remain in the possession of the lessees, and any subleases of the aircraft
generally must be approved by the lessor. Under most of the 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 lessee), provided the
lessee does not part with operational control of the aircraft. Under certain
leases, the lessee is permitted to enter into subleases to specified operators
without the lessor's consent, provided certain conditions are met. As of the
date of this prospectus, Britannia subleases its aircraft to Ansett and
Icelandair subleases its aircraft to Falcon Air AB.
All of the leases permit the lessees to subject the engines, and other
equipment or components in certain cases, to removal or replacement and, in
certain cases, to pooling arrangements (temporary borrowing of equipment), in
some cases with permitted entities (which may include certain manufacturers,
suppliers, other airlines or aircraft operators) without the lessor's consent
but subject to conditions and criteria set forth in the lease. Under all of the
leases, the lessees may deliver possession of the aircraft, engines and other
equipment or components to the manufacturer thereof for testing or similar
purposes, or to a third party for service, maintenance, repair or other work
required or permitted under the lease. The lessor's ability to repossess the
aircraft or engines, equipment or components from any such sublessee,
transferee, manufacturer, or other person may be restricted by liens or similar
rights of detention and by applicable bankruptcy and insolvency laws.
MAINTENANCE AND MAINTENANCE RESERVES
The leases contain detailed provisions specifying maintenance standards and
the required condition of the aircraft upon redelivery. In addition, under
certain of the leases, depending upon the specific maintenance condition of the
aircraft or specified items (airframe, engines, certain components, auxiliary
power unit or landing gear) at redelivery, the lessee may be required to make
certain adjustment payments to the lessor. During the term of each lease, the
lessee is required to ensure that the aircraft is maintained in accordance with
an agreed maintenance program designed to ensure that the aircraft meets
applicable airworthiness and other regulatory requirements in the jurisdiction
in which the aircraft is registered or, in the case of the lease for the spare
engine, the jurisdiction of the lessee. Under the leases, the agreed maintenance
program is generally performed by the lessee. Under most of the leases, the
lessee is required to provide monthly maintenance reserves. In cases where the
lessee has paid maintenance reserves, such payments are used to reimburse the
lessee for significant maintenance charges, including major airframe and engine
overhauls.
Under the balance of the leases there is no provision for the payment of
maintenance reserves. In these cases the lessor must rely on the credit of the
lessee or, if available, any credit support, and the ability of the lessee to
return the aircraft in the condition required by the lease upon termination, to
make any required payments based on the aircraft's return condition upon
termination of the related lease and to perform scheduled maintenance throughout
the lease term.
The lessees are required under the leases to comply with airworthiness
directives ("ADs") of the applicable aviation authorities specified in the
leases and with manufacturer's service bulletins and the lessees primarily bear
the cost of compliance. However, under some of the leases, the lessor may be
required by the lease to contribute to the cost of certain ADs or manufacturer's
service bulletins or to the cost above a specified threshold.
25
<PAGE> 30
LESSEES' OPTIONS
As of February 1, 1999, six lessees had outstanding options to purchase a
total of eight aircraft (representing 27.79% of the portfolio by appraised value
at September 30, 1998). The exercise of these options allows the lessee to
purchase the aircraft either upon expiration of the lease or on a specific
anniversary of the delivery of the aircraft, after specific notice. The duration
of some of the purchase options depends on whether the lessee exercises a
separate option to extend the lease. Assuming that all outstanding lease
extension options are exercised, the latest date on which a purchase option may
be exercised is June 8, 2008 for a purchase on March 8, 2009. Upon the exercise
of a purchase option, in two cases the lessor is relieved of an obligation to
contribute to the costs of complying with ADs and, conversely, in seven cases
the leases provide that the lessor refund unused maintenance reserves and/or
security deposits to the lessee.
As of February 1, 1999, 14 of the aircraft leases included outstanding
options for the lessee to extend the term of the lease. The rent payable during
the extension period under these leases varies from lease to lease. As of
February 1, 1999, seven of the aircraft leases contained provisions under which
the relevant lessee could terminate its lease prior to its scheduled expiration
date, subject, in certain instances, to specified conditions and the payment of
a fee.
The spare engine lease has no purchase option. The term of the spare engine
lease may be extended by five successive one-year terms which have not yet been
exercised. At the end of the fifth and sixth years of the term, the lessee may
terminate the spare engine lease with 12 months' notice and payment of a fee.
CONDITIONAL SALE AGREEMENT
MSAF Group has entered into the conditional sale agreement with Navasota
Holdings Inc., a British Virgin Islands corporation, pursuant to which MSAF
Group will be obliged, assuming that Navasota complies with its payment and
other obligations, to transfer title to an A310 aircraft on December 15, 2003,
although Navasota may prepay all purchase price installments under the
conditional sale agreement at any time. Navasota has entered into an operating
lease with Passaredo. All payments under both the conditional sale agreement and
the Passaredo lease are unconditionally guaranteed by six Brazilian tour
operators for whose benefit Passaredo will use the aircraft to operate charter
flights. The present value of all amounts payable with respect to the A310
aircraft (discounted to February 1, 1999 at 5.86%) is $8.6 million less than the
pro rata portion of the unpaid Note principal represented by the aircraft being
purchased.
INDEMNIFICATION AND INSURANCE OF THE AIRCRAFT
GENERAL
The lessees are required under the leases to bear responsibility (through
an operational indemnity) and carry insurance for any liabilities arising out of
the operation of the aircraft, including any liabilities for death or injury to
persons and damage to property that ordinarily would attach to the operator of
the aircraft, subject to customary exclusions. In addition, the lessees are
required to carry other types of insurance that are customary in the air
transportation industry, including all risks aircraft hull and hull war risks
insurance (in each case at a value stipulated in the relevant lease, subject to
adjustment in certain circumstances) and aircraft spares insurance (on a
replacement cost basis), in each case subject to customary deductibles. The
Servicer is required to monitor the performance of the obligations of the
lessees with the insurance provisions of the leases. In addition, MSAF Group
also has in place its own contingent liability coverage. This operates both to
cover a liability that is in excess of the coverage provided by a lessee's
policy and where a lessee's policy lapses for any reason (including an early
termination of a lease and repossession of an aircraft). MSAF's contingent third
party liability insurance covers all of the aircraft and its contingent hull and
hull war risks insurance covers certain of the aircraft. The amount of such
contingent liability policies may or may not be the same as required under the
relevant lease. The amount of third party contingent liability insurance is
subject to certain limitations imposed by the air transportation insurance
industry.
26
<PAGE> 31
If any of the existing insurance policies are canceled or terminated and in
the case of the re-lease of an aircraft, MSAF may from time to time engage
insurance experts, to advise and recommend to ILFC, as Servicer, the appropriate
amount of insurance coverage MSAF should procure.
LIABILITY INSURANCE
Third party liability insurance is required under the leases for a combined
single limit for bodily injury and property damage in minimum amounts ranging
between $250 million and $1.25 billion for each aircraft. In general, liability
coverage on each aircraft includes third party legal liability, passenger legal
liability, baggage legal liability, cargo legal liability, mail and aviation
general third party (including products) legal liability.
In some jurisdictions liabilities for risks that are insured against by the
lessees also may attach to MSAF Group as owner of the aircraft irrespective of
whether it is in any way responsible for the loss for which liability is
asserted. In addition, claimants may assert claims against MSAF Group on the
basis of alleged responsibility for a loss, even if such claim is not ultimately
sustained. Under the leases, the lessees are currently obligated to indemnify
the lessor against claims, including the costs of defending against such claims,
by third parties against them for such liabilities while the aircraft are owned
by MSAF and under lease to the lessees.
The indemnified losses include both operating costs relating to the actual
operation of the aircraft as well as losses to persons and property resulting
from the operation of the aircraft. The latter types of losses are generally
covered by the lessees' liability insurance.
AIRCRAFT PROPERTY INSURANCE
In addition to liability insurance, the lessees are obligated under the
leases to carry other types of insurance that are customary in the air
transportation industry, including all risks aircraft hull and hull war risks
insurance (in each case at a value stipulated in the relevant lease, subject to
adjustment in certain circumstances) and aircraft spares insurance (on a
replacement cost basis), in each case subject to customary deductibles. In
addition to such stipulated lease value coverage obtained by the lessees, MSAF
Group has also purchased declining "total loss only" coverage with respect to
certain aircraft. As of February 1, 1999, in no case was the sum of the
stipulated lease value and MSAF Group's additional coverage in place for all
risks aircraft hull and hull war risks insurances less than 100% of the
appraised value as of September 30, 1998 of the applicable aircraft, and on
average the sum of such coverages in place for each aircraft was approximately
120% of the appraised value as of September 30, 1998 of the applicable aircraft.
In most cases, the lessor is permitted to increase the insured value above the
stipulated lease value consistent with industry practice with the lessee being
responsible for any increased premium that results. Permitted deductibles range
from $500,000 to $1,000,000; however, the deductible generally applies only in
the case of a partial loss. In the case of a total loss of an aircraft, no
deductible would be applied against the insurance proceeds received.
The leases include provisions defining an event of loss or a casualty
occurrence such that where a total loss of the airframe occurs, with or without
loss of the engines installed on the airframe, the agreed value is payable by
the lessee. This payment is generally funded with insurance proceeds. However,
the air transportation insurance industry practice is to treat only a loss of
greater than 75% of the value of the aircraft, including the engines, as a total
loss. In such a case, the lessee would be responsible for the payment of the
difference between the insurance proceeds and the stipulated lease value. Where
insurance proceeds do cover a total loss, most leases require the lessor to pay
to the lessee the balance of the insurance proceeds received under the hull all
risks or war risks policy after deduction of all amounts payable by the lessee
to the lessor under the lease.
All insurance certificates contain a breach of warranty endorsement so that
the additional insureds continue to be protected even if the lessee violates one
or more of the terms, conditions or warranties of the insurance policies,
provided that such additional insured has not caused, contributed to or
knowingly condoned such breach.
27
<PAGE> 32
The insurance advisor will confirm to MSAF Group, among other things, that
the insurance requirements currently detailed in the insurance certificates meet
customary practices.
The leases require the lessee to maintain as part of its hull war and
allied perils insurance coverage for confiscation or requisition of the
applicable aircraft (including confiscation or requisition by the relevant state
of registration), although in certain countries (including France and the
People's Republic of China) such insurance may not be obtainable.
THE LESSEES
As of February 1, 1999, there were 28 lessees in 18 countries.
PAYMENT HISTORY
As a general matter, weakly capitalized airlines are more likely than well
capitalized airlines to seek operating leases and at any point in time,
investors should expect varying numbers of lessees to be experiencing payment
difficulties.
As of February 1, 1999, two lessees were in arrears. The amounts
outstanding and overdue in respect of rental payments, maintenance reserves and
other miscellaneous amounts due under the leases (net of default interest and
certain cash in transit) with respect to these two lessees amounted to
approximately $3.4 million. The weighted average number of days past due of such
arrears was 70.
In certain cases, MSAF Group may respond to the needs of lessees in
financial difficulty including, in certain instances, restructuring the
applicable leases. Such restructurings may involve reduced rental payments for a
specified period (which may be several months). In addition, certain
restructurings may involve the voluntary termination of a lease prior to its
expiration and the arrangement of subleases from the lessee to another aircraft
operator.
DESCRIPTION OF THE LESSEES
The table below sets forth certain available information with respect to
the country of domicile, first year of operation, service type, nature of
ownership and fleet size and composition of each lessee as of February 10, 1999.
See "-- Portfolio Information" above for additional tables setting forth the
exposure of the aircraft (as a percentage of appraised value as of September 30,
1998) to each lessee and the countries in which the lessees are domiciled.
<TABLE>
<CAPTION>
BEGAN SERVICE OPERATING
LESSEE DOMICILE OPERATION TYPE OWNERSHIP FLEET(1)
- ------ -------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Aero Mexico Mexico 1934 Scheduled Cintra (90%) 6 B757-200
Staff (10%) 2 B767-200ER
2 B767-300ER
2 DC-9-31
15 DC-9-32
12 MD-82
9 MD-83
3 MD-87
10 MD-88
Aeropostale France 1986 Scheduled, Groupe Air France (50%) 2 B727-200F
Chartered and Groupe La Poste (50%) 3 B737-200C
Postal 15 B737-300QC
1 B737-200QC
Air Pacific Fiji 1951 Scheduled Government of Fiji (51%) 1 B737-700
Qantas (46%) 1 B737-500
Air New Zealand (2%) 2 B747-200B
Others (0.8%) 1 B767-300ER
Pacific Islands
governments (0.3%)
</TABLE>
28
<PAGE> 33
<TABLE>
<CAPTION>
BEGAN SERVICE OPERATING
LESSEE DOMICILE OPERATION TYPE OWNERSHIP FLEET(1)
- ------ -------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Air Liberte France 1987 Scheduled and British Airways (74%) 11 Fokker 100
Chartered Banque Rivaud (26%) 1 Fokker 1000C
3 Fokker 2000
4 ATR ATR 42
2 ATR ATR 72
2 DC-10-30
1 DC-10-30ER
10 MD-83
Alaska Airlines United States 1932 Scheduled Public (100%) 37 B737-400
4 B737-200C
4 B737-200QC
6 MD-82
30 MD-83
Asiana Republic of Korea 1988 Scheduled and Kumho Group (54%) 18 B737-400
Chartered Pacific Investment Capital, 3 B737-500
Swiss Bank Corp, 6 B747-400
Korean Development Bank, 2 B747-400F
Korea Long Term Credit Bank 8 B767-300
(46%) 1 B767-300ER
1 B767-300 ERF
2 A321-130
Britannia United Kingdom 1961 Chartered Thomson Travel Holdings 21 B757-200
(100%) 4 B767-200EM
2 B767-200ER
4 B767-300ER
Caledonian(2) United Kingdom 1969 Chartered Inspirations plc (100%) 2 DC-10-30
5 A320-230
2 TriStar-1
5 TriStar-100
China Airlines Republic of China 1959 Scheduled and China Civil Aviation 12 A300-620R
(Taiwan) Chartered Development Foundation 6 A300-B4-220
(71%) 8 B737-800
Others (29%) 10 B747-200
11 B747-400
1 MD-11
2 Beechjet 400
China Hainan People's Republic 1991 Scheduled and American Aviation 5 B737-300
of China Executive Investment (25%) 6 B737-400
Charters Individuals (70%) 2 B737-800
People's Republic of China 9 Fairchild-23
(5%) 1 Learjet-60
Flightlease Switzerland 1931 Scheduled Swiss Air (100%) 3 A310-320
6 A319-110
17 A320-210
5 A321-110
1 B737-400
3 B747-300
16 MD-11
Flying Colours United Kingdom 1995 Chartered Sunworld (100%) 1 A320
2 A321
6 B757
Icelandair Iceland 1937 Scheduled and Public (100%) 1 B737-300F
Chartered 3 B737-400
5 B757-200
</TABLE>
29
<PAGE> 34
<TABLE>
<CAPTION>
BEGAN SERVICE OPERATING
LESSEE DOMICILE OPERATION TYPE OWNERSHIP FLEET(1)
- ------ -------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
KLM The Netherlands 1919 Scheduled Dutch Government (80%) 17 B737-300
Nationale Investeringsbank 19 B737-400
(20%) 7 B747-200B
3 B747-200SF
3 B747-300
19 B747-400
10 B767-300ER
10 MD-11
Malev Hungary 1946 Scheduled and Government of Hungary (62%) 4 B737-200A
Chartered Air Invest Ltd. (35%) 4 B737-300
Municipalities (2%) 2 B737-400
Individuals (1%) 2 B737-500
2 B767-200ER
6 F70
2 TV-154
Monarch United Kingdom 1967 Scheduled and Cosmos Guide Holding 4 A300-600R
Chartered International NV (100%) 5 A320-210
6 B757-200
1 DC10-30
1 A321-230
1 Tristar
Olympic Greece 1957 Scheduled Government (100%) 2 A300-600R
11 B737-200A
4 B747-200B
13 B737-400
1 A300-B4-200
2 B727-200
1 B737-300
1 A300-B4-100
Onur Air Turkey 1992 Scheduled Cankut Bagana, Onsail 1 A300-B4-100
Tulbentai and Hayri Igli 1 A320-230
(100%) 3 A321-130
4 MD-88
Passaredo Brazil 1995 Scheduled Passaredo Group (100%) 3 EMB-120-QC
1 ATR-300
2 A310-320
TAESA Mexico 1987 Scheduled and Alberto Abed (80%) 1 B727-100C
Chartered International 3 B727-100
Air Finance (20%) 1 Falcon-900
2 Learjet 25-B
1 Learjet 31-A
1 Learjet 35-A
2 Gulfstream II
1 Gulfstream IV
3 Jetstar-8
1 Jetstar-731
4 B737-200
2 DC-9-14
3 DC-9-15
1 Jetstar-II
1 Challenger-601-3A
1 C550&C551-550
1 B727-200
5 B737-300
2 B757-200
1 Learjet-24D
1 DC-9-31F
</TABLE>
30
<PAGE> 35
<TABLE>
<CAPTION>
BEGAN SERVICE OPERATING
LESSEE DOMICILE OPERATION TYPE OWNERSHIP FLEET(1)
- ------ -------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
TAP Portugal 1945 Scheduled Government (61%); 5 A310-300
Swiss Air (10%); 9 A319-110
SPAC and Others (29%) 6 A320-210
1 A320-230
7 B737-300
4 A340-310
TransAer Ireland 1991 Chartered Translift Holding (100%) 2 A300-B4-200
1 A300-B4-100
Transavia The Netherlands 1965 Scheduled and KLM (80%) 12 B737-300
Chartered Nationale Investeringsbank 3 B757-200
(20%) 3 737-800
Transwede SAFE Sverige Sweden 1985 Scheduled Braathens (100%) 4 Fokker 100
AB 1 B737-300
1 737-500
TWA United States 1930 Scheduled Public (65%) 5 B727-200
Employees (30%) 17 B727-200A
Prince Al-Waleed bin Talal 16 B757-200
(5%) 12 B767-200EM
4 B767-300ER
6 DC-9-15
18 DC-9-31
14 DC-9-32
1 DC-9-33CF
2 DC-9-34
3 DC-9-41
12 DC-9-51
40 MD-82
39 MD-83
Unijet(2) United Kingdom 1992 Charter British Air Transport 2 A320-200
Holdings Ltd. (100%) 1 A321-200
2 B767-300ER
Varig Brazil 1927 Scheduled Rio Grande do Sul 1 B727-100C
State Government (1.2%) 2 B727-100F
Ruben Berta Foundation 2 B727-100QC
(51.4%) 33 B737-300
Public (47.4%) 14 B737-200A
1 B747-200SF
5 B747-300
6 B767-200ER
6 B767-300ER
3 DC-10-30
2 DC-10-30F
13 MD-11
5 737-700
VASP Brazil 1933 Scheduled Canhedo Group (60%) 3 A300-B2-200FF
Sao Paolo State 6 B737-200
Government (40%) 1 B737-200F
1 B737-200C
7 B737-300
4 B727-200F
9 MD-11GE
1 MD-11-73CF
15 737-200A
1 737-200CA
</TABLE>
- ---------------
(1) Source: Airclaims Limited.
(2) Unijet recently acquired AIR 2000 which is owned by Thomas Cook. Thomas Cook
and Carlson Group (which owns Caledonian) are in the process of merging
their businesses which means that Unijet and Caledonian will be owned by the
same company.
31
<PAGE> 36
MANAGEMENT OF MSAF GROUP
Except to the limited extent described herein, particularly upon an event
of default under the Indenture, neither the Trustee nor any Noteholder has any
right to participate in the management or affairs of MSAF Group. In particular,
such parties cannot supervise the functions relating to the leases and the
re-lease of the aircraft in MSAF's initial portfolio, which functions have
generally been delegated to ILFC under the Servicing Agreement. See "Risk
Factors -- No Executive Management -- Reliance on Third Parties to Manage Our
Business," "Description of the Notes -- Indenture Covenants" and "-- Events of
Default and Remedies."
TRUSTEES
There are six trustees of MSAF, including the Delaware Trustee. The
Controlling Trustees listed below manage MSAF. Two of the trustees must be
Independent Trustees. The controlling or independent trustees or directors, as
applicable, of each Aircraft-Owning Subsidiary are the same persons as the
Controlling Trustees and the Independent Trustees, unless otherwise required by
any provisions of local law mandating a particular citizenship for trustees or
directors. The initial Controlling Trustees and Independent Trustees were
appointed by a subsidiary of MSDW. Any succeeding or additional Controlling
Trustees and Independent Trustees will be appointed by a majority of the then
standing Controlling Trustees. Transactions or proceedings involving certain
insolvency proceedings of MSAF may only be approved by a unanimous vote of all
Controlling Trustees and all Independent Trustees.
The Controlling Trustees and the Independent Trustees, their respective
ages and principal activities are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Karl Essig................................... 47 Controlling Trustee
Alexander C. Frank........................... 41 Controlling Trustee
A. Maurice Mason............................. 35 Controlling Trustee
C. Scott Peterson............................ 38 Alternate Controlling Trustee
Juan C. O'Callahan........................... 65 Independent Trustee
Alexander C. Bancroft........................ 61 Independent Trustee
</TABLE>
Karl Essig is a Managing Director in the International Securitisation Group
at Morgan Stanley & Co. International Limited. Mr. Essig joined MSDW in August
of 1980 and has worked in the London, New York and Tokyo offices on corporate
finance, capital markets and derivatives transactions. In 1986 he founded Morgan
Stanley's Asset-Backed Finance Group which he headed for five years. In 1992,
Mr. Essig moved to London and established the International Securitisation
Group, which he currently heads. Mr. Essig is a graduate of Stanford University
and the Yale School of Management.
Alexander C. Frank is a Managing Director in the Corporate Treasury
Department, and the Treasurer of MSDW. Mr. Frank joined MSDW in 1985 and has
worked in the New York and London offices, in the firm's Corporate Treasury and
Corporate Tax Departments. In 1990 he established Morgan Stanley Treasury's
European Capital and Financing activity in London. In 1993 Mr. Frank assumed
responsibility for the firm's Global Capital and Finance function and became the
Treasurer for North and South American activities. Mr. Frank is a graduate of
Dartmouth College and the University of Michigan School of Business
Administration.
A. Maurice Mason is an Executive Director in the International
Securitisation Group at Morgan Stanley & Co. International Limited. He joined
MSDW's Investment Banking Division in 1994 where he was responsible for MSDW's
corporate finance activities in the European transportation sector. In 1997 he
transferred to the International Securitisation Group where he is responsible
for the aviation finance sector. Prior to joining MSDW, he spent over six years
in the capital markets group at GPA. Mr. Mason received a BA, BAI degree from
Trinity College, Dublin.
32
<PAGE> 37
C. Scott Peterson is a Managing Director in the International
Securitisation Group at Morgan Stanley & Co. International Limited. Mr. Peterson
joined MSDW in 1988 in the Mortgage-Backed Finance Group. In 1989 he joined the
Asset-Backed Finance Group and subsequently established the Equipment Finance
Group to focus on transactions backed by aircraft and other capital equipment.
In 1993 he initiated the liability management effort and led both the Equipment
Finance and Liability Management Groups until his transfer to London in 1996.
Mr. Peterson received a BSc from Oregon State University in 1982 and an MBA from
The Wharton School in 1988.
Juan C. O'Callahan is principal of JOCR, an aviation consultancy based in
Connecticut. He joined The Boeing Company in 1961 after a career as a fighter
pilot with the United States Marine Corps and has since worked at Pacific Air
Lines, World Airways and GPA (having founded TAI, a forecasting and valuation
consultancy that was acquired by GPA in 1982). He has served on the boards of
America West Inc., Avitas Inc., Pembroke Capital Limited and WorldCorp Inc. Mr.
O'Callahan is a graduate of the University of Pittsburgh, where he obtained a
BSc in Aeronautical Engineering.
Alexander C. Bancroft is a partner of the law firm of Shearman & Sterling.
He specializes in the legal aspects of the financing of aircraft and other
transportation equipment. He joined Shearman & Sterling in 1964 after military
service and became a partner in 1973. Mr. Bancroft is a graduate of Harvard
College and Harvard Law School.
The Independent Trustees will be entitled to participate in all meetings of
the Controlling Trustees but will not be entitled to vote on any matter except
that the Independent Trustees will be entitled to vote on any action (i) to
cause MSAF or any subsidiary of MSAF to institute any proceeding seeking
liquidation or insolvency or similar proceeding, (ii) to consent to any
liquidation, insolvency or similar proceeding instituted against MSAF or any
subsidiary of MSAF, (iii) to take certain other actions related to insolvency
matters, and (iv) to sell, transfer, or otherwise dispose of, directly or
indirectly, any aircraft where the proceeds received from such sale or transfer
are less then certain targets set forth in the Indenture, and the unanimous
consent of all the Controlling Trustees and the Independent Trustees shall be
required to take any action specified in clauses (i), (ii) or (iii) above. See
"Description of the Notes -- Indenture Covenants -- Bankruptcy and Insolvency."
As is common with many other special purpose companies, MSAF will not have
any employees or executive officers. Accordingly, the Controlling Trustees will
rely upon the Servicer, the Administrative Agent, the Cash Manager, the
Financial Advisor and the other service providers for all asset servicing,
executive and administrative functions pursuant to the respective service
provider agreements. See "Risk Factors -- Risks Relating to MSAF Group and
Certain Third Parties." Certain individuals other than the Controlling Trustees
and the Independent Trustees listed above may serve as controlling or
independent trustees or directors of various subsidiaries of MSAF Group where
provisions of local law mandate a particular citizenship for trustees or
directors.
All trustees will be compensated for travel and other expenses incurred by
them in the performance of their duties. MSAF will pay each Independent Trustee
$50,000 per annum for their services in such capacity. The Controlling Trustees
appointed by a subsidiary of MSDW as the depositor of MSAF will not receive
remuneration from MSAF for their services.
The Controlling Trustees have not received any additional cash or non-cash
compensation as salary or bonus for their services as Controlling Trustees. In
the future, however, Controlling Trustees may receive an interest in the
Beneficial Interest. None of the trustees of MSAF currently has an employment
contract with MSAF.
BENEFICIAL OWNERSHIP OF MSAF
All of the Beneficial Interest is currently owned by MSF, a wholly-owned
direct subsidiary of MSDW but all or a portion of the Beneficial Interest may be
transferred to related or unrelated third parties in the future.
33
<PAGE> 38
THE SERVICER
ILFC and its affiliates cannot be held responsible for any liabilities of
MSAF or its affiliates, including any payments due to you on the Notes.
ILFC provides services under the servicing agreement to MSAF Group (except
where a substitute servicer may perform the services as described below). The
servicing agreement details ILFC's:
- various duties for the management and administration of our aircraft and
the related leases;
- aircraft marketing activities; and
- initial aircraft management-related obligations in connection with
offers and sales by MSAF of refinancing notes or additional notes.
ILFC provides the services in accordance with the express terms of its
servicing agreement with MSAF which, inter alia, provides that ILFC will act in
accordance with applicable law and with directions given by MSAF Group from time
to time in accordance with the servicing agreement. In addition, under the
servicing agreement, ILFC agrees to perform its services in accordance with the
ILFC Services Standard and the ILFC Conflicts Standard, as defined on page 39 of
this prospectus.
The duties and obligations of ILFC are limited to those expressly set forth
in the servicing agreement and ILFC will not have any fiduciary or other implied
duties or obligations to MSAF Group or any other person, including any
Noteholder.
In addition to managing the aircraft, ILFC also manages aircraft assets
owned by ILFC and other third parties. In the course of conducting such
activities, ILFC will from time to time have conflicts of interest in performing
its obligations on behalf of MSAF Group. See "Risk Factors -- Conflicts of
Interest of ILFC."
Pursuant to the servicing agreement, ILFC will not be liable to MSAF Group
for any losses arising (i) as a result of an aircraft sold, leased or purchased
on less favorable terms than might have been achieved at any time, provided such
transactions were entered into on the basis of a commercial decision of ILFC, or
(ii) in respect of ILFC's obligation to apply the ILFC Conflicts Standard in
respect of its performance of the services, except, in either situation, in the
case of wilful misconduct or fraud on the part of ILFC. See "Risk Factors --
Limitation on ILFC's Liability."
AIRCRAFT SERVICES
ILFC has agreed to:
- engage and maintain the necessary staff and supporting resources
required to perform its services;
- grant MSAF Group and its agent, access to its information, programs,
records and personnel to enable MSAF Group to monitor its compliance
with the Servicing Agreement and for general MSAF Group business; and
- separate its own funds from the funds of any person within MSAF Group.
ILFC provides a wide range of services to MSAF Group, including:
- lease marketing, such as remarketing, lease drafting, negotiation and
execution;
- aircraft asset management, such as rent collection, aircraft
maintenance, insurance, contract compliance and enforcement against
current lessees, and accepting delivery and redelivery of aircraft;
- current aircraft sales;
- arranging valuations and monitoring and advising MSAF on regulatory
developments;
- assisting MSAF to stay in compliance with certain covenants under the
Indenture;
- providing MSAF with data and information relating to our aircraft and
the commercial aviation industry;
34
<PAGE> 39
- assistance with any public or private offering and sale of refinancing
notes or additional notes;
- legal and other professional services relating to the lease, sale or
financing of our aircraft, amendment modification or enforcement of our
aircraft lease; and
- periodic reporting of operational, financial and other information on
our aircraft and leases.
OPERATING GUIDELINES
ILFC does not have any fiduciary or other implied duties to you or MSAF,
and its obligations are limited to the express terms of the servicing agreement.
In accordance with the express terms of the servicing agreement, ILFC will act
in accordance with applicable law and with MSAF's directions.
ILFC may exercise such authority as is necessary to give it a practicable
and working autonomy in performing the services and must also comply with the
following two principal contractual standards in performing its services.
(1) ILFC must perform its services with reasonable care and diligence as
if it were the owner of the aircraft consistent with the customary
commercial practice of a prudent international aircraft lessor in the
management servicing and marketing of commercial jet aircraft and
related assets. This is referred to in this prospectus as the ILFC
Services Standard.
(2) If a conflict of interest arises regarding ILFC's management,
servicing or marketing of: (a) any two aircraft or (b) any aircraft
and any other assets owned, managed, serviced or marketed by ILFC,
ILFC is required to notify MSAF and perform the services in good
faith. If the two aircraft and other assets owned, managed, serviced
or market by ILFC are substantially similar in terms of objectively
identifiable characteristics that are relevant for the particular
services to be performed, ILFC will not discriminate among the
aircraft or between any of the aircraft and any other aircraft then
owned, managed, serviced or marketed by ILFC on an unreasonable basis.
This is referred to in this prospectus as the ILFC Conflicts Standard.
All transactions to be entered into by ILFC on behalf of MSAF Group (other
than with other persons within MSAF Group) must be at arm's length and on fair
market value terms unless otherwise agreed or directed by MSAF Group. Certain
transactions or matters require the specific approval of MSAF Group, including:
- sales of (or commitments or agreements to sell) aircraft (other than as
required by a lease);
- the entering into of any new leases (including renewals or extensions,
unless any such lease had originally been approved) if the lease does
not comply with any applicable operating covenants set forth under
"Description of the Notes -- Operating Covenants";
- terminating any lease or leases to any single lessee with respect to
aircraft then having a value in excess of $100 million;
- unless provided for in the applicable budget, entering into any contract
for the modification or maintenance of aircraft where the costs to be
incurred (A) exceed the greater of (i) the estimated aggregate cost of a
heavy maintenance or structural check for similar aircraft and (ii)
available maintenance reserves or other collateral under the related
lease or (B) are outside the ordinary course of MSAF Group's business;
- entering into any capital commitment or confirming any order or
commitment to acquire or acquiring aircraft or engines on behalf of MSAF
Group, except, with respect to a replacement engine or a spare part for
an aircraft, (A) if provided for in the applicable budget or (B) at such
times and on such terms and conditions as ILFC deems reasonably
necessary or appropriate and in no greater quantity than that which is
required to enable the aircraft to be leased;
- issuing any guarantee on behalf of, or otherwise pledging the credit of,
any person within MSAF Group;
35
<PAGE> 40
- unless otherwise permitted, entering into any agreement for services to
be provided in respect of aircraft by third parties at MSAF Group's cost
outside the ordinary course of ILFC's business, except to the extent
provided for in the applicable budget;
- incurring or causing to be incurred on behalf of any person within MSAF
Group any liability (actual or contingent), unless contemplated in the
applicable budget, pursuant to a transaction of a type for which MSAF
Group's specific approval is otherwise required, or incurred in the
ordinary course of MSAF Group's business; and
- any transaction with ILFC or any of its affiliates not contemplated in
the servicing agreement.
BUDGETS
MSAF Group will adopt an annual and a three-year budget each year for all
aircraft. ILFC has agreed to use best efforts to achieve the annual budget for
each year.
MANAGEMENT FEES AND SERVICER EXPENSES
ILFC is paid a retainer fee as follows: $243,000 per month is payable until
November 30, 1999 and approximately $162,000 is payable per month thereafter.
The retainer fee is payable monthly in arrears and is subject to pro rata
reduction for any month in which MSAF Group does not own all the aircraft
currently in our fleet. ILFC also receives a monthly fee equal to 1% of the
aggregate rent due for any month (or portion of a month) plus 1% of the
aggregate rent actually paid for such month.
ILFC will also receive three incentive fees:
- a results-based incentive fee equal to 10% of any excess of actual net
results for any year over a target amount contained in the applicable
annual budget;
- a sales-based fee equal to 1.5% of the lesser of the net proceeds of any
sale and the target amount for the relevant aircraft agreed in advance
by MSAF and ILFC; and
- a sales-based incentive fee equal to 5% of any excess of the net
proceeds of an aircraft sale over the target sales price for the
aircraft.
ILFC also will be reimbursed for certain expenses incurred in connection
with its performance of the services. These expenses include, among other
expenses, aircraft maintenance costs and insurance, outside professional
advisory fees (including legal fees) and other out of pocket expenses, all of
which in the aggregate may constitute a significant additional component of MSAF
Group's total overhead costs.
TERM AND TERMINATION
The servicing agreement is for a term of 25 years expiring on May 26, 2023.
Each party will also have the right to terminate the servicing agreement
under certain circumstances. ILFC may terminate the servicing agreement if:
- MSAF does not pay any amount payable by MSAF within five days of a
delinquency notice;
- MSAF or any of its subsidiaries shall materially breach any of their
obligations under the servicing agreement other than payment
obligations;
- all of the public debt of the MSAF Group is repaid or defeased in full
in accordance with the terms of any Indenture;
- all of the aircraft in MSAF Group's initial portfolio are sold;
- an involuntary proceeding under applicable bankruptcy, insolvency,
receivership or similar law against MSAF, any of its subsidiaries or a
substantial part of the property or assets of any person within MSAF
Group, continues undismissed for 120 days or any such person shall go
into liquidation, suffer a receiver or mortgagee to take possession of
all or substantially all of its assets or have an examiner
36
<PAGE> 41
appointed over it, or a petition or proceeding is presented for any of
the foregoing and not discharged within 120 days; or
- a voluntary proceeding is commenced under bankruptcy, insolvency,
receivership or similar law against MSAF or any of its subsidiaries or
MSAF or any of its subsidiaries, consents to the institution of, or
fails within 120 days to contest the filing of, any petition described
above, or files an answer admitting the material allegations of any such
petition, or makes a general assignment for the benefit of its
creditors.
MSAF may terminate the servicing agreement if:
- ILFC materially breaches any of its obligations under the servicing
agreement;
- ILFC fails, within a reasonable period of time, to re-lease an aircraft
upon the termination of any lease or to sell an aircraft upon
commercially reasonable written direction from MSAF;
- all of the public debt of the MSAF Group is repaid or defeased in full
in accordance with the terms of any Indenture;
- all of the aircraft in MSAF Group's initial portfolio are sold;
- a Rating Decline occurs as a result of a Change of Control;
A "Rating Decline" means that the rating of the outstanding senior
unsecured long-term debt securities of the Servicer is decreased below A1
by Moody's, below A+ by Standard & Poor's or below AA- by DCR, at any
time between (a) the date of public notice of a Change of Control, or of
the intention of ILFC or any person to effect a Change of Control and (b)
90 days after the occurrence of the Change of Control (which period shall
be extended so long as the rating of the outstanding senior unsecured
long-term debt securities of the Servicer is under publicly announced
consideration for possible downgrade by a Rating Agency). A "Change of
Control" means that either (A) any person or any persons acting together
that would constitute a "group" (a "Group") for purposes of Section 13(d)
of the Securities Exchange Act of 1934, together with any affiliates or
persons directly or indirectly owning 5% of the outstanding common stock
or equity interest, or of the combined voting power of the voting stock,
of such person ("Related Persons"), shall beneficially own (within the
meaning of Rule 13d-3 under the Securities Exchange Act of 1934) at least
50% of the aggregate voting power of all classes of voting stock of ILFC,
or (B) any person or Group, together with any affiliates or Related
Persons, shall succeed in having a sufficient number of its nominees
elected to the Board of Directors of the Servicer such that such
nominees, when added to any existing director remaining on the Board of
Directors of ILFC after such election who was a nominee of or is an
affiliate or Related Person of such person or Group, will constitute a
majority of the Board of Directors of the Servicer; provided that with
respect to both clauses (A) and (B) above, a Change of Control shall not
be deemed to have occurred if American International Group, Inc.
continues to beneficially own (within the meaning of Rule 13d-3) at least
51% of the aggregate voting power of all classes of voting stock of the
Servicer;
- an involuntary proceeding under applicable bankruptcy, insolvency,
receivership or similar law against ILFC or any of its subsidiaries
continues undismissed for 120 days or ILFC goes into liquidation,
suffers a receiver or mortgagee to take possession of all or
substantially all of its assets or has an examiner appointed over it or
if a petition or proceeding is presented for any of the foregoing and
not discharged within 120 days; or
- a voluntary proceeding is commenced against ILFC under bankruptcy,
insolvency, receivership or similar law or ILFC shall make a general
assignment for the benefit of its creditors.
Except where ILFC terminates the servicing agreement because MSAF does not
pay ILFC, the servicing agreement may not be terminated, unless a replacement
servicer has been appointed and accepted such appointment. In the event that a
replacement servicer has not been appointed within 90 days after any
37
<PAGE> 42
termination of the servicing agreement or resignation by ILFC, ILFC may petition
any court of competent jurisdiction for the appointment of a replacement
servicer.
ASSIGNMENT OF SERVICING AGREEMENT
ILFC and MSAF may not assign their rights and obligations under the
servicing agreement without each others prior consent.
PRIORITY OF PAYMENT OF SERVICING FEES AND REIMBURSABLE EXPENDITURES
ILFC's fees and expenses rank senior in priority of payment to all payments
on the Notes.
CORPORATE MANAGEMENT
With regard to the corporate affairs of MSAF Group, the administrative
agent, the cash manager and the financial advisor provide management services to
MSAF Group as follows:
ADMINISTRATIVE AGENT
Cabot Aircraft Services Limited acts as the administrative agent of MSAF
Group.
Cabot is responsible for providing administrative, accounting, bank account
management and calculation and other services to MSAF. Cabot's duties include:
- monitoring the performance of ILFC (including ILFC's compliance with the
servicing agreement) and reporting on such performance to MSAF;
- assisting MSAF in establishing a program for evaluating ILFC's
performance under the servicing agreement;
- acting as liaison with various rating agencies to assess the impact of
management decisions on the ratings of the Notes and coordinating
responses to rating agency questions;
- maintaining on behalf of MSAF Group accounting ledgers and providing on
a quarterly and annual basis draft accounts on a combined basis for MSAF
Group as well as, on a quarterly and annual basis, on an individual
company basis for certain companies. However, MSAF Group retains
responsibility for the ledgers and accounts including all discretionary
decisions and judgments relating to the preparation and maintenance
thereof, and MSAF Group retains responsibility for, and prepares, its
financial statements;
- preparing annual budgets and presenting them to MSAF Group for approval;
- authorizing payment of certain bills and expenses;
- to the extent required by MSAF Group or the parties thereto,
coordinating any amendments to the transaction agreements, subject to
the approval of MSAF Group;
- supervising outside counsel and other professional advisers and
coordinating legal and other professional advice received by MSAF Group
other than with respect to any service or matter which is ILFC's
responsibility under the servicing agreement;
- preparing and coordinating reports to investors and to the Securities
and Exchange Commission, including preparing press releases and managing
investor relations with the assistance of outside counsel and auditors,
if appropriate;
- preparing for the approval of MSAF Group and filing all required tax
returns with the assistance of outside counsel and auditors, if
appropriate;
- maintaining, or monitoring the maintenance of, the books, records,
registers and associated filings of MSAF Group;
38
<PAGE> 43
- preparing an agenda and any required papers for meetings of the
governing bodies of the entities within MSAF Group;
- assisting in making aircraft lease, sale and capital investment
decisions;
- overseeing the general operation of the credit facility with ILFC
whereby ILFC has agreed to make loans to MSAF to provide MSAF with
liquidity necessary to meet its obligations under the Notes;
- overseeing the general operation of the MSDW credit facility whereby
MSDW has agreed to make loans to MSAF to provide MSAF with liquidity
necessary to meet its obligations under the Notes;
- establishing and maintaining bank accounts;
- advising MSAF Group as to the appropriate levels of the Liquidity
Reserve Amount which is intended to provide a source of liquidity for
(i) MSAF Group's maintenance obligations, (ii) MSAF Group's obligation
to repay lessee security deposits, (iii) certain other contingencies in
respect of the aircraft and (iv) payments of interest and principal on
the Notes;
- informing ILFC of the aggregate deposits in the accounts as required;
- directing withdrawals and transfers from the accounts in accordance with
the Indenture;
- receiving data provided by ILFC with respect to the aircraft and leases;
- calculating certain monthly payments, and all other calculations
otherwise required pursuant to the Indenture;
- providing the Trustee with information required by the Trustee to
provide its reports to the Noteholders; and
- providing additional services upon the request of MSAF Group upon terms
to be agreed at the time of any such request.
Cabot may delegate to a third party one or more of the above administrative
services it is responsible for providing to MSAF Group.
Cabot receives a monthly fee equal to 1.5% of the rental payments made by
the lessees under the leases for such month from MSAF Group in respect of its
services to MSAF Group subject to an annual minimum of $200,000. Cabot is
entitled to indemnification by MSAF Group for, and will be held harmless
against, any loss or liability incurred by Cabot arising out of or in connection
with its provision of administrative services to MSAF Group (other than through
its own deceit, fraud, gross negligence or wilful misconduct or that of its
officers, directors, agents and employees).
MSAF Group may remove Cabot at any time on 120 days' written notice.
Cabot may resign on 120 days' written notice in certain circumstances.
CASH MANAGER
Bankers Trust Company acts as the cash manager. Subject to certain
limitations and at the direction of MSAF Group, Bankers Trust is authorized to
invest the funds held by MSAF Group in the accounts in certain prescribed
investments (the "Permitted Account Investments") on permitted terms.
Bankers Trust devotes the same amount of time and attention to and is
required to exercise the same level of skill, care and diligence in the
performance of its services as a prudent businessperson would in administering
such services on its own behalf. Bankers Trust's annual fees are not expected to
exceed $50,000 per annum. Bankers Trust is entitled to indemnification by MSAF
Group for, and will be held harmless against, any loss or liability incurred by
Bankers Trust (other than through its own gross negligence (or simple negligence
in the handling of funds), deceit, fraud or wilful misconduct or that of its
officers, directors, agents and employees).
MSAF may remove Bankers Trust at any time on 90 days' written notice as
long as MSAF Group has engaged another person or entity to perform the services
that were being provided by Bankers Trust.
39
<PAGE> 44
Bankers Trust may resign on 90 days' written notice as long as MSAF Group has
engaged another person or entity to perform the services that were being
provided by Bankers Trust.
FINANCIAL ADVISOR
Morgan Stanley & Co. Incorporated acts as the financial advisor.
The financial advisor is responsible for assisting MSAF Group in developing
and implementing its interest rate risk management policies and developing
models for the purposes of analyzing the financial impact of aircraft lease,
sale and capital investment decisions. The financial advisor receives a fee of
$50,000 per annum, payable monthly in arrears in equal installments, from MSAF
Group in respect of its services to MSAF Group. MSAF or the financial advisor
may terminate the financial advisory agreement on 30 days' written notice.
DELAWARE TRUSTEE
Wilmington Trust Company maintains the books and records, including minute
books and records and trust certificate records, of MSAF. Wilmington Trust makes
available telephone, telecopy, telex and post office box facilities and
maintains MSAF's principal place of business in Delaware.
40
<PAGE> 45
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data in the following table have been
derived from, and should be read in conjunction with, MSAF Group's consolidated
financial statements as of and for the fiscal year ended November 30, 1998 and
as of and for the period ended November 30, 1997 including the notes thereto
(the "Financial Statements") appearing elsewhere in this prospectus. MSAF
Group's Financial Statements have been audited by Deloitte & Touche LLP,
independent auditors.
<TABLE>
<CAPTION>
PERIOD FROM
FISCAL YEAR OCTOBER 30, 1997
ENDED (DATE OF FORMATION)
NOVEMBER 30, 1998 TO NOVEMBER 30, 1997
----------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Lease income, net..................................... $ 120,005 $ 4,747
Investment income on collection account............... 2,156 --
--------- --------
Total revenues........................................ 122,161 4,747
--------- --------
Expenses:
Interest expense...................................... 50,533 --
Depreciation expense.................................. 38,876 43
Operating expenses:
Service provider and other fees.................... 9,534 --
Maintenance and other aircraft related costs....... 2,969 --
--------- --------
Total expenses........................................ 101,912 43
--------- --------
Net income.............................................. $ 20,249 $ 4,704
========= ========
STATEMENT OF CASH FLOWS DATA:
Net cash provided by operating activities............... $ 83,941 $ --
Net cash used for investing activities.................. (887,315) (66,370)
Net cash provided by financing activities............... 838,224 66,370
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30, 1998 NOVEMBER 30, 1997
----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 34,850 $ --
Total Assets............................................. 1,010,492 71,074
Total Liabilities........................................ 1,057,241 66,369
Total Beneficial Interestholder's (Deficit)/Equity....... (46,749) 4,705
</TABLE>
41
<PAGE> 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The MSAF Group entities were organized in late 1997 and since that time
their principal business activity has been the acquisition of aircraft and the
placement of such aircraft on operating lease. MSAF Group's future business is
expected to consist principally of aircraft operating lease activities,
acquisitions of additional aircraft and sales of aircraft. Cash flows generated
from such activities will be used to service interest and principal on the
Notes, any refinancing notes and any additional notes but only after various
expenses of MSAF Group have been paid for, including any taxes, obligations to
lessees including maintenance obligations, fees and expenses of ILFC and other
service providers and payments to MSAF Group's interest rate swap
counterparties.
MSAF Group's ability to generate sufficient cash from its aircraft assets
to service the Notes will depend primarily on (i) the rental rates it can
achieve on leases and the lessees' ability to perform according to the terms of
those leases and (ii) the prices it can achieve on any aircraft sales. MSAF
Group's ability to service the Notes will also depend on the level of its
operating expenses, including maintenance obligations which will increase as the
aircraft age, and on any unforeseen contingent liabilities arising.
RECENT DEVELOPMENTS
THE AIRCRAFT
As of November 30, 1998, all but one of the aircraft which MSAF Group had
agreed to purchase from ILFC had been acquired by MSAF Group. The undelivered
aircraft was a B737-400 on lease to the Turkish national carrier, THY, with an
appraised value of $28.82 million. Pursuant to the Indenture, the Trustees
decided not to acquire a substitute for this aircraft but instead refunded to
investors $26.1 million of the proceeds from the Notes offering pursuant to the
priority of payments set forth in the Indenture. As a result, the total number
of aircraft owned by MSAF Group at November 30, 1998 was 32 aircraft plus a
spare engine.
APPRAISED VALUES AT SEPTEMBER 30, 1998
The most recent annual appraisals of the value of each aircraft occurred on
September 30, 1998 with total appraised value of the aircraft at September 30,
1998 equal to $1,029.44 million. The appraisals at September 30, 1998 did not
indicate a decline in value sufficiently in excess of the value decline assumed
under the terms of the Notes to require excess cash flows to be redirected to
the class A Notes pursuant to the scheduled principal payment amount for the
class A Notes under the Indenture. The next annual appraisals are due to occur
no later than October 31, 1999.
LESSEE DIFFICULTIES
As of February 1, 1999, two lessees were in arrears. The aircraft on lease
to the two lessees in arrears represent approximately 7.3% of the appraised
value of the portfolio at September 30, 1998. The amounts outstanding and
overdue for the two lessees in respect of rental payments, maintenance reserves
and other miscellaneous amounts due under the leases (net of default interest
and certain cash in transit) with respect to these lessees amounted to
approximately $3.4 million. The weighted average number of days past due of such
arrears was 70 days.
Since November 30, 1998, one lease has terminated early and the aircraft, a
B757, has been repossessed by ILFC. The termination was agreed by the lessee and
the repossession was uncontested. A letter of intent was signed with a new
lessee based in the United States in February 1999.
ECONOMIC CRISES IN EMERGING MARKETS
EUROPE/MIDDLE EAST
In light of the severe economic and financial difficulties being
experienced in Russia, ILFC agreed to terminate early a lease with Transaero, a
Russian airline, and repossess the aircraft. The aircraft represents
42
<PAGE> 47
3.4% of the appraised value of the portfolio at September 30, 1998. Arrears owed
by Transaero were restructured as part of the early termination agreement and
are scheduled for repayment in full by April 1999. As of February 1, 1999,
Transaero was in arrears on the restructured payments. The aircraft has been
re-leased to Flying Colours, a UK based charter airline. MSAF will incur
maintenance and modification costs estimated at approximately $2.1 million as
part of the restoration and delivery of this aircraft to the new lessee.
One lessee in the Europe/Middle East region (representing 4.3% of the
appraised value of the portfolio at September 30, 1998) has consistently been in
arrears. The lease rentals and maintenance reserves were restructured in March
1998 and the restructured amounts have now been repaid in full, however, the
lessee continues to be in arrears with subsequent lease payments.
ASIA
Currently, MSAF leases 13.0% of its fleet in the Asia Pacific region (5.5%
in South Korea, 4.9% in Taiwan and 2.6% in China) and 6.7% in Pacific and other
regions (6.7% in Fiji) by appraised value of the portfolio at September 30,
1998. As of February 1, 1999 none of these lessees were in arrears although
severe financial difficulties have been reported for certain other air carriers
in the region. One of the lessees restructured its lease payments which will
result in a lower rental payment over the remaining lease term.
LATIN AMERICA
The downturn in Asia and Russia has recently begun to undermine business
confidence in Latin America and to adversely affect the economies of Latin
American countries. As of February 1, 1999, MSAF leases 17.4% of its fleet in
Latin America (6.3% in Mexico and 11.1% in Brazil) by appraised value of the
portfolio at September 30, 1998.
In January 1999, Brazil decided to float its currency on the international
currency market which resulted in a devaluation of its exchange rate and
increased exchange rate volatility. One of MSAF's Brazilian lessees, which
accounts for 6.09% of the appraised value of the portfolio at September 30,
1998, has requested a short-term stay in lease payments during the current
period of exchange rate volatility. The rental arrears of a second Brazilian
lessee, which accounts for 2.93% of the appraised value of the portfolio at
September 30, 1998, were recently restructured in December 1998, and the lessee
is in arrears with respect to the restructured payments amounts as well as
subsequent lease payments.
In January 1999, ILFC agreed with Guyana Airways to terminate the lease
early and repossess the aircraft. As part of the agreement, Guyana has agreed to
repay all arrears and costs of redelivery. The Guyana aircraft is a B757-200 and
accounts for 3.3% of the appraised value of the portfolio at September 30, 1998.
RESULTS OF OPERATIONS -- YEAR ENDED NOVEMBER 30, 1998
LEASE INCOME
MSAF Group's results of operations for the 12 months ended November 30,
1998 ("Fiscal 1998") and the period from October 30, 1997 (date of formation) to
November 30, 1997 ("Fiscal 1997") are discussed below. The results for Fiscal
1998 and Fiscal 1997 are not directly comparable since Fiscal 1997 only reflects
one month of operations.
Lease income for Fiscal 1998 amounted to $120.0 million. Many of the
aircraft were not owned by MSAF Group for the entire year. During the year,
there was a loss in lease rental revenues caused by four AOG ($2.0 million).
Four aircraft had been repossessed from Western Pacific Airlines, Transaero and
Pan Am Airlines (formerly Carnival) but were all subject to signed lease
agreements as of November 30, 1998. The four aircraft were placed on lease with
Olympic Airways, VASP, TAESA and Flying Colours. Lease income may decline in
fiscal 1999 due to potential lessee defaults and lessee arrears.
Part of the AOG period was spent performing maintenance work on all four
aircraft prior to re-leasing. MSAF Group records the cash prepayments made by
lessees for maintenance as a component of the liability for maintenance account
which appears on the Consolidated Balance Sheets. When the lessee incurs
maintenance expenditures, MSAF Group must return a corresponding amount of the
prepayment to the
43
<PAGE> 48
lessee. At this time, MSAF Group will forward cash to the lessee, with a
corresponding decrease to the liability for maintenance account. MSAF Group will
only reimburse the lessee for the cost of maintenance expenditures to the extent
that sufficient prepayments have been made by the lessee. At the time an
aircraft is re-leased to a new lessee, an assessment is made of the expected
maintenance reserve requirements; any excess reserve is then released to lease
income.
Lease income for Fiscal 1997 was $4.7 million, primarily reflecting a gain
of $4.6 million relating to an aircraft leased to a customer under a sales-type
capital lease.
INVESTMENT INCOME
MSAF Group earned investment income of $2.2 million in Fiscal 1998.
Investment income is expected to decline going forward principally because
excess cash has now either been used to acquire the aircraft or refunded to
investors in respect of the undelivered THY aircraft.
INTEREST EXPENSE
Interest expense, including swap costs of $2.2 million, amounted to $50.5
million in Fiscal 1998. Interest expense relates to the cost of the Notes which
were issued on March 3, 1998 and, therefore, only outstanding for approximately
nine months in the period. The weighted average interest rate on the Subclass
A-1 to D-1 Notes during Fiscal 1998 was 6.33% and the average debt in respect of
the Subclass A-1 to D-1 Notes outstanding during Fiscal 1998 was $1,012.2
million.
MSAF Group is a party to eight interest rate swaps with Morgan Stanley
Capital Services Inc. ("MSCS"), a wholly-owned subsidiary of MSDW. In six of
these swaps, MSAF Group pays a fixed monthly coupon and receives one month LIBOR
on a notional balance of $1,000 million and in two of these swaps, MSAF Group
pays one month LIBOR and receives a fixed monthly coupon on a notional balance
of $200 million.
All eight swaps were originally entered into by MSCS, with an internal
swaps desk as the counterparty, on November 12, 1997 and February 19, 1998,
respectively. On March 3, 1998, all eight swaps were assigned to MSAF Group by
MSCS and on such date such swaps had an aggregate fair value of approximately
$(15.3) million. No consideration was paid to or received by MSAF Group in
connection with the assumption of these swap positions. MSAF Group has recorded
the assumption of these interest rate swaps at their fair value by recognizing a
liability within other liabilities in its Consolidated Balance Sheets, with a
corresponding charge to deemed distribution, a component of Beneficial
Interestholder's Deficit.
Four of the swaps assumed from MSCS having an aggregate notional principal
amount of $800 million are accounted for as hedges of its obligations under the
Notes. Under these swap arrangements MSAF Group will pay fixed and receive
floating amounts on a monthly basis. The fair value of the liability assumed
relating to those swaps which are being accounted for as hedges is being
deferred and recognized when the offsetting gain or loss is recognized on the
hedged transaction. This amount and the differential payable or receivable on
such interest rate swap contracts, to the extent such swaps are deemed to be
effective hedges for accounting purposes, are recognized as an adjustment to
interest expense. The portion of these swaps not deemed to be effective hedges
for accounting purposes are accounted for on a mark-to-market basis with changes
in fair value reflected in interest expense.
The remaining four swaps assumed by MSAF Group have an aggregate gross
notional principal amount of $400 million. Under these swap arrangements, MSAF
Group will pay/receive fixed and receive/pay floating amounts on a monthly
basis. MSAF Group determined that these swaps do not qualify for hedge
accounting. The fair value of the liability assumed related to these swaps is
accounted for on a mark-to-market basis with changes in fair value reflected in
interest expense.
Notwithstanding the different accounting treatments for the various swaps,
all eight swaps were required to hedge MSAF Group's interest rate exposure on an
economic basis. In November 1997, MSAF Group had contracted to purchase the
aircraft and their associated fixed rate leases but, prior to the time of
pricing the Notes, was exposed to movements in interest rates with respect to
its anticipated liabilities under the Notes.
44
<PAGE> 49
Accordingly, in November 1997, six swaps with a notional balance of $1,000
million were entered into by MSCS under which MSAF Group would pay fixed amounts
and receive floating amounts. Once the Notes were priced in February 1998, MSAF
Group could determine that to hedge the interest rate exposure associated with
its variable rate debt it required swaps with a notional balance of
approximately $800 million. Accordingly, in February 1998, MSCS entered into
re-balancing swaps with a notional amount of $200 million under which MSAF Group
would pay floating amounts and receive fixed amounts.
The net economic effect of assigning all eight swaps with a gross notional
amount of $1.2 billion to MSAF Group on March 3, 1998 was to fix MSAF Group's
interest rate liability at November 12, 1997, shortly after the date MSAF Group
incurred its exposure to movements in interest rates when it agreed to purchase
the aircraft with associated fixed rate leases. See "Interest Rate Risk
Management" under Item 7A below for more information regarding MSAF Group's
swaps positions and hedging policy.
DEPRECIATION
The charge for depreciation in Fiscal 1998 amounted to $38.9 million. The
charge is expected to be proportionately higher in future periods given that
MSAF Group did not own all of the aircraft throughout Fiscal 1998.
Depreciation expense was $0.04 million in Fiscal 1997, which was
attributable to the three aircraft owned by MSAF Group during that period.
OPERATING EXPENSES
Service Provider and Other Fees. Service provider and other fees for
Fiscal 1998 were $9.5 million. The most significant element was the aircraft
servicing fee paid to ILFC, which amounted to $6.0 million for the year. A
significant portion of the fees payable to ILFC are calculated as a percent of
rental revenue actually received. Accordingly, the fees paid to ILFC reflected
the lower rental revenue caused by AOGs and undelivered aircraft during the
period. MSAF Group's service provider expenses also included $1.3 million in
respect of administrative agency and cash management fees.
Maintenance and Other Aircraft Related Costs. Maintenance and other
aircraft related costs in Fiscal 1998 amounted to $3.0 million. These costs
reflected additional maintenance work that was performed on the four aircraft
which were repossessed. This work included a "C-check" for certain of the
aircraft and the installation of new landing gear. MSAF Group will incur extra
maintenance and modification costs as part of the restoration and delivery of
the fourth aircraft to the new lessee. In the next six months it is likely that
maintenance disbursements will increase due to an increase in the number of
anticipated maintenance events.
Included within maintenance and other aircraft related costs were
insurance, re-leasing and other costs incurred in Fiscal 1998, which amounted to
approximately $1.0 million. It is expected that re-leasing costs will increase
proportionately over the next several months due to costs relating to
reconfiguring aircraft for new lessees upon redelivery. It is also expected that
additional insurance premiums relating to AOG will become payable in the first
quarter of 1999.
NET INCOME
Net income for Fiscal 1998 was $20.2 million. Fiscal 1997's net income was
$4.7 million.
MSAF Group is a Delaware business trust treated as a branch of MSF for U.S.
Federal, state and local income tax purposes. As such, MSAF Group is not subject
to U.S. Federal, state and local income taxes.
FINANCIAL RESOURCES AND LIQUIDITY
You should refer to Appendix 12 for more information regarding the cash
performance of MSAF for the period from March 3, 1998 to November 16, 1998.
45
<PAGE> 50
LIQUIDITY
MSAF's cash and cash equivalents balances at November 30, 1998 were $34.8
million. Of this amount, $25 million represents the cash portion of the
Liquidity Reserve Amount (as defined below) and $9.8 million represents rental
and maintenance receipts and cash held for accrued expenses.
In addition to the $25 million cash portion at November 30, 1998, the
Liquidity Reserve Amount also contained $41.2 million of undrawn credit and
liquidity facilities from MSDW and ILFC. As of November 30, 1998, ILFC's
short-term unsecured debt was rated A-1+ by Standard & Poor's, and, accordingly,
the letter of credit previously issued by the Bank of Montreal to support ILFC's
obligations under the ILFC facility was canceled.
CASH FLOWS FROM OPERATING ACTIVITIES
Operating cash flows depend on many factors including the performance of
lessees and MSAF Group's ability to re-lease aircraft, the average cost of the
Notes, the efficacy of MSAF Group's interest rate hedging policies, the ability
of MSAF Group's swap providers to perform under the terms of their swap and
similar obligations and whether MSAF Group will be able to refinance certain
subclasses of Notes that have not been repaid with lease cash flows.
Net cash provided by operating activities in Fiscal 1998 amounted to $83.9
million, principally reflecting non-cash depreciation expense of $38.9 million,
net income of $20.2 million, maintenance liabilities of $13.2 million and rental
payment receivables of $7.4 million.
There was no net cash provided by operating activities in Fiscal 1997, as
cash flows from net income of $4.7 million was offset by the gain on a capital
lease of $4.6 million and rental payment receivables of $0.1 million.
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES
In Fiscal 1998, the use of cash flows for investing activities of $887.3
million was to acquire the aircraft. Cash flows provided by financing activities
of $838.2 million in Fiscal 1998 primarily reflect the proceeds from the
offering of the Old Notes and the payment to MSF of a distribution with respect
to the beneficial interest in MSAF.
In Fiscal 1997, the use of cash flows for investing activities of $66.4
million was to acquire three of MSAF Group's aircraft. Cash flows provided by
financing activities of $66.4 million primarily reflects the proceeds of
borrowings from MSF.
INDEBTEDNESS
MSAF Group's indebtedness primarily consisted of the subclass A-1 to D-1
Notes in the amount of $978.9 million at November 30, 1998. You should refer to
"Interest Rate Risk Management" for a presentation of the outstanding principal
amounts and estimated fair values of each subclass of Notes as of November 30,
1998.
LIQUIDITY RESERVE AMOUNT
The "Liquidity Reserve Amount" is intended to serve as a source of
liquidity for MSAF Group's maintenance obligations, security deposit return
obligations, operating expenses, contingent liabilities and Note obligations.
The Liquidity Reserve Amount may be funded with cash and with letters of credit,
guarantees or other credit support instruments ("Eligible Credit Facilities")
provided by, or supported with further Eligible Credit Facilities provided by, a
person (an "Eligible Provider") whose short-term unsecured debt is rated P-1 by
Moody's, A-1+ by Standard & Poor's, or D-1+ by Duff & Phelps or is otherwise
designated as an Eligible Provider by the Controlling Trustees. Both the ILFC
facility discussed below under "-- ILFC Facility" and the MSDW facility
discussed below under "-- MSDW Facility" are Eligible Credit
46
<PAGE> 51
Facilities and comprise part of the Liquidity Reserve Amount. There are
currently no other Eligible Credit Facilities in place.
The Liquidity Reserve Amount was approximately $66.2 million on November
30, 1998. The "Minimum Liquidity Reserve Amount" may be funded with cash and
with Eligible Credit Facilities and was approximately $15 million on November
30, 1998. The Liquidity Reserve Amount and the Minimum Liquidity Reserve Amount
may be increased or decreased from time to time for any reason (including upon
acquisitions of additional aircraft) by an action of the Controlling Trustees in
light of changes in, inter alia, the condition of the Aircraft, the terms and
conditions of the leases, the financial condition of the lessees, sales of
aircraft and prevailing industry conditions; provided that MSAF Group will
obtain confirmation in advance in writing from the rating agencies that any
proposed reduction in the Liquidity Reserve Amount or the Minimum Liquidity
Reserve Amount will not result in a lowering or withdrawal by any of the rating
agencies of their respective ratings of any Notes.
If the balance of cash on deposit, together with the amount available for
drawing under any Eligible Credit Facilities, should fall below the Liquidity
Reserve Amount at any time (including as a result of MSAF Group's determination
that the Liquidity Reserve Amount should be increased, as required by the rating
agencies or otherwise), MSAF Group may continue to make all payments, and any
credit or liquidity enhancement facilities may be drawn to fund such payments,
including required payments on the Notes, which rank prior to, or equally with,
payments of the minimum principal payment amount on the class D Notes under the
Indenture and any Permitted Accruals other than in respect of Modification
Payments, provided that the balance of cash on deposit, together with the amount
available for drawing under any Eligible Credit Facilities, does not fall below
the Minimum Liquidity Reserve Amount at its then current level. "Modification
Payments" are any capital expenditures for the purpose of effecting any optional
improvement or modification of any aircraft, or for the optional conversion of
any aircraft from a passenger aircraft to a freighter or mixed-use aircraft, for
the purpose of purchasing or otherwise acquiring any engines or parts outside of
the ordinary course of business. "Permitted Accruals" are amounts in respect of
expenses and costs that are not regular, monthly recurring expenses, including
Modification Payments and refinancing expenses, if any, anticipated to become
due and payable in any future interest accrual period. However, the balance of
cash on deposit, together with the amount available for drawing under any
Eligible Credit Facilities, may fall below the Minimum Liquidity Reserve Amount
at its then current level and MSAF Group may continue to make payments of, and
any credit or liquidity enhancement facilities may be drawn to fund such
payments, all accrued and unpaid interest on any subclass of the most senior
class of Notes then outstanding to avoid an event of default, with respect to
the Notes and, on the final maturity date of any subclass thereof, principal of,
any subclass of the most senior class of Notes then outstanding to avoid an
event of default with respect to the Notes.
Amounts drawn under any Eligible Credit Facility will either be repayable
at the third level in the priority of payments, as set forth in the Indenture
before the First Collection Account Top-Up (any such facility, a "Primary
Eligible Credit Facility") or at the 11th level in the priority of payments,
before the Second Collection Account Top-Up (any such facility, a "Secondary
Eligible Credit Facility"). The "First Collection Account Top-Up" is the amount,
if positive, equal to (A) the Minimum Liquidity Reserve Amount less (B) amounts
available for drawing under any Primary Eligible Credit Facilities. The "Second
Collection Account Top-Up" is the amount, if positive, equal to (A) the
Liquidity Reserve Amount less (B) an amount equal to cash amounts reserved at
the third level in the priority of payments plus amounts available for drawing
under any Eligible Credit Facilities.
The Liquidity Reserve Amount and the Minimum Liquidity Reserve Amount have
been determined largely based on an analysis of historical experience,
assumptions regarding MSAF Group's future experience and the frequency and cost
of certain contingencies in respect of the aircraft currently owned by MSAF
Group, and are intended to provide liquidity for meeting the cost of maintenance
obligations and non-maintenance, aircraft-related contingencies such as removing
regulatory liens, complying with ADs, repossessing and releasing aircraft. In
analyzing the future impact of these costs, assumptions have been made regarding
their frequency and amount based upon historical experience. There can be no
assurance, however, that historical experience will prove to be relevant in the
future or that actual cash received by MSAF Group
47
<PAGE> 52
in the future will not be significantly less than that assumed. Any significant
variation may materially adversely affect the ability of MSAF Group to make
payments of interest and principal on the Notes.
ILFC FACILITY
Under the ILFC facility, ILFC will hold certain security deposits with
respect to the aircraft currently owned by MSAF Group as custodian for the
benefit of the MSAF Group. ILFC will hold all cash security deposits paid with
respect to the aircraft in MSAF Group's initial portfolio other than, (i)
amounts determined in good faith by ILFC to be no longer held on behalf of a
lessee, whether upon expiry of or default under the applicable lease or
otherwise, and (ii) any cash security deposits in an amount exceeding three
months' rent with respect to a single aircraft and paid by a single lessee. Any
interest accruing on amounts of aircraft security deposits that are being held
by ILFC will generally accrue for the benefit of ILFC.
In addition, under the ILFC facility, ILFC will make loans to MSAF Group
which MSAF Group may use for the same purposes as those for which the Liquidity
Reserve Amount may be applied as discussed above under "-- Liquidity Reserve
Amount," including to pay interest and minimum principal payment amounts payable
under the Indenture on the Notes. ILFC's obligation to make such amounts
available shall be limited to the ILFC facility commitment which was
approximately $31.2 million on November 30, 1998. The ILFC facility commitment
shall be equal to, (i) at any time before an early termination of the Servicing
Agreement for a reason other than a sale of all the aircraft in MSAF Group's
current portfolio or the repayment or defeasance of MSAF Group's debt (a
"Facility Reduction Event"), the sum of, (A) $10 million plus, (B) total
security deposits held by ILFC for the benefit of MSAF Group at such time minus,
(C) all drawings previously made by MSAF Group under the ILFC facility and
required to be repaid to ILFC but not repaid at such time, and (ii) at any time
from and after a Facility Reduction Event, $10 million minus all ILFC facility
drawn amounts required to be repaid to ILFC but not repaid at such time.
The ILFC facility is a Secondary Eligible Credit Facility and, accordingly,
on the Note payment date following any drawing on the ILFC facility, MSAF Group
will be obligated, to the extent there are available collections remaining after
payment of the minimum principal payment amount on the class D Notes under the
Indenture, to repay ILFC facility drawn amounts to ILFC, together with interest
accrued thereon at 3% per annum, calculated on the basis of a 360-day year
consisting of twelve 30-day months and compounded daily.
ILFC's agreement to provide the ILFC facility will expire on the earliest
of, (i) May 26, 2023, (ii) a sale of all the aircraft in MSAF Group's initial
portfolio, and (iii) the repayment or defeasance of all MSAF Group's debt.
At any time and for so long as ILFC is not an Eligible Provider, ILFC's
obligations under the ILFC facility will be supported by an Eligible Credit
Facility satisfactory to MSAF Group provided by an Eligible Provider at ILFC's
expense (a "Back-Up Facility").
MSAF Group may borrow under the ILFC facility, (i) in order to pay interest
and minimum principal payment amounts on the Notes, (ii) upon a downgrade in the
short-term unsecured debt rating of the provider of the Back-Up Facility such
that it is no longer an Eligible Provider, and (iii) upon failure by the
provider of the Back-Up Facility to renew the Back-Up Facility (the events
described in clause (ii) and (iii), each, a "Suspension Event"). If for any
reason ILFC fails to make any loan requested when due, MSAF Group may draw on
the Back-Up Facility.
In the event of a loan by ILFC, or a drawing on the Back-Up Facility, in a
Suspension Event (a "Suspension Drawing"), MSAF Group will hold the drawing
proceeds and such proceeds will comprise part of the cash portion of the
Liquidity Reserve Amount. In the event of any drawing, the obligation to
reimburse the provider of the Back-Up Facility shall be solely ILFC's obligation
and the provider of the Back-Up Facility shall have no recourse to MSAF Group
for any such amounts that are not reimbursed by ILFC. Immediately following and
after giving effect to any Suspension Drawing, ILFC shall set off and apply the
security deposits held by it on the date of such Suspension Drawing on MSAF
Group's behalf against the principal amount of any ILFC facility drawn amounts
then outstanding, which shall be deemed repaid in the
48
<PAGE> 53
amount of such set-off and application. After giving effect to such set-off and
application, MSAF Group shall be obliged to repay only up to $10 million of any
outstanding ILFC facility drawn amounts unless and until ILFC has procured, at
its expense, a replacement Back-Up Facility acceptable to MSAF Group. MSAF Group
shall be obliged to pay interest on the proceeds of a Suspension Drawing at 3%
per annum, calculated on the basis of a 360-day year consisting of twelve 30-day
months and compounded daily.
MSDW FACILITY
Under the MSDW facility, MSDW will make loans to MSAF Group which MSAF
Group may use for the same purposes as those for which the Liquidity Reserve
Amount may be applied as discussed above under "-- Liquidity Reserve Amount,"
including to pay interest and minimum principal payment amounts on the Notes.
MSDW's obligation to make such amounts available shall be limited to the MSDW
facility commitment. The MSDW facility commitment, at any time, shall be equal
to the sum of, (A) $10 million minus, (B) all drawings previously made by MSAF
Group under the MSDW facility and not repaid at such time.
The MSDW facility is a Secondary Eligible Credit Facility and, accordingly,
on the Note payment date following any drawing on the MSDW facility, MSAF Group
will be obligated, to the extent that there are Available Collections remaining
after payment of the minimum principal payment amount on the class D Notes, to
repay MSDW facility drawn amounts to MSDW, together with interest accrued
thereon at 3% per annum, calculated on the basis of a 360-day year consisting of
twelve 30-day months and compounded daily.
MSDW's agreement to provide the MSDW facility will expire on the earlier
of, (i) a sale of all the aircraft, and (ii) the repayment or defeasance of all
MSAF Group's debt. MSDW has been designated by the Controlling Trustees as an
Eligible Provider. MSDW's long-term unsecured debt is currently rated Aa3 by
Moody's, A+ by Standard & Poor's and AA by DCR.
OTHER FACILITIES
There are currently no Primary Eligible Credit Facilities in place. MSAF
Group may put in place other Eligible Credit Facilities from time to time, each
of which shall be designated by the Controlling Trustees as a Primary Eligible
Credit Facility or a Secondary Eligible Credit Facility. In addition, MSAF Group
may from time to time put in place other credit or liquidity enhancement
facilities which are not Eligible Credit Facilities. Amounts drawn under any
such other facilities are repayable at the 11th level in the order of
priorities, before the Second Collection Account Top-Up.
YEAR 2000 READINESS DISCLOSURE
Many existing computer systems use only two digits to identify a year in
the date field. These systems were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the year
2000. We have begun a process of assessing the potential impact of the year 2000
issue on our operations. Since substantially all of our operational functions
have been delegated to the Servicer we have no information systems of our own.
We may, however, suffer a material adverse impact on our business and results of
operations if information technology upon which the lessees and ILFC rely is not
year 2000 compliant.
The administrative agent, cash manager and financial advisor each are
reviewing their year 2000 exposure and identifying the steps that will need to
be taken to ensure that their systems are year 2000 compliant. If the
administrative agent's, cash manager's or financial advisor's systems are not
fully year 2000 compliant, we do not expect the consequences of such
noncompliance to have a material adverse effect on our business.
ILFC has assessed its computer and information systems to determine the
extent of its exposure to year 2000 risks. ILFC believes that all of its
critical computer and information systems were year 2000 compliant as of
September 30, 1998. ILFC is conducting a survey of the critical third parties
with which it conducts business on our behalf to determine the extent of their
exposure to year 2000 risks and the status of their year 2000 compliance
efforts. As of February 1, 1999, ILFC has received responses from all but three
of
49
<PAGE> 54
MSAF's 28 current lessees. Based on these responses, ILFC has indicated to MSAF
that approximately half of the lessees are or will be year 2000 compliant by
August 1999. ILFC is engaged in an ongoing dialog with noncompliant lessees and
continues to attempt to contact the three lessees that have not responded so
far. Nonetheless, significant uncertainties remain regarding the status of year
2000 compliance efforts of critical third parties and the risks to MSAF of
noncompliance by such third parties.
Noncompliance by a lessee could result in lost revenue for the lessee and
an inability to make lease payments to MSAF. Noncompliance by the lessee's
financial institutions could also adversely affect the ability to process lease
payments. ILFC, on behalf of MSAF, has inquired of each lessee about whether it
has addressed year 2000 compliance issues with its financial institutions.
Our worst case scenario would be that a large number of lessees are unable
to operate their aircraft and generate revenues and as a result are unable to
make lease payments to MSAF. MSAF is unable to determine at this time the
likelihood or magnitude of any resulting lost revenue or whether the
consequences of year 2000 failures will have a material impact on MSAF's
business or financial position.
If a noncompliant lessee cannot operate its aircraft and cannot make
contractual lease payments, our contingency plans may include for ILFC to
repossess aircraft from lessees in default and then attempt to re-lease such
aircraft to a year 2000 compliant lessee. We cannot assure that ILFC would be
able to re-lease such aircraft at favorable terms or at all or that there may
not be a significant delay in re-leasing. If a significant number of aircraft
could not be re-leased at favorable terms or at all, it may have a material
adverse effect on our business.
Aircraft and air traffic control systems also depend heavily on
microprocessors and software technology. If the systems employed by the aircraft
are not year 2000 compliant, our business and results of operations may be
adversely affected. Major aircraft manufacturers, including Boeing and Airbus,
are conducting year 2000 reviews of the systems employed on their aircraft and
are advising owners, operators and service providers of the steps to be taken to
address any year 2000 problems that are identified. Among the aircraft systems
that have been identified as being susceptible to year 2000 problems are certain
on-board aircraft management and navigation systems. The nature and extent of
the risks posed by potential failure of aircraft and aircraft control systems
because of year 2000 problems has not been fully determined. We cannot assure
that our lessees will follow the advice of aircraft manufacturers regarding the
steps to be taken to address year 2000 compliance. It is not clear whether or to
what extent manufacturers, owners or lessees will be responsible for the costs
necessary to make aircraft systems year 2000 compliant. Accordingly, MSAF is
currently not able to make any estimate of the amount, if any, it may be
required to spend to remediate year 2000 problems associated with the aircraft.
Such expenditures could, however, have a material adverse impact on the ability
of MSAF to make payments on the Notes.
The aviation insurance markets have sought to exclude any claims for losses
incurred as a result of year 2000 problems under existing policies. However, the
application of this exclusion may be mitigated by the availability of the
following limited writeback endorsements ("year 2000 endorsements"): (i) hull
and aircraft liability coverage in respect of accidental loss of damage to
insured aircraft and for liability arising out of an accident involving the
insured aircraft as a result of a year 2000 occurrence and (ii) non aircraft
liability coverage with regard to liability caused by an accident and arising
out of a risk insured under the policy as a result of year 2000 failure.
Therefore, the effect of the year 2000 endorsements is to provide that losses
(including consequential losses) arising from a year 2000 failure will only be
paid where they result from an accident involving an aircraft or an injury to a
third party. Insurers will provide year 2000 endorsements to those airlines
which satisfy insurers that they have identified and are adequately addressing
the year 2000 issues affecting that airline. MSAF Group, in conjunction with
ILFC and its insurance brokers, is currently assessing the year 2000 status of
all of its lessees' aviation insurance.
The year 2000 endorsements are currently available to MSAF Group in respect
of any of its off-lease aircraft. In addition, MSAF Group maintains contingent
insurance designed to protect the lessor in circumstances where the lessor fails
to collect from the insurances required to be provided by the lessee. In respect
of any insured claims for losses incurred as a result of year 2000 problems,
MSAF Group's contingent insurances are not available if the operator's policy
does not contain year 2000 endorsements.
50
<PAGE> 55
INTEREST RATE SENSITIVITY
MSAF Group's principal market risk exposure is to changes in interest
rates. This exposure arises from its Notes and the derivative instruments used
by MSAF to manage interest rate risk.
The terms of each subclass of the Notes, including the outstanding
principal amount and estimated fair value as of November 30, 1998 are as
follows:
<TABLE>
<CAPTION>
OUTSTANDING ESTIMATED FAIR
PRINCIPAL AMOUNT ANNUAL VALUE AT
AT NOVEMBER 30, INTEREST RATE EXPECTED FINAL PAYMENT FINAL MATURITY NOVEMBER 30,
SUBCLASS OF NOTE 1998 (PAYABLE MONTHLY) DATE DATE 1998
- ---------------- ---------------- ----------------- ---------------------- -------------- --------------
($000'S) ($000'S)
<S> <C> <C> <C> <C> <C>
Subclass A-1 $400,000 LIBOR + 0.21% March 15, 2000 March 15, 2023 $391,320
Subclass A-2 274,062 LIBOR + 0.35% September 15, 2005 March 15, 2023 270,581
Subclass B-1 94,819 LIBOR + 0.65% March 15, 2013 March 15, 2023 100,309
Subclass C-1 100,000 6.90% March 15, 2013 March 15, 2023 102,610
Subclass D-1 110,000 8.70% March 14, 2014 March 15, 2023 136,499
</TABLE>
INTEREST RATE RISK MANAGEMENT
The leasing revenues of MSAF Group are generated primarily from rental
payments. Rental payments are currently entirely fixed but may be either fixed
or floating with respect to future leases. In general, an interest rate exposure
arises to the extent that MSAF Group's fixed and floating interest obligations
in respect of the Notes do not correlate to the mix of fixed and floating rental
payments for different rental periods. This interest rate exposure can be
managed through the use of interest rate swaps and other derivative instruments.
The subclass A-1, A-2 and B-1 Notes bear floating rates of interest and the
subclass C-1 and D-1 Notes bear fixed rates of interest.
MSAF is a party to eight interest rate swaps with MSCS. In six of these
swaps MSAF pays a fixed monthly coupon and receives one month LIBOR and in two
of these swaps MSAF pays one month LIBOR and receives a fixed monthly coupon on
the notional balances as set out below:
<TABLE>
<CAPTION>
FAIR VALUE AT
NOTIONAL FIXED MONTHLY FIXED MONTHLY NOVEMBER 30,
BALANCE EFFECTIVE DATE MATURITY DATE PAY RATE RECEIVE RATE 1998
- -------- ----------------- ----------------- ------------- ------------- -------------
($000'S) (%) (%) ($000'S)
<C> <S> <C> <C> <C> <C>
100,000 November 12, 1997 November 15, 1999 6.0550 -- (1,011)
300,000 November 12, 1997 November 15, 2000 6.1325 -- (6,147)
200,000 November 12, 1997 November 15, 2002 6.2150 -- (7,541)
200,000 November 12, 1997 November 15, 2004 6.2650 -- (10,355)
150,000 November 12, 1997 November 15, 2007 6.3600 -- (10,098)
50,000 November 12, 1997 November 15, 2009 6.4250 -- (3,769)
150,000 February 19, 1998 November 15, 2007 -- 5.860 4,724
50,000 February 19, 1998 November 15, 2009 -- 5.905 1,606
</TABLE>
All eight swaps were originally entered into by MSCS with an internal swaps
desk as the counterparty on November 12, 1997 and February 19, 1998,
respectively. On March 3, 1998, all eight of the above swaps were assigned to
MSAF by MSCS. Although MSAF Group's floating rate liability March 3, 1998 was
approximately $800 million (after the repayment of principal due to the
undelivered aircraft), the net economic effect of assigning all eight swaps to
MSAF with an aggregate notional amount of $1.2 billion was to fix the interest
rate liability at the November 12, 1997 interest rate. MSAF Group required this
certainty both in furtherance of its interest rate management policy not to be
adversely exposed to material movements in interest rates from November 12, 1997
(shortly after MSAF entered into the asset purchase agreement with ILFC for the
acquisition of the aircraft and related fixed rate leases) and, by fixing the
principal liabilities relating to the transaction, to facilitate the structuring
of the transaction.
51
<PAGE> 56
MSAF Group regularly reviews its hedging requirements. In the future MSAF
Group expects to seek to enter into additional swaps or sell at market value or
unwind part or all of the initial and any future swaps in order to rebalance the
fixed and floating mix of interest obligations (including those arising as a
result of previous interest rate swaps entered into) and the fixed and floating
mix of rental payments.
Through the use of interest rate swaps, and other interest rate hedging
products, it is MSAF Group's policy not to be adversely exposed to material
movements in interest rates. MSAF Group's interest rate management strategy will
need to be rebalanced with any acquisition of additional aircraft to reflect the
adjusted mix of fixed and floating rate rental payments arising from any such
acquisition. There can be no assurance, however, that MSAF Group's interest rate
risk management strategies will be effective in this regard. Any change to MSAF
Group's policy with regard to its dealing in interest rate hedging products will
be subject to periodic review by the rating agencies.
The Controlling Trustees are responsible for reviewing and approving the
overall interest rate management policies and transaction authority limits.
Counterparty risk will be monitored on an ongoing basis. Counterparties will be
subject to the prior approval of the Controlling Trustees. MSAF Group's
counterparties are currently all affiliates of MSDW. Future counterparties will
consist primarily of the affiliates of major United States and European
financial institutions (including special-purpose derivative vehicles) which
have credit ratings, or which provide collateralization arrangements, consistent
with maintaining the ratings of the Notes.
52
<PAGE> 57
DESCRIPTION OF THE NOTES
The following description is a summary of the provisions of the Notes, the
Indenture, the security trust agreement, the cash management agreement and other
agreements. It does not restate these agreements in their entirety. We urge you
to read the Indenture and the security trust agreement because these agreements
define your rights as holders of the Notes. We have filed these agreements and
the servicing agreement, the administrative agency agreement and the cash
management agreement as exhibits to the registration statement which includes
this prospectus. The following discussion uses terms that have specific
definitions in the Indenture and other transaction agreements. You should refer
to Appendix 1 for an index showing the definitions of these terms as they appear
in this prospectus.
GENERAL
We issued the Notes under the Indenture, which was qualified under the
Trust Indenture Act of 1939, as amended, upon effectiveness of the Registration
Statement. Bankers Trust Company is the trustee under the Indenture.
The Notes are solely obligations of MSAF and are not secured by the
aircraft. The Notes do not represent obligations of any lessee, MSDW, the
trustee or ILFC.
RATINGS
Each subclass of Notes is rated as of the date of this prospectus as
follows:
<TABLE>
<CAPTION>
RATING AGENCIES
-----------------------------------
MOODY'S STANDARD & POOR'S DCR
------- ----------------- ---
<S> <C> <C> <C>
Subclass A-1 Notes....................................... Aa2 AA AA
Subclass A-2 Notes....................................... Aa2 AA AA
Subclass B-1 Notes....................................... A2 A A
Subclass C-1 Notes....................................... Baa2 BBB BBB
Subclass D-1 Notes....................................... Ba2 BB BB
</TABLE>
The ratings of the Notes address the likelihood of the timely payment of
interest and the ultimate payment of principal and premium, if any, on the
Notes. The rating agencies have not rated our ability to pay step-up interest on
any subclass of the Notes. The ratings do not address the imposition of any
withholding tax on any payments under the leases, the Notes or otherwise.
A rating is not a recommendation to buy, sell or hold Notes because the
ratings do not comment as to market price or suitability for a particular
investor and may be subject to revision or withdrawal at any time by the
assigning rating agency. If a rating agency lowers, suspends or withdraws its
rating of any subclass of Notes, no person or other entity has an obligation to
support MSAF's obligations under the Notes in any way.
FORM
GLOBAL NOTES
The Notes are represented by global notes, each of which is registered in
the name of Cede & Co., as nominee of DTC and is deposited with Banker's Trust
Company, the trustee, as custodian for DTC. Interests in the Notes will
therefore be shown only on, and transfers of book-entry interests will be
effected only through, records maintained in book-entry form by DTC or its
nominee and its participants (including Euroclear and Cedel). You should refer
to "Book-Entry Registration, Global Clearance and Settlement" for a description
of book-entry interests in the Notes may be held and transferred and new
payments on them will be distributed.
53
<PAGE> 58
DEFINITIVE NOTES
You will receive definitive Notes in registered form without interest
coupons in exchange for your book-entry interests only if:
- MSAF advises the trustee in writing that DTC is no longer willing or
able to act as depositary with respect to the Notes and the trustee does
not appoint a successor at MSAF's request within 90 days of DTC's notice;
- MSAF, at its option, elects to terminate the book-entry system through
DTC; or
- after an event of default has occurred with respect to any class of
Notes, holders representing 51% or more of the outstanding principal
balance of any subclass within that class notify MSAF, the trustee and
DTC that continuing a book-entry system through DTC is no longer in their
interest.
If any of these events occurs, the trustee will notify the relevant holders
and will arrange for definitive notes to be issued in exchange for the holders'
book-entry interests.
The trustee or a paying agent will make distributions of interest,
principal and any premium on any definitive Notes directly to holders of
definitive Notes in whose names the definitive Notes were registered at the
close of business on the record date. Such distributions will be made by check
mailed to the address of such holder as it appears on the register maintained by
the trustee. A noteholder holding definitive Notes representing at least
$1,000,000 of the principal balance of any subclass may apply to have
distributions paid by wire transfer to its account at a financial institution in
New York, New York. The final payment on any such definitive Notes, however,
will be made only upon presentation and surrender of such definitive Notes at
the office or agency, specified in the notice of final distribution to
noteholders.
Definitive Notes will be freely transferable and exchangeable for
definitive Notes of the same subclass at the office of the trustee or the
offices of the co-transfer agent and the co-registrar in Luxembourg. No service
charge will be imposed for any registration of transfer or exchange, but payment
of a sum sufficient to cover any tax or other governmental charge may be
required.
You may exchange or replace a Note that is mutilated, destroyed, lost or
stolen, at the offices of the trustee or of the co-registrar in Luxembourg upon
presentation of the Note or satisfactory evidence of destruction, loss or theft.
An indemnity satisfactory to the trustee or co-registrar may be required at the
expense of the noteholder before a replacement Note will be issued. The
noteholder will have to pay any tax or other governmental charge imposed in
connection with such exchange or replacement and any other expenses (including
the fees and expenses of the trustee and the co-transfer agent and co-registrar)
connected therewith.
PAYMENTS AND DISTRIBUTIONS
On each payment date, the trustee will pay (or will instruct a paying agent
appointed in Luxembourg to pay) to the noteholders all payments of interest,
principal and any premium on the Notes of each subclass, so long as the trustee
or paying agent confirms that it has received the payment by 1:00 p.m. (New York
time) on the payment date. If the trustee or the paying agent confirms receipt
of the payment after that time on the payment date, then it will make the
payment to the noteholders on the next business day after the business day it
received the payment. The trustee or paying agent to the noteholders will make
each payment on any payment date other than the final payment date with respect
to any subclass of Notes will be made as of the record date immediately
preceding such payment date. The final distribution with respect to any Note,
however, will be made only upon presentation and surrender of such Note by the
noteholder or its agent (including any holder in street name) at the office or
agency of the trustee or paying agent. So long as the Notes are listed on the
Luxembourg Stock Exchange, MSAF must appoint and maintain a paying agent in
Luxembourg.
The following table sets forth the expected weighted average life, the
expected final payment date and the final maturity date for each subclass of
Notes.
54
<PAGE> 59
EXPECTED WEIGHTED AVERAGE LIFE, EXPECTED FINAL PAYMENT DATES
AND FINAL MATURITY DATES OF THE NOTES
<TABLE>
<CAPTION>
EXPECTED
WEIGHTED
AVERAGE LIFE EXPECTED FINAL
SUBCLASS OF NOTES IN YEARS PAYMENT DATE FINAL MATURITY DATE
- ----------------- ------------ ------------------ -------------------
<S> <C> <C> <C>
Subclass A-1............................ 2.0 March 15, 2000 March 15, 2023
Subclass A-2............................ 3.8 September 15, 2005 March 15, 2023
Subclass B-1............................ 8.6 March 15, 2013 March 15, 2023
Subclass C-1............................ 10.6 March 15, 2013 March 15, 2023
Subclass D-1............................ 12.1 March 15, 2014 March 15, 2023
</TABLE>
The "expected final payment date" for each subclass of Notes means the date
on which the final payment of principal of and interest on such subclass of
Notes is expected to be made based on the assumptions we describe below under
"-- Assumptions". The final maturity date for each subclass of Notes means the
date on which all principal not previously paid is due and payable. The actual
final payment date for each subclass of Notes is likely to occur earlier or
later than the expected final payment date as a result of numerous factors,
including that the assumptions are unlikely to correspond to actual experience.
MSAF may also redeem or refinance the Notes before their expected final payment
date.
ASSUMPTIONS
The assumptions and tables set forth below represent possible revenue
scenarios designed to illustrate certain payment characteristics of the Notes.
They are not projections, estimates, forecasts or forward-looking statements. We
developed the tables by fixing certain of the assumptions and by varying other
assumptions and certain other factors which affect MSAF Group's revenues and
costs and expenses. The assumptions do not represent a complete list of factors
which may affect the revenues and costs and expenses of MSAF Group but rather
indicate those factors which are likely to significantly affect the performance
of MSAF Group in future years. More severe stresses may lead to payments of
principal on the Notes being delayed or decreased, or in certain cases, an event
of default.
You should understand that the following tables only illustrate some of the
payment sensitivities of the Notes to market and economic stresses. We prepared
these tables for inclusion in the offering memorandum for the Old Notes based on
information as of February 1, 1998. We have not updated or revised the
information presented to reflect changes occurring after February 1, 1998. For
example, LIBOR rates have changed since that time. We are not aware of events or
circumstances since that date that would cause the assumptions to be unreliable.
It is highly likely that actual experience will vary from the assumptions and
the possible revenue scenarios represented by the tables. The principals factors
that could cause MSAF Group's actual revenues to differ materially from such
scenarios are the stresses described below and the risks we describe under "Risk
Factors".
REVENUE ASSUMPTIONS:
We used assumptions (1) to (12) below to determine the assumed gross
monthly revenue of MSAF Group before interest payments, principal payments, swap
payments, selling, general and administrative expenses and before lost rental
payments and expenditures required due to aircraft downtime, lessee defaults,
aircraft repossession costs, bad debts and operating costs incurred in the
ordinary course of the operating lease business. See Appendix 3 to this
prospectus for further data regarding assumed gross revenue.
(1) One month LIBOR remains constant at 5.75% per annum and the U.S.
Treasury rate used for premium calculations is 5.5%.
(2) Funds on deposit in the Collection Account and any other cash balances
held by MSAF earn interest at a rate of one month LIBOR.
55
<PAGE> 60
(3) - Aircraft coming off-lease in the future are re-leased at a monthly
rate that is a function of the current contracted monthly lease
rate as of February 1, 1998 for such aircraft of that age.
- Lease rates are assumed to remain constant at the monthly lease rate
for the first 60% of an aircraft's expected useful life, then
declining on a straight-line basis to 40% of such lease rate over the
remainder of its expected useful life.
- All types of aircraft in the portfolio are assumed to have an
expected useful life of 25 years.
(4) Aircraft have no scrap value at the end of their expected useful life.
(5) MSAF Group receives all contracted and assumed future payments in
respect of the leases on the due date.
(6) Future lease terms are five years.
(7) MSAF Group grants no new purchase options to lessees and the only
existing purchase option exercised is the option associated with the
Conditional Sale Agreement.
(8) MSAF Group grants no new lease termination or extension options to
lessees and no existing termination or extension options are
exercised.
(9) The remaining aircraft are delivered to MSAF Group and with the
exception described in paragraph (7) above, MSAF Group sells no
aircraft.
(10) MSAF Group acquires no additional aircraft.
(11) MSAF makes and receives swap payments in accordance with the
contracted terms of the initial swaps.
(12) Security deposits, modification payments and subordinated swap
payments are zero.
INTEREST, EXPENSE AND OPERATING COST ASSUMPTIONS:
(13) MSAF issues Notes in amounts and with coupons as set forth in the
following table and payments are made in accordance with the order of
priorities set forth under "-- Priority of Payments."
<TABLE>
<CAPTION>
SUBCLASS OF NOTES AMOUNT MONTHLY COUPON
----------------- ------------ --------------------
($ MILLIONS)
<S> <C> <C>
Subclass A-1................................ 400 1 Month LIBOR+ 0.21%
Subclass A-2................................ 340 1 Month LIBOR+ 0.35%
Subclass B-1................................ 100 1 Month LIBOR+ 0.65%
Subclass C-1................................ 100 6.90%
Subclass D-1................................ 110 8.70%
------
$1,050
======
</TABLE>
(14) Refinancing notes are issued and sold on the expected final payment
date of the subclass A-1 Notes (and on each subsequent expected final
payment dates of any such Refinancing notes) on the same terms with
respect to priority, coupon and redemption as the Notes being
refinanced and with maturities and amortization schedules paid with
the application of the Minimum, Scheduled and Supplemental Principal
Payment Amounts. Issuance expenses are 0.0042% of the outstanding
principal balance.
(15) ILFC's fees as servicer are as described under "Management of MSAF
Group -- Servicer" and the results-based incentive fee is assumed to
be equal to 1% of gross revenue. The administrative agent's fee is as
described in "Management of MSAF Group -- Corporate Management."
MSAF's other selling, general and administrative expenses in the
amount of $1 million per annum are deducted from gross revenue and
include fees to the cash manager and financial advisor.
56
<PAGE> 61
(16) Gross revenues are reduced each year by 3.5% to account for certain
operating costs incurred in the ordinary course of the operating lease
business including insurance expenses, aircraft related costs and
leasing transaction expenses.
(17) The maximum Beneficial Interest Distribution Amount that can be paid
on any payment date in accordance with the above Assumptions is paid.
ASSUMED CASE STRESS SCENARIO:
(18) Gross revenues are reduced by 4.5% per annum in respect of lost rental
payments and expenditures required due to AOG, lessee defaults,
aircraft repossession costs and bad debts.
The following set of stresses are presented for illustrative purposes and
only represent an example of a combination of stresses which result in
approximately a 4.5% reduction in gross revenues. Other stress combinations
could result in gross revenue reductions which exceed 4.5%.
<TABLE>
<S> <C> <C>
A: Weighted Average Portfolio Turnover:........ 20% per annum
(see Assumption(6))
B: Average Re-marketing Time:.................. 4 weeks (.08 years)
C: Weighted Average Default Rate:.............. 4% per annum
D: Average Repossession Time:.................. 14 weeks (.27 years)
E: Average Repossession Cost:.................. $500,000 per Aircraft
F: Weighted Average Bad Debt Expense:.......... 1% per annum
</TABLE>
<TABLE>
<S> <C>
AOG = (A X B) + (C X (B + D))
Annual Repossession Expense = (C X(E/Average Gross Revenue per
Aircraft)) (See Appendix 3)
Aircraft on Ground = (20% X .08 yrs) + (4% X (.08 yrs + .27
yrs))..................................................... 3.0%
Annual Repossession Expense = (4% X 13%).................... 0.5
Bad Debt Expense............................................ +1.0
-----
Stress Related Gross Revenue Reduction...................... 4.5%
Operating costs (see Assumption (16))....................... +3.5
-----
Gross Revenue Reduction in the assumed case................. 8.0%
=====
</TABLE>
Increasing the above stresses would result in a greater reduction in annual
gross revenues. The following table shows the effect upon gross revenues of
doubling the severity of each stress (other than average repossession cost)
outlined in the above example (in each case holding other stresses unchanged).
<TABLE>
<CAPTION>
GROSS
REVENUE
STRESS SEVERITY REDUCTION
- ------ ------------- ---------
<S> <C> <C>
Portfolio Turnover........................... 40% per annum 9.6%
Re-marketing Time............................ 8 weeks 9.9%
Default Rate................................. 8% per annum 9.9%
Repossession Time............................ 28 weeks 9.1%
Bad Debt Expense............................. 2% per annum 9.0%
</TABLE>
Actual experience will likely differ from the assumptions and the stresses.
Because of this, principal payments on certain Notes will likely occur earlier
or later than assumed. These timing differences may be significant.
57
<PAGE> 62
PRINCIPAL REPAYMENTS UNDER THE ASSUMED CASE
The table below shows, for each payment date presented, the percentage of
the initial outstanding principal balance of the aggregate class A Notes
(including refinancing notes), and the subclass A-1, subclass A-2, subclass B-1,
subclass C-1 and subclass D-1 Notes expected to be outstanding on such payment
date based on the assumptions. It is highly unlikely that the assumptions will
correspond to actual experience. Therefore, principal payments on the Notes may
occur earlier or later than as set forth in the table. MSAF may fail to pay
principal of any subclass of its Notes prior to the final maturity date of such
because we do not have the funds to make the payment according to the order of
priorities described under "-- Priority of Payments." Such a failure will not,
by itself, be an event of default.
PERCENT OF INITIAL PRINCIPAL BALANCE OF THE
NOTES BASED ON THE ASSUMED CASE
<TABLE>
<CAPTION>
AGGREGATE CLASS A
NOTES, INCLUDING
PAYMENT DATE OCCURRING IN MARCH A-1 A-2 REFINANCING NOTES B-1 C-1 D-1
------------------------------- ---- ---- ----------------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
1998 (March 3, 1998)................... 100% 100% 100% 100% 100% 100%
1999................................... 100% 87% 94% 96% 100% 100%
2000................................... 0% 74% 88% 92% 100% 100%
2001................................... 0% 61% 82% 88% 99% 100%
2002................................... 0% 48% 76% 83% 97% 99%
2003................................... 0% 34% 69% 78% 94% 98%
2004................................... 0% 19% 63% 71% 89% 96%
2005................................... 0% 6% 57% 64% 84% 93%
2006................................... 0% 0% 51% 57% 77% 88%
2007................................... 0% 0% 45% 50% 70% 83%
2008................................... 0% 0% 39% 42% 61% 76%
2009................................... 0% 0% 33% 33% 51% 67%
2010................................... 0% 0% 28% 24% 40% 57%
2011................................... 0% 0% 22% 15% 28% 45%
2012................................... 0% 0% 18% 7% 14% 32%
2013................................... 0% 0% 12% 0% 0% 17%
2014................................... 0% 0% 6% 0% 0% 0%
Weighted Average Life (Years).......... 2.0 3.8 8.4 8.6 10.6 12.1
</TABLE>
- ---------------
The weighted average life of a Note equals:
P/I, where
<TABLE>
<S> <C>
P= the sum of the following amounts calculated for each payment
date: A X Y, where
A= principal amount that is assumed to be paid on the
payment date
Y= number of years from the date the Note was issued to the
payment date
I= the initial principal balance of the Note.
</TABLE>
58
<PAGE> 63
DECLINING BALANCES OF THE NOTES AND ASSUMED PORTFOLIO VALUE
BASED ON THE ASSUMED CASE
In each of the following tables, "expected maturity" means the period
(expressed in years) from March 3, 1998 through the expected final payment of
principal of the relevant Notes.
EFFECT OF INABILITY TO REFINANCE SUBCLASS A-1 NOTES
The table below is based on the assumptions, except that we have assumed no
refinancing notes are issued and sold and the subclass A-1 Notes are amortized
according to the priority of payments. If no refinancings occur, the expected
maturities (Exp) and weighted average lives (Avg) of the Notes would be as set
forth below.
EXPECTED MATURITIES AND WEIGHTED AVERAGE LIVES OF NOTES
<TABLE>
<CAPTION>
EXPECTED MATURITY/
WEIGHTED AVERAGE LIFE
--------------------------------
ASSUMED CASE NO REFINANCINGS
------------- ---------------
EXP AVG EXP AVG
---- ---- ----- -----
<S> <C> <C> <C> <C>
Subclass A-1................................................ 2.0 2.0 17.3 12.6
Subclass A-2................................................ 7.5 3.8 8.9 4.0
Subclass B-1................................................ 15.0 8.6 15.0 8.6
Subclass C-1................................................ 15.0 10.6 15.0 10.6
Subclass D-1................................................ 16.0 12.1 16.3 12.6
</TABLE>
MINIMUM REVENUE PERCENTAGE REQUIRED TO RETIRE NOTES
The table below indicates the minimum percentage of gross revenue that will
be necessary to repay all interest and principal on each class of Notes by their
respective final maturity dates. If MSAF Group received actual revenues below
the percentages of gross revenue indicated below and all of the other
assumptions occurred, MSAF would be unable to make the required payments on the
Notes which would constitute an event of default.
59
<PAGE> 64
PERCENTAGE OF GROSS REVENUE NECESSARY TO REPAY THE
NOTES BY THE APPLICABLE FINAL MATURITY DATE ASSUMING ACTUAL
EXPERIENCE CORRESPONDS TO THE ASSUMED CASE UNTIL THE BEGINNING OF THE YEAR
STATED
<TABLE>
<CAPTION>
MARCH 3, 1998 YEAR 3 YEAR 6 YEAR 10
------------- ------ ------ -------
<S> <C> <C> <C> <C>
Aggregate Class A Notes............................... 59.4% 58.2% 54.7% 47.5%
Subclass B-1 Notes.................................... 67.1% 65.7% 61.6% 53.0%
Subclass C-1 Notes.................................... 75.8% 74.2% 70.6% 61.4%
Subclass D-1 Notes.................................... 84.8% 83.3% 80.0% 72.1%
</TABLE>
EFFECT OF A PERMANENT CHANGE IN GROSS REVENUE
We have prepared the tables below based on the assumptions, except that we
have varied the revenue received by MSAF Group from gross revenues by the
indicated percentages, beginning in years 3 and 6. If MSAF Group received actual
revenues as indicated below and all of the other assumptions occurred, then the
expected maturities and weighted average lives of the respective subclasses of
Notes would be as set forth below.
EXPECTED MATURITIES AND WEIGHTED AVERAGE LIVES OF NOTES
ASSUMING A PERMANENT CHANGE IN GROSS REVENUE, BEGINNING IN YEAR 3
<TABLE>
<CAPTION>
PERMANENT CHANGE IN GROSS REVENUE
--------------------------------------------------------------------
+10% 0% -8%* -15% -20%
----------- ----------- ----------- ----------- ------------
EXP AVG EXP AVG EXP AVG EXP AVG EXP AVG
---- ---- ---- ---- ---- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Subclass A-1........................ 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0
Subclass A-2........................ 5.9 3.2 6.4 3.4 7.5 3.8 8.9 4.4 9.2 4.6
Subclass B-1........................ 11.2 6.8 12.0 8.0 15.0 8.6 18.5 9.2 18.5 9.2
Subclass C-1........................ 11.0 9.2 14.0 10.5 15.0 10.6 20.0 14.2 20.0 14.7
Subclass D-1........................ 9.7 7.6 13.5 11.3 16.0 12.1 21.3 16.9 (1)
</TABLE>
- ---------------
*Assumed case
(1) Not all principal repaid prior to the Final Maturity Date. (Yield = 6.17%)
EXPECTED MATURITIES AND WEIGHTED AVERAGE LIVES OF NOTES
ASSUMING A PERMANENT CHANGE IN GROSS REVENUE, BEGINNING IN YEAR 6
<TABLE>
<CAPTION>
PERMANENT CHANGE IN GROSS REVENUE
-------------------------------------------------------------------
+10% 0% -8%* -15% -20%
----------- ----------- ----------- ----------- -----------
EXP AVG EXP AVG EXP AVG EXP AVG EXP AVG
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Subclass A-1......................... 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0
Subclass A-2......................... 6.6 3.7 7.0 3.8 7.5 3.8 8.9 4.0 8.9 4.1
Subclass B-1......................... 12.0 7.6 13.8 8.5 15.0 8.6 15.0 8.6 18.5 9.2
Subclass C-1......................... 12.8 10.2 14.7 10.6 15.0 10.6 17.4 12.2 20.0 14.0
Subclass D-1......................... 12.2 10.4 14.6 11.8 16.0 12.1 19.5 15.5 24.9 18.9
</TABLE>
- ---------------
*Assumed case
60
<PAGE> 65
EFFECT OF PERMANENT DECLINE IN PORTFOLIO VALUE
If the value of the portfolio, as adjusted for our appraisals, becomes
significantly less than the value of the portfolio based on the assumptions, the
Scheduled Principal Payment Amount payable to holders of the class A Notes may
be increased. You should refer to "-- Principal Amortization" for a description
of how these amounts are determined. Payment of this increased amount may
shorten the weighted average lives of the class A Notes and lengthen the
weighted average lives of the subclasses of Notes that rank behind the class A
Notes in priority of payment. The following tables show the expected maturity
and weighted average life of each subclass of Notes if the adjusted portfolio
value permanently declined to a given percentage of the assumed portfolio value,
beginning in years 1 and 5.
EXPECTED MATURITIES AND WEIGHTED AVERAGE LIVES OF NOTES
ASSUMING A PERMANENT CHANGE IN PORTFOLIO VALUE, BEGINNING IN YEAR 1
<TABLE>
<CAPTION>
ADJUSTED PORTFOLIO VALUE AS PERCENTAGE OF
ASSUMED PORTFOLIO VALUE BEGINNING IN YEAR 1
-----------------------------------------------------
100%* 90% 80% 70%
----------- ----------- ----------- -----------
EXP AVG EXP AVG EXP AVG EXP AVG
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Subclass A-1.................................... 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0
Subclass A-2.................................... 7.5 3.8 7.5 3.8 7.0 3.7 7.0 3.7
Subclass B-1.................................... 15.0 8.6 15.0 8.6 15.0 8.6 15.0 8.6
Subclass C-1.................................... 15.0 10.6 15.0 10.6 15.0 10.9 15.0 11.4
Subclass D-1.................................... 16.0 12.1 16.0 12.1 16.0 12.3 16.0 13.5
</TABLE>
- ---------------
*Assumed case
EXPECTED MATURITIES AND WEIGHTED AVERAGE LIVES OF NOTES
ASSUMING A PERMANENT CHANGE IN PORTFOLIO VALUE, BEGINNING IN YEAR 5
<TABLE>
<CAPTION>
ADJUSTED PORTFOLIO VALUE AS PERCENTAGE OF
ASSUMED PORTFOLIO VALUE BEGINNING IN YEAR 5
-----------------------------------------------------
100%* 90% 80% 70%
----------- ----------- ----------- -----------
EXP AVG EXP AVG EXP AVG EXP AVG
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Subclass A-1.................................... 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0
Subclass A-2.................................... 7.5 3.8 7.5 3.8 7.0 3.7 7.0 3.7
Subclass B-1.................................... 15.0 8.6 15.0 8.6 15.0 8.6 15.0 8.6
Subclass C-1.................................... 15.0 10.6 15.0 10.6 15.0 10.8 15.0 11.3
Subclass D-1.................................... 16.0 12.1 16.0 12.1 16.0 12.3 16.0 13.5
</TABLE>
- ---------------
*Assumed case
EFFECT OF CYCLICAL VARIATIONS IN GROSS REVENUE AND PORTFOLIO VALUE --
"RECESSION SCENARIOS"
Historically, the aviation industry has experienced cyclical swings in the
supply and demand for aircraft. MSAF Group would be negatively affected by a
decline in the demand for aircraft. We have assumed that such a decline in
demand or "RECESSION" (as used in this discussion) will result in a decline in
aircraft values and an increase in defaults and downtime, as well as a decline
in operating lease rental rates. In that case, gross revenues would decline.
61
<PAGE> 66
We have prepared the following tables to show the effect on expected
maturities and weighted average lives of subclass B-1, subclass C-1 and subclass
D-1 Notes if recessions of different lengths were to occur in the future. In
preparing the following tables we have assumed that a recession would have the
following effect on MSAF Group:
- Aircraft values would fall on the first day of the recession to a given
percentage of the assumed portfolio value. This decrease would trigger
an increase in Scheduled Principal Payment Amounts on the class A Notes
being paid if amounts are available.
- After a period of two years following the first day of the recession,
gross revenues fall by a given percentage as aircraft are re-leased or
lessees default. This would result in less cash flow being available to
make payments of interest and principal on the Notes.
- The recession lasts a given period of time. Afterwards, the adjusted
portfolio value returns to the assumed portfolio value on the first day
after the recession. Two years following the end of the recession, gross
revenues return to the assumed case.
- Actual experience will likely differ from the assumptions we have used
in preparing the following tables. Specifically, we can give no
assurance that periods of weak traffic growth and lower demand for
aircraft will be followed by periods of strong growth and high demand
for aircraft nor can we assure that following a recession aircraft
values and gross revenues will return to assumed case levels. Because
actual experience will likely differ from those assumptions, the actual
maturities and weighted average lives of the Notes will likely differ
from what is shown in the tables below.
EXPECTED MATURITIES AND WEIGHTED AVERAGE LIVES OF SUBCLASS B-1
NOTES ASSUMING A RECESSION LASTING THREE YEARS
<TABLE>
<S> <C> <C> <C> <C>
DECLINE IN GROSS REVENUES..................... 0% 8%* 10% 20%
ADJUSTED PORTFOLIO VALUE AS A PERCENTAGE OF
ASSUMED PORTFOLIO VALUE..................... 100% 100%* 90% 80%
</TABLE>
<TABLE>
<CAPTION>
EXP AVG EXP AVG EXP AVG EXP AVG
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Recession begins at start of
Year........................ 1 (March 3, 1998) 15.0 8.6 15.0 8.6 15.0 8.6 15.0 8.6
3 15.0 8.6 15.0 8.6 15.0 8.6 15.0 8.6
5 15.0 8.6 15.0 8.6 15.0 8.6 15.0 8.6
10 15.0 8.6 15.0 8.6 15.0 8.6 15.0 8.6
</TABLE>
- ---------------
*Assumed case
EXPECTED MATURITIES AND WEIGHTED AVERAGE LIVES OF SUBCLASS B-1
NOTES ASSUMING A RECESSION LASTING FIVE YEARS
<TABLE>
<S> <C> <C> <C> <C>
DECLINE IN GROSS REVENUES..................... 0% 8%* 10% 20%
ADJUSTED PORTFOLIO VALUE AS A PERCENTAGE OF
ASSUMED PORTFOLIO VALUE..................... 100% 100%* 90% 80%
</TABLE>
<TABLE>
<CAPTION>
EXP AVG EXP AVG EXP AVG EXP AVG
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Recession begins at start of
Year........................ 1 (March 3, 1998) 14.8 8.6 15.0 8.6 15.0 8.6 16.3 9.1
3 15.0 8.6 15.0 8.6 15.0 8.6 15.0 8.6
5 15.0 8.6 15.0 8.6 15.0 8.6 15.0 8.7
10 15.0 8.6 15.0 8.6 15.0 8.6 15.0 8.6
</TABLE>
- ---------------
*Assumed case
62
<PAGE> 67
EXPECTED MATURITIES AND WEIGHTED AVERAGE LIVES OF SUBCLASS C-1
NOTES ASSUMING A RECESSION LASTING THREE YEARS
<TABLE>
<S> <C> <C> <C> <C>
DECLINE IN GROSS REVENUES..................... 0% 8%* 10% 20%
ADJUSTED PORTFOLIO VALUE AS A PERCENTAGE OF
ASSUMED PORTFOLIO VALUE..................... 100% 100%* 90% 80%
</TABLE>
<TABLE>
<CAPTION>
EXP AVG EXP AVG EXP AVG EXP AVG
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Recession begins at start of
Year........................ 1 (March 3, 1998) 15.0 10.6 15.0 10.6 15.0 10.6 15.6 11.1
3 15.0 10.6 15.0 10.6 15.0 10.6 15.1 10.9
5 15.0 10.6 15.0 10.6 15.0 10.6 15.0 10.9
10 15.0 10.6 15.0 10.6 15.0 10.6 15.0 10.7
</TABLE>
- ---------------
*Assumed case
EXPECTED MATURITIES AND WEIGHTED AVERAGE LIVES OF SUBCLASS C-1
NOTES ASSUMING A RECESSION LASTING FIVE YEARS
<TABLE>
<S> <C> <C> <C> <C>
DECLINE IN GROSS REVENUES..................... 0% 8%* 10% 20%
ADJUSTED PORTFOLIO VALUE AS A PERCENTAGE OF
ASSUMED PORTFOLIO VALUE..................... 100% 100%* 90% 80%
</TABLE>
<TABLE>
<CAPTION>
EXP AVG EXP AVG EXP AVG EXP AVG
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Recession begins at start of
Year.......................... 1 (March 3, 1998) 15.0 10.6 15.0 10.6 15.0 10.6 18.2 14.1
3 15.0 10.6 15.0 10.6 15.0 10.6 17.2 13.2
5 15.0 10.6 15.0 10.6 15.0 10.6 16.3 12.2
10 15.0 10.6 15.0 10.6 15.0 10.6 15.0 10.8
</TABLE>
- ---------------
*Assumed case
EXPECTED MATURITIES AND WEIGHTED AVERAGE LIVES OF SUBCLASS D-1
NOTES ASSUMING A RECESSION LASTING THREE YEARS
<TABLE>
<S> <C> <C> <C> <C>
DECLINE IN GROSS REVENUES..................... 0% 8%* 10% 20%
ADJUSTED PORTFOLIO VALUE AS A PERCENTAGE OF
ASSUMED PORTFOLIO VALUE..................... 100% 100%* 90% 80%
</TABLE>
<TABLE>
<CAPTION>
EXP AVG EXP AVG EXP AVG EXP AVG
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Recession begins at start of
Year.......................... 1 (March 3, 1998) 15.9 12.1 16.0 12.1 16.0 12.3 17.9 15.2
3 16.0 12.1 16.0 12.1 16.0 12.2 17.5 14.7
5 16.0 12.1 16.0 12.1 16.0 12.1 17.1 14.0
10 16.0 12.1 16.0 12.1 16.0 12.1 16.5 12.9
</TABLE>
- ---------------
*Assumed case
63
<PAGE> 68
EXPECTED MATURITIES AND WEIGHTED AVERAGE LIVES OF SUBCLASS D-1
NOTES ASSUMING A RECESSION LASTING FIVE YEARS
<TABLE>
<S> <C> <C> <C> <C>
DECLINE IN GROSS REVENUES..................... 0% 8%* 10% 20%
ADJUSTED PORTFOLIO VALUE AS A PERCENTAGE OF
ASSUMED PORTFOLIO VALUE..................... 100% 100%* 90% 80%
</TABLE>
<TABLE>
<CAPTION>
EXP AVG EXP AVG EXP AVG EXP AVG
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Recession begins at start of
Year.......................... 1 (March 3, 1998) 15.3 12.0 16.0 12.1 16.0 12.4 19.9 16.6
3 15.5 12.1 16.0 12.1 16.0 12.3 19.0 16.1
5 15.6 12.1 16.0 12.1 16.0 12.2 18.3 15.7
10 16.0 12.1 16.0 12.1 16.0 12.1 17.2 13.8
</TABLE>
- ---------------
*Assumed case
EFFECT OF CHANGES IN GROSS REVENUES ON YIELDS OF FIXED RATE NOTES
We have prepared the following tables based on the Assumptions, except that
the revenue received by MSAF Group varies from gross revenues by the indicated
percentages, beginning in certain years, for a period of three years in one case
and permanently in the other. If the actual revenues received by MSAF Group were
to vary as indicated below and all of the other Assumptions occurred, then the
yield to maturity for the subclass C-1 and subclass D-1 Notes would be as set
forth below. If gross revenues significantly declined, there may not be
sufficient revenues available to meet interest payments (as well as principal
payments) on the Notes. In such cases, interest on the Notes would be deferred.
EFFECT ON INTEREST PAYMENTS FOR THE SUBCLASS C-1 NOTES GIVEN THE ASSUMPTIONS BUT
WITH A THREE YEAR CHANGE IN GROSS REVENUE OF THE MAGNITUDE SHOWN
<TABLE>
<CAPTION>
CHANGE IN GROSS REVENUES BEGINNING IN YEAR:
------------------------------------------------------------------------------------------
3 6 9
---------------------------- ---------------------------- ----------------------------
DATE OF DATE OF DATE OF
FIRST MONTHS OF FIRST MONTHS OF FIRST MONTHS OF
CHANGE IN GROSS REVENUES YIELD DEFERRAL DEFERRALS YIELD DEFERRAL DEFERRALS YIELD DEFERRAL DEFERRALS
- ------------------------ ----- -------- --------- ----- -------- --------- ----- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase of 10%.................. 7.01% none 0 7.01% none 0 7.01% none 0
Decrease of 8%*.................. 7.01% none 0 7.01% none 0 7.01% none 0
Decrease of 20%.................. 7.01% none 0 7.01% none 0 7.01% none 0
Decrease of 30%.................. 7.01% none 0 7.01% none 0 7.01% none 0
</TABLE>
EFFECT ON INTEREST PAYMENTS FOR THE SUBCLASS C-1 NOTES GIVEN THE ASSUMPTIONS BUT
WITH A PERMANENT CHANGE IN GROSS REVENUE OF THE MAGNITUDE SHOWN
<TABLE>
<CAPTION>
CHANGE IN GROSS REVENUES BEGINNING IN YEAR:
------------------------------------------------------------------------------------------
3 6 9
---------------------------- ---------------------------- ----------------------------
DATE OF DATE OF DATE OF
FIRST MONTHS OF FIRST MONTHS OF FIRST MONTHS OF
CHANGE IN GROSS REVENUES YIELD DEFERRAL DEFERRALS YIELD DEFERRAL DEFERRALS YIELD DEFERRAL DEFERRALS
- ------------------------ ----- -------- --------- ----- -------- --------- ----- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase of 10%.................. 7.12% none 0 7.04% none 0 7.01% none 0
Decrease of 8%*.................. 7.01% none 0 7.01% none 0 7.01% none 0
Decrease of 20%.................. 7.01% none 0 7.01% none 0 7.01% none 0
Decrease of 30%.................. 3.38% Jul-03 237 6.72% Apr-07 122 7.01% May-11 17
</TABLE>
64
<PAGE> 69
EFFECT ON INTEREST PAYMENTS FOR THE SUBCLASS D-1 NOTES, GIVEN THE ASSUMPTIONS
BUT WITH A THREE YEAR CHANGE IN GROSS REVENUE OF THE MAGNITUDE SHOWN
<TABLE>
<CAPTION>
CHANGE IN GROSS REVENUES BEGINNING IN YEAR:
------------------------------------------------------------------------------------------
3 6 9
---------------------------- ---------------------------- ----------------------------
DATE OF DATE OF DATE OF
FIRST MONTHS OF FIRST MONTHS OF FIRST MONTHS OF
CHANGE IN GROSS REVENUES YIELD DEFERRAL DEFERRALS YIELD DEFERRAL DEFERRALS YIELD DEFERRAL DEFERRALS
- ------------------------ ----- -------- --------- ----- -------- --------- ----- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase of 10%.................. 8.86% none 0 8.86% none 0 8.86% none 0
Decrease of 8%*.................. 8.86% none 0 8.86% none 0 8.86% none 0
Decrease of 20%.................. 8.86% none 0 8.86% none 0 8.86% none 0
Decrease of 30%.................. 8.86% none 0 8.86% none 0 8.86% none 0
</TABLE>
- ---------------
*Assumed case
EFFECT ON INTEREST PAYMENTS FOR THE SUBCLASS D-1 NOTES, GIVEN THE ASSUMPTIONS
BUT WITH A PERMANENT CHANGE IN GROSS REVENUE OF THE MAGNITUDE SHOWN
<TABLE>
<CAPTION>
CHANGE IN GROSS REVENUES BEGINNING IN YEAR:
---------------------------------------------------------------------------------------------
3 6 9
------------------------------ ----------------------------- ----------------------------
DATE OF MONTHS OF DATE OF MONTHS OF DATE OF MONTHS OF
CHANGE IN GROSS REVENUES YIELD DEFERRAL DEFERRALS YIELD DEFERRAL DEFERRALS YIELD DEFERRAL DEFERRALS
- ------------------------ ------- -------- --------- ------ -------- --------- ----- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase of 10%.............. 9.21% none 0 8.90% none 0 8.86% none 0
Decrease of 8%*.............. 8.86% none 0 8.86% none 0 8.86% none 0
Decrease of 20%.............. 6.17% Jul-07 189 8.86% May-13 15 8.86% none 0
Decrease of 30%.............. -25.02% Jun-03 238 -3.88% Apr-07 192 7.00% May-11 143
</TABLE>
- ---------------
* Assumed case
EFFECT OF PRINCIPAL ALLOCATION ACCORDING TO THE EXTENDED POOL FACTOR ONLY FOR
THE SUBCLASS A-2, SUBCLASS B-1, SUBCLASS C-1 AND SUBCLASS D-1 NOTES.
If available collections on a payment date are not sufficient to pay the
principal amount that is to be paid on a class of notes on that payment date
according to the order of priorities, then the available collections will be
allocated to the subclasses in that class of notes as we describe under "--
Principal Amortization -- Allocation of Principal Among Subclasses."
We have prepared this table to show the effect of this allocation on the
assumed maturities and the weighted average lives of subclass A-2, subclass B-1,
subclass C-1 and subclass D-1 notes if:
- we issue additional notes to finance the acquisition of additional
aircraft BUT
- MSAF Group's gross revenues are sufficient only to pay down the
principal of these subclasses according to paragraph (1) under "Payment
of Principal and Interest -- Allocation of Principal Among Subclasses of
Notes."
<TABLE>
<CAPTION>
SUBCLASSES OF NOTES EXP. AVG.
------------------- ---- ----
<S> <C> <C>
Subclass A-2 Notes.......................................... 8.9 4.9
Subclass B-1 Notes.......................................... 16.0 9.6
Subclass C-1 Notes.......................................... 17.0 12.6
Subclass D-1 Notes.......................................... 18.0 14.1
</TABLE>
65
<PAGE> 70
PAYMENT OF PRINCIPAL AND INTEREST
GENERAL
The Notes are direct obligations of MSAF and are not secured by the
aircraft. MSAF's only sources of payment for the Notes and its other obligations
are:
- the payments made by the lessees under the leases;
- proceeds from any sales or other dispositions of its assets;
- net payments to MSAF received under MSAF's swap agreements (and any other
hedging instruments we may enter into);
- interest earned on the investment of cash balances; and
- net cash proceeds received from the sale of refinancing notes.
The Notes are subordinated to expenses and other obligations of MSAF Group
according to the order of priorities we described under "-- Priority of
Payments". Each class and subclass of the notes has the priority given to it
according to the priority of payments in the indenture. MSAF may make no payment
of principal, interest or any premium on any class of notes unless it has made
the required payments on the relevant payment date on each class of notes that
ranks prior to that class. The subordination provisions of the indenture may not
be amended or modified without the agreement of each swap provider, each holder
of a class of notes that is affected by the amendment or modification and each
holder of any class of notes that ranks senior to an affected class. The
priority of the expenses and payments under swap agreements may not be amended
or modified under any circumstances.
If an event of default occurs, then the holders of a class of notes (except
the class A notes) may not give a default notice or exercise any other remedy
until all amounts owed by MSAF under the more senior classes of notes have been
paid.
Under the leases, the lessee must make rental and other payments and
related collateral payments directly to the rental account held in the name of
the security trustee. This amount will then be transferred, within one business
day of receipt, to the collection account, except for certain limited amounts
that must be left on deposit for local legal reasons. Any amounts received by
MSAF Group which are required to be segregated will be transferred to the lessee
funded account. Unsegregated amounts received by MSAF Group will be transferred
directly to the collection account. On the basis of the assumptions, we expect
these amounts will be sufficient to pay the principal, interest and any premium,
on the Notes and all other amounts payable by MSAF Group to the trustee, the
swap providers and the service providers, in each case when and as due.
INTEREST
Each Note bears interest on the outstanding principal balance, payable
monthly in arrears on each payment date. An interest accrual period is the
period from and including a payment date and to but excluding the next payment
date. The final interest accrual period for each subclass of Notes will end on
but exclude the final maturity date or the date upon which all principal,
interest and any premium on such subclass of Notes is paid in full. Each
subclass of Notes will bear interest for each interest accrual period at the
rate per annum set forth on the cover page of this prospectus.
Interest on the subclass A-1, A-2 and B-1 Notes will be calculated on the
basis of a 360-day year and the actual number of days elapsed in an interest
accrual period. Interest on subclass C-1 and D-1 Notes will be calculated on the
basis of one-twelfth of an annual interest payment on the outstanding principal
balance and in the case of an incomplete interest accrual period on the basis of
a 360-day year consisting of twelve 30-day months.
If MSAF does not repay the subclass A-1 notes in full on or before their
expected final payment date, additional interest will accrue on the subclass A-1
notes at the rate of 0.50% per annum. We refer to this additional interest as
step-up interest. MSAF may also issue additional notes or refinancing notes that
will
66
<PAGE> 71
accrue step-up interest after their expected final payment date. Step-up
interest will be subordinated to other amounts payable on the class A, B, C and
D notes, including accrued and unpaid interest, the Minimum Principal Payment
Amount and the Scheduled Principal Payment Amount. The rating agencies did not
rate MSAF's ability to pay step-up interest.
REFERENCE AGENCY AGREEMENT
For the purpose of calculating the rate of interest payable on the subclass
A-1, A-2 and B-1 Notes, MSAF has entered into a reference agency agreement with
the trustee, Bankers Trust Company as reference agent and the cash manager. The
reference agent determines LIBOR for each interest accrual period following the
initial interest accrual period, on a reference date (the date that is two
business days before the payment date on which the interest accrual period
begins).
Under the reference agency agreement, the reference agent determines LIBOR
as follows:
On each reference date, the reference agent will determine LIBOR as the per
annum offered rate for deposits in U.S. dollars for a period of one month that
appears on the display designated as page "3750" on the Telerate Monitor (or
such other page or service as may replace it for the purpose of displaying LIBOR
of major banks for U.S. dollar deposits) at approximately 11:00 a.m. (London
time).
If this offered rate is replaced by the corresponding rates of more than
one bank, then the determination of LIBOR shall be made on the basis of the
average of the rates (being at least two) that appear. If these rates do not
appear or the Telerate page is unavailable, the reference agent will request
that each of the banks or a substitute reference bank in London provide the
reference agent with its offered quotation to prime banks for dollar deposits in
London for the next interest accrual period as at 11:00 a.m. (London time) on
the reference date. In this case, the floating rate of interest for each
subclass of Notes will be the average of the quotations received (at least two)
plus the applicable interest spread over LIBOR (and step-up interest, if
payable).
If one or no reference bank provides a quotation, the reference agent will
select New York City banks who provide quotations for their U.S. dollar lending
rate to leading European banks on the reference date for the next interest
accrual period. In this case, the interest rate for the next interest accrual
period will be the average of these quotations plus the applicable interest
spread over LIBOR (and step-up interest, if payable). If the banks selected do
not provide these quotations, the interest rate will be the rate that applied to
the last interest accrual period.
Once it determines the interest rate, the reference agent will calculate
the interest amount for the interest accrual period for the subclass A-1, A-2
and B-1 Notes as:
(I)(P) X N/360, where
<TABLE>
<S> <C>
I = interest rate for the interest accrual period
P = outstanding principal balance of the subclass at the
beginning of the interest accrual period, as estimated by
the reference agent
N = number of days in the interest accrual period.
</TABLE>
The reference agent's determination of LIBOR, the interest rate and the
interest amount for the subclass A-1, A-2 and B-1 Notes (in the absence of
negligence, wilful default, bad faith or manifest error) will be conclusive and
binding upon all parties.
The reference agent will give notice of applicable LIBOR, the payment date,
the interest rate for the subclass A-1, A-2 and B-1 Notes for the relevant
interest accrual period and the amount of interest on each of the subclass A-1,
A-2 and B-1 Notes to MSAF, the listing agent for the Luxembourg Stock Exchange
and the cash manager. Holders of the subclass A-1, A-2 and B-1 Notes may obtain
such information at the offices of the listing agent or paying agent in
Luxembourg or otherwise in the cash reports provided to noteholders by the
trustee on the second business day before each payment date and any other date
for distribution of any payments with respect to the notes.
67
<PAGE> 72
If the reference agent does not or is unable to determine the interest rate
and amount for an interest accrual period as described above, the administrative
agent will determine such rate of interest or calculate such interest amount in
accordance with the provisions described above.
MSAF reserves the right to terminate the appointment of the reference agent
at any time on 30 days' notice and to appoint a replacement reference agent in
its place. Notice of any such termination will be given to the holders of the
subclass A-1, A-2 and B-1 Notes. The reference agent may not be removed or
resign its duties unless a successor has been appointed.
PRINCIPAL AMORTIZATION
For each class of Notes, only to the extent that there are sufficient funds
in the collection account, principal will be distributed on each payment date
equal to the sum of the following amounts:
- the Minimum Principal Payment Amount
- the Scheduled Principal Payment Amount
- the Supplement Principal Payment Amount (only applicable to the class A
and class B notes)
- redeemed principal as described below in paragraphs (21) through (24)
under "-- Priority of Payments."
If MSAF issues any additional notes or refinancing notes, each issuance
will be a new subclass of the relevant class of Notes.
MINIMUM PRINCIPAL PAYMENT AMOUNT. For each class of Notes, the "Minimum
Principal Payment Amount" will equal the difference, if positive, between the
outstanding principal balance of such class and the Minimum Target Principal
Balance for such class on the payment date.
On each payment date, the "Minimum Target Principal Balance" for the class
A and class B notes will equal:
(MCP) X (APV), where
<TABLE>
<S> <C>
MCP = the "Minimum Class Percentage" as set forth in Appendices 5
and 6 to this prospectus and
APV = the "Assumed Portfolio Value" for the payment date as
described below.
</TABLE>
In the case of the class A Notes only, IF the outstanding principal balance of
the class A Notes (including any additional notes and refinancing notes) is
greater than the Adjusted Portfolio Value (as described below), THEN the Minimum
Target Principal Balance of the class A Notes will be equal to the Scheduled
Target Principal Balance of the class A Notes (as described below).
For each payment date, the Minimum Target Principal Balance for the class C
and class D Notes is set out in Appendices 7 and 8 to this prospectus.
For each payment date, the "Assumed Portfolio Value" for the initial
aircraft will equal the sum of the following products:
(IAV) X (DF1)/(DF2), where
<TABLE>
<S> <C>
IAV = the initial appraised value of each aircraft on the relevant
calculation date
DF1 = the depreciation factor for that aircraft on the calculation
date
DF2 = the depreciation factor for that aircraft on March 3, 1998.
</TABLE>
"Initial Appraised Value" means the average of the base values of each of
the aircraft, determined, in the case of the initial aircraft as of September
30, 1997 and, in the case of any additional aircraft, as of a date not more than
six months prior to the closing date for the issue of the relevant additional
notes.
68
<PAGE> 73
The depreciation factor equals: (1 - (kn)) X (1 + g)(n) but not less than
zero
where, with respect to the initial aircraft:
<TABLE>
<S> <C>
n = age of the aircraft expressed in years
1
k =
-----------------------------------------
expected useful life
g = 0.02
</TABLE>
The depreciation factors produce a "depreciation curve" that assumes that
the value of an initial aircraft will decline at an accelerating rate as the
aircraft ages. We have used the depreciation factors described above solely for
the purpose of determining repayments of principal of the Notes. They are not
intended to predict or conform to actual declines in aircraft values over any
period. Furthermore, variables used to calculate the depreciation factor will
change as the composition of the portfolio changes through acquisitions and
sales of additional aircraft and initial aircraft. Finally, MSAF Group may in
the future apply different depreciation factors or alternative methodologies to
express the assumed decline in values of additional aircraft. In addition, the
Minimum Class Percentages, the Scheduled Class Percentages and the Supplemental
Class Percentages for the class A and class B Notes and Minimum Target Principal
Balances and Scheduled Target Principal Balances for the class C and class D
Notes will change as additional aircraft are acquired. The Pool Factors and the
Extended Pool Factors for each subclass that are described below will not change
as the composition of the portfolio changes.
Scheduled Principal Payment Amount. For each class of Notes, the
"Scheduled Principal Payment Amount" on any payment date will equal the
difference, if positive, between the outstanding principal balance of such class
(after giving effect to any payment of the Minimum Principal Payment amount for
such class) and the Scheduled Target Principal Balance for such class.
On each payment date, the "Scheduled Target Principal Balance" for the
class A Notes will equal:
(SCP) X (APV*), where
<TABLE>
<S> <C>
SCP = the "Scheduled Class Percentage" on the payment date (as
set forth in Appendix 5 to this prospectus)
APV* = EITHER the Assumed Portfolio Value on the payment date OR
105% of the Adjusted Portfolio Value on the payment date,
WHICHEVER IS LESS.
</TABLE>
For each payment date the Scheduled Target Principal Balance for the class
B Notes will equal:
(SCP) X (APV), where
<TABLE>
<S> <C>
SCP = the Scheduled Class Percentage on the payment date (as set
forth in Appendix 6)
APV = the Assumed Portfolio Value on the payment date.
</TABLE>
For each payment date, the Scheduled Target Principal Balance of the class
C and class D Notes is set out in Appendices 7 and 8 to this prospectus.
For each payment date or the calculation date preceding such payment date,
the "Adjusted Portfolio Value" will equal the sum of the following amounts for
each aircraft in the portfolio:
(Avg. BV) X (DF1)/(DF2), where
<TABLE>
<S> <C>
Avg. BV = the average base value of the aircraft as determined in
the most recent appraisal
DF1 = the depreciation factor for the aircraft on the
calculation date
DF2 = the depreciation factor for the aircraft on the date of
the most recent appraisal.
</TABLE>
Supplemental Principal Payment Amount. For the class A and class B Notes,
the "Supplemental Principal Payment Amount" on any payment date will equal the
difference, if positive, between the outstanding principal balance of such class
(after giving effect to the payment of any Minimum Principal Payment Amount and
Scheduled Principal Payment Amount) and the Supplemental Target Principal
Balance for such class.
69
<PAGE> 74
On each payment date, the "Supplemental Target Principal Balance" for the
class A and class B Notes will equal:
(Supp. CP) X (APV), where
<TABLE>
<S> <C>
Supp. CP = the "Supplemental Class Percentage" on the payment date
(as set forth in Appendices 5 and 6)
APV = the Assumed Portfolio Value on the payment date.
</TABLE>
ALLOCATION OF PRINCIPAL AMONG SUBCLASSES OF NOTES
On the expected final payment date of the subclass A-1 Notes, MSAF intends
to refinance 100% of the outstanding principal balance of the subclass A-1 Notes
by issuing refinancing notes and selling such refinancing notes in the capital
markets. Failure to repay any subclass A-1 Note in full at its expected final
payment date will not result in an event of default. If the subclass A-1 Notes
are not repaid in full on their expected final payment date, then that subclass
will convert automatically into a subclass of Notes having a principal repayment
schedule intended to ensure that the remaining outstanding principal balance of
the subclass A-1 Notes will be repaid in full on or before its final maturity
date in accordance with the subclass A-1 pool factors set forth in Appendix 9.
MSAF may also refinance any other subclass of Notes, at any time, at the
redemption price that would be payable if MSAF were to have redeemed such Notes
instead. See "-- Refinancing" and "-- Indenture Covenants -- Limitation on
Indebtedness" for a description of the redemption price.
The terms of the subclass A-2, subclass B-1, subclass C-1 and subclass D-1
Notes will require amortization of their outstanding principal balance before
their expected final payment dates, if there are funds available in accordance
with the order of priorities set forth under "-- Priority of Payments."
IF on a payment date, we must pay a principal amount on a class of Notes
according to the order of priorities but the amount of our available collections
is not sufficient to pay the amount payable to all subclasses of that class,
THEN the available amount will be allocated as follows:
(1) First, to each subclass in order of the subclass that was issued
first, the difference, if positive, between the outstanding principal
balance of each subclass and the following amount:
(EPF) X (IPB), where
<TABLE>
<S> <C>
EPF = the "Extended Pool Factor" for the subclass as set forth
in Appendix 10
IPB = the initial principal balance for the subclass at the time
it was issued.
</TABLE>
If two or more subclasses were issued on the same date, available
collections will be applied to each of those subclasses pro rata
according to the result of the above calculation for each subclass.
(2) Second, to each subclass, pro rata according to the amount of but not
more than the difference, if positive, between the outstanding
principal balance of each subclass (after giving effect to any payment
under clause (1) above) and the following amount:
(PF) X (IPB), where
<TABLE>
<S> <C>
PF = the "Pool Factor" for the subclass as set forth in
Appendix 9
IPB = the initial principal balance of the subclass at the time
it was issued.
</TABLE>
(3) Third, to each subclass with an expected final payment date on or
before the payment date, in order of the earliest issued subclass. If
there are two or more subclasses that were issued on the same date,
available collections will be applied to them in order of the subclass
with the earliest expected final payment date. If two or more of those
subclasses have the same expected final payment date, then available
collections will be applied pro rata according to the outstanding
principal balances of the subclasses on the payment date after any
payments under clauses (1) and (2) above.
(4) Fourth, to each subclass with an Excess Amortization Date (as set
forth below) on or before such payment date, pro rata according to the
outstanding principal balance of each such subclass after giving
effect to any payment under clauses (1), (2) and (3) above on the
payment date.
70
<PAGE> 75
(5) Fifth, to each subclass in order of the earliest expected final
payment date. If two or more subclasses have the same expected final
payment date, then available collections will be applied pro rata to
those subclasses according to the outstanding principal balance of the
subclass on the payment date (after any payments under clauses (1),
(2) and (3) above).
The "Excess Amortization Date" for each subclass of the Notes is as set out
below:
<TABLE>
<CAPTION>
SUBCLASS OF NOTES EXCESS AMORTIZATION DATE
- ----------------- ------------------------
<S> <C>
Subclass A-1................................................ March 15, 2000
Subclass A-2................................................ April 15, 1998
Subclass B-1................................................ April 15, 1998
Subclass C-1................................................ March 15, 2013
Subclass D-1................................................ March 15, 2010
</TABLE>
REFINANCING
MSAF may repay any subclass of the Notes, in whole but not in part, on any
date with the proceeds of the issuance of any refinancing note issued in
accordance with the "Limitation on Indebtedness" covenant under the Indenture.
The amount we will repay in connection with the refinancing of any subclass of
Notes will be equal to the redemption price for such subclass on the refinancing
date plus accrued and unpaid interest.
At least five days but not more than 30 days before the proposed
refinancing date, the trustee will give notice of the refinancing to each holder
of such subclass of Notes in accordance with the notice provisions contained in
the Indenture. In connection with any refinancing, MSAF will deposit, in the
refinancing account an amount equal to the redemption price, plus an amount
sufficient to pay or provide for all accrued and unpaid interest as of the
refinancing date. Each notice of refinancing will state:
- the applicable refinancing date;
- the redemption price of the Notes to be repaid and the amount of
accrued but unpaid interest payable;
- that Notes of the subclass to be repaid must be surrendered; and
- that, unless MSAF defaults in the payment of the redemption price and
any accrued and unpaid interest, interest on the subclass of Notes to
be refinanced will cease to accrue on and after the refinancing date.
Once a notice of refinancing is published, each subclass of Notes to
which it applies will become due and payable on the refinancing date
at their redemption price, together with accrued and unpaid interest.
REDEMPTION
MSAF may redeem any subclass of the Notes out of available amounts, if any,
on any payment date, in whole or in part, at the redemption price plus accrued
but unpaid interest. In addition, MSAF must on each payment date redeem Notes to
the extent of any available collections in the manner described in "Principal
Amortization" above and "Priority of Payments" below at the redemption price
plus accrued but unpaid interest. Within each class or subclass of Notes being
redeemed in part, the amount of the outstanding principal balance being prepaid
will be applied in each case pro rata among all Notes of such subclass.
The redemption price of the subclass A-1, subclass A-2 and subclass B-1
Notes will be:
- IF THE REDEMPTION IS MADE WITH PROCEEDS FROM REFINANCING NOTES OR FROM
THIRD PARTIES OR OTHER THAN FROM AVAILABLE COLLECTIONS, the outstanding
principal balance of the subclass being redeemed multiplied by the
redemption premium set out in the table below.
- IF THE REDEMPTION IS MADE WITH AVAILABLE COLLECTIONS, the outstanding
principal balance of the subclass being redeemed.
71
<PAGE> 76
The redemption price of the subclass C-1 Notes will be EITHER:
- the discounted present value of Scheduled Principal Payment Amounts and
interest from the redemption date to the applicable Expected Final
Payment Date, discounted at the applicable Treasury yield plus 0.50%
OR
- the outstanding principal balance on the redemption date,
WHICHEVER IS HIGHER.
If MSAF redeems the subclass D-1 Notes before March 15, 2003, the
redemption price will be EITHER:
- the discounted present value of the Scheduled Principal Payments and
interest from the redemption date to March 15, 2003 PLUS the following
amount:
(RP) X (OPB), where
<TABLE>
<S> <C>
RP = the applicable redemption premium set out below
OPB = the assumed outstanding principal balance for such
subclass on March 15, 2003, discounted to the redemption
date at the applicable Treasury yield plus 1.00%
</TABLE>
OR
- the outstanding principal balance on the redemption date,
WHICHEVER IS HIGHER.
If MSAF redeems the subclass D-1 notes on or after March 15, 2003, the
redemption price will be the applicable redemption premium multiplied by the
outstanding principal balance on the redemption date.
<TABLE>
<CAPTION>
REDEMPTION DATE REDEMPTION PREMIUM
--------------- ------------------------------------------------
SUBCLASS SUBCLASS SUBCLASS SUBCLASS
A-1 NOTES A-2 NOTES B-1 NOTES D-1 NOTES
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
On or after March 15, 1999................... 100.50% 101.50% 102.50% --
On or after March 15, 2000................... 100.00% 101.00% 102.00% --
On or after March 15, 2001................... -- 100.50% 101.50% --
On or after March 15, 2002................... -- 100.00% 101.00% --
On or after March 15, 2003................... -- 100.00% 100.50% 105.25%
On or after March 15, 2004................... -- 100.00% 100.00% 104.50%
On or after March 15, 2005................... -- 100.00% 100.00% 103.75%
On or after March 15, 2006................... -- -- 100.00% 103.00%
On or after March 15, 2007................... -- -- 100.00% 102.25%
On or after March 15, 2008................... -- -- 100.00% 101.50%
On or after March 15, 2009................... -- -- 100.00% 100.75%
On or after March 15, 2010................... -- -- 100.00% 100.00%
On or after March 15, 2011................... -- -- 100.00% 100.00%
On or after March 15, 2012................... -- -- 100.00% 100.00%
On or after March 15, 2013................... -- -- 100.00% 100.00%
On or after March 15, 2014................... -- -- -- 100.00%
</TABLE>
Treasury Yield means a per annum rate (expressed as a monthly equivalent
yield) determined to be the per annum rate equal to the semi-annual yield to
maturity of the 6 1/4% United States Treasury Note maturing on February 15,
2003.
72
<PAGE> 77
For redemptions of the subclass C-1 Notes, Treasury Yield means, on any
payment date the interest rate (expressed as a semi-annual decimal and, in the
case of United States Treasury bills, converted to a bond equivalent yield)
determined to be the per annum rate equal to the semiannual yield to maturity
for United States Treasury securities maturing on the Average Life Date of such
subclass and trading in the public securities markets either (x) as determined
by interpolation between the most recent weekly average yield to maturity for
two series of United States Treasury securities trading in the public securities
markets, (A) one maturing as close as possible to, but earlier than, the Average
Life Date of such subclass and (B) the other maturing as close as possible to,
but later than, the Average Life Date of such subclass in each case as published
in the most recent H.15 (519) or (y) if a weekly average yield to maturity for
United States Treasury securities maturing on the Average Life Date of such
subclass is reported in the most recent H.15 (519), such weekly average yield to
maturity as published in such H.15 (519). "H.15 (519)" means the weekly
statistical release designated as such, or any successor publication, published
by the Board of Governors of the Federal Reserve System. The date of
determination of the Treasury Yield with respect to the Subclass C-1 Notes shall
be the fourth business day prior to the applicable Payment Date and the "most
recent H.15 (519)" means the H.15 (519) published prior to the close of business
on the fourth business day prior to the applicable Payment Date.
Average Life Date shall be the date which follows the applicable Payment
Date by a period equal to the Remaining Weighted Average Life of such subclass.
Remaining Weighted Average Life, with respect to the Subclass C-1 Notes on any
payment date shall be (a) the sum of the products of (i) each Scheduled
Principal Payment Amount for such subclass on each subsequent payment date
(each, a "Subsequent Date") and (ii) the number of days remaining until such
Subsequent Date divided by (b) the then outstanding principal balance of such
subclass on such payment date.
REDEMPTION FOR TAXATION PURPOSES. All payments of principal, interest and
premium, if any, made by MSAF in respect of any Notes will be made without
withholding or deduction for or on account of any present or future taxes or
duties of whatever nature unless required by law. Should such withholding or
deduction be required by law, MSAF will not be obliged to pay any additional
amounts in respect of such withholding or deduction.
IF AT ANY TIME:
(a) MSAF is, or on the next payment date will be, required to make any
withholding or deduction under the laws or regulations of any applicable
tax authority with respect to any payment in respect of any subclass of
Notes; or
(b) MSAF is or will be subject to any circumstance (whether by reason of
any law, regulation, regulatory requirement or double-taxation
convention, or the interpretation or application thereof, or otherwise)
leading to the imposition of a tax (whether by direct assessment or by
withholding at source) or other similar imposition by any jurisdiction
which would
(1) materially increase the cost to MSAF of making payments in respect
of any subclass of Notes or of complying with its obligations under
or in connection with any Notes;
(2) materially increase the operating or administrative expenses of
MSAF; or
(3) otherwise obligate MSAF or any of its subsidiaries to make any
material payment on, or calculated by reference to, the amount of
any sum received or receivable by MSAF, or by the administrative
agent on behalf of MSAF as contemplated by the Administrative
Agency Agreement;
THEN MSAF will inform the trustee at such time of any such
requirement or imposition and shall use its or their best efforts
to avoid the effect of the same. MSAF shall take no action to avoid
such effects unless each rating agency has confirmed that such
action will not result in the lowering or withdrawal by it of its
current rating of any subclass of MSAF Notes then outstanding.
73
<PAGE> 78
IF, after using its best efforts to avoid the adverse effect
described above, MSAF or any of its subsidiaries has not avoided
such effects, THEN MSAF may, at its election, redeem the Notes of
any or all subclasses to which such withholding or deduction
applies in whole with accrued and unpaid interest but without
premium on any payment date. However, any such redemptions may not
occur more than 30 days prior to such time as the requirement or
imposition described in (a) or (b) above is to become effective.
Method of Redemption. If MSAF proposes to redeem any subclass of Notes
with funds other than available collections, at least 20 days but not more than
60 days before the redemption date, the trustee will give notice of such
redemption to each holder of subclass of Notes. If a redemption is of less than
all of the Notes of any subclass, Notes of such subclass to be redeemed will be
repaid principal pro rata, to the extent funds are available. In the case of any
redemption in whole, other than a redemption resulting from taxation reasons,
MSAF will deposit, in the defeasance/redemption account the redemption price,
together with an amount sufficient to pay or provide for all of the accrued and
unpaid interest as of the redemption date. If MSAF redeems all or any part of a
subclass of Notes with available collections as required by the priority of
payments, MSAF will send no notice of redemption.
Each notice of redemption will state:
- the applicable redemption date,
- the trustee's arrangements for making payments due,
- the redemption price of the Notes to be redeemed,
- in the case of redemptions in whole, that Notes of the subclass to be
redeemed must be surrendered (which action may be taken by any holder of
the Notes or its authorized agent) to the trustee to collect the
redemption price and accrued and unpaid interest on such Notes, and
- in the case of redemptions in whole, that, unless MSAF defaults in the
payment of the redemption price and any accrued and unpaid interest
thereon, interest on the subclass of Notes called for redemption will
cease to accrue on and after the redemption date. Once a notice of
redemption for a redemption in whole is mailed, each subclass of Notes to
which it applies will become due and payable on the redemption date at
its Redemption Price, together with accrued and unpaid interest thereon.
DEFEASANCE
MSAF at any time may terminate all of its obligations under the Notes and
the Indenture -- this is known as legal defeasance. Legal defeasance will not
apply to (1) obligations relating to the defeasance trust and (2) obligations to
register the transfer or exchange of the Notes, to replace mutilated, destroyed,
lost or stolen Notes and to maintain a register in respect of the Notes.
Also, MSAF at any time may terminate its obligations under the covenants
described under "Indenture Covenants" and "Operating Covenants" and the events
of default described under "Events of Default and Remedies" other than clauses
(a), (b), (c), (e) (solely with respect to MSAF) and (f) (solely with respect to
MSAF) set forth under "-- Events of Default and Remedies." This is known as
covenant defeasance.
MSAF may exercise its legal defeasance options even if it has already
exercised the covenant defeasance option. If MSAF exercises its legal defeasance
options, payment of the Notes may not be accelerated because of an event of
default. If MSAF exercises its covenant defeasance options, payment of the Notes
may not be accelerated because of the events of default described under "Events
of Default and Remedies" other than clauses (a), (b), (c), (e) (solely with
respect to MSAF) and (f) (solely with respect to MSAF) set forth under "--
Events of Default and Remedies."
In order to exercise either defeasance option, MSAF must irrevocably
deposit in trust with the trustee any combination of cash or obligations of the
U.S. Government as will be sufficient for the payment of principal, premium (if
any), and interest on the Notes to redemption or maturity. MSAF also must comply
74
<PAGE> 79
with other conditions, including delivering to the trustee an opinion of counsel
to the effect that holders of the Notes (1) will not recognize income, gain or
loss for United States federal income tax purposes as a result of the deposit
and defeasance and (2) will be subject to United States federal income tax on
the same amount and in the same manner and at the same times as would have been
the case if such deposit and defeasance had not occurred. In the case of legal
defeasance only, the opinion of counsel must be based on a ruling of the
Internal Revenue Service or other change in applicable United States federal
income tax law.
Priority of Payments
On each payment date, the administrative agent will withdraw all amounts on
deposit in the collection account and will distribute them in the order of
priority set forth below. Any amount below will be paid only if all amounts
ranking senior to that amount are paid in full on the payment date.
(1) First, to the expense account, or directly to the relevant expense
payees, an amount equal to the required expense amount and then to
the relevant Expense payees;
(2) Second, the following amounts pro rata:
(A) to the holders of each subclass of class A Notes, all accrued and
unpaid interest excluding step-up interest, if applicable, on
such subclass of class A Notes pro rata according to the amount
of accrued and unpaid interest on such subclass of class A Notes;
and
(B) pro rata, to any swap provider, an amount equal to any payment,
other than subordinated swap payments due from MSAF under any
swap agreement;
(3) Third, (1) first, to any persons providing primary eligible credit
facilities, any amounts then payable to such persons under the
terms of their respective primary eligible credit facilities and
THEN, (2) retain in the collection account an amount, if positive,
equal to (A) the minimum liquidity reserve amount less (B) amounts
available for drawing under any primary eligible credit
facilities;
(4) Fourth, to the holders of class A Notes, in the order of priority
by subclass set forth under "-- Allocation of Principal among
Subclasses of Notes," an amount equal to the Minimum Principal
Payment Amount with respect to the class A Notes;
(5) Fifth, to the holders of each subclass of class B Notes, all
accrued and unpaid interest, excluding step-up interest, if
applicable, on such subclass of class B Notes pro rata according
to the amount of accrued and unpaid interest on such subclass of
class B Notes;
(6) Sixth, to the holders of class B Notes, in the order of priority
by subclass set forth under "-- Allocation of Principal among
Subclasses of Notes," an amount equal to the Minimum Principal
Payment Amount with respect to the class B Notes;
(7) Seventh, to the holders of each subclass of class C Notes, all
accrued and unpaid interest, excluding step-up interest, if
applicable, on such subclass of class C Notes pro rata according
to the amount of such accrued and unpaid interest on such subclass
of class C Notes;
(8) Eighth, to the holders of Class C Notes, in the order of priority
by subclass set forth under "-- Allocation of Principal among
Subclasses of Notes," an amount equal to the Minimum Principal
Payment Amount with respect to the class C Notes;
(9) Ninth, to the holders of each subclass of class D Notes, all
accrued and unpaid interest, excluding step-up interest, if
applicable, on such subclass of class D Notes pro rata according
to the amount of such accrued and unpaid interest on such subclass
of class D Notes;
(10) Tenth, to the holders of class D Notes, in the order of priority
by subclass set forth under "-- Allocation of Principal among
Subclasses of Notes," an amount equal to the Minimum Principal
Payment Amount with respect to the class D Notes;
75
<PAGE> 80
(11) Eleventh, (1) first, to any persons providing credit or liquidity
enhancement facilities that are not primary eligible credit
facilities, any amounts then payable to such persons under the
terms of their facilities and THEN, (2) retain in the collection
account an amount, if positive, equal to (A) the liquidity reserve
amount less (B) the sum of the amount of cash reserved under (3)
above plus the amounts available for drawing under any eligible
credit facilities;
(12) Twelfth, to the holders of class A Notes, in the order of priority
by subclass set forth under "-- Allocation of Principal among
Subclasses of Notes," an amount equal to the Scheduled Principal
Payment Amount with respect to the class A Notes;
(13) Thirteenth, to the holders of class B Notes, in the order of
priority by subclass set forth under "-- Allocation of Principal
among Subclasses of Notes," an amount equal to the Scheduled
Principal Payment Amount with respect to the class B Notes;
(14) Fourteenth, to the holders of class C Notes, in the order of
priority by subclass set forth under "-- Allocation of Principal
among Subclasses of Notes," an amount equal to the Scheduled
Principal Payment Amount with respect to the class C Notes;
(15) Fifteenth, to the holders of class D Notes, in the order of
priority by subclass set forth under "-- Allocation of Principal
among Subclasses of Notes," an amount equal to the Scheduled
Principal Payment Amount with respect to the class D Notes;
(16) Sixteenth, to the permitted accruals balance in the expense
account, an amount equal to permitted accruals in respect of any
modification payments (or any part thereof);
(17) Seventeenth, to the holders of each subclass of Notes entitled
thereto, an amount equal to all accrued and unpaid step-up
interest on such subclass, if any, pro rata according to the
amount of such accrued and unpaid step-up interest;
(18) Eighteenth, to the holders of the Beneficial Interest, the
Beneficial Interest Distribution Amount;
(19) Nineteenth, to the holders of class A Notes, in the order of
priority by subclass set forth under "-- Allocation of Principal
among Subclasses of Notes," an amount equal to the Supplemental
Principal Payment Amount with respect to the class A Notes;
(20) Twentieth, to the holders of class B Notes, in the order of
priority by subclass set forth under "-- Allocation of Principal
among Subclasses of Notes," an amount equal to the Supplemental
Principal Payment Amount with respect to class B Notes;
(21) Twenty-first, to the holders of class D Notes, in the order of
priority by subclass set forth under "-- Allocation of Principal
among Subclasses of Notes," an amount equal to the redemption
price of the outstanding principal balance, if any, of any
subclass of class D Notes;
(22) Twenty-second, to the holders of class C Notes, in the order of
priority by subclass set forth under "-- Allocation of Principal
among Subclasses of Notes," an amount equal to the redemption
price of the outstanding principal balance, if any, of any
subclass of class C Notes;
(23) Twenty-third, to the holders of class B Notes, in the order of
priority by subclass set forth under "-- Allocation of Principal
among Subclasses of Notes," an amount equal to the redemption
price of the outstanding principal balance, if any, of any
subclass of class B Notes;
(24) Twenty-fourth, to the holders of class A Notes, in the order of
priority by subclass set forth under "-- Allocation of Principal
among Subclasses of Notes," an amount equal to the redemption
price of the outstanding principal balance, if any, of any
subclass of class A Notes;
(25) Twenty-fifth, payments to swap providers which are subordinated in
accordance with their terms; and
(26) Twenty-sixth, to the holders of the Beneficial Interest, all
remaining amounts.
76
<PAGE> 81
PRIORITY OF PAYMENTS FOLLOWING A DEFAULT NOTICE
If a default notice is delivered to MSAF or the administrative agent or an
event of default described in clause (5) or (6) under "-- Events of Default and
Remedies" occurs and continues, the allocation of payments described above will
not apply. Instead, all amounts on deposit in the collection account and the
expense account will be applied in the following order of priority:
(1) First, to the expense account, or directly to the relevant expense
payees, an amount equal to the required expense amount;
(2) Second, pro rata, to the providers of any primary eligible credit
facilities, such amounts as are required to make any payments due to
such providers under their primary eligible credit facilities;
(3) Third, the following amounts: (A) pro rata to the holders of each
subclass of class A Notes, all accrued and unpaid interest (including
step-up interest, if any) on, and all outstanding principal of, such
subclass and (B) pro rata to any swap provider, such amounts as are
required to make any payments (other than subordinated swap payments)
due to such swap provider under any swap agreement;
(4) Fourth, pro rata to the holders of each subclass of class B Notes, all
accrued and unpaid interest (including step-up interest, if any) on
and all outstanding principal of such subclass of class B Notes;
(5) Fifth, pro rata to the holders of each subclass of class C Notes, all
accrued and unpaid interest (including step-up interest, if any) on
and all outstanding principal of such subclass of class C Notes;
(6) Sixth, pro rata to the holders of each subclass of class D Notes, all
accrued and unpaid interest (including step-up interest, if any) on
and all outstanding principal of such subclass of class D Notes;
(7) Seventh, pro rata to the providers of any credit or liquidity
enhancement facilities in favor of MSAF other than primary eligible
credit facilities, such amounts as are required to make any payments
due under their facilities;
(8) Eighth, pro rata to any swap provider, such amounts as are required to
make any subordinated swap payments due to such swap provider under
any swap agreement; and
(9) Ninth, to the holders of the Beneficial Interest, all remaining
amounts.
INDENTURE COVENANTS
No Release of Obligations. MSAF will not take, or knowingly permit any
subsidiary to take, any action which would amend, terminate, other than any
termination in connection with the replacement of such agreement with an
agreement on terms substantially no less favorable to MSAF and its subsidiaries
than the agreement being terminated, or discharge or prejudice the validity or
effectiveness of the Indenture, other than as permitted therein, the security
trust agreement, the cash management agreement, the administrative agency
agreement, the financial advisory agreement or any servicing agreement or permit
any party to any such document to be released from such obligations, except, in
each case, as permitted or contemplated by the terms of such document, except:
MSAF may take or permit such actions and may permit such releases if it shall
have first obtained an authorizing resolution of the controlling trustees
determining that such action, permitted action or release does not materially
adversely affect the interests of the Noteholders.
Despite the preceding paragraph, in any case:
(1) MSAF will not take any action which would result in any amendment or
modification to any conflicts standard or duty of care in such
agreements and
77
<PAGE> 82
(2) there must be at all times an administrative agent, a cash manager, a
financial advisor and, unless a servicer resigns prior to the
appointment of a replacement servicer as a result of any failure to
pay amounts due and owing to it, one or more servicers with respect to
all aircraft in the portfolio.
Limitation on Encumbrances. MSAF will not, and will not permit any
subsidiary to, create, incur, assume or suffer to exist any mortgage, pledge,
lien, encumbrance, charge or security interest, including, without limitation,
any conditional sale, or any sale with recourse against the seller or any
affiliate of the seller, or any agreement to give any security interest over or
with respect to any of MSAF's or any subsidiary's assets, excluding segregated
funds, including, without limitation, all beneficial interests in trusts,
ordinary shares and preferred shares, any options, warrants and other rights to
acquire such shares of capital stock and any indebtedness of any subsidiary held
by MSAF or a subsidiary.
However, MSAF may create, incur, assume or suffer to exist:
(1) any permitted encumbrance;
(2) any security interest created or required to be created under the
security trust agreement;
(3) encumbrances over rights in or derived from leases, upon confirmation
from the rating agencies in advance that such action or event will not
result in the lowering or withdrawal of any rating assigned by any
rating agency to any of the Notes, so long as any transaction or series
of transactions resulting in such encumbrance, taken as a whole, does
not materially adversely affect the amount of collections that would
have been received by MSAF from such lease had such encumbrance not been
created or
(4) any other encumbrance the validity or applicability of which is being
contested in good faith in appropriate proceedings by MSAF or any of its
subsidiaries.
Affiliate means, with respect to any person, any other person that,
directly or indirectly, controls, is controlled by or is under common control
with, such person or is a director or officer of such person.
Control of a person means the possession, direct or indirect, of the power
to direct or cause the direction of the management and policies of such person,
whether through the ownership of voting stock, by contract or otherwise;
Permitted encumbrance means:
(1) any lien for taxes, assessments and governmental charges or levies not
yet due and payable or which are being contested in good faith by
appropriate proceedings;
(2) in respect of any aircraft, any liens of a repairer, carrier or hanger
keeper arising in the ordinary course of business by operation of law or
any engine or parts-pooling arrangements or other similar lien;
(3) any permitted lien or encumbrance on any aircraft, engines or parts as
defined under any lease thereof (other than liens or encumbrances
created by the relevant lessor);
(4) any liens created by or through or arising from debt or liabilities or
any act or omission of any lessee in each case either in contravention
of the relevant lease (whether or not such lease has been terminated) or
without the consent of the relevant lessor (as long as if such lessor
becomes aware of any such lien, such lessor shall use commercially
reasonable efforts to have any such liens lifted);
(5) any head lease, lease, conditional sale agreement or purchase option
existing on March 3, 1998, with respect to the initial aircraft, or, in
the case of any additional aircraft, on the date such aircraft is
acquired by MSAF or any of its subsidiaries or affiliates, or any
aircraft agreement meeting the requirements of (c) or (e) of the second
paragraph under the "Limitation on Aircraft Sales" covenant;
(6) any lien for air navigation authority, airport tending, gate or
handling (or similar) charges or levies;
(7) any lien created in favor of MSAF or any of its subsidiaries or the
Security Trustee;
78
<PAGE> 83
(8) any lien not referred to in (1) through (7) above which would not
adversely affect the owner's rights and does not exceed the greater of
1% of the aggregate initial appraised value of the portfolio and
$250,000 per aircraft; and
(9) any encumbrance arising under the ILFC facility or any other
agreements the terms of which contemplate that custody of security
deposits held for lessees with respect to additional aircraft is held by
a third party.
Limitation on Restricted Payments. MSAF will not, and will not permit any
of its subsidiaries to:
(1) declare or pay any dividend or make any distribution on its stock held
by persons other than MSAF or any of its subsidiaries; except that, so
long as no event of default occurs and continues, MSAF may make payments
on its Beneficial Interest to the extent permitted by the Indenture;
(2) purchase, redeem, retire or otherwise acquire for value any beneficial
interest in MSAF or any stock of its subsidiaries held by and on behalf
of persons other than MSAF, any of its subsidiaries or other Persons
permitted under the requirements of (2)(b) under the "Limitation on the
Issuance, Delivery and Sale of Capital Stock" covenant;
(3) make any interest, principal or premium payment on the Notes or make
any voluntary or optional repurchase, defeasance or other acquisition or
retirement for value of indebtedness of MSAF or any of its subsidiaries
that is not owed to MSAF or any of its subsidiaries other than in
accordance with the Notes and the Indenture; except that MSAF or any of
its affiliates may repurchase, defease or otherwise acquire or retire
any of the Notes other than from available collections so long as any
new notes of MSAF issued in connection with such transaction rank pari
passu with the Notes being repurchased, defeased, acquired or retired;
provided further that the Controlling Trustees shall determine that such
action does not materially adversely affect the Noteholders and shall
have obtained confirmation in advance that such action will not result
in the lowering or withdrawal of any rating assigned by any Rating
Agency to any of the MSAF Notes; or
(4) make any investments other than permitted account investments,
investments permitted under the Limitation on Engaging in Business
Activities covenant, allowed restructurings and investments in any
subsidiaries that own additional aircraft).
The term "investment" for purposes of the above covenant means any loan or
advance to a person or entity, any purchase or other acquisition of any
beneficial interest, capital stock, warrants, rights, options, obligations or
other securities of such person or entity, any capital contribution to such
person or entity or any other investment in such person or entity. The term
"investment" shall not include any obligation of a purchaser of an aircraft to
make deferred or installment payments pursuant to any aircraft agreement
specified in clauses (c) or (e) of the second paragraph under "Limitations on
Aircraft Sales" below so long as MSAF Group retains a security interest in the
relevant aircraft until all such obligations are discharged.
Limitation on Dividends and Other Payment Restrictions. MSAF will not, and
will not permit any of its subsidiaries to, create or otherwise suffer to exist
any consensual encumbrance or restriction of any kind on the ability of any
subsidiary to:
(1) declare or pay dividends or make any other distributions permitted by
applicable law, or purchase, redeem or otherwise acquire for value,
any beneficial interest in MSAF or the stock of any such subsidiary,
as the case may be;
(2) pay any Indebtedness owed to MSAF or such subsidiary;
(3) make loans or advances to MSAF or such subsidiary; or
(4) transfer any of its property or assets to MSAF or any other
subsidiary thereof.
The foregoing restrictions shall not apply to any consensual encumbrances
or other restrictions:
(1) existing on March 3, 1998, with respect to the initial aircraft, or,
with respect to any additional aircraft, on the date such aircraft is
acquired, under any related document, including any
79
<PAGE> 84
amendments, extensions, refinancings, renewals or replacements of such
documents so long as the consensual encumbrances and restrictions in any
such amendments, extensions, refinancings, renewals or replacements are
no less favorable in any material respect to the holders of the MSAF
Notes than those previously in effect and being amended, extended,
refinanced, renewed or replaced; or
(2) in the case of clause (4) above:
(a) that restrict in a customary manner the subletting, assignment or
transfer of any property or asset that is a lease, license,
conveyance or contract or similar property or asset: or
(b) existing by virtue of any transfer of, agreement to transfer,
option or right with respect to, or consensual encumbrance on, any
property or assets of MSAF or any subsidiary not otherwise
prohibited by the Indenture. This covenant shall not prevent MSAF
or any subsidiary from creating, incurring, assuming or suffering
to exist any encumbrances not otherwise prohibited under the
Indenture.
Limitation on Engaging in Business Activities. MSAF will not, and will not
permit any subsidiary to, engage in any business or activity other than:
(1) purchasing or otherwise acquiring aircraft assets (subject to the
limitations set forth in the "Limitation on Aircraft Acquisitions"
covenant);
(2) owning, holding, converting, maintaining, modifying, managing,
operating, leasing, re-leasing and, subject to the limitations set
forth in the "Limitations on Aircraft Sales" covenant, selling or
otherwise disposing of the aircraft;
(3) entering into all contracts and engaging in all related activities
incidental thereto, including from time to time accepting, exchanging,
holding or permitting any of its subsidiaries to accept, exchange or
hold promissory notes, contingent payment obligations or equity
interests, of lessees or their affiliates issued in connection with
the bankruptcy, reorganization or other similar process, or in
settlement of delinquent obligations or obligations anticipated to be
delinquent, of such lessees or their respective affiliates in the
ordinary course of business;
(4) providing loans to, and guaranteeing or otherwise supporting the
obligations and liabilities of, MSAF's subsidiaries or any future MSAF
group entity, in each case on such terms and in such manner as the
Controlling Trustees see fit and (whether or not such member of MSAF
Group derives a benefit therefrom) so long as such loans, guarantees
or other supports are provided in connection with the purposes set
forth in clauses (1)-(3) of this covenant;
(5) financing or refinancing the business activities described in clauses
(1)-(3) of this covenant through the offer, sale and issuance of any
securities of MSAF, upon such terms and conditions as the Controlling
Trustees see fit, for cash or in payment or in partial payment for any
property purchased or otherwise acquired by MSAF Group or any future
MSAF group entity;
(6) engaging in currency and interest rate exchange transactions for the
purposes of avoiding, reducing, minimizing, hedging against or
otherwise managing the risk of any loss, cost, expense or liability
arising, or which may arise, directly or indirectly, from any change
or changes in any interest rate or currency exchange rate or in the
price or value of any of the property or assets of MSAF or any of its
subsidiaries within limits determined by the Controlling Trustees from
time to time and submitted to the rating agencies, including but not
limited to dealings, whether involving purchases, sales or otherwise,
in foreign currency, spot and forward interest rate exchange
contracts, forward interest rate agreements, caps, floors and collars,
futures, options, swaps, and any other currency, interest rate and
other similar hedging arrangements and other similar instruments;
(7) establishing, promoting and aiding in promoting, constituting, forming
or organizing companies, trusts, syndicates, partnerships or other
entities of all kinds in any part of the world for the purposes set
forth in clauses (1)-(3) above;
80
<PAGE> 85
(8) acquiring, holding and disposing of shares, securities and other
interests in any such entity or partnership;
(9) disposing of shares, securities and other interests in, or causing the
dissolution of, any existing subsidiary so long as any disposition
which results in the disposition of an aircraft meets the requirements
set forth under the "Limitation on Aircraft Sales" covenant; and
(10) taking out, acquiring, surrendering and assigning policies of
insurance and assurances with any insurance company or companies which
MSAF or any of its subsidiaries may think fit and to pay the premiums
thereon.
Limitation on Indebtedness. MSAF will not, and will not permit any of its
subsidiaries to, incur, create, issue, assume, guarantee or otherwise become
liable for or with respect to, or become responsible for, the payment of,
contingently or otherwise, whether present or future, indebtedness, except as
described below.
For the purposes of the Indenture, "indebtedness" means, with respect to
any person at any date of determination without duplication:
(1) all indebtedness of such person for borrowed money;
(2) all obligations of such person evidenced by bonds, debentures, notes
or other similar instruments;
(3) all obligations of such person in respect of letters of credit or
other similar instruments including reimbursement obligations with
respect thereto;
(4) all obligations of such person to pay the deferred and unpaid purchase
price of property or services, which purchase price is due more than
six months after the date of purchasing such property or service or
taking delivery and title thereto or the completion of such services,
and payment deferrals arranged primarily as a method of raising
finance or financing the acquisition of such property or service;
(5) all obligations of such person under a lease of (or other agreement
conveying the right to use) any property, whether real, personal or
mixed, that is required to be classified and accounted for as a
capital lease obligation under generally accepted accounting
principles in the United States ("U.S. GAAP");
(6) all indebtedness (as defined in clauses (1) through (5) of this
paragraph) of other persons secured by a lien on any asset of such
person, whether or not such indebtedness is assumed by such person;
and
(7) all indebtedness as defined in clauses (1) through (5) of this
paragraph of other persons guaranteed by such person.
However, the above restriction does not apply to:
(1) Indebtedness under the Notes.
(2) Indebtedness under any refinancing notes or other indebtedness issued
in connection with the repurchase, acquisition, defeasance or
retirement for value of Notes so long as:
(a) such refinancing notes or other indebtedness receive ratings from
the rating agencies at the close of such refinancing or issuance
equal to or higher than those of the subclass being refinanced or
repurchased, acquired, defeased or retired (determined at the date
of incurrence);
(b) taking into account such refinancing or repurchase, acquisition,
defeasance or retirement for value, MSAF receives confirmation
prior to such refinancing from the rating agencies that such
transaction will not result in the lowering or withdrawal of any
rating assigned by any rating agency to any MSAF Notes outstanding
at such time; and
81
<PAGE> 86
(c) the net proceeds of any such refinancing or issuance shall be used
only to repay the outstanding principal balance of the subclass of
the Notes being so refinanced or repurchased, acquired, defeased or
retired (plus any redemption premium and transaction expenses
relating thereto).
(3) Indebtedness under guarantees by MSAF or any subsidiary of any other
member of MSAF Group other than guarantees described in clause (5)
below so long as no such indebtedness in respect of any member of MSAF
Group other than MSAF or any subsidiary of MSAF shall be incurred if
it would materially adversely affect the Noteholders.
(4) Indebtedness in respect of any additional notes incurred in connection
with a permitted additional aircraft acquisition so long as:
(a) taking into account the incurrence of such indebtedness, MSAF
receives prior confirmation that the incurrence of such
indebtedness will not result in the lowering or withdrawal of any
rating assigned by any rating agency to any of the Notes
outstanding at such time; and
(b) the net proceeds of such indebtedness shall be used only to finance
the permitted additional aircraft acquisition.
(5) Indebtedness in respect of guarantees by MSAF or any subsidiary of
indebtedness incurred by any future MSAF Group Entity other than a
subsidiary of MSAF in connection with a permitted additional aircraft
acquisition so long as:
(a) such future MSAF group entity shall have guaranteed the Notes;
(b) the indebtedness being guaranteed would be permitted pursuant to
clause (2) or (4) above if such indebtedness were incurred directly
by MSAF or any subsidiary in connection with such permitted
additional aircraft acquisition; and
(c) the Indebtedness being guaranteed was issued by such future MSAF
group entity under an indenture, the terms of which including the
covenants and other obligations of such future MSAF group entity
thereunder, are substantially similar to those of the Indenture.
(6) Indebtedness to aircraft sellers pursuant to aircraft acquisition or
similar agreements.
(7) Indebtedness under intercompany loans or any agreement between MSAF or
any of its subsidiaries and any other members of MSAF Group. Any
indebtedness owed by any member of MSAF Group to MSAF shall be
evidenced by promissory notes.
(8) Indebtedness of MSAF Group under any credit or liquidity enhancement
facility provided in favor of MSAF Group.
As used in this prospectus, guarantee means any obligation, contingent or
otherwise, of any person directly or indirectly guaranteeing any indebtedness or
other obligation of any other person and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or otherwise, of such
person:
(1) to purchase or pay or advance or supply funds for the purchase or
payment of such indebtedness or other obligation of any other person
or
(2) entered into for purposes of assuring in any other manner the obligee
of such indebtedness or other obligation of the payment thereof or to
protect such obligee against loss in respect thereof in whole or in
part.
The term guarantee shall not include endorsements for collection or deposit
in the ordinary course of business. The term guarantee when used as a verb has a
corresponding meaning.
82
<PAGE> 87
Limitation on Aircraft Sales. MSAF will not, and will not permit any of
its subsidiaries to, sell, transfer or otherwise dispose of any aircraft or any
interest therein, except as described below.
MSAF and any of its subsidiaries will be permitted to sell, transfer or
otherwise dispose of, directly or indirectly:
(1) any engines owned on March 3, 1998, or, in the case of any additional
aircraft, owned on the date such aircraft is acquired, or any
replacements thereof or other parts installed in or attached to any
aircraft; or
(2) one or more aircraft or an interest in aircraft:
(a) under a purchase option or other agreements of a similar character
existing on March 3, 1998, in the case of the initial aircraft, or,
in the case of any additional aircraft, on the closing date of the
related issue of additional notes;
(b) within or among MSAF and its subsidiaries without limitation, and
among MSAF or any of its subsidiaries and any other member of MSAF
Group if such sale, transfer or disposition, as the case may be,
would not materially adversely affect the Noteholders;
(c) under any aircraft agreement as long as such sale does not result
in a concentration default, and the net present value of the cash
net sale proceeds is not less than the note target price;
(d) pursuant to receipt of insurance proceeds in connection with an
event of loss; or
(e) under an aircraft agreement and, in any one calendar year, not
exceeding 10% of the adjusted portfolio value as determined by the
most recent appraisal obtained for such calendar year so long as:
(1) the Controlling Trustees unanimously confirm that each such
sale does not materially adversely affect MSAF and the
Noteholders; and
(2) such sale does not result in a concentration default.
For the purpose of this covenant, the net present value of the cash net
sale proceeds of any sale, transfer or other disposition of any aircraft shall
mean the present value of all payments received or to be received by MSAF Group
from the date of execution or option granting date, as the case may be, of the
relevant aircraft agreement through and including the date of transfer of title
to such aircraft, discounted back to the date of execution or option granting
date, as the case may be, of such aircraft agreement at the weighted average
cost of funds of MSAF Group (based on the cost of funds represented by the Notes
on the payment date immediately preceding such date and taking into account any
swap agreements).
The note target price of an aircraft means 103% of the aggregate
outstanding principal balance of the MSAF Notes, together with any accrued but
unpaid interest thereon, allocable to such aircraft on the date of the sale
agreement or purchase option date, as the case may be. On any date, the
outstanding principal balance of MSAF Notes allocable to an aircraft will equal
(ABV)/(APV) X (OPB), where
<TABLE>
<S> <C> <C>
ABV = the adjusted base value of the aircraft
APV = the adjusted portfolio value of the aircraft based on the
most recent appraisal
OPB = the aggregate outstanding principal balance of the MSAF
Notes on the most recent payment date.
</TABLE>
Aircraft agreement means any lease, sub-lease, conditional sale agreement,
finance lease, hire purchase agreement or other agreement (other than an
agreement relating to maintenance, modification or repairs) or any purchase
option granted to a person other than MSAF or its subsidiaries or any other
member of MSAF Group to purchase an aircraft pursuant to a purchase option
agreement, in each case where a person acquires or is entitled to acquire legal
title, or the economic benefits of ownership of, such aircraft.
83
<PAGE> 88
Net sale proceeds means the aggregate amount of cash received or to be
received from time to time (whether as initial or deferred consideration) by or
on behalf of the seller in connection with the transaction after deducting
(without duplication):
(1) reasonable and customary brokers' commissions and other similar fees
and commissions (including fees received by the servicer under the
servicing agreement); and
(2) the amount of taxes payable in connection with or as a result of such
transaction, in each case to the extent, but only to the extent, that
the amounts so deducted are, at the time of receipt of such cash,
actually paid to a person that is not an affiliate of the seller and
are properly attributable to such transaction or to the asset that is
the subject thereof.
Concentration default means an event of default under "Operating Covenants
- -- Concentration Limits," as such covenant may be adjusted from time to time
upon approval by the rating agencies, which would arise if effect were given to
any sale, transfer or other disposition or any purchase or other acquisition as
of the date of the binding sale or purchase agreement even if the sale, transfer
or other disposition or purchase or other acquisition is scheduled or expected
to occur after the date of the binding agreement.
Limitation on Aircraft Acquisitions. MSAF will not, and will not permit
any of its subsidiaries, to purchase or otherwise acquire any aircraft other
than the initial aircraft, any substitute aircraft or any interest therein
except as described below.
MSAF and any of its subsidiaries will be permitted to:
(1) purchase or otherwise acquire, directly or indirectly, additional
aircraft so long as:
(a) no event of default shall have occurred and be continuing;
(b) all Scheduled Principal Payment Amounts on the Notes have been
paid;
(c) the acquisition does not result in a concentration default; and
(d) after giving effect to such acquisition:
- no more than 90% of the portfolio by appraised base value
consists of Stage 3 narrowbody aircraft and regional jets,
- no more than 50% of the portfolio by appraised base value
consists of Stage 3 widebody aircraft, and
- no more than 15% consists of Stage 2 aircraft and turboprop
aircraft,
unless the Controlling Trustees obtain advance confirmation that
such action will not result in the lowering or withdrawal of any
rating assigned by any rating agency to any of the MSAF Notes
outstanding at such time; or
(2) act as sponsor of a future MSAF group entity other than a subsidiary
of MSAF that would fund an acquisition of aircraft assets with
indebtedness guaranteed by MSAF pursuant to the "Limitation on
Indebtedness" covenant as described above; so long as, if such
acquisition of aircraft assets had been consummated indirectly by
MSAF, such acquisition would have been permitted pursuant to the
preceding clause (1).
A Permitted Additional Aircraft Acquisition means a transaction described
in clause (1) or (2) above.
Limitation on Modification Payments and Capital Expenditures. MSAF will
not, and will not permit any of its subsidiaries to, make any capital
expenditures for the purpose of effecting any optional improvement or
modification of any aircraft, or for the optional conversion of any aircraft
from a passenger aircraft to a freighter or mixed-use aircraft, for the purpose
of purchasing or otherwise acquiring any engines or parts outside of the
ordinary course of business except as described below.
MSAF may, and may permit any of its subsidiaries to, make modification
payments if:
84
<PAGE> 89
(1) each modification payment, together with all other modification
payments made after March 3, 1998 with respect to any single aircraft,
do not exceed the aggregate amount of funds that would be necessary to
perform heavy maintenance as described in the applicable servicing
agreement on such aircraft, including the airframe and the engines;
(2) such modification payment is included in the annual operating budget
of the MSAF Group and approved by the Controlling Trustees;
(3) the amount of funds necessary to make such modification payment shall
have been accrued in advance as a permitted accrual in the expense
account through transfers into the expense account pursuant to the
Indenture or is otherwise allowed to be paid under permitted
indebtedness; and
(4) the aggregate amount of all modification payments made by members of
MSAF Group, taken as a whole, pursuant to this covenant after March 3,
1998, including the modification payment in question, shall not exceed
5% of the aggregate initial appraised value of all aircraft acquired
by MSAF Group.
Limitation on Consolidation, Merger and Transfer of Assets. MSAF will not,
and will not permit any subsidiary to, consolidate with, merge with or into, or
sell, convey, transfer, lease or otherwise dispose of its property and assets
(as an entirety or substantially as an entirety in one transaction or in a
series of related transactions) to, any other person, or permit any other person
to merge with or into MSAF or any subsidiary, unless:
(1) the resulting entity is a special purpose entity, the constituent
document of which is substantially similar to MSAF's amended and
restated trust agreement or the equivalent charter document of such
subsidiary, as the case may be, and, after such consolidation, merger,
sale, conveyance, transfer, lease or other disposition, payments from
such resulting entity to the holders of the Notes do not give rise to
any withholding tax payments less favorable to the holders of the
Notes than the amount of any withholding tax payments which would have
been required had such event not occurred;
(2) in the case of consolidation, merger or transfer by MSAF, the
surviving successor or transferee entity shall expressly assume all of
the obligations of MSAF in the Indenture, the Notes and each other
related document;
(3) the Controlling Trustees shall have obtained advance confirmation that
such action or event will not result in the lowering or withdrawal of
any rating assigned by any rating agency to any of the Notes;
(4) immediately after giving effect to such transaction, no event of
default shall have occurred and be continuing; and
(5) MSAF delivers to the trustee an officers' certificate and an opinion
of counsel, in each case stating that such consolidation, merger or
transfer and such supplemental indenture comply with the above
criteria and, if applicable, the "Limitation on Aircraft Sales"
covenant and that all conditions precedent provided for in the
Indenture relating to such transaction have been complied with.
This covenant shall not apply to any such consolidation, merger, sale,
conveyance, transfer, lease or disposition:
(1) within and among MSAF and any of its subsidiaries and among MSAF Group
if such consolidation, merger, sale, conveyance, transfer, lease or
disposition, as the case may be, would not materially adversely affect
the holders of the Notes;
(2) complying with the terms of the "Limitation on Aircraft Sales"
covenant; or
(3) effected as part of a single transaction providing for the redemption
or defeasance of the MSAF Notes in accordance with the terms thereof
as described under "-- Redemption" or "-- Defeasance," respectively.
85
<PAGE> 90
Limitation on Transactions with Affiliates. MSAF will not, and will not
permit any subsidiary to, directly or indirectly, enter into, renew or extend
any transaction (including, without limitation, the purchase, sale, lease or
exchange of property or assets, or the rendering of any service) with any
affiliate of MSAF or any subsidiary, except upon fair and reasonable terms no
less favorable to MSAF or such subsidiary than could be obtained, at the time of
such transaction or at the time of the execution of the relevant agreement, in a
comparable arm's-length transaction with a person that is not such an affiliate.
The foregoing limitation shall not apply to:
(1) any transaction in connection with the establishment of MSAF Group,
its acquisition of the initial aircraft, any substitute aircraft or
pursuant to the terms of the related documents;
(2) any transaction within and among MSAF or any of its subsidiaries and
any other member of MSAF Group, except that no such transaction, other
than between MSAF and any of its subsidiaries, shall be consummated if
it would materially adversely affect the holders of the MSAF Notes;
(3) the payment of reasonable and customary fees to, and the provision of
reasonable and customary liability insurance in respect of, the
Controlling Trustees;
(4) any payments on the Beneficial Interest in accordance with the
Indenture and the "Order of Priorities";
(5) any permitted additional aircraft acquisition or any transaction
complying with the "Limitation on Aircraft Sales" covenant;
(6) any payments of the types referred to in clauses (1) or (2) of the
"Limitation on Restricted Payments" covenant and not prohibited
thereunder;
(7) entering into any transaction effected as part of a single transaction
providing for the redemption or defeasance of the MSAF Notes, in
accordance with the terms thereof as described under "-- Redemption" or
"-- Defeasance," respectively;
(8) entering into an interest rate swap or option on an interest rate swap
or other instrument used for the management of interest rate risk with
Morgan Stanley or any of its affiliates; or
(9) the tax indemnification agreement between MSAF and MSDW.
Limitation on the Issuance, Delivery and Sale of Stock. MSAF will not:
(1) issue, deliver or sell any shares, participations or other equivalents
(however designated, whether voting or non-voting, other than beneficial
interests, shares, participations or other equivalents existing on March
3, 1998) in equity; or
(2) sell, or permit any subsidiary, directly or indirectly, to issue,
deliver or sell, any beneficial interests, shares, participations or
other equivalents (however designated, whether voting or non-voting,
other than such shares, interests, participations or other equivalents
existing on March 3, 1998) in equity except:
(a) issuances or sales of further beneficial interests in MSAF having
economic terms that are no less favorable to the Noteholders than
those of the Beneficial Interest existing on March 3, 1998;
(b) issuances or sales of shares of stock of foreign subsidiaries of
MSAF to nationals in the jurisdiction of incorporation or
organization of such subsidiary, as the case may be, to the extent
required by applicable law or necessary in the determination of the
Controlling Trustees to avoid an adverse tax consequence in any
such jurisdiction;
(c) the pledge of the beneficial interests and shares in MSAF's
subsidiaries pursuant to the security trust agreement;
86
<PAGE> 91
(d) the sale, delivery or transfer of any stock of any member of the
MSAF Group as part of a single transaction providing for the
redemption or defeasance of the MSAF Notes, in accordance with the
terms set forth under "-- Redemption" or "-- Defeasance,"
respectively;
(e) the sale of any stock in connection with any sale of aircraft in
compliance with the terms of the "Limitation on Aircraft Sales"
covenant; and
(f) the sale, delivery, transfer or pledge of beneficial interests or
shares of any MSAF Group member to or for the benefit of any other
MSAF Group member.
Bankruptcy and Insolvency. MSAF:
(1) will promptly provide the trustee and the rating agencies with notice
of the institution of any proceeding by or against MSAF or any of its
subsidiaries, as the case may be, seeking to adjudicate any of them a
bankrupt or insolvent, or seeking liquidation, winding up,
reorganization, arrangement, adjustment, protection, relief or
composition of their debts under any law relating to bankruptcy,
insolvency or reorganization or relief of debtors, or seeking an entry
of an order for relief or the appointment of a receiver, trustee or
other similar official for either or for any substantial part of their
property;
(2) MSAF will not amend any provision of the amended and restated trust
agreement that would adversely affect the rights, privileges or
preferences of any holder of the Notes, as determined by the Controlling
Trustees; and
(3) MSAF will not, without an affirmative unanimous written resolution of
the Controlling Trustees and the Independent Trustees take any action to
waive, repeal, amend, vary, supplement or otherwise modify the provision
of the amended and restated trust agreement which requires a unanimous
resolution of the Controlling Trustees and the Independent Trustees, or
limits the actions of beneficial interest holders, with respect to
voluntary insolvency proceedings or consents to involuntary insolvency
proceedings.
In addition, under the terms of the amended and restated trust agreement
the Controlling Trustees and Independent Trustees will agree that while the
Notes are outstanding they will not take any action:
(1) to cause MSAF to institute any proceeding seeking liquidation or
insolvency (or similar proceeding);
(2) in the case of any such proceeding instituted against MSAF, to
authorize or consent to such proceedings; or
(3) to terminate MSAF's existence.
OPERATING COVENANTS
Concentration Limits. Unless the Controlling Trustees obtain prior written
confirmation from each of the rating agencies that no lowering or withdrawal of
the then current rating of any subclass of Notes will result, MSAF will not
permit any of its subsidiaries to lease or re-lease any aircraft if entering
into such proposed lease would cause the portfolio,
For purposes of this restriction, the portfolio:
- excludes any aircraft then subject to an aircraft agreement and expected
to be disposed of within one year from the effective date of such lease
pursuant to clauses (c) and (e) under "-- Indenture Covenants --
Limitation on Aircraft Sales,"
- but includes any aircraft for which MSAF Group has entered into a
binding agreement to acquire and which the Controlling Trustees
reasonably expect to acquire within 180 days from the date of
effectiveness of such agreement.
87
<PAGE> 92
to exceed any of the concentration limits set forth below. The Indenture
permits breaches of these concentration limits upon any renewal,
extension or restructuring of any lease.
<TABLE>
<CAPTION>
LESSEE CONCENTRATION LIMITS PERCENTAGE OF
MOST RECENT APPRAISED
VALUE OF PORTFOLIO(1)
---------------------
<S> <C>
Single Lessee rated BBB/Baa2 (or the equivalent) or
better.................................................... 15%
Other single Lessees........................................ 10%
Five largest Lessees........................................ 35%
</TABLE>
<TABLE>
<CAPTION>
COUNTRY CONCENTRATION LIMITS PERCENTAGE OF
MOST RECENT APPRAISED
VALUE OF PORTFOLIO(1)
---------------------
<S> <C>
United States............................................... 25%
Countries rated BBB/Baa2 (or the equivalent) or better(2)... 20%
Other....................................................... 15%
</TABLE>
<TABLE>
<CAPTION>
REGION CONCENTRATION LIMITS PERCENTAGE OF
MOST RECENT APPRAISED
VALUE OF PORTFOLIO(1)
---------------------
<S> <C>
Developed Market Region(3).................................. 50%
Emerging Market Region(3)................................... 25%
Other(3).................................................... 20%
</TABLE>
- ---------------
(1) Percentage to be obtained by dividing the aggregate most recent appraised
values of all aircraft leased or to be leased to lessees habitually based in
the applicable country by the aggregate most recent appraised values of all
aircraft then owned by MSAF Group and any future MSAF Group member.
(2) Based on the sovereign foreign currency debt rating assigned by the rating
agencies to the country in which a lessee is habitually based at the time
the relevant lease is executed.
(3) The designations of Emerging Markets and Developed Markets are as determined
and published by Capital International Perspective S.A. from time to time
based on, among other things, gross domestic product levels, regulation of
foreign ownership of assets, the regulatory environment, exchange controls
and perceived investment risk. The current designations are as set out
below:
<TABLE>
<CAPTION>
REGION COUNTRY
------ -------
<S> <C>
Developed Markets
Europe....................... EU (except Greece and Luxembourg), Norway and Switzerland
North America................ Canada and United States
Pacific...................... Australia, Hong Kong, Japan, New Zealand and Singapore
Emerging Markets
Asia......................... China, India, Indonesia, Korea, Malaysia, Pakistan,
Philippines, Sri Lanka, Taiwan and Thailand
Europe and Middle East....... Czech Republic, Greece, Hungary, Israel, Jordan, Poland,
Russia and Turkey
Latin America................ Argentina, Brazil, Chile, Colombia, Mexico, Peru and
Venezuela
Other
All other countries (generally those that have small or underdeveloped capital markets,
including Iceland, Fiji and Guyana)
</TABLE>
In addition, the Indenture will not permit MSAF or any subsidiary to lease
aircraft operated or to be operated by lessees domiciled in (i) certain
countries and (ii) certain other countries without procuring
88
<PAGE> 93
political risk insurance. The list of prohibited countries and countries with
respect to which political risk insurance must be procured may be modified from
time to time upon the approval of the rating agencies.
The Indenture contains no limitations on the country or region where any
sublessees of aircraft operated or to be operated are domiciled if:
(1) such sublease is permitted under the relevant lease (including by
reason of consent or waiver, if applicable) or renewed lease
(including by reason of consent or waiver, if applicable); and
(2) the relevant lessee is either a signatory to a lease or a renewed
lease.
COMPLIANCE WITH LAW, MAINTENANCE OF PERMITS. MSAF will:
(1) comply, and cause each of its subsidiaries to comply, in all material
respects with all applicable laws;
(2) obtain, and cause each of its subsidiaries to obtain, all material
governmental including regulatory registrations, certificates, licenses,
permits and authorizations required for such person's use and operation
of the aircraft, including, without limitation, a current certificate of
airworthiness for each aircraft (issued by the applicable aviation
authority and in the appropriate category for the nature of operations
of such Aircraft), except that:
(a) no certificate of airworthiness shall be required for any aircraft:
- during any period when such aircraft is undergoing maintenance,
modification or repair; and
- following the withdrawal or suspension by such applicable
aviation authority of certificates of airworthiness in respect
of all aircraft of the same model or period of manufacture as
such aircraft; in that case MSAF shall comply, and cause each of
its subsidiaries to comply, with all directions of such
applicable aviation authority in connection with such withdrawal
or suspension;
(b) no registration, certificates, licenses, permits or authorizations
required for the use or operation of any aircraft need be obtained
with respect to any period when such aircraft is not being
operated; and
(c) no such registrations, certificates, licenses, permits or
authorizations shall be required to be maintained for any aircraft
that is not the subject of a lease, except to the extent required
under applicable laws;
(3) not cause or knowingly permit, directly or indirectly, through any of
its subsidiaries, any lessee to operate any aircraft under any lease in
any material respect contrary to any applicable law; and
(4) not knowingly permit, directly or indirectly, through any of its
subsidiaries, any lessee not to obtain all material governmental
(including regulatory) registrations, certificates, licenses, permits
and authorizations required for such lessee's use and operation of any
aircraft under any operating lease except in the cases provided in
clauses (2)(a) and (2)(b) above.
This covenant shall not be breached by virtue of any act or omission of a
lessee or sub-lessee, or of any person which has possession of the aircraft or
any engine for the purpose of repairs, maintenance, notification or storage, or
by virtue of any requisition, seizure, or confiscation of the aircraft (other
than seizure or confiscation arising from a breach by MSAF or a subsidiary of
such covenant) so long as:
(1) no member of MSAF Group consents or has consented to such third party
event; and
(2) the member of MSAF Group which is the lessor or owner of such aircraft
promptly and diligently takes such commercially reasonable actions as
a leading international aircraft operating lessor or owner would
reasonably take in respect of such third party event, including,
(taking into account, among other things, the laws of the
jurisdictions in which the aircraft are located), seeking to
89
<PAGE> 94
compel such lessee or other relevant person to remedy such third party
event or seeking to repossess the relevant aircraft or engine.
Appraisal of Portfolio. MSAF will, at least once each year and in any case
no later than October 31 of each year, deliver to the trustee appraisals of the
base value of each of the aircraft, from at least three independent appraisers
that are members of the International Society of Transport Aircraft Trading or
any similar organization. Each appraisal shall be dated within 30 days prior to
its delivery to the trustee.
MAINTENANCE OF ASSETS. MSAF will:
(1) in the case of each aircraft and engine that is subject to a lease,
cause directly or indirectly, through any of its subsidiaries, such
aircraft and engine to be maintained in a state of repair and
condition consistent with the reasonable commercial practice of
leading international aircraft operating lessors with respect to
similar aircraft under lease, taking into consideration, among other
things, the identity of the relevant lessee (including the credit
standing and operating experience thereof), the age and condition of
the aircraft and the jurisdiction in which such aircraft will be
operated or registered under such lease; and
(2) in the case of each aircraft that is not subject to a lease, maintain,
and cause each of its subsidiaries to maintain, such aircraft in a
state of repair and condition consistent with the reasonable
commercial practice of leading international aircraft operating
lessors with respect to aircraft not under lease. A third party event
will not cause a breach of this covenant so long as:
(a) no member of MSAF Group consents or has consented to the third
party event; and
(b) the member of MSAF Group which is the lessor or owner of such
aircraft promptly and diligently takes such commercially reasonable
actions as a leading international aircraft operating lessor would
reasonably take in respect of the third party event, including
seeking to compel such lessee or other relevant person to remedy
the third party event or seeking to repossess the relevant aircraft
or engine.
Notification of Trustee and Administrative Agent. MSAF will notify the
trustee and administrative agent as soon as MSAF or any of its subsidiaries
becomes aware of any loss, theft, damage or destruction to any aircraft or
engine if the potential cost of repair or replacement of such asset (without
regard to any insurance claim related thereto) may exceed $2,000,000.
Leases. MSAF shall adopt and has agreed to cause the servicer to use, and
will adopt and will agree to cause any additional servicer replacing the
servicer pursuant to the terms of the servicing agreement to use, the pro forma
lease agreement or agreements then used by the servicer or such additional
servicer, as the case may be, in connection with its aircraft operating leasing
services business generally, as such pro forma lease agreement or agreements may
be revised from time to time by the servicer or additional servicer as a
starting point in the negotiation of future leases.
In the case of any future lease entered into in connection with:
(1) the renewal or extension of a lease;
(2) the leasing of an aircraft to a person that is or was a lessee under a
pre-existing lease; or
(3) the leasing of an aircraft to a person that is or was a lessee under
an operating lease of an aircraft that is being managed or serviced by
the servicer or such additional servicer, as the case may be.
A form of lease substantially similar to the pre-existing lease or
operating lease may, in lieu of the pro forma lease, be used by the servicer or
such additional servicer, as a starting point in the negotiation of such future
lease with persons who are not members of the MSAF Group or any future MSAF
Group entity.
Opinions. MSAF will not enter into, and will not permit any of its
subsidiaries to enter into, any future lease with any person that is not a
member of MSAF Group or change the jurisdiction of registration of any aircraft
that is subject to a lease, UNLESS, upon entering into such future lease or
changing the jurisdiction or registration of such aircraft or within a
commercially reasonable period thereafter, the servicer or additional
90
<PAGE> 95
servicer, as the case may be, obtains such legal opinions, if any, with regard
to compliance with the registration requirements of the relevant jurisdiction,
enforceability of the future lease and such other matters customary for such
transactions to the extent that receiving such legal opinions is consistent with
the reasonable commercial practice of leading international aircraft operating
lessors.
Insurance. MSAF will maintain or cause, directly or indirectly through its
subsidiaries, to be maintained with reputable and responsible insurers or with
insurers that maintain relevant reinsurance with reputable and responsible
reinsurers:
(1) airline hull insurance for each aircraft in an amount at least equal
to the note target price for such aircraft or the equivalent thereof
from time to time if such insurance is denominated in a currency other
than United States dollars;
(2) airline liability insurance for each aircraft and occurrence in an
amount at least equal to the relevant amounts set forth in the
Indenture for each model of aircraft; and
(3) airline political risk insurance for each aircraft subject to a lease
and habitually based in a jurisdiction determined in accordance with
the political risk insurance guidelines, as set forth in the Indenture
and as amended from time to time with the consent of the rating
agencies, in an amount at least equal to the note target price, or the
equivalent thereof from time to time if such insurance is denominated
in a currency other than United States Dollars, for such aircraft;
except that such insurance may be subject to commercially reasonable
deductible and self-insurance arrangements, taking into account, among
other things, the creditworthiness and experience of the lessee, if
any, the type of aircraft and market practices in the aircraft
insurance industry generally. The coverage and terms (including
endorsements, deductibles and self-insurance arrangements) of any
insurance maintained with respect to any aircraft not subject to a
lease shall be substantially consistent with the commercial practices
of leading international aircraft operating lessors regarding similar
aircraft.
In determining the amount of insurance required to be maintained, MSAF may
take into account any indemnification from, or insurance provided by, any
governmental, supranational or inter-governmental authority or agency (other
than, with respect to political risk insurance, any governmental authority or
agency of any jurisdiction for which political risk insurance must be obtained),
the sovereign foreign currency debt rating of which is rated AA, or the
equivalent, by at least one of the rating agencies, against any risk with
respect to an aircraft. The amount of such indemnification or insurance when
added to the amount of insurance against such risk maintained by MSAF or which
MSAF has caused to be maintained, shall be at least equal to the amount of
insurance against such risk otherwise required by the covenant taking into
account self-insurance permitted by the covenant. Any such indemnification or
insurance provided by such government shall provide substantially similar
protection as the insurance required by the covenant. MSAF will not be required
to maintain, or to cause to be maintained, any insurance otherwise required
hereunder to the extent that such insurance is not generally available in the
relevant insurance market at commercially reasonable rates from time to time.
Indemnity. MSAF will, and will cause each of its subsidiaries to, include
in each lease between a member of MSAF Group and a person who is not a member of
MSAF Group an indemnity in respect of the lease in respect of any losses or
liabilities arising from the use or operation of the aircraft during the term of
such lease, subject to such exceptions, limitations and qualifications as are
consistent with the reasonable commercial practices of leading international
aircraft operating lessors.
EVENTS OF DEFAULT AND REMEDIES
Each of the following events will be an event of default with respect to
any class of Notes, except as specified below:
(1) failure to pay interest on the Notes of such class or any subclass
thereof, other than step-up interest, in each case when such amount
becomes due, and such default continues for a period of five or more
business days;
91
<PAGE> 96
(2) failure to pay principal or premium, if any, on the Notes of such
class or any subclass thereof either on or prior to the applicable
final maturity date;
(3) failure to pay any amount other than interest when due and payable in
connection with any Note of such class or any subclass thereof, to the
extent that there are at such time available collections therefor, and
such default continues for a period of five or more business days;
(4) failure by MSAF to comply with any of the covenants, obligations,
conditions or provisions binding on it under the Indenture or the
Notes (other than a payment default for which provision is made in
clause (1), (2) or (3) above), if such failure materially adversely
affects the holders of such class of Notes and continues for a period
of 30 days or more after written notice thereof has been given to MSAF
by the cash manager, the administrative agent, the servicer or
additional servicer, or by holders of at least 25% of the aggregate
outstanding principal balance of the Notes of the most senior class of
the Notes outstanding;
(5) a court having jurisdiction in the premises enters a decree or order
for:
(1) relief in respect of MSAF, or any subsidiary (other than a
subsidiary which owns or leases aircraft having an aggregate base
value of less than 10% of the adjusted portfolio value at that
time) (a "Significant Subsidiary") under any applicable law
relating to bankruptcy, insolvency, receivership, winding-up,
liquidation, reorganization, examination, relief of debtors or
other similar law now or hereafter in effect;
(2) appointment of a receiver, liquidator, examiner, assignee,
custodian, trustee, sequestrator or similar official of MSAF or any
Significant Subsidiary; or
(3) the winding up or liquidation of the affairs of MSAF or any
Significant Subsidiary and, in each case, such decree or order shall
remain unstayed or such writ or other process shall not have been
stayed or dismissed within 90 days from entry thereof;
(6) MSAF or any Significant Subsidiary:
(a) commences a voluntary case under any applicable law relating to
bankruptcy, insolvency, receivership, winding-up, liquidation,
reorganization, examination, relief of debtors or other similar law
now or hereafter in effect, or consents to the entry of an order
for relief in any voluntary case under any such law;
(b) consents to the appointment of or taking possession by a receiver,
liquidator, examiner, assignee, custodian, trustee, sequestrator or
similar official of MSAF or any Significant Subsidiary or for all
or substantially all of the property and assets of MSAF or any
Significant Subsidiary; or
(c) effects any general assignment for the benefit of creditors;
(7) any judgment or order for the payment of money in excess of 5% of the
aggregate adjusted portfolio value shall be rendered against MSAF or
any subsidiary or any other member of MSAF Group and either:
(a) enforcement proceedings shall have been commenced by any creditor
upon such judgment or order; or
(b) there shall be any period of 10 consecutive days during which a
stay of enforcement of such judgment or order, by reason of a
pending appeal or otherwise, shall not be in effect. However, any
such judgment or order shall not be an event of default under the
Indenture if and for so long as:
- the amount of such judgment or order is covered by a valid and
binding policy of insurance between the defendant and the
insurer covering payment thereof; and
92
<PAGE> 97
- such insurer, which shall be rated at least A by A.M. Best
Company or any similar successor entity, has been notified of,
and has not disputed the claim made for payment of, the amount
of such judgment or order;
(8) the constitutional documents of MSAF cease to be in full force and
effect without replacement documents having the same terms being in
full force and effect.
The Indenture provides that, within 30 days of when an event of default
occurs in respect of any class of Notes, the trustee will give to the
Noteholders of such class notice, transmitted by mail, of all uncured or
unwaived defaults under the Indenture known to it on such date. If an event of
default other than an event of default under (5) or (6) above) with respect to
the senior class of Notes shall have occurred and be continuing, the trustee for
the senior class may, and, when instructed by the holders of 25% of the
aggregate outstanding principal balance of the senior class of Notes, shall,
give a default notice to MSAF, the administrative agent, the trustee and the
cash manager declaring the outstanding principal balance of the Notes and all
accrued and unpaid interest thereon to be due and payable.
At any time after the senior trustee has declared the outstanding principal
balance of the Notes to be due and payable and before the exercise of any other
remedies pursuant to the Indenture, holders of a majority of the outstanding
principal balance of the senior class of Notes, by written notice to MSAF, the
senior trustee and the administrative agent, may, except in the case of:
(1) a default in the deposit or distribution of any payment required to be
made on the Notes of such class;
(2) a payment default on such class of Notes; or
(3) a default in respect of any covenant or provision of the Indenture
that cannot by the terms thereof be modified or amended without the
consent of each Noteholder affected thereby.
Rescind and annul such declaration and thereby annul its consequences if:
(1) there has been paid to or deposited with the senior trustee an amount
sufficient to pay all overdue installments of interest on the Notes, and
the principal of and premium, if any, on the Notes that would have
become due otherwise than by such declaration of acceleration;
(2) the rescission would not conflict with any judgment or decree; and
(3) all other defaults and events of default, other than nonpayment of
interest and principal on the Notes that have become due solely because
of such acceleration, have been cured or waived.
If an event of default under clause (5) or (6) above occurs, the
outstanding principal balance of the Notes and all accrued and unpaid interest
thereon shall automatically become due and payable without any further action by
any party.
After the occurrence and during the continuation of an event of default:
(1) the class B Noteholders will not be permitted to give or direct the
giving of a default notice or to exercise any remedy in respect of such
event of default until all interest and principal on the class A Notes
have been paid in full,
(2) the class C Noteholders will not be permitted to give a default notice
or to exercise any remedy in respect of such event of default until all
interest and principal on the class A Notes and the class B Notes have
been paid in full, and
(3) the class D Noteholders will not be permitted to give a default notice
or to exercise any remedy in respect of such event of default until all
interest and principal on the class A Notes, the class B Notes and the
class C Notes have been paid in full.
The trustee shall provide each rating agency with a copy of any default
notice it receives pursuant to the Indenture.
93
<PAGE> 98
The Indenture contains a provision entitling the trustee, subject to its
duty during a default to act with the required standard of care, to be
indemnified by the holders of any class of the Notes before proceeding to
exercise any right or power under the Indenture or the administrative agency
agreement at the request or direction of such holders. Except in limited
circumstances, no holder of the Notes will have the right, other than through
the senior trustee acting in accordance with the Indenture, to sue for recovery
or take any other actions to enforce the obligations of MSAF to pay any and all
amounts due and payable under the Notes, and no holder of the Notes will have
the right to take any steps to cause the filing for bankruptcy of MSAF. However,
such limitation does not apply to a suit instituted by any holder of a Note for
the enforcement of payment of principal or interest on such Note on or after the
respective due dates therefor unless such holder shall have consented thereto.
The senior trustee is entitled to exercise any and all remedies available under
the Indenture.
The term default means the occurrence of any event which is, or after
notice or lapse of time, or both, would constitute an event of default.
INTERCREDITOR RIGHTS
Subject to the terms of the Indenture, the senior trustee will have sole
discretion as to whether to direct the administrative agent to exercise and
enforce any and all remedies with respect to the Notes. The senior trustee may
take various actions in respect of the Notes, without regard to the interests of
any other creditors.
MODIFICATION AND WAIVER
If the trustee receives a request for its consent to an amendment,
modification or waiver under the Indenture, the Notes or any related document
relating to the Notes, the trustee shall mail a notice of such proposed
amendment, modification or waiver to each Noteholder as to whether or not to
consent to such amendment, modification or waiver.
The Indenture provides that, with the consent of the holders of a majority
of the outstanding principal balance of the Notes (acting as a single class),
modifications may be made to the Notes or the Indenture except that any
modification of the provisions:
- setting forth the frequency or the currency of payment of, the maturity
of, or the method of calculation of the amount of any interest, principal
and premium, if any, payable in respect of any subclass of Notes;
- reducing the percentage of the aggregate outstanding principal balance
of any subclass of Notes required to approve any such amendment or
waiver; or
- altering the manner or priority of payment of any subclass of Notes;
is not permitted without the consent of any swap provider and the holder
of each outstanding Note affected. The senior trustee may also waive any
event of default. Any such modification approved by the required holders
of any subclass of Notes will be binding on the holders of the relevant
subclass of Notes and each party to the Indenture. This provision shall
not prevent MSAF or any subsidiary from amending any lease if such
amendment is otherwise permitted by the Indenture.
The subordination provisions contained in the Indenture may not be amended
or modified without the consent of each swap provider, each holder of the class
of Notes affected thereby and each holder of any class of Notes ranking senior
to such Notes.
Without the consent of each Noteholder, no amendment or modification of the
Indenture or the administrative agency agreement may, among other things:
(1) modify the provisions of the Indenture or the administrative agency
agreement with respect to account payment instructions and the payment
thereunder by the administrative agent; or
(2) result in the sale of MSAF's assets other than pursuant to the
provisions of "Indenture Covenants."
94
<PAGE> 99
In no event shall the provisions relating to the priority of the expenses
or swap payments in the Indenture be amended or modified.
NOTICES TO NOTEHOLDERS
Except as provided below, any notice to the Noteholders will be valid if
given:
(1) by publication in the Luxemburger Wort or, if such newspaper shall
cease to be published or timely publication therein shall not be
practicable, in such English language newspaper or newspapers as the
trustee shall approve having a general circulation in Europe;
(2) by either of (a) the information contained in such notice appearing on
the relevant page of the Reuters screen or such other medium for the
electronic display of data as may be approved by the Trustee and
notified to Noteholders or (b) publication in the Financial Times and
The Wall Street Journal (National Edition) or, if either newspaper shall
cease to be published or timely publication therein shall not be
practicable, in such English language newspaper or newspapers as the
trustee shall approve having a general circulation in Europe and the
United States; and
(3) until such time as any definitive notes are issued and, so long as the
Notes are registered in the name of a nominee for DTC, Euroclear and/or
Cedel Bank, delivery of the relevant notice to DTC, Euroclear and/or
Cedel Bank for communication by them to Noteholders.
The trustee may approve some other method of giving notice to the
Noteholders if, in its opinion:
(1) the method is reasonable, having regard to the number and identity of
the Noteholders and/or to market practice then prevailing;
(2) is in the best interests of the Noteholders; and
(3) will comply with the rules of the Luxembourg Stock Exchange or such
other stock exchange (if any) on which the Notes are then listed.
Any such notice shall be deemed to have been given on such date as the
trustee may approve so long as notice of such method is given to the Noteholders
in such manner as the trustee shall require.
Notice specifying the rate, amount or payment date in respect of any
floating rate Notes, or in respect of any repayment of principal on any Notes
shall, for so long as the Notes are listed on the Luxembourg Stock Exchange and
so long as the rules of the Luxembourg Stock Exchange so require, be given to
the Luxembourg Stock Exchange.
However this requirement shall be satisfied until such time as any
definitive Notes are issued to all Noteholders and so long as the Notes are held
on behalf of DTC, Cedel Bank and Euroclear by:
(1) delivery of the relevant notice to DTC, Cedel Bank and Euroclear for
communication by them to the Noteholders without the need for
publication in the Luxemburger Wort; and
(2) delivery of the notice to the Luxembourg Stock Exchange and the paying
agent in Luxembourg.
Any notice specifying:
(1) an increase in the interest rate of any subclass of Notes due to
step-up interest or failure by MSAF to comply with the registration
requirements for the Notes; or
(2) redemption of principal of any Notes must be published in the
Luxemburger Wort or another daily newspaper of general circulation in
Luxembourg.
Such notice shall be deemed to have been given on the first day on which
any of such conditions shall have been met.
95
<PAGE> 100
GOVERNING LAW AND JURISDICTION
The Indenture, the Notes, the administrative agency agreement and the cash
management agreement are to be governed by and construed in accordance with the
laws of the State of New York. In the Indenture, the administrative agency
agreement and the cash management agreement, MSAF has submitted to the
jurisdiction of the United States Federal and New York State courts located in
The City of New York for all purposes of or in connection with the Notes, the
administrative agency agreement and cash management agreement and has designated
a person in the city of New York to accept service of any process on its behalf.
BENEFICIAL INTEREST
The nominal value of the Beneficial Interest is $1.00. MSDW indirectly
holds 100% of the Beneficial Interest, but MSDW may transfer all or a portion of
the Beneficial Interest to a related or unrelated person in the future. The
Beneficial Interest will rank junior in priority of payment to certain payments
on the Notes and certain other obligations of MSAF and, to the extent held by
more than one person, pari passu among such persons. Pursuant to the
subordination provisions of the Indenture, payments on the Beneficial Interest,
other than the beneficial interest distribution amount, as set forth in "--
Priority of Payments," are subordinated to all payments of interest and
principal on the Notes and no payments may be made on the Beneficial Interest
other than the beneficial interest distribution amount while the Notes remain
outstanding.
When, as and if declared by the Controlling Trustees, a Beneficial Interest
Distribution Amount shall only be payable on any payment date occurring after
March 15, 2003 and will not exceed the lesser of:
(1) 3% of the difference, if positive, between the adjusted portfolio
value on such payment date and the outstanding principal balance of
the MSAF Notes (determined prior to application of available
collections on such payment date); and
(2) 15% of available collections on such payment date after application of
payments and retentions (1) through (17) as set forth above under "--
Priority of Payments."
THE ACCOUNTS
The administrative agent, acting on behalf of the security trustee, has
established the following accounts:
(1) the collection account;
(2) the expense account;
(3) the initial rental account;
(4) the lessee funded account;
(5) the refinancing account;
(6) the defeasance/redemption account; and
(7) the aircraft purchase account.
Each of the collection account, the expense account, the rental accounts,
the lessee funded account and the aircraft purchase account has been established
at a bank having:
(1) a long-term unsecured debt rating of not less than AA, or the
equivalent, by the rating agencies; or
(2) a certificate of deposit rating of A-1+ by Standard & Poor's and P-1
by Moody's and that is acceptable to the other rating agencies.
Where required by the terms of the relevant leases, certain rental accounts
may be established at banks having ratings of less than AA, or the equivalent,
by the rating agencies, or a certificate of deposit rating of less than A-1+ by
Standard and Poor's and P-1 by Moody's. Except where local legal or regulatory
reasons do not permit, all of such accounts will be held in the names of the
security trustee, who will have sole dominion and control over the accounts,
including, among other things, the sole power to direct withdrawals from or
transfers among such accounts. Subject to certain conditions set forth in the
administrative agency agreement, the
96
<PAGE> 101
security trustee will delegate such authority over the accounts to the
administrative agent; the security trustee will not be responsible for the acts
or omissions of the administrative agent.
For as long as any Notes remain outstanding, funds on deposit in the
accounts will be invested and reinvested by the cash manager at MSAF Group's
written direction (or, following delivery to MSAF or the administrative agent of
a default notice or if any event of default described in clause (5) or (6) under
"-- Events of Default and Remedies" shall have occurred and be continuing, at
the security trustee's written direction). These investments must be permitted
account investments maturing, in the case of the collection account and expense
account, such that sufficient funds shall be available to make required payments
on the first succeeding scheduled payment date after such permitted account
investments are made. Investment and reinvestment of funds in the lessee funded
account must be made in a manner and with maturities that conform to the
requirements of the related leases or aircraft agreements. Investment earnings
on funds deposited in any account, net of losses and investment expenses, will,
if permitted by the terms of the related leases in the case of such funds in the
lessee funded account, be deposited in the collection account and treated as
collections.
RENTAL ACCOUNTS
The lessees will make all payments under the leases directly into the
applicable rental accounts. The administrative agent will transfer, or cause to
be transferred, all funds deposited into the rental accounts into the Collection
Account as collections within one business day of receipt thereof, other than
certain limited amounts, if any, required to be left on deposit for local legal
or regulatory reasons.
THE COLLECTION ACCOUNT
Collections include all amounts received by MSAF Group, including:
(1) rental payments;
(2) payments under any credit or liquidity enhancement facility;
(3) payments under any letter of credit, letter of comfort, letter of
guarantee or other assurance in respect of a lessee's obligations
under a lease;
(4) the cash portion of the liquidity reserve amount;
(5) amounts received in respect of claims for damages or in respect of any
breach of contract for nonpayment of any of the foregoing (including
any amounts received from any MSAF Group subsidiary, whether by way of
distribution, dividend, repayment of a loan or otherwise and any
proceeds received in connection with any allowed restructuring);
(6) net proceeds of any aircraft sale or amounts received under any
aircraft agreement;
(7) proceeds of any insurance payments in respect of any aircraft or any
indemnification proceeds;
(8) certain amounts transferred from the lessee funded account to the
collection account;
(9) certain security deposits transferred from ILFC;
(10) net payments to MSAF Group under any swap agreement;
(11) investment income, if any, on all amounts on deposit in the accounts
(in each case to the extent consistent with the terms of applicable
related leases); and
(12) any other amounts received by any member of the MSAF Group other than
segregated funds, certain funds to be applied in connection with a
redemption, certain funds received in connection with a refinancing
and other amounts required to be paid over to any third party pursuant
to any related document.
Collections on deposit in the collection account will be calculated by the
administrative agent on the calculation date. The portion of the required
expense amount that has not been paid directly by the
97
<PAGE> 102
administrative agent to expense payees will be transferred into the expense
account on each payment date and the administrative agent may, from time to
time, transfer other amounts into the expense account in respect of
unanticipated expenses falling due and payable within such interest accrual
period. If funds are available on any payment date, the administrative agent
will also transfer amounts in respect of expenses and costs that are not
regular, monthly recurring expenses, including modification payments and
refinancing expenses, if any, anticipated to become due and payable in any
future interest accrual period. Amounts received for segregated security
deposits and maintenance reserves (as described below) will be transferred
directly into the lessee funded account.
LIQUIDITY RESERVE AMOUNT
All collections received by MSAF Group will either be transferred to
another account as described above and below, paid to the appropriate third
party on behalf of MSAF Group or held in the collection account as a part of the
cash portion of the liquidity reserve amount, a balance required to be held by
MSAF Group in the collection account pursuant to the Indenture. The liquidity
reserve amount is intended to provide liquidity for MSAF Group to meet its
aircraft maintenance obligations and its lessee security deposit repayment
obligations and to provide for certain other contingencies that may arise in the
course of MSAF Group's activities. The liquidity reserve amount may be funded
with cash in the collection account or with amounts available under eligible
credit facilities.
The liquidity reserve amount was approximately $66.2 million on November
30, 1998. The liquidity reserve amount may be increased or decreased from time
to time for any reason including upon acquisitions of additional aircraft by an
action of the Controlling Trustees in light of significant changes in, the
condition of the aircraft, the terms and conditions of the leases, the financial
condition of the lessees or prevailing industry conditions. MSAF Group must
obtain confirmation in advance in writing from the rating agencies that any such
proposed reduction in the liquidity reserve amount will not result in a lowering
or withdrawal by the rating agencies of their respective ratings of any class of
Notes.
If the balance of cash on deposit in the collection account, together with
the amount available for drawing under any eligible credit facilities, should
fall below the liquidity reserve amount at any time (including as a result of
MSAF Group's determination that the liquidity reserve amount should be
increased, as required by the rating agencies or otherwise), MSAF Group may
continue to make all payments, and any credit or liquidity enhancement
facilities may be drawn to fund such payments, including required payments on
the Notes, which rank prior to, or equally with, payments of minimum principal
payment amount on the class D Notes under "Description of the Notes -- Priority
of Payments" and any permitted accruals other than those for modification
payments. Except as described below, the balance of funds in the collection
account, together with the amount available for drawing under any eligible
credit facilities, does not fall below the minimum liquidity reserve amount at
its then current level. However, the balance of funds in the collection account,
together with the amount available for drawing under any eligible credit
facilities, may fall below the minimum liquidity reserve amount at its then
current level and MSAF Group may continue to make payments of, and any credit or
liquidity enhancement facilities may be drawn to fund such payments, all accrued
and unpaid interest on any subclass of the most senior class of Notes then
outstanding to avoid an event of default, and, on the final maturity date of any
subclass thereof, principal of, any subclass of the most senior class of Notes
then outstanding to avoid an event of default.
At such time as the aggregate outstanding principal balance of the Notes is
less than or equal to the liquidity reserve amount, the balance of funds, if
any, in the collection account will be distributed in accordance with the
priority of payments.
THE LESSEE FUNDED ACCOUNT
Certain lessee security deposits and supplemental rent payments to provide
for maintenance reserves may be required to be segregated from other MSAF Group
funds in the future. Amounts we receive from lessees in respect of such security
deposits and maintenance obligations will be held in the lessee funded account.
Funds on deposit in the lessee funded account will be used to make certain
maintenance and security deposit repayment related payments (or such other
payments as may be required or permitted under the terms of the
98
<PAGE> 103
relevant leases) or may be applied against maintenance-related payments
otherwise required to be made by the lessee during the term of the related lease
and will not be used to make payments in respect of the Notes or the Notes at
any time, including after the delivery of a default notice. In certain
circumstances where lessees relinquish their rights to receive certain
maintenance and security deposit payments upon the expiration of a lease,
surplus funds may be credited from the lessee funded account to the collection
account.
THE EXPENSE ACCOUNT
On each payment date, the administrative agent will withdraw from the funds
deposited in the collection account, in the priority of payments established for
the Notes, an amount equal to the required expense amount. We will then use this
amount to pay the expenses. If the required expense amount has not been paid
directly by the administrative agent to expense payees, the required expense
amount will be deposited into the expense account. In addition, in the period
between payment dates, the administrative agent may make further withdrawals of
cash from the collection account in order to satisfy expenses due and payable
prior to the next payment date that were not previously anticipated to become so
due and payable on the previous Payment Date. If funds on deposit in the
collection account are less than the required expense amount on any payment
date, MSAF Group will be unable to pay the Required Expense Amount in full on
such date, which may lead to a default under one or more of the related
documents or MSAF Group's various service agreements. All available collections
remaining in the collection account will be used by the administrative agent to
make payments on the Notes in accordance with the priority of payments
established therefor under "-- Priority of Payments."
99
<PAGE> 104
REPORTS TO NOTEHOLDERS
On the second business day before each payment date and any other date for
distribution of any payments with respect to each subclass of Notes then
outstanding, the trustee will distribute to each Noteholder a monthly report
with respect to any payment to be made, setting forth the following information:
(1) With respect to each payment date,
(a) the balances on deposit on the calculation date immediately
preceding the prior payment date,
(b) the aggregate amounts of deposits and withdrawals between such
calculation date and the calculation date immediately preceding the
payment date, and
(c) the balances on deposit in the expense account, collection account
and lessee funded account on the calculation date immediately
preceding such payment date.
<TABLE>
<S> <C> <C>
(2) Analysis of expense account activity
Balance on preceding calculation date.......................
Net transfer to the expense account during the period
between the prior calculation date and the relevant
calculation date ...........................................
Payments during period between prior calculation date and
the relevant calculation date
(1) Payments on prior payment date..........................
(2) Other payments..........................................
Balance on relevant calculation date........................
(3) Analysis of collection account activity
Balance on preceding calculation date.......................
-- Required expense amount (including on preceding payment
date).....................................................
-- Net transfer to lessee funded accounts during period.....
-- Collections during period................................
-- Transfer from the aircraft purchase account..............
-- Drawings under credit or liquidity enhancement
facilities................................................
-- Aggregate note payments..................................
-- Swap payments............................................
-- Repayments of drawings under credit or liquidity
enhancement facilities....................................
Balance on relevant calculation date (separately stating the
liquidity reserve amount)...................................
Analysis of current payment date distributions..............
(4) Payments on the Notes
(a) Floating rate Notes (by class and, if applicable,
subclass)...............................................
-- Applicable LIBOR for the current interest accrual
period....................................................
-- Applicable margin for the current interest accrual
period....................................................
-- Applicable interest rate for the current interest accrual
period....................................................
-- Interest amount payable..................................
-- Step-up interest.........................................
-- Opening outstanding principal balance....................
-- Minimum principal payment amount.........................
-- Scheduled principal payment amount.......................
-- Supplemental principal payment amount....................
-- Redemption amount........................................
-- amount allocable to principal............................
-- amount allocable to premium..............................
-- Closing outstanding principal balance....................
</TABLE>
100
<PAGE> 105
<TABLE>
<S> <C> <C>
(b) Fixed rate Notes (by class and, if applicable, subclass)
Applicable interest rate....................................
Interest amount payable.....................................
Opening outstanding principal balance.......................
Minimum principal payment amount............................
Scheduled principal payment amount..........................
Redemption amount
-- amount allocable to principal............................
-- amount allocable to premium..............................
Closing outstanding principal balance.......................
(5) Floating rate Note information for next interest accrual
period (by subclass)
Applicable LIBOR............................................
Applicable margin...........................................
Applicable interest rate....................................
(6) Payments per $100,000 initial outstanding principal balance
of notes (by subclass)
Opening outstanding principal balance.......................
Total principal payments....................................
Closing outstanding principal balance.......................
Total interest..............................................
Total premium...............................................
</TABLE>
These monthly reports are filed by MSAF with the Securities and Exchange
Commission in a Report on Form 8-K and the Quarterly Reports accompanying the
Monthly Reports for each April 15, July 15 and October 15 are filed with the
Securities and Exchange Commission in a Report on Form 10-Q. The Annual Report
accompanying the Monthly Report for each February 15 is filed with the
Commission in a Report on Form 10-K.
After the end of each calendar year, the trustee will furnish to each
person who at any time during such calendar year was a holder of any subclass of
Notes a statement containing the sum of the amounts determined pursuant to
clause (4) above with respect to such subclass for such calendar year or, in the
event such person was a holder of record of any subclass of Notes during a
portion of such calendar year, for the applicable portion of such calendar year,
and such other items as are readily available to the trustee and which a
Noteholder shall reasonably request as necessary for the purpose of such
Noteholder's preparation of its United States federal income tax returns. So
long as the Notes of any subclass are registered in the name of DTC or its
nominee, such report and such other items will be prepared on the basis of such
information supplied to the indenture trustee by DTC and the DTC Participants,
and will be delivered by the trustee to such DTC participants to be available
for forwarding by such DTC participants to the applicable Noteholders in the
manner described above.
The trustee will publish or will cause to be published following each
payment date and other date specified above in a daily newspaper in Luxembourg
(the Luxemburger Wort) a notice to the effect that the information set forth
above will be available for review at the main office of the listing agent for
the Notes in Luxembourg City, Luxembourg. Notices to Noteholders in respect of
the Notes will be given by publication in the Luxemburger Wort, a daily
newspaper in Luxembourg. The Luxembourg Stock Exchange will receive notice
promptly following each distribution date. In addition, the trustee intends to
provide such information to Bloomberg Financial Markets promptly following each
payment date for publication on the BLOOMBERG.
If the Notes of any subclass are issued in the form of definitive notes,
the trustee will prepare and deliver the information described above to each
holder of record of a definitive note of such subclass as the name and period of
beneficial ownership of such holder of record of a definitive note of such
subclass appears on the records of the trustee. The trustee maintains the
records concerning the holders of such Notes.
101
<PAGE> 106
BOOK-ENTRY REGISTRATION, GLOBAL CLEARANCE AND SETTLEMENT
BOOK-ENTRY REGISTRATION
Investors hold their Notes through The Depository Trust Company ("DTC") (in
the United States) or Cedel Bank, societe anonyme ("Cedel Bank") or Morgan
Guaranty Trust Company of New York, Brussels Office, as operator of the
Euroclear System ("Euroclear") (in Europe) if they are participants in such
systems, or indirectly through organizations which are participants in such
systems. Except as set forth below, the Notes are registered in the name of Cede
as the nominee for DTC. Investors will be entitled to receive a physical
certificate representing such person's interest therein only in the limited
circumstances described herein. Unless and until definitive Notes are issued,
all references herein to actions by Noteholders will refer to actions taken by
DTC upon instructions from participants whose securities are held by DTC (the
"DTC Participants"), and all references herein to distributions, notices,
reports and statements to Noteholders will refer to distributions, notices,
reports and statements, respectively, to DTC or Cede, as the registered holder
of the Notes, or to DTC Participants for distribution to Noteholders in
accordance with DTC procedures.
Cedel Bank and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in the names of Cedel Bank
and Morgan Guaranty Trust Company of New York, Brussels office, on the books of
their respective Depositaries which, in turn, will hold such positions in
customers' securities accounts in the Depositaries' names on the books of DTC.
Citibank, N.A. will act as depositary for Cedel Bank and Morgan Guaranty Trust
Company of New York will act as depositary for Euroclear (in such capacities,
the "Depositaries").
Transfers between DTC Participants will occur in the ordinary way in
accordance with DTC rules. Transfers between participating organizations whose
securities are held by Cedel Bank (the "Cedel Participants") and participants in
Euroclear (the "Euroclear Participants") will occur in the ordinary way in
accordance with the applicable rules and operating procedures of Cedel Bank and
Euroclear.
Cross-market transfers between persons holding directly or indirectly
through DTC Participants, on the one hand, and directly or indirectly through
Cedel Participants or Euroclear Participants, on the other, will be effected by
DTC in accordance with DTC rules on behalf of Cedel Bank or Euroclear, as the
case may be, by its respective Depositary. However, such cross-market
transactions will require delivery of instructions to Cedel Bank or Euroclear,
as the case may be, by the counterparty in such system in accordance with its
rules and procedures and within its established deadlines. If the transaction
meets its settlement requirements, Cedel Bank or Euroclear, as the case may be,
will deliver instructions to its respective Depositary to take action to effect
final settlement on its behalf by delivering or receiving securities in DTC, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to DTC. Cedel Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of beneficial interests in the
Notes received in Cedel Bank or Euroclear as a result of a transaction with a
DTC Participant will be made during the securities settlement processing day
dated the Business Day following the DTC settlement date. Such credits or any
transactions in such Notes settled during such processing will be reported to
the relevant Cedel Participant or Euroclear Participant on such Business Day.
Cash received in Cedel Bank or Euroclear as a result of sales of beneficial
interests in the Global Notes by or through a Cedel Participant or Euroclear
Participant to a DTC Participant will be received with value on the DTC
settlement date but will be available in the relevant Cedel Bank or Euroclear
cash account only as of the Business Day following settlement in DTC.
DTC
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities for DTC Participants and to
facilitate the clearance and settlement of securities transactions between DTC
Participants through electronic book-entry changes in accounts of DTC
Participants, thereby eliminating the need for physical movement of
certificates. DTC
102
<PAGE> 107
Participants include securities brokers and dealers (including the Initial
Purchasers), banks, trust companies and clearing corporations and may in the
future include certain other organizations. Indirect access to the DTC systems
also is available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a DTC Participant
either directly or indirectly ("Indirect Participants").
Investors who are not DTC Participants but desire to purchase, sell or
otherwise transfer ownership of, or other interests in, beneficial interests in
the Notes may do so only through DTC Participants. Indirect Participants are
required to effect transfers through a DTC Participant. Payments of interest,
principal, and premium, if any, in respect of the Notes will be made to DTC and
are the responsibility of MSAF. Noteholders will receive all distributions of
interest, principal and premium, if any, in respect of the Notes from the
Trustee or a paying agent through DTC Participants and Indirect Participants.
Disbursement of such payments to DTC Participants will be the responsibility of
DTC and disbursement of such payments to the Noteholders will be the
responsibility of DTC Participants and Indirect Participants. DTC's practice is
to credit DTC Participants' accounts on the payment date in accordance with
their respective holdings shown on DTC's records unless DTC has reason to
believe that it will not receive payment on such payment date. Payments by DTC
Participants to Noteholders will be governed by standing instructions and
customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name," and will be the
responsibility of such DTC Participant. So long as the Notes are registered in
the name of Cede & Co., the only "Noteholder" will be Cede & Co., as nominee for
DTC and such nominee will be considered the sole owner or holder of the Notes
for all purposes under the Indenture and the Notes. While so registered,
Noteholders will be permitted to exercise the rights of Noteholders only
indirectly through DTC and DTC Participants.
Under the rules, regulations and procedures governing DTC and its
operations (the "Rules"), DTC is required to make book-entry transfers of the
Notes among the DTC Participants on whose behalf it acts with respect to the
Notes and to receive and transmit distributions of interest, principal and
premium, if any, in respect of the Notes. DTC Participants and Indirect
Participants similarly are required to make book-entry transfers and receive and
transmit such payments on behalf of their respective Notes. The Rules provide a
mechanism by which Noteholders will receive payments and will be able to
transfer their interests.
DTC has advised MSAF that it will take any action permitted to be taken by
a Noteholder in respect of each subclass of Notes under the Indenture only at
the direction of one or more DTC Participants to whose accounts that subclass of
Notes is credited. Additionally, DTC has advised MSAF that it will take such
actions with respect to any percentage of the outstanding principal amount of
any subclass of Notes only at the direction of and on behalf of the DTC
Participants whose customers own such outstanding principal amount. DTC may take
conflicting actions with respect to different subclasses of Notes to the extent
that such actions are taken on behalf of DTC Participants whose holdings include
such different subclasses of Notes.
DTC's Year 2000 Efforts. DTC management is aware that some computer
applications, systems, and the like for processing data that are dependent upon
calendar dates, including dates before, on and after January 1, 2000, may
encounter Year 2000 problems. DTC has informed its participants and other
members of the financial community that it has developed and is implementing a
program so that its systems, as they relate to the timely payment of
distributions to securityholders, book-entry deliveries, and settlement of
trades within DTC, continue to function appropriately. This program includes a
technical assessment and a remediation plan, each of which is complete.
Additionally, DTC's plan includes a testing phase, which is expected to be
completed within appropriate time frames.
However, DTC's ability to perform its services properly is also dependent
upon other parties, including issuers and their agents, as well as third party
vendors from whom DTC licenses software and hardware, and third party vendors on
whom DTC relies for information or the provision of services, including
telecommunications and electrical utility service providers. DTC has informed
its participants and members of the financial community that it is contacting
third party vendors from whom DTC acquires services to emphasize the importance
of their services being Year 2000 compliant and determine the extent of their
efforts for Year 2000 remediation of their services. In addition, DTC is
developing any contingency plans as it
103
<PAGE> 108
deems appropriate.
According to DTC, the information above has been provided to its
participants and members of the financial community for informational purposes
only and is not intended to serve as a representation, warranty, or contract
modification of any kind.
CEDEL
Distributions with respect to Notes held beneficially through Cedel Bank
will be credited to cash accounts of Cedel Participants in accordance with Cedel
Bank's rules and procedures, to the extent received by its Depositary. Cedel
Bank will take any other action permitted to be taken by a Noteholder under the
Indenture on behalf of a Cedel Participant only in accordance with its rules and
procedures and subject to its Depositary's ability to effect such actions on its
behalf through DTC.
EUROCLEAR
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear and receipts of payments with respect to securities in
Euroclear. All securities of a particular subclass in Euroclear are held on a
fungible basis without attribution of specific certificates to specific
securities clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of Euroclear Participants, and has no record of or
relationship with persons holding through Euroclear Participants.
Distributions with respect to Notes beneficially held through Euroclear
will be credited to the cash accounts of Euroclear Participants in accordance
with the Terms and Conditions, to the extent received by its Depositary. The
Euroclear Operator will take any other action permitted to be taken by a
Noteholder under the Indenture on behalf of a Euroclear Participant only in
accordance with the Terms and Conditions subject to its Depositary's ability to
effect such actions on its behalf through DTC.
Although DTC, Cedel Bank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Notes among participants of DTC,
Cedel Bank and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
DEFINITIVE NOTES
The Notes of any subclass may be issued in fully registered certificated
form (i.e. definitive Notes) to individual Noteholders of that subclass or their
nominees only if:
(1) MSAF advises the trustee in writing that DTC is no longer willing or
able to act as depositary with respect to the Notes and the trustee
does not appoint a successor at MSAF's request within 90 days of DTC's
notice;
(2) MSAF, at its option, elects to terminate the book-entry system through
DTC; or
(3) after the occurrence of an event of default with respect to any class
of Notes, Noteholders of a subclass within such class representing an
aggregate of not less than 51% of the aggregate outstanding principal
amount of Notes of such subclass advise MSAF, the trustee and DTC
through DTC Participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in
such Noteholder's best interest.
If any of these events occurs, the trustee will notify the relevant holders
and will arrange for definitive notes to be issued in exchange for the holders'
book-entry interests.
The trustee or a paying agent will make distributions of interest,
principal and any premium on any definitive Notes directly to holders of
definitive Notes in whose names the definitive Notes were registered at the
close of business on the record date. Such distributions will be made by check
mailed to the address of
104
<PAGE> 109
such holder as it appears on the register maintained by the registrar. The final
payment on any such Definitive Notes, however, will be made only upon
presentation and surrender of such Definitive Notes at the office or agency
specified in the notice of final distribution to Noteholders.
Definitive Notes will be freely transferable and exchangeable for
definitive Notes of the same subclass at the office of the trustee or the
offices of the co-registrar in Luxembourg. No service charge will be imposed for
any registration of transfer or exchange, but payment of a sum sufficient to
cover any tax or other governmental charge may be required.
You may exchange or replace a Note that is mutilated, destroyed, lost or
stolen at the offices of the trustee or of the co-registrar in Luxembourg upon
presentation of the Note or satisfactory evidence of destruction, loss or theft.
An indemnity satisfactory to the trustee or co-registrar may be required at the
expense of the Noteholder before a replacement Note will be issued. The
Noteholder will have to pay any tax or other governmental charge imposed in
connection with such exchange or replacement and any other expenses (including
the fees and expenses of the trustee and co-registrar) connected therewith.
CUSIP, ISIN AND COMMON CODE NUMBERS
The Notes have been accepted for clearance through Euroclear and Cedel
Bank. The CUSIP numbers, International Securities Identification Numbers and the
Common Code Numbers are set forth in the table below.
<TABLE>
<CAPTION>
SUBCLASS CUSIP ISIN CCN
- -------- --------- ------------ ---------
<S> <C> <C> <C>
Subclass A-1.................................. 61745WAL5 US61745WAL54 009188126
Subclass A-2.................................. 61745WAM3 US61745WAM38 009188363
Subclass B-1.................................. 61745WAN1 US61745WAN11 009188380
Subclass C-1.................................. 61745WAP6 US61745WAP68 009188436
Subclass D-1.................................. 61745WAQ4 US61745WAQ42 009188452
</TABLE>
105
<PAGE> 110
TAXATION
U.S. FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Davis Polk & Wardwell, the following discussion sets
forth the material United States federal tax consequences resulting from the
purchase, ownership and disposition of Notes to the U.S. Holders and Non-U.S.
Holders described herein. It does not purport to consider all the possible tax
consequences of the purchase, ownership or disposition of the Notes, and it is
not intended to reflect the individual tax position of any holder. This
discussion deals only with Notes held as capital assets and does not deal with
holders with a special tax status or special tax situation, such as financial
institutions or dealers in securities or currencies, Notes held as a hedge
against currency risks or as part of a straddle with other investments or as
part of a "synthetic security" or other integrated investment (including a
"conversion transaction") consisting of a Note and one or more other
investments, or situations in which the functional currency of the Noteholder is
not the U.S. dollar. This discussion is based upon the United States federal tax
laws and regulations as now in effect and as currently interpreted, and does not
take into account possible changes in such tax laws or such interpretations, all
of which may be applied retroactively. This discussion does not include any
description of the tax laws of any state or local governments within the United
States, or of any foreign government, that may be applicable to the Notes or
holders thereof. Holders of Notes should consult their own tax advisors
concerning the application of the United States federal tax laws to their
particular situations as well as any consequences arising under the laws of any
other taxing jurisdiction.
For purposes of the discussion below, (i) U.S. Holder means a beneficial
owner of a Note that is for United States federal income tax purposes a citizen
or resident of the United States, a corporation, partnership or certain other
entities created or organized in or under the laws of the United States, or any
political subdivision thereof, or an estate or trust the income of which is
subject to United States federal income taxation regardless of its source and
(ii) Non-U.S. Holder means a person other than a U.S. Holder.
TAXATION OF U.S. HOLDERS
PAYMENTS OF INTEREST
Interest on a Note generally will be taxable to a U.S. Holder as ordinary
interest income at the time it accrues or is received in accordance with the
U.S. Holder's method of accounting for United States federal income tax
purposes.
MARKET DISCOUNT AND BOND PREMIUM
If a U.S. Holder purchases a Note for an amount that is less than its
principal amount, the difference generally will be treated as "market discount"
for United States federal income tax purposes (subject to a statutory de minimis
exception). In such case, any partial principal payment on, or any gain realized
on the sale, exchange, retirement or other disposition (including certain
dispositions which are nonrecognition transactions under certain provisions of
the Code) of, the Note will be included in gross income and characterized as
ordinary income to the extent of the market discount that has not previously
been included in income and that is treated as having accrued on the Note prior
to such payment or disposition. Market discount generally accrues on a
straight-line basis over the remaining term of the Note; upon an irrevocable
election, however, market discount will accrue on a constant yield basis. A U.S.
Holder may elect to include market discount in gross income currently as it
accrues (either on a straight-line basis, or, if the holder so irrevocably
elects, on a constant yield basis), in which case the preceding rules relating
to the recognition of market discount and the deferral of interest expense rules
described below will not apply. An election made to include market discount in
gross income as it accrues will apply to all debt instruments acquired by the
U.S. Holder on or after the first day of the taxable year to which such election
applies and may be revoked only with the consent of the IRS. A U.S. Holder might
be required to defer until the maturity of the Note or its earlier disposition
(including dispositions in certain non taxable transactions) the deductions for
all or a portion of the interest expense on any indebtedness incurred or
continued to purchase or carry such Note.
If a U.S. Holder purchases a Note for an amount that is in excess of all
amounts payable on the Note after the purchase date, other than payments of
interest, such excess will be treated as "bond
106
<PAGE> 111
premium." In general, a U.S. Holder may elect to amortize bond premium over the
remaining term of the Note on a constant yield method. The amount of bond
premium allocable to any accrual period is offset against the qualified stated
interest allocable to such accrual period (and any excess may be deducted,
subject to certain limitations). An election to amortize bond premium applies to
all taxable debt instruments held at the beginning of the first taxable year to
which such election applies and thereafter acquired by the U.S. Holder and may
be revoked only with the consent of the IRS.
SALE, EXCHANGE OR RETIREMENT OF NOTES
Upon the sale, exchange or retirement of a Note, a U.S. Holder will
recognize taxable gain or loss equal to the difference between the amount of
cash plus the fair market value of any property received (not including any
amount attributable to accrued but unpaid interest not previously included in
income) and such holder's adjusted tax basis in the Note. A U.S. Holder's
adjusted tax basis in a Note will be its cost, increased by any accrued market
discount included in gross income and reduced by any amortized bond premium and
any principal payment on the note received by such holder.
Subject to the discussion of market discount above, gain or loss realized
on the sale, exchange or retirement of a Note by a U.S. Holder generally will be
capital gain or loss and generally will be U.S. source gain or loss. Net capital
gains of individuals are subject to tax at lower rates than items of ordinary
income. The deductibility of capital losses is subject to limitations.
TAXATION OF NON-U.S. HOLDERS
Payments of interest (including original issue discount, if any), principal
and premium, if any, on the Notes to any Non-U.S. Holder will not be subject to
United States federal withholding tax, providing that, in the case of interest,
such person (i) does not own, actually or constructively, 10% or more of the
total combined voting power of all classes of stock entitled to vote in the MSDW
subsidiary that owns the Beneficial Interest, (ii) is not a controlled foreign
corporation related, directly or indirectly, to the issuer through stock
ownership and (iii) is not a bank receiving interest described in Section
881(c)(3)(A) of the Code, and provided that the statement requirement described
in the next sentence has been fulfilled with respect to the beneficial owner.
Sections 871(h) and 881(c) of the Code require that, in order to obtain the
exemption from withholding tax described in the previous sentence, either the
beneficial owner of the Note, or a securities clearing organization, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business and that is holding the Note on behalf of such
beneficial owner, file a statement with the withholding agent to the effect that
the beneficial owner of the Note is not a United States person. Under temporary
United States Treasury Regulations which apply to both stated interest and sale
or exchange proceeds if either is paid with respect to a Note on or before
December 31, 1999, such requirement will be fulfilled if (i) the beneficial
owner of a Note certifies on Internal Revenue Service Form W-8, under penalties
of perjury, that it is not a United States person and provides its name and
address and (ii) any financial institution holding the Note on behalf of the
beneficial owner files a statement with the withholding agent to the effect that
it has received such a statement from the Noteholder (and furnishes the
withholding agent with a copy thereof). Final Treasury Regulations (the "Final
Regulations"), which apply to interest (including original issue discount) and
sale or exchange proceeds paid with respect to a Note after December 31, 1999,
also provide that the requirement of Section 871(h) and 881(c) generally will be
fulfilled if beneficial owners (including partners of certain foreign
partnerships), as well as certain foreign partnerships, meet the two conditions
set forth in the preceding sentence. However, a beneficial owner that is a
foreign estate or trust (or fiduciary thereof), a foreign partnership that has
entered into a withholding agreement with the Internal Revenue Service, or a
Non-U.S. Holder holding a Note through its United States branch will be required
to provide its "taxpayer identification number" in addition to its name and
address on Form W-8. Foreign partnerships and their partners should consult
their tax advisors regarding possible additional reporting requirements.
Notwithstanding the foregoing, if interest or other income received with
respect to the Note is effectively connected with a United States trade or
business conducted by a Non-U.S. Holder, such Noteholder,
107
<PAGE> 112
although exempt from the withholding tax described in the preceding paragraph,
may be subject to United States federal income tax on such interest in the same
manner as if it were a United States person. In addition, if such Noteholder is
a corporation, it may be subject to a branch profits tax equal to 30% (or a
lower treaty rate) of its effectively connected earnings and profits for the
taxable year, subject to certain adjustments.
A Non-U.S. Holder will not be subject to United States federal income tax
on gain realized on the sale, exchange or other disposition of a Note, unless
(i) such Noteholder is an individual who is present in the United States for 183
days or more in the taxable year of disposition, and either (a) such individual
has a "tax home" (as defined in code Section 911(d)(3)) in the United States
(unless such gain is attributable to a fixed place of business in a foreign
country maintained by such individual and has been subject to foreign tax of at
least 10%) or (b) the gain is attributable to an office or other fixed place of
business maintained by such individual in the United States or (ii) such gain is
effectively connected with the conduct by such Noteholder of a trade or business
in the United States.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The trustee will be required to report annually to the Internal Revenue
Service, and to each Noteholder of record, certain information, including the
Noteholder's name, address and taxpayer identification number (either the
Noteholder's Social Security number or its employer identification number, as
the case may be), the aggregate amount of principal and interest paid and the
amount of tax withheld, if any. This obligation, however, does not apply with
respect to certain U.S. Holders, including corporations, tax-exempt
organizations, qualified pension and profit-sharing trusts and individual
retirement accounts.
In the event a U.S. Holder subject to the reporting requirements described
above fails to supply its correct taxpayer identification number in the manner
required by applicable law or underreports its tax liability, MSAF, its agents
or paying agents may be required to "backup" withhold a tax equal to 31% of each
payment of interest and principal on the Notes. This backup withholding is not
an additional tax and may be credited against the Noteholder's United States
federal income tax liability, provided that the required information is
furnished to the Internal Revenue Service.
Under current Treasury regulations, information reporting and backup
withholding will not apply to payments made by MSAF or any agent thereof to a
Noteholder that is a Non-U.S. Holder if the certifications required by Section
871(h) and 881(c) of the Code (described above) are received, provided that MSAF
or such agent does not have actual knowledge that the payee is a United States
person.
The Final Regulations modify the backup withholding and information
reporting procedures in certain respects for payments made after December 31,
1999. Holders are urged to consult their tax advisors regarding the application
of the backup withholding and information reporting rules.
MARKET-MAKING ACTIVITIES OF
MORGAN STANLEY & CO. INCORPORATED
This prospectus is to be used by Morgan Stanley & Co. Incorporated in
connection with offers and sales of the Notes in market-making transactions at
negotiated prices related to prevailing market prices at the time of sale.
Morgan Stanley & Co. Incorporated may act as principal or agent in such
transactions. Morgan Stanley & Co. Incorporated has no obligation to make a
market in the Notes and may discontinue its market-making activities at any time
without notice, in its sole discretion.
Morgan Stanley & Co. Incorporated is a wholly-owned subsidiary of MSDW,
which indirectly holds 100% of the beneficial interest in MSAF. The initial
Controlling Trustees of MSAF are officers of an affiliate of MSDW.
108
<PAGE> 113
Morgan Stanley & Co. Incorporated acted as representative of the initial
purchasers in connection with the original offering of the Old Notes. The
subscription discounts and commissions received on each subclass of the Old
Notes were as follows:
<TABLE>
<CAPTION>
SUBSCRIPTION
DISCOUNTS AND
SUBCLASS OF NOTES COMMISSIONS
- ----------------- -------------
<S> <C>
Subclass A-1 Notes.......................................... 0.30%
Subclass A-2 Notes.......................................... 0.60%
Subclass B-1 Notes.......................................... 0.85%
Subclass C-1 Notes.......................................... 1.50%
Subclass D-1 Notes.......................................... 2.50%
</TABLE>
109
<PAGE> 114
ERISA CONSIDERATIONS
ERISA and the Code impose certain requirements on employee benefit plans
and certain other retirement plans and arrangements, including individual
retirement accounts and annuities, that are subject to ERISA and/or the Code or
any entity which may be deemed to hold the assets of any such plan (all of which
are hereinafter referred to as "Plans") and or persons who are fiduciaries with
respect to such Plans. A person who exercises discretionary authority or control
with respect to the management or assets of a Plan will be considered a
fiduciary of the Plan under ERISA. In accordance with ERISA's general fiduciary
standards, before investing in a Note, a Plan fiduciary should determine whether
such an investment is permitted under the governing Plan instruments and is
appropriate for the Plan in view of its overall investment policy and the
composition and diversification of its portfolio, taking into account the
limited liquidity of the Notes. Other provisions of ERISA and the Code prohibit
certain transactions involving the assets of a Plan and persons who have certain
specified relationships to the Plan ("parties in interest" within the meaning of
ERISA or "disqualified persons" within the meaning of the Code). By virtue of
its relationship with Morgan Stanley, MSAF may be a party in interest or a
disqualified person with respect to a Plan purchasing the Notes. Any Plan that
proposes to purchase Notes must determine that its purchase of Notes will not
give rise to a direct or indirect Prohibited Transaction.
Certain statutory or administrative exemptions from the prohibited
transaction rules under ERISA and the Code may be available to a Plan which is
purchasing the Notes. Included among these exemptions are: Prohibited
Transaction Class Exemption ("PTCE") 84-14 (regarding transactions directed by
an independent qualified professional asset manager), PTCE 91-38 (regarding
investments by bank collective investment funds), PTCE 90-1 (regarding
investments by insurance company pooled separate accounts), PTCE 95-60
(regarding investments by insurance company general accounts) or PTCE 96-23
(regarding transactions directed by a qualified in-house asset manager).
Governmental plans and certain church plans (as defined under ERISA) are
not subject to the Prohibited Transaction rules. Such plans may, however, be
subject to federal, state or local laws or regulations which may affect their
investment in the Notes. Any fiduciary of such a governmental or church plan
considering a purchase of the Notes must determine the need for, and the
availability, if necessary, of any exemptive relief under any such laws or
regulations.
A Plan fiduciary considering the purchase and holding of the Notes should
consult with its tax and/or legal advisors regarding the consequences of such
purchase and holding. By its purchase and acceptance of a Note, each such
purchaser will be deemed to have represented and warranted that either (i) no
Plan assets have been used to purchase such Notes or (ii) one or more prohibited
transaction statutory or administrative exemptions applies such that the use of
such Plan assets to purchase and hold such Notes will not constitute a
non-exempt prohibited transaction.
110
<PAGE> 115
LEGAL MATTERS
Certain legal matters relating to the Notes were passed upon for MSAF by
Davis Polk & Wardwell, New York, New York, counsel for MSAF Group and by
Richards, Layton & Finger, Wilmington, Delaware, special Delaware counsel for
MSAF Group.
In accordance with the rules of the Luxembourg Stock Exchange, MSAF states
that there has been no material adverse change in the financial condition of
MSAF since the date of its formation on October 30, 1997.
EXPERTS
The financial statements as of November 30, 1998 and 1997 and for the
periods ended November 30, 1998 and 1997 included in this prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and have been so included in reliance upon the report
of such firm given their authority as experts in accounting and auditing.
Valuations of the aircraft have been made by three expert aircraft
appraisers: Aircraft Information Services, Inc., BK Associates, Inc. and
Airclaims Limited. These valuations are discussed in detail elsewhere in this
prospectus and are included herein in reliance upon the authority of such firms
as experts in giving such appraisals.
111
<PAGE> 116
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statement of Income............................ F-4
Consolidated Statements of Cash Flows....................... F-5
Consolidated Statements of Changes in Beneficial
Interest/(Deficit)........................................ F-6
Notes to the Consolidated Financial Statements.............. F-7
</TABLE>
F-1
<PAGE> 117
REPORT OF INDEPENDENT AUDITORS
To the Trustees of
Morgan Stanley Aircraft Finance and Subsidiaries
We have audited the accompanying consolidated balance sheets of Morgan
Stanley Aircraft Finance and Subsidiaries (the "Group") as of November 30, 1998
and 1997, and the related consolidated statements of income, cash flows and
changes in beneficial interest/(deficit) for the fiscal year ended November 30,
1998 and the period from October 30, 1997 (date of formation) to November 30,
1997. These consolidated financial statements are the responsibility of the
Group's trustees. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 the
trustees, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Group at November 30, 1998
and 1997, and the results of its operations and its cash flows for the fiscal
year ended November 30, 1998 and the period from October 30, 1997 to November
30, 1997 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
New York, New York
January 22, 1999
F-2
<PAGE> 118
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NOVEMBER 30, NOVEMBER 30,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 34,850 $ --
Receivables:
Lease income, net......................................... 4,968 137
Investment income and other............................... 153 --
Aircraft under operating leases, net........................ 933,111 45,937
Investment in capital lease, net............................ 20,357 25,000
Underwriting and other issuance related costs, net of
amortization.............................................. 17,053 --
---------- --------
Total Assets................................................ $1,010,492 $ 71,074
========== ========
LIABILITIES AND BENEFICIAL INTERESTHOLDER'S (DEFICIT)/EQUITY
Payables:
To Morgan Stanley Financing Inc. ......................... $ -- $ 66,369
Interest payable to Noteholders........................... 2,655 --
Deferred rental income...................................... 7,351 --
Liability for maintenance................................... 51,939 --
Other liabilities........................................... 16,415 --
Notes payable:
Class A-1................................................. 400,000 --
Class A-2................................................. 274,062 --
Class B-1................................................. 94,819 --
Class C-1................................................. 100,000 --
Class D-1................................................. 110,000 --
---------- --------
1,057,241 66,369
---------- --------
Commitments and contingencies
Beneficial Interestholder's (Deficit)/Equity:
Beneficial Interest....................................... 1 1
Deemed Distribution....................................... (15,305) --
(Accumulated Deficit)/Retained Earnings................... (31,445) 4,704
---------- --------
Total Beneficial Interestholder's (Deficit)/Equity........ (46,749) 4,705
---------- --------
Total Liabilities and Beneficial Interestholder's
(Deficit)/Equity.......................................... $1,010,492 $ 71,074
========== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE> 119
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 30, 1997
FISCAL YEAR ENDED (DATE OF FORMATION) TO
NOVEMBER 30, 1998 NOVEMBER 30, 1997
----------------- ----------------------
<S> <C> <C>
Revenues:
Lease income, net.................................... $120,005 $ 4,747
Investment income on collection account.............. 2,156 --
-------- --------
Total revenues....................................... 122,161 4,747
-------- --------
Expenses:
Interest expense..................................... 50,533 --
Depreciation expense................................. 38,876 43
Operating expense:
Service provider and other fees................... 9,534 --
Maintenance and other aircraft related costs...... 2,969 --
Total expenses....................................... 101,912 43
-------- --------
Net income............................................. $ 20,249 $ 4,704
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 120
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 30, 1997
FISCAL YEAR ENDED (DATE OF FORMATION) TO
NOVEMBER 30, 1998 NOVEMBER 30, 1997
----------------- ----------------------
<S> <C> <C>
Cash flows from operating activities
Net income.............................................. $ 20,249 $ 4,704
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation expenses -- equipment under operating
leases............................................... 38,876 43
Gain on capital lease................................... -- (4,610)
Amortization of underwriting and other issuance related
costs................................................ 837 --
Provision for doubtful accounts......................... 689 --
Changes in assets and liabilities:
Receivables:
Investment income and other........................ (153) --
Lease income, net.................................. (5,520) (137)
Investment in capital lease.......................... 4,643 --
Liability for maintenance............................ 13,204 --
Interest payable to Noteholders...................... 2,655 --
Deferred rental income............................... 7,351 --
Other liabilities.................................... 1,110 --
--------- --------
Net cash provided by operating activities................. 83,941 --
--------- --------
Cash flows from investing activities
Purchase of aircraft.................................... (887,315) (66,370)
--------- --------
Net cash used for investing activities.................... (887,315) (66,370)
--------- --------
Cash flows from financing activities
Issuance of beneficial interest to Morgan Stanley
Financing Inc........................................ -- 1
Proceeds from Notes, net of underwriting costs.......... 1,041,610 --
Proceeds from borrowings from Morgan Stanley
Financing Inc........................................ 853,490 66,369
Beneficial Interest Distribution........................ (976,257) --
Repayments of Notes..................................... (71,119) --
Other issuance related costs............................ (9,500) --
--------- --------
Net cash provided by financing activities................. 838,224 66,370
--------- --------
Net increase in cash and cash equivalents................. 34,850 --
Cash and cash equivalents at beginning of period.......... -- --
--------- --------
Cash and cash equivalents at end of period................ $ 34,850 $ --
========= ========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE> 121
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN BENEFICIAL INTEREST/(DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED TOTAL
EARNINGS BENEFICIAL
BENEFICIAL DEEMED (ACCUMULATED INTEREST
INTEREST DISTRIBUTION DEFICIT) (DEFICIT)
---------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Issuance of Beneficial Interest.......... $ 1 $ -- $ -- $ 1
Net income............................... -- -- 4,704 4,704
--------- -------- -------- ---------
Balance at November 30, 1997............. 1 -- 4,704 4,705
Net Income............................... -- -- 20,249 20,249
Deemed Distribution...................... -- (15,305) -- (15,305)
Borrowings from Morgan Stanley Financing
Inc. converted into Beneficial
Interest............................... 919,859 -- -- 919,859
Payment of Beneficial Interest
Distribution to Morgan Stanley
Financing Inc.......................... (919,859) -- (56,398) (976,257)
--------- -------- -------- ---------
Balance at November 30, 1998............. $ 1 $(15,305) $(31,445) $ (46,749)
========= ======== ======== =========
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE> 122
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
Morgan Stanley Aircraft Finance ("MSAF") is a special-purpose statutory
business trust that was formed on October 30, 1997 under the laws of Delaware.
MSAF and its subsidiaries ("MSAF GROUP") were formed to conduct certain limited
activities, including acquiring, financing, re-financing, owning, leasing, re-
leasing, selling, maintaining and modifying commercial aircraft. All of the
beneficial interest of MSAF Group is owned by Morgan Stanley Financing Inc.
("MSF"), a wholly owned subsidiary of Morgan Stanley Dean Witter & Co. ("MSDW").
MSAF Group's obligations, including its financial debt obligations, are not
obligations of, or guaranteed by, MSDW, MSF or any person other than MSAF Group.
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles, which require management to make
estimates and assumptions that affect the financial statements and related
disclosures. Management believes that the estimates utilized in the preparation
of the consolidated financial statements are prudent and reasonable. Actual
results could differ materially from these estimates.
All material intercompany transactions have been eliminated.
The accompanying Consolidated Financial Statements include the results of
MSAF Group for the 12 months ended November 30, 1998 ("Fiscal 1998") and the
period from October 30, 1997 (date of formation) to November 30, 1997 ("Fiscal
1997").
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments
with a maturity of three months or less.
Revenue Recognition
Revenue from aircraft on operating leases is recognized on a straight-line
basis.
Certain lease contracts may require the lessee to make separate payments
for flight hours flown and revenue sector passenger miles flown. In such
instances, MSAF Group recognizes rental revenues as they are earned in
accordance with the terms of the lease contract.
Aircraft
Aircraft, including engines, are stated at cost less accumulated
depreciation. Cost is comprised of the cash purchase price paid plus any
maintenance liabilities that MSAF Group assumed from the seller at the date of
purchase. Depreciation is calculated on a straight line basis. The estimates of
useful lives and residual values are reviewed periodically. The current
estimates for residual values are generally 10% of cost and useful lives are
generally 25 years from the date of manufacture.
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" ("SFAS 121"), the recognition of an impairment loss for an asset
held for use is required when the estimate of undiscounted future cash flows
expected to be generated by the asset is less than its carrying amount.
Measurement of impairment loss is to be recognized based on the fair value of
the asset. Fair value reflects the underlying economic value of the aircraft,
including engines, in normal market conditions (where supply and demand are in
reasonable equilibrium) and assumes adequate time for a sale and a willing buyer
and seller. Short-term fluctuations in the market place are disregarded and it
is assumed that there is no necessity either to dispose of a significant number
of aircraft simultaneously or to dispose of aircraft quickly. The fair value of
the assets is based on independent valuations of the aircraft in the fleet and
estimates of discounted future cash flows.
F-7
<PAGE> 123
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS 121 also requires that long-lived assets to be disposed of be reported at
the lower of the carrying amount or fair value less estimated disposal costs. At
November 30, 1998 and 1997, no impairment losses had been recognized.
Liability for Maintenance
In most lease contracts the lessee has the obligation for maintenance costs
on airframes and engines. In many lease contracts the lessee makes a full or
partial prepayment to the lessor, calculated at an hourly rate, which is used to
reimburse the lessee for significant maintenance charges, including major
airframe and engine overhauls. Such prepayments are generally non-refundable.
MSAF Group records the cash prepayments made by lessees for maintenance as a
component of the liability for maintenance account which appears on the
Consolidated Balance Sheets. When the lessee incurs maintenance expenditures,
MSAF Group must return a corresponding amount of the prepayment to the lessee.
At this time, MSAF Group will forward cash to the lessee, with a corresponding
decrease to the liability for maintenance account. MSAF Group will only
reimburse the lessee for the cost of maintenance expenditures to the extent that
sufficient prepayments have been made by the lessee. At the time an aircraft is
re-leased to a new lessee, an assessment is made of the expected maintenance
reserve requirements; any excess reserve is then released to lease income.
MSAF Group also estimates the amount of maintenance expenditures for which
it will have primary responsibility. Such expenditures typically are required
when an aircraft must be prepared prior to the commencement of a new lease. MSAF
Group also makes estimates of the amounts that, in certain circumstances
(including lessees defaulting on payment obligations), could result in MSAF
Group incurring maintenance costs which are the lessee's primary responsibility.
When MSAF Group determines that it will be primarily responsible for certain
maintenance expenditures, the amount of such expenditure is charged directly to
earnings and is included as a component of the liability for maintenance account
appearing on the Consolidated Balance Sheets.
Allowance for Doubtful Accounts
Allowances are made for doubtful accounts where it is considered that there
is a significant risk of non-recovery. The assessment of risk of non-recovery is
primarily based on the extent to which amounts outstanding exceed the expected
value of security deposits held (if any), together with an assessment of the
financial strength and condition of a lessee and the economic conditions
existing in the lessee's operating environment. At November 30, 1998, MSAF Group
had recorded allowances for doubtful accounts against lease income receivables
for two lessees totalling $0.7 million. There was no allowance for doubtful
accounts at November 30, 1997.
Income Taxes
MSAF is a Delaware business trust treated as a branch of MSF for U.S.
Federal, State and local income tax purposes. As such, MSAF is not subject to
U.S. Federal, State and local income taxes.
Concentrations of Credit Risk
Credit risk with respect to operating lease receivables is generally
diversified due to the number of lessees comprising MSAF Group's customer base
and the different geographic areas in which they operate. At November 30, 1998
MSAF Group had leased aircraft to 29 lessees in 19 countries. The geographic
concentrations of the Company's leasing revenues is set forth in Note 6.
Many of MSAF Group's lessees are in a relatively weak financial position
because of the difficult economic conditions in the civil aviation industry as a
whole and because, in general, weakly capitalized airlines are more likely to
seek operating leases. In addition, at November 30, 1998, 15 of MSAF
F-8
<PAGE> 124
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Group'saircraft are being leased to lessees domiciled in certain emerging
markets nations, including those located in Eastern Europe, the Middle East,
Latin America and Asia. Emerging market economies have recently been affected by
severe economic and financial difficulties. The exposure of MSAF Group's
aircraft to particular countries and customers is managed partly through
concentration limits and through obtaining security from lessees by way of
deposits. MSAF Group will continue to manage its exposure to particular
countries, regions and lessees through concentration limits.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. MSAF Group is
in the process of evaluating the impact of adopting SFAS No. 133.
NOTE 3 -- AIRCRAFT
<TABLE>
<CAPTION>
NOVEMBER 30, NOVEMBER 30,
1998 1997
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Stage 3 Aircraft and one spare engine:
Cost........................................................ $972,030 $ 45,980
Less Accumulated depreciation............................... (38,919) (43)
-------- --------
$933,111 $ 45,937
======== ========
Aircraft cost includes $38.7 million of maintenance
liabilities that MSAF Group assumed at the date of
purchase.
Fleet Analysis:
On lease for a further period of:
More than five years........................................ 8 2
From one to five years...................................... 20 1
Less than one year.......................................... 5 --
-------- --------
Total aircraft portfolio (including one spare engine)....... 33 3
======== ========
</TABLE>
At November 30, 1998 and 1997 there were no non-revenue earning aircraft in
MSAF Group's portfolio.
NOTE 4 -- INVESTMENT IN CAPITAL LEASE
One of MSAF Group's aircraft has been leased to a customer under a
sales-type capital lease. The components of MSAF Group's investment in this
lease are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30, NOVEMBER 30,
1998 1997
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Minimum lease payments receivable........................... $ 25,302 $ 31,542
Less: Unearned income....................................... (4,945) (6,542)
-------- --------
Net investment in capital lease............................. $ 20,357 $ 25,000
======== ========
</TABLE>
F-9
<PAGE> 125
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At November 30, 1998, minimum lease payments for each of the five
succeeding fiscal years are $4 million.
In Fiscal 1997, the Company recorded a gain of $4.6 million at the
inception of the lease, which represented the excess of the present value of the
minimum lease payments over the cost of the aircraft.
Unearned income is recognized over the term of the lease using the interest
method.
NOTE 5 -- LEASE INCOME RECEIVABLE
Lease income receivable was as follows:
<TABLE>
<CAPTION>
NOVEMBER 30, NOVEMBER 30,
1998 1997
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Lease income receivable..................................... $5,657 $ 137
Less: Provision for doubtful accounts....................... (689) --
------ ------
Lease income receivable, net................................ $4,968 $ 137
====== ======
</TABLE>
The provision for doubtful accounts of $0.7 million in Fiscal 1998 is
recorded as a reduction of lease income revenues in the Consolidated Statement
of Income.
NOTE 6 -- REVENUES
The distribution of lease revenues by geographic area is as follows:
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
North America............................................... $ 8,743 $ 137
Asia........................................................ 13,814 --
Europe...................................................... 51,409 --
Middle East................................................. 10,950 --
Latin America............................................... 20,084 4,610
Other....................................................... 15,005 --
-------- --------
Total....................................................... $120,005 $ 4,747
======== ========
</TABLE>
At November 30, 1998, MSAF Group had contracted to receive the following
minimum rentals under operating leases (Dollars in millions):
<TABLE>
<CAPTION>
FISCAL YEAR ENDING NOVEMBER 30,
- -------------------------------
<S> <C>
1999........................................................ $114
2000........................................................ 102
2001........................................................ 80
2002........................................................ 67
2003........................................................ 43
Thereafter.................................................. 64
</TABLE>
F-10
<PAGE> 126
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- LIABILITY FOR MAINTENANCE
Activity in the liability for maintenance account was as follows:
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance, beginning of period................................ $ -- $ --
Liabilities assumed from International Lease Finance
Corporation............................................... 38,735 --
Collections from lessees.................................... 15,837 --
Reimbursements to lessees................................... (2,633) --
-------- --------
Balance, end of period...................................... $ 51,939 $ --
======== ========
</TABLE>
NOTE 8 -- NOTES PAYABLE
During the year ended November 30, 1998, MSAF Group acquired 29 aircraft
and one spare engine having an aggregate cost of $926 million. MSAF Group
financed these purchases primarily through additional borrowings from MSF and
from the net proceeds from MSAF Group's private placement of securitized notes
as discussed below.
On March 3, 1998, MSAF Group completed an offering of $1,050 million of
securitized notes (the "NOTES") on a basis exempt from registration under the
Securities Act of 1933, as amended. Simultaneous with the private placement, the
loan provided by MSF was automatically converted into a beneficial interest held
by MSF. MSAF Group primarily utilized the proceeds from the Notes to pay a
beneficial interest distribution to MSF and to acquire an additional aircraft.
With the exception of MSAF Group, the Notes are not obligations of, or
guaranteed by, MSDW or any of its subsidiaries, including MSF.
Underwriting and other issuance related costs of $17.9 million which were
incurred in connection with the offering are being amortized over the expected
life of the Notes, which is currently estimated to be 16 years.
The repayment terms of each subclass of Notes are such that certain
principal amounts are expected to be repaid based on certain assumptions (the
"EXPECTED FINAL PAYMENT DATE") or refinanced through the issuance of new Notes,
but in any event are ultimately due for repayment on specified final maturity
dates (the "FINAL MATURITY DATE"). The Expected Final Payment Dates, Final
Maturity Dates and interest rates applicable to each subclass of the Notes are
listed below:
<TABLE>
<CAPTION>
INITIAL EXPECTED FINAL
SUBCLASS OF NOTE PRINCIPAL AMOUNT INTEREST RATE PAYMENT DATE FINAL MATURITY DATE
- ---------------- ---------------- ------------- -------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Subclass A-1......... 400,000 LIBOR+0.21% March 15, 2000 March 15, 2023
Subclass A-2......... 340,000 LIBOR+0.35% Sept. 15, 2005 March 15, 2023
Subclass B-1......... 100,000 LIBOR+0.65% March 15, 2013 March 15, 2023
Subclass C-1......... 100,000 6.90% March 15, 2013 March 15, 2023
Subclass D-1......... 110,000 8.70% March 14, 2014 March 15, 2023
</TABLE>
If the Subclass A-1 Note are not repaid on or before the Expected Final
Payment Date for such subclass, such subclass of Notes will accrue interest
thereafter at a rate equal to the stated interest rate therefore, plus 0.50% per
annum ("STEP-UP INTEREST").
MSAF Group filed a registration statement with the Securities and Exchange
Commission (the "SEC") with respect to an exchange offer (the "EXCHANGE OFFER")
for exchange Notes with terms virtually identical to the Notes which was
declared effective on January 12, 1999. The Exchange Offer was consummated on
F-11
<PAGE> 127
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
January 18, 1999. MSAF Group paid an additional coupon of 0.50% on each of the
subclasses of debt during the period from November 30, 1998 to January 18, 1999,
as required under the terms of the Notes.
The dates on which principal repayments on the Notes will actually occur
will depend on the cash flows generated by the rental income from MSAF Group's
portfolio of aircraft. Amounts received by MSAF Group and available for
distribution are paid in accordance with the priorities specified in the Note
Indenture.
As of November 30, 1998, the estimated fair value of the Notes, based on
rates available to MSAF Group at year-end for borrowings with similar terms and
maturities, was approximately $1,001 million.
Cash paid for interest amounted to $48.9 million in Fiscal 1998.
NOTE 9 -- LINES OF CREDIT
MSAF Group requires liquidity in order to finance many of its primary
business activities, including maintenance obligations, security deposit return
obligations, operating expenses and obligations under the Notes. MSAF Group's
primary sources of liquidity are cash bank deposits and lines of credit.
The Company's cash account (the "COLLECTION ACCOUNT") is primarily funded
through the receipt of rental payments from lessees.
In connection with the issuance of the Notes, the Company entered into two
credit agreements. Under a Custody and Loan Agreement between International
Lease Finance Corporation ("ILFC") and MSAF Group (the "ILFC FACILITY"), ILFC
will hold substantially all of the cash security deposits paid by certain
lessees with respect to MSAF Group's aircraft portfolio and will retain the
interest earnings on such security deposits. In addition, ILFC has agreed to
extend loans to MSAF Group in a maximum amount of $10 million plus the aggregate
amount of cash security deposits held by ILFC. Under a Loan Agreement (the "MSDW
FACILITY") between MSDW and MSAF Group, MSDW has agreed to extend loans in a
maximum amount of $10 million.
As of November 30, 1998, the aggregate amount available under the ILFC
Facility and the MSDW Facility was approximately $41.2 million.
NOTE 10 -- DERIVATIVE FINANCIAL INSTRUMENTS
The leasing revenues of MSAF Group will be generated primarily from rental
payments. Rental payments are currently entirely fixed but may be either fixed
or floating with respect to leases entered into in the future. In general, an
interest rate exposure arises to the extent that MSAF Group's fixed and floating
interest obligations in respect of the Notes do not correlate to the mix of
fixed and floating rental payments for different rental periods. This interest
rate exposure can be managed through the use of interest rate swaps and other
derivative instruments. The Subclass A-1, A-2 and B-1 Notes bear floating rates
of interest and the Subclass C-1 and D-1 Notes bear fixed rates of interest.
MSAF Group is a party to eight interest rate swaps with Morgan Stanley Capital
Services Inc. ("MSCS"), a wholly-owned subsidiary of MSDW. In six of these
swaps, MSAF Group pays a fixed monthly coupon and receives one month LIBOR on a
notional balance of $1,000 million and in two of these swaps, MSAF Group pays
one month LIBOR and receives a fixed monthly coupon on a notional balance of
$200 million.
All eight swaps were originally entered into by MSCS, with an internal
swaps desk as the counterparty, on November 12, 1997 and February 19, 1998,
respectively. On March 3, 1998, all eight swaps were assigned to MSAF Group by
MSCS. Although MSAF Group's floating rate liability at March 3, 1998 was $800
million (after the repayment of principal due to an undelivered aircraft), the
net economic effect of assigning all eight swaps to MSAF Group with an aggregate
notional amount of $1.2 billion was to fix the interest rate liability at the
November 12, 1997 interest rate. MSAF Group required this certainty both in
F-12
<PAGE> 128
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
furtherance of its interest rate management policy not to be adversely exposed
to material movements in interest rates from November 12, 1997 (shortly after
MSAF entered into an asset purchase agreement relating to its initial portfolio
of aircraft) and by fixing the principal liabilities relating to the
transaction, to facilitate the structuring of the transaction.
On the date that the eight interest rate swaps were assigned from MSCS to
MSAF Group, such swaps had an aggregate fair value of approximately $(15.3)
million. No consideration was paid to or received by MSAF Group in connection
with the assumption of these swap positions. MSAF Group has recorded the
assumption of these interest rate swaps at their fair value by recognizing a
liability within other liabilities in its Consolidated Balance Sheets, with a
corresponding charge to deemed distribution, a component of Beneficial
Interestholder's Deficit.
Four of the swaps assumed from MSCS having an aggregate notional principal
amount of $800 million are accounted for as hedges of its obligations under the
Notes. Under these swap arrangements MSAF Group will pay fixed and receive
floating amounts on a monthly basis. The fair value of the liability assumed
relating to those swaps which are being accounted for as hedges is being
deferred and recognized when the offsetting gain or loss is recognized on the
hedged transaction. This amount and the differential payable or receivable on
such interest rate swap contracts, to the extent such swaps are deemed to be
effective hedges, is recognized as an adjustment to interest expense. The
portion of these swaps not deemed to be an effective hedge is accounted for on a
mark-to-market basis with changes in fair value reflected in interest expense.
Gains and losses resulting from the termination of such interest rate swap
contracts prior to their stated maturity are deferred and recognized when the
offsetting gain or loss is recognized on the hedged transaction. The fair value
of these interest rate swaps at November 30, 1998 was $(25.0) million.
The remaining four swaps assumed by MSAF Group have an aggregate gross
notional principal amount of $400 million. Under these swap arrangements, MSAF
Group will pay/receive fixed and receive/pay floating amounts on a monthly
basis. MSAF Group determined that these swaps do not qualify for hedge
accounting. The fair value of the liability assumed related to these swaps is
accounted for on a mark-to-market basis with changes in fair value reflected in
interest expense. At November 30, 1998, the fair value of these swaps was $(7.5)
million.
The gross notional amounts of these swaps are indicative of MSAF Group's
degree of use of such swaps but do not represent MSAF Group's exposure to credit
or market risk. Credit risk arises from the failure of the counterparty to
perform according to the terms of the swap contract. MSAF Group's exposure to
credit risk at any point in time is represented by the fair value of the swap
contracts reported as assets. MSAF Group does not currently require collateral
to support swap contracts with credit risk. The credit risk of these swap
contracts is monitored by MSAF Group's Trustees.
MSAF Group does not utilize derivative financial instruments for trading
purposes.
NOTE 11 -- RELATED PARTY TRANSACTIONS
Under service agreements with MSAF Group, Cabot Aircraft Services Limited
and Morgan Stanley & Co. Incorporated, both subsidiaries of MSDW, act as
Administrative Agent and Financial Advisor, respectively. During Fiscal 1998,
Cabot Aircraft Services Limited received a fee of $1.3 million for providing
these services, which is calculated as a percentage of the operating lease
rentals received. Morgan Stanley & Co. Incorporated received advisory fees of
$.037 million in Fiscal 1998.
Prior to the issuance of the Notes, MSAF Group received approximately $920
million of non-interest bearing financing from MSF which was utilized to
purchase 31 of the 32 aircraft in its aircraft portfolio. At the time of the
issuance of the Notes, this loan was automatically converted into a beneficial
interest and a
F-13
<PAGE> 129
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payment of approximately $976 million was made in the form of a distribution on
such beneficial interest, comprising the following amounts (dollars in
millions):
<TABLE>
<S> <C>
Non-interest bearing loans (subsequently converted into
beneficial interest)...................................... $920
Distribution (comprising $21 million in lease rentals
accrued to the date of issuance of the Notes with the
balance representing finance and other charges paid to
MSF)...................................................... 56
----
Total Beneficial Interest Distribution...................... $976
====
</TABLE>
In connection with the issuance of the Notes, MSAF Group paid approximately
$7.1 million in subscription discounts and commissions to subsidiaries of MSDW.
MSAF Group's counterparty to its interest rate swap agreements is MSCS, a
wholly owned subsidiary of MSDW.
MSAF Group's management is comprised of six trustees, as MSAF Group has no
employees or executive officers. Three of MSAF Group's six trustees and one
alternate trustee are employees of MSDW. MSAF Group's remaining two trustees are
unaffiliated with MSDW.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
MSAF Group did not have any material contractual commitments for capital
expenditures at November 30, 1998.
In accordance with the terms of a servicing agreement (the "Servicing
Agreement"), ILFC is performing certain aircraft related activities with respect
to MSAF Group's aircraft portfolio. Such activities include marketing MSAF
Group's aircraft for lease or sale and monitoring lessee compliance with lease
terms including terms relating to payment, maintenance and insurance. In
accordance with the Servicing Agreement, fees payable to ILFC by MSAF Group are
calculated as a percentage of the lease rentals received, in addition to certain
incentive-based fees.
The Servicing Agreement expires in 2023, although each party has the right
to terminate the Servicing Agreement under certain circumstances.
F-14
<PAGE> 130
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL 1998
-------------------------------------------
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
FEB. 28, MAY 31, AUG. 31, NOV. 30,
1998 1998 1998 1998
-------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Lease income, net............................... $25,117 $32,688 $30,932 $31,268
Investment income on collection account......... -- 961 724 471
------- ------- ------- -------
Total revenues.................................. 25,117 33,649 31,656 31,739
------- ------- ------- -------
Expenses:
Interest expense................................ -- 16,664 17,693 16,176
Depreciation expense............................ 3,823 11,523 11,765 11,765
Operating expenses:
Service provider and other fees.............. 2,837 2,839 1,805 2,053
Maintenance and other aircraft related
costs...................................... 375 1,921 305 368
------- ------- ------- -------
Total expenses.................................. 7,035 32,947 31,568 30,362
------- ------- ------- -------
Net income........................................ $18,802 $ 702 $ 88 $ 1,377
======= ======= ======= =======
</TABLE>
F-15
<PAGE> 131
APPENDIX 1
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Adjusted Portfolio Value.............. 72
ADs................................... 25
Aircraft-Owning Subsidiaries.......... 17
AOG................................... 33
ASMs.................................. 32
Assumed Portfolio Value............... 72
Average Life Date..................... 77
Back-Up Facility...................... 52
Beneficial Interest................... 7
Beneficial Interest Distribution
Amount.............................. 100
Change of Control..................... 41
Controlling Trustees.................. 17
Delaware Trustee...................... 17
Eligible Credit Facilities............ 50
Eligible Provider..................... 50
expected final payment date........... 59
expected maturity..................... 63
Extended Pool Factor.................. 74
Facility Reduction Event.............. 52
Final Regulations..................... 112
Financial Statements.................. 45
First Collection Account Top-Up....... 51
Fiscal 1997........................... 47
Fiscal 1998........................... 47
GPA................................... 35
Group................................. 41
H.15 (519)............................ 77
ILFC.................................. 17
Indenture............................. 1
Independent Trustees.................. 17
Initial Appraised Value............... 72
investment............................ 83
IRS................................... 112
issue price........................... 111
Minimum Class Percentage.............. 72
Minimum Liquidity Reserve Amount...... 51
Minimum Principal Payment Amount...... 72
Minimum Target Principal Balance...... 72
Modification Payments................. 51
most recent H.15 (519)................ 77
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MSAF.................................. ii
MSAF Group............................ ii
MSCS.................................. 48
MSDW.................................. 7
MSF................................... 7
Net Sale Proceeds..................... 87
New Notes............................. 1
Non-U.S. Holder....................... 111
Noteholders........................... 8
Notes................................. 1
Old Notes............................. 1
Permitted Account Investments......... 43
Permitted Accruals.................... 51
Permitted Additional Aircraft
Acquisition......................... 88
Plans................................. 114
Primary Eligible Credit Facility...... 51
PTCE.................................. 115
Rating Decline........................ 41
Related Persons....................... 41
Remaining Weighted Average Life....... 77
RPMs.................................. 32
Scheduled Class Percentage............ 73
Scheduled Principal Payment Amount.... 73
Scheduled Target Principal Balance.... 73
Secondary Eligible Credit Facility.... 51
Second Collection Account Top-Up...... 51
Significant Subsidiary................ 96
Stage 3 aircraft...................... 18
Subsequent Date....................... 77
Supplemental Class Percentage......... 73
Supplemental Principal Payment
Amount.............................. 73
Supplemental Target Principal
Balance............................. 73
Suspension Drawing.................... 52
Suspension Event...................... 52
Treasury Yield........................ 76
Trustees.............................. 17
U.S. GAAP............................. 85
U.S. Holder........................... 111
World Traffic Growth.................. 32
year 2000 endorsements................ 54
</TABLE>
A-1
<PAGE> 132
APPENDIX 2
AIRCRAFT TYPES DATA(1)
<TABLE>
<CAPTION>
NO. & STAGE 3
NARROW/ MFR. OF NOISE
TYPE & VARIANT WIDEBODY TYPICAL SEATS ENGINES COMPLIANCE PROD. YEARS NO. DELIVERED(2)
-------------- -------- ------------- ------------ ---------- ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Airbus A300-600R............... Wide 220 (3 class) 2 X GE/PW Yes 1987- 156
Airbus A310-300................ Wide 180 (3 class) 2 X GE/PW Yes 1985- 169
Airbus A320-200................ Narrow 150 (2 class) 2 X CFM/IAE Yes 1988- 591
Airbus A321-100................ Narrow 185 (2 class) 2 X CFM/IAE Yes 1993- 65
Boeing 737-300................. Narrow 130 (2 class) 2 X CFM Yes 1984- 1032(4)
Boeing 737-300F................ Narrow 0 2 X CFM Yes (all conversions) (all conversions)
Boeing 737-300QC............... Narrow 130/freight 2 X CFM Yes (all conversions) (all conversions)
Boeing 737-400................. Narrow 150 (2 class) 2 X CFM Yes 1988- 442
Boeing 737-500................. Narrow 110 (2 class) 2 X CFM Yes 1989- 354
Boeing 747-300................. Wide 400 (3 class) 4 X GE/PW/RR Yes 1982-90 81
Boeing 757-200................. Narrow 200 (2 class) 2 X PW/RR Yes 1982- 783
Boeing 767-200ER............... Wide 180 (3 class) 2 X GE/PW Yes 1984- 133
Boeing 767-300ER............... Wide 220 (3 class) 2 X GE/PW/RR Yes 1986- 362
Fokker 70...................... Narrow 70 (2 class) 2 X RR Yes 1994-97 48
MDC MD-82(6)................... Narrow 140 (2 class) 2 X PW Yes 1981- 577
MDC MD-83(6)................... Narrow 140 (2 class) 2 X PW Yes 1984- 224
<CAPTION>
CURRENT ON NO. OF
TYPE & VARIANT FLEET ORDER OPERATORS(3)
-------------- ------- ----- -------------
<S> <C> <C> <C>
Airbus A300-600R............... 154 8 18
Airbus A310-300................ 166 7 43
Airbus A320-200................ 588 297 80
Airbus A321-100................ 65 59 13
Boeing 737-300................. 992 88 95
Boeing 737-300F................ 3 0 2
Boeing 737-300QC............... 29 0 6
Boeing 737-400................. 439 37 54
Boeing 737-500................. 353 29 41
Boeing 747-300................. 79 0 22
Boeing 757-200................. 779 128 63
Boeing 767-200ER............... 130 0 26
Boeing 767-300ER............... 361 77 38
Fokker 70...................... 48 0 11
MDC MD-82(6)................... 570 0 24
MDC MD-83(6)................... 246(5) 10 31
</TABLE>
- ---------------
Source: Airclaims Limited.
(1) Data is as at January 1, 1998.
(2) Includes demonstrators/test aircraft.
(3) Excludes lessors.
(4) 737-300 deliveries include aircraft later converted to - 300F or 300QC.
(5) MD-83 current fleet includes aircraft converted from MD-81 and -82.
(6) Boeing has announced that production of these aircraft types is expected to
end in 1999.
A-2
<PAGE> 133
APPENDIX 3
MONTHLY GROSS REVENUES BASED ON THE ASSUMPTIONS
<TABLE>
<CAPTION>
GROSS
MONTH REVENUES
- ------------------------- ----------
($)
<S> <C>
April 1998............... 20,127,090
May 1998................. 11,041,661
June 1998................ 11,898,636
July 1998................ 9,998,636
August 1998.............. 11,070,411
September 1998........... 11,898,636
October 1998............. 9,998,636
November 1998............ 11,070,411
December 1998............ 11,875,636
January 1999............. 9,978,787
February 1999............ 10,440,562
March 1999............... 11,890,312
April 1999............... 10,617,053
May 1999................. 9,858,828
June 1999................ 12,545,803
July 1999................ 10,645,803
August 1999.............. 9,887,578
September 1999........... 12,545,803
October 1999............. 10,645,803
November 1999............ 9,887,578
December 1999............ 12,522,803
January 2000............. 10,624,379
February 2000............ 9,866,154
March 2000............... 12,534,330
April 2000............... 10,646,906
May 2000................. 9,897,643
June 2000................ 12,563,720
July 2000................ 10,663,720
August 2000.............. 9,906,095
September 2000........... 12,563,720
October 2000............. 10,663,720
November 2000............ 9,906,095
December 2000............ 11,317,631
January 2001............. 11,292,706
February 2001............ 10,535,081
March 2001............... 11,329,154
April 2001............... 10,736,600
May 2001................. 10,806,275
June 2001................ 11,590,400
July 2001................ 10,736,600
August 2001.............. 10,806,875
September 2001........... 11,590,400
October 2001............. 10,736,600
November 2001............ 10,806,875
December 2001............ 11,590,400
January 2002............. 10,738,176
February 2002............ 10,808,451
March 2002............... 11,601,927
April 2002............... 10,749,703
May 2002................. 10,819,978
June 2002................ 11,603,503
July 2002................ 10,749,703
August 2002.............. 10,772,967
September 2002........... 11,626,767
October 2002............. 10,737,967
</TABLE>
<TABLE>
<CAPTION>
($)
GROSS
MONTH REVENUES
- ------------------------- ----------
<S> <C>
November 2002............ 10,737,967
December 2002............ 11,591,767
January 2003............. 10,739,543
February 2003............ 10,739,543
March 2003............... 11,310,319
April 2003............... 10,742,695
May 2003................. 11,026,611
June 2003................ 11,026,611
July 2003................ 11,026,611
August 2003.............. 11,026,611
September 2003........... 11,026,611
October 2003............. 11,055,921
November 2003............ 11,055,921
December 2003............ 11,055,921
January 2004............. 15,613,844
February 2004............ 10,707,385
March 2004............... 10,711,291
April 2004............... 10,586,731
May 2004................. 10,586,731
June 2004................ 10,586,731
July 2004................ 10,586,731
August 2004.............. 10,586,731
September 2004........... 10,586,731
October 2004............. 10,552,625
November 2004............ 10,552,625
December 2004............ 10,552,625
January 2005............. 10,552,625
February 2005............ 10,552,625
March 2005............... 10,532,565
April 2005............... 10,532,565
May 2005................. 10,532,565
June 2005................ 10,532,565
July 2005................ 10,532,565
August 2005.............. 10,532,565
September 2005........... 10,532,565
October 2005............. 10,532,565
November 2005............ 10,532,565
December 2005............ 10,456,449
January 2006............. 10,456,449
February 2006............ 10,432,224
March 2006............... 10,432,224
April 2006............... 10,343,761
May 2006................. 10,309,593
June 2006................ 10,309,593
July 2006................ 10,270,089
August 2006.............. 10,270,089
September 2006........... 10,270,089
October 2006............. 10,270,089
November 2006............ 10,270,089
December 2006............ 10,270,089
January 2007............. 10,228,759
February 2007............ 10,228,759
March 2007............... 10,227,930
April 2007............... 10,227,930
May 2007................. 10,227,541
</TABLE>
<TABLE>
<CAPTION>
($)
GROSS
MONTH REVENUES
- ------------------------- ----------
<S> <C>
June 2007................ 10,227,541
July 2007................ 10,227,541
August 2007.............. 10,227,541
September 2007........... 10,227,541
October 2007............. 10,227,541
November 2007............ 10,227,541
December 2007............ 10,227,541
January 2008............. 10,227,541
February 2008............ 10,227,541
March 2008............... 10,226,619
April 2008............... 10,226,619
May 2008................. 9,843,805
June 2008................ 9,842,377
July 2008................ 9,842,377
August 2008.............. 9,842,377
September 2008........... 9,842,377
October 2008............. 9,734,411
November 2008............ 9,734,411
December 2008............ 9,653,636
January 2009............. 9,653,636
February 2009............ 9,653,636
March 2009............... 9,653,636
April 2009............... 9,431,656
May 2009................. 9,431,656
June 2009................ 9,431,656
July 2009................ 9,431,656
August 2009.............. 9,431,656
September 2009........... 9,431,656
October 2009............. 9,359,938
November 2009............ 9,359,938
December 2009............ 9,359,938
January 2010............. 9,359,938
February 2010............ 9,359,938
March 2010............... 9,335,730
April 2010............... 9,335,730
May 2010................. 9,335,730
June 2010................ 9,335,730
July 2010................ 9,335,730
August 2010.............. 9,335,730
September 2010........... 9,335,730
October 2010............. 9,335,730
November 2010............ 9,335,730
December 2010............ 9,191,116
January 2011............. 9,191,116
February 2011............ 9,056,116
March 2011............... 9,056,116
April 2011............... 8,737,419
May 2011................. 8,666,319
June 2011................ 8,666,319
July 2011................ 8,593,314
August 2011.............. 8,593,314
September 2011........... 8,593,314
October 2011............. 8,593,314
November 2011............ 8,593,314
December 2011............ 8,593,314
</TABLE>
A-3
<PAGE> 134
MONTHLY GROSS REVENUES BASED ON THE ASSUMPTIONS (CONTINUED)
<TABLE>
<CAPTION>
GROSS
MONTH REVENUES
- ------------------------- ----------
($)
<S> <C>
January 2012............. 8,519,289
February 2012............ 8,519,289
March 2012............... 8,444,739
April 2012............... 8,444,739
May 2012................. 8,344,530
June 2012................ 8,344,530
July 2012................ 8,344,530
August 2012.............. 8,341,451
September 2012........... 8,341,451
October 2012............. 8,341,451
November 2012............ 8,341,451
December 2012............ 8,341,451
January 2013............. 8,341,451
February 2013............ 8,341,451
March 2013............... 8,254,151
April 2013............... 8,254,151
May 2013................. 7,330,081
June 2013................ 7,234,864
July 2013................ 7,234,864
August 2013.............. 7,234,864
September 2013........... 7,050,432
October 2013............. 6,872,139
November 2013............ 6,872,139
December 2013............ 6,791,139
January 2014............. 6,758,168
February 2014............ 6,725,939
March 2014............... 6,693,561
April 2014............... 6,300,808
May 2014................. 6,300,808
June 2014................ 6,300,808
July 2014................ 6,300,808
August 2014.............. 6,300,808
September 2014........... 6,300,808
October 2014............. 6,167,572
November 2014............ 6,167,572
December 2014............ 6,167,572
January 2015............. 6,167,572
February 2015............ 6,167,572
March 2015............... 6,051,063
April 2015............... 6,051,063
May 2015................. 6,051,063
June 2015................ 5,966,095
July 2015................ 5,966,095
August 2015.............. 5,966,095
September 2015........... 5,966,095
</TABLE>
<TABLE>
<CAPTION>
($)
GROSS
MONTH REVENUES
- ------------------------- ----------
<S> <C>
October 2015............. 5,966,095
November 2015............ 5,966,095
December 2015............ 5,700,476
January 2016............. 5,700,476
February 2016............ 5,409,701
March 2016............... 5,409,701
April 2016............... 4,804,828
May 2016................. 4,673,096
June 2016................ 4,673,096
July 2016................ 4,542,254
August 2016.............. 4,542,254
September 2016........... 4,542,254
October 2016............. 4,542,254
November 2016............ 4,542,254
December 2016............ 4,542,254
January 2017............. 4,410,860
February 2017............ 4,410,860
March 2017............... 4,237,738
April 2017............... 4,237,738
May 2017................. 4,004,307
June 2017................ 4,004,307
July 2017................ 4,004,307
August 2017.............. 3,997,328
September 2017........... 3,997,328
October 2017............. 3,997,328
November 2017............ 3,997,328
December 2017............ 3,997,328
January 2018............. 3,997,328
February 2018............ 3,997,328
March 2018............... 3,794,549
April 2018............... 3,794,549
May 2018................. 3,192,249
June 2018................ 2,971,504
July 2018................ 2,971,504
August 2018.............. 2,971,504
September 2018........... 2,740,804
October 2018............. 2,432,753
November 2018............ 2,432,753
December 2018............ 2,324,528
January 2019............. 2,270,820
February 2019............ 2,217,156
March 2019............... 2,163,540
April 2019............... 1,995,242
May 2019................. 1,995,242
June 2019................ 1,995,242
</TABLE>
<TABLE>
<CAPTION>
($)
GROSS
MONTH REVENUES
- ------------------------- ----------
<S> <C>
July 2019................ 1,995,242
August 2019.............. 1,995,242
September 2019........... 1,995,242
October 2019............. 1,995,242
November 2019............ 1,995,242
December 2019............ 1,995,242
January 2020............. 1,995,242
February 2020............ 1,995,242
March 2020............... 1,747,595
April 2020............... 1,747,595
May 2020................. 1,747,595
June 2020................ 1,643,127
July 2020................ 1,643,127
August 2020.............. 1,643,127
September 2020........... 1,643,127
October 2020............. 1,643,127
November 2020............ 1,643,127
December 2020............ 1,502,065
January 2021............. 1,502,065
February 2021............ 1,502,065
March 2021............... 1,502,065
April 2021............... 918,578
May 2021................. 918,578
June 2021................ 918,578
July 2021................ 918,578
August 2021.............. 918,578
September 2021........... 918,578
October 2021............. 918,578
November 2021............ 918,578
December 2021............ 918,578
January 2022............. 918,578
February 2022............ 918,578
March 2022............... 918,578
April 2022............... 918,578
May 2022................. 918,578
June 2022................ 918,578
July 2022................ 918,578
August 2022.............. 905,372
September 2022........... 905,372
October 2022............. 905,372
November 2022............ 905,372
December 2022............ 905,372
January 2023............. 905,372
February 2023............ 905,372
March 2023............... 905,372
</TABLE>
A-4
<PAGE> 135
APPENDIX 4
ASSUMED PORTFOLIO VALUES FOR THE INITIAL PORTFOLIO
<TABLE>
<CAPTION>
EXPECTED
MONTH PORTFOLIO VALUE
- ---------------------- ---------------
($ MILLIONS)
<S> <C>
Closing............... 1,115.51
April 1998............ 1,110.73
May 1998.............. 1,107.30
June 1998............. 1,103.85
July 1998............. 1,100.39
August 1998........... 1,096.92
September 1998........ 1,093.43
October 1998.......... 1,089.93
November 1998......... 1,086.41
December 1998......... 1,082.88
January 1999.......... 1,079.33
February 1999......... 1,075.77
March 1999............ 1,072.19
April 1999............ 1,068.60
May 1999.............. 1,064.99
June 1999............. 1,061.37
July 1999............. 1,057.74
August 1999........... 1,054.08
September 1999........ 1,050.42
October 1999.......... 1,046.74
November 1999......... 1,043.04
December 1999......... 1,039.33
January 2000.......... 1,035.61
February 2000......... 1,031.86
March 2000............ 1,028.11
April 2000............ 1,024.34
May 2000.............. 1,020.55
June 2000............. 1,016.75
July 2000............. 1,012.93
August 2000........... 1,009.10
September 2000........ 1,005.25
October 2000.......... 1,001.39
November 2000......... 997.51
December 2000......... 993.61
January 2001.......... 989.70
February 2001......... 985.78
March 2001............ 981.83
April 2001............ 977.88
May 2001.............. 973.90
June 2001............. 969.92
July 2001............. 965.91
August 2001........... 961.89
September 2001........ 957.85
October 2001.......... 953.80
November 2001......... 949.73
December 2001......... 945.65
January 2002.......... 941.55
February 2002......... 937.43
March 2002............ 933.30
April 2002............ 929.15
May 2002.............. 924.98
June 2002............. 920.80
July 2002............. 916.60
August 2002........... 912.39
September 2002........ 908.16
</TABLE>
<TABLE>
<CAPTION>
($ MILLIONS)
EXPECTED
MONTH PORTFOLIO VALUE
- ---------------------- ---------------
<S> <C>
October 2002.......... 903.91
November 2002......... 899.65
December 2002......... 895.37
January 2003.......... 891.07
February 2003......... 886.76
March 2003............ 882.43
April 2003............ 878.08
May 2003.............. 873.72
June 2003............. 869.34
July 2003............. 864.94
August 2003........... 860.53
September 2003........ 856.09
October 2003.......... 851.65
November 2003......... 847.18
December 2003......... 842.70
January 2004.......... 817.34
February 2004......... 813.02
March 2004............ 808.67
April 2004............ 804.31
May 2004.............. 799.94
June 2004............. 795.54
July 2004............. 791.13
August 2004........... 786.70
September 2004........ 782.26
October 2004.......... 777.80
November 2004......... 773.32
December 2004......... 768.83
January 2005.......... 764.31
February 2005......... 759.79
March 2005............ 755.24
April 2005............ 750.68
May 2005.............. 746.10
June 2005............. 741.50
July 2005............. 736.89
August 2005........... 732.25
September 2005........ 727.60
October 2005.......... 722.94
November 2005......... 718.25
December 2005......... 713.55
January 2006.......... 708.83
February 2006......... 704.10
March 2006............ 699.35
April 2006............ 694.57
May 2006.............. 689.78
June 2006............. 684.98
July 2006............. 680.15
August 2006........... 675.31
September 2006........ 670.45
October 2006.......... 665.57
November 2006......... 660.68
December 2006......... 655.76
January 2007.......... 650.83
February 2007......... 645.88
March 2007............ 640.91
April 2007............ 635.93
</TABLE>
<TABLE>
<CAPTION>
($ MILLIONS)
EXPECTED
MONTH PORTFOLIO VALUE
- ---------------------- ---------------
<S> <C>
May 2007.............. 630.92
June 2007............. 625.90
July 2007............. 620.86
August 2007........... 615.80
September 2007........ 610.72
October 2007.......... 605.62
November 2007......... 600.51
December 2007......... 595.38
January 2008.......... 590.22
February 2008......... 585.05
March 2008............ 579.86
April 2008............ 574.66
May 2008.............. 569.43
June 2008............. 564.18
July 2008............. 558.92
August 2008........... 553.63
September 2008........ 548.33
October 2008.......... 543.01
November 2008......... 537.67
December 2008......... 532.31
January 2009.......... 526.93
February 2009......... 521.53
March 2009............ 516.12
April 2009............ 510.68
May 2009.............. 505.22
June 2009............. 499.75
July 2009............. 494.25
August 2009........... 488.74
September 2009........ 483.20
October 2009.......... 477.65
November 2009......... 472.08
December 2009......... 466.48
January 2010.......... 460.87
February 2010......... 455.24
March 2010............ 449.59
April 2010............ 443.91
May 2010.............. 438.22
June 2010............. 432.51
July 2010............. 426.78
August 2010........... 421.02
September 2010........ 415.25
October 2010.......... 409.46
November 2010......... 403.65
December 2010......... 398.11
January 2011.......... 392.70
February 2011......... 387.27
March 2011............ 381.82
April 2011............ 376.36
May 2011.............. 370.87
June 2011............. 365.37
July 2011............. 359.84
August 2011........... 354.30
September 2011........ 348.74
October 2011.......... 343.16
November 2011......... 337.56
</TABLE>
A-5
<PAGE> 136
ASSUMED PORTFOLIO VALUES FOR THE INITIAL PORTFOLIO (CONTINUED)
<TABLE>
<CAPTION>
EXPECTED
MONTH PORTFOLIO VALUE
- ---------------------- ---------------
($ MILLIONS)
<S> <C>
December 2011......... 331.94
January 2012.......... 326.30
February 2012......... 320.64
March 2012............ 314.96
April 2012............ 309.26
May 2012.............. 303.54
June 2012............. 297.89
July 2012............. 292.31
August 2012........... 286.70
September 2012........ 281.28
October 2012.......... 276.01
November 2012......... 270.82
December 2012......... 265.62
January 2013.......... 260.39
February 2013......... 255.15
March 2013............ 249.89
April 2013............ 244.61
May 2013.............. 239.57
June 2013............. 234.76
July 2013............. 229.93
August 2013........... 225.09
September 2013........ 220.23
October 2013.......... 215.36
November 2013......... 210.71
December 2013......... 206.14
January 2014.......... 201.90
February 2014......... 197.83
March 2014............ 193.89
April 2014............ 190.08
May 2014.............. 186.40
June 2014............. 182.71
July 2014............. 179.00
August 2014........... 175.29
September 2014........ 171.56
October 2014.......... 167.81
November 2014......... 164.06
December 2014......... 160.29
January 2015.......... 156.51
February 2015......... 152.72
March 2015............ 148.91
April 2015............ 145.38
May 2015.............. 141.92
June 2015............. 138.45
July 2015............. 134.97
August 2015........... 131.47
September 2015........ 127.97
</TABLE>
<TABLE>
<CAPTION>
($ MILLIONS)
EXPECTED
MONTH PORTFOLIO VALUE
- ---------------------- ---------------
<S> <C>
October 2015.......... 124.58
November 2015......... 121.44
December 2015......... 118.28
January 2016.......... 115.12
February 2016......... 111.95
March 2016............ 108.76
April 2016............ 105.57
May 2016.............. 102.36
June 2016............. 99.14
July 2016............. 95.91
August 2016........... 92.67
September 2016........ 89.42
October 2016.......... 86.16
November 2016......... 82.89
December 2016......... 79.61
January 2017.......... 76.32
February 2017......... 73.20
March 2017............ 70.36
April 2017............ 67.59
May 2017.............. 64.86
June 2017............. 62.26
July 2017............. 59.64
August 2017........... 57.02
September 2017........ 54.39
October 2017.......... 51.75
November 2017......... 49.10
December 2017......... 46.45
January 2018.......... 43.78
February 2018......... 41.11
March 2018............ 38.55
April 2018............ 36.26
May 2018.............. 34.29
June 2018............. 32.68
July 2018............. 31.12
August 2018........... 29.55
September 2018........ 27.98
October 2018.......... 26.41
November 2018......... 24.82
December 2018......... 23.27
January 2019.......... 21.85
February 2019......... 20.42
March 2019............ 19.12
April 2019............ 17.95
May 2019.............. 16.79
June 2019............. 15.61
</TABLE>
<TABLE>
<CAPTION>
($ MILLIONS)
EXPECTED
MONTH PORTFOLIO VALUE
- ---------------------- ---------------
<S> <C>
July 2019............. 14.44
August 2019........... 13.26
September 2019........ 12.07
October 2019.......... 11.30
November 2019......... 10.53
December 2019......... 9.76
January 2020.......... 8.99
February 2020......... 8.22
March 2020............ 7.45
April 2020............ 6.67
May 2020.............. 5.89
June 2020............. 5.30
July 2020............. 4.73
August 2020........... 4.17
September 2020........ 3.60
October 2020.......... 3.04
November 2020......... 2.47
December 2020......... 1.89
January 2021.......... 1.40
February 2021......... 0.93
March 2021............ 0.59
April 2021............ 0.32
May 2021.............. 0.05
June 2021............. 0.00
July 2021............. 0.00
August 2021........... 0.00
September 2021........ 0.00
October 2021.......... 0.00
November 2021......... 0.00
December 2021......... 0.00
January 2022.......... 0.00
February 2022......... 0.00
March 2022............ 0.00
April 2022............ 0.00
May 2022.............. 0.00
June 2022............. 0.00
July 2022............. 0.00
August 2022........... 0.00
September 2022........ 0.00
October 2022.......... 0.00
November 2022......... 0.00
December 2022......... 0.00
January 2023.......... 0.00
February 2023......... 0.00
March 2023............ 0.00
</TABLE>
A-6
<PAGE> 137
APPENDIX 5
CLASS A CLASS PERCENTAGES
<TABLE>
<CAPTION>
CLASS A CLASS A CLASS A
MINIMUM SCHEDULED SUPPLEMENTAL
PAYMENT DATE CLASS CLASS CLASS
OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE
- ------------ ---------- ---------- ------------
<S> <C> <C> <C>
Closing.............. 66.34% 66.34% 59.70%
April 1998........... 66.34% 66.34% 59.69%
May 1998............. 66.34% 66.34% 59.66%
June 1998............ 66.34% 66.34% 59.63%
July 1998............ 66.34% 66.34% 59.58%
August 1998.......... 66.34% 66.34% 59.53%
September 1998....... 66.34% 66.34% 59.47%
October 1998......... 66.33% 66.33% 59.40%
November 1998........ 66.33% 66.33% 59.33%
December 1998........ 66.33% 66.33% 59.26%
January 1999......... 66.33% 66.33% 59.18%
February 1999........ 66.33% 66.33% 59.09%
March 1999........... 66.32% 66.32% 59.00%
April 1999........... 66.32% 66.32% 58.91%
May 1999............. 66.32% 66.32% 58.81%
June 1999............ 66.31% 66.31% 58.71%
July 1999............ 66.31% 66.31% 58.60%
August 1999.......... 66.30% 66.30% 58.49%
September 1999....... 66.30% 66.30% 58.38%
October 1999......... 66.29% 66.29% 58.26%
November 1999........ 66.29% 66.28% 58.13%
December 1999........ 66.28% 66.27% 58.01%
January 2000......... 66.27% 66.26% 57.88%
February 2000........ 66.26% 66.25% 57.75%
March 2000........... 66.25% 66.24% 57.61%
April 2000........... 66.24% 66.23% 57.47%
May 2000............. 66.23% 66.22% 57.33%
June 2000............ 66.22% 66.21% 57.18%
July 2000............ 66.21% 66.19% 57.03%
August 2000.......... 66.19% 66.18% 56.88%
September 2000....... 66.18% 66.16% 56.73%
October 2000......... 66.16% 66.14% 56.57%
November 2000........ 66.15% 66.12% 56.41%
December 2000........ 66.13% 66.10% 56.24%
January 2001......... 66.11% 66.08% 56.07%
February 2001........ 66.09% 66.06% 55.90%
March 2001........... 66.07% 66.04% 55.73%
April 2001........... 66.05% 66.01% 55.55%
May 2001............. 66.03% 65.99% 55.38%
June 2001............ 66.01% 65.96% 55.20%
July 2001............ 65.98% 65.93% 55.01%
August 2001.......... 65.96% 65.90% 54.82%
September 2001....... 65.93% 65.87% 54.63%
October 2001......... 65.90% 65.84% 54.44%
November 2001........ 65.87% 65.81% 54.25%
December 2001........ 65.84% 65.77% 54.05%
January 2002......... 65.81% 65.74% 53.85%
February 2002........ 65.78% 65.70% 53.65%
March 2002........... 65.75% 65.66% 53.44%
April 2002........... 65.71% 65.62% 53.24%
May 2002............. 65.68% 65.58% 53.03%
June 2002............ 65.64% 65.53% 52.81%
July 2002............ 65.60% 65.49% 52.60%
August 2002.......... 65.56% 65.44% 52.38%
</TABLE>
<TABLE>
<CAPTION>
CLASS A CLASS A CLASS A
MINIMUM SCHEDULED SUPPLEMENTAL
PAYMENT DATE CLASS CLASS CLASS
OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE
- ------------ ---------- ---------- ------------
<S> <C> <C> <C>
September 2002....... 65.52% 65.39% 52.16%
October 2002......... 65.48% 65.34% 51.94%
November 2002........ 65.43% 65.29% 51.72%
December 2002........ 65.39% 65.23% 51.49%
January 2003......... 65.34% 65.18% 51.26%
February 2003........ 65.29% 65.12% 51.03%
March 2003........... 65.24% 65.06% 50.80%
April 2003........... 65.19% 65.00% 50.56%
May 2003............. 65.14% 64.93% 50.32%
June 2003............ 65.09% 64.87% 50.08%
July 2003............ 65.03% 64.80% 49.84%
August 2003.......... 64.97% 64.73% 49.60%
September 2003....... 64.91% 64.66% 49.35%
October 2003......... 64.85% 64.58% 49.10%
November 2003........ 64.79% 64.51% 48.85%
December 2003........ 64.73% 64.43% 48.60%
January 2004......... 64.66% 64.35% 48.34%
February 2004........ 64.59% 64.27% 48.08%
March 2004........... 64.53% 64.19% 47.82%
April 2004........... 64.46% 64.10% 47.56%
May 2004............. 64.38% 64.01% 47.30%
June 2004............ 64.31% 63.92% 47.03%
July 2004............ 64.23% 63.83% 46.76%
August 2004.......... 64.16% 63.73% 46.49%
September 2004....... 64.08% 63.64% 46.22%
October 2004......... 63.99% 63.54% 45.95%
November 2004........ 63.91% 63.43% 45.67%
December 2004........ 63.83% 63.33% 45.39%
January 2005......... 63.74% 63.22% 45.11%
February 2005........ 63.65% 63.11% 44.83%
March 2005........... 63.56% 63.00% 44.55%
April 2005........... 63.47% 62.89% 44.26%
May 2005............. 63.37% 62.77% 43.97%
June 2005............ 63.28% 62.65% 43.68%
July 2005............ 63.18% 62.53% 43.39%
August 2005.......... 63.08% 62.40% 43.10%
September 2005....... 62.98% 62.28% 42.80%
October 2005......... 62.87% 62.15% 42.50%
November 2005........ 62.76% 62.01% 42.20%
December 2005........ 62.66% 61.88% 41.90%
January 2006......... 62.54% 61.74% 41.60%
February 2006........ 62.43% 61.60% 41.29%
March 2006........... 62.32% 61.46% 40.99%
April 2006........... 62.20% 61.31% 40.68%
May 2006............. 62.08% 61.16% 40.37%
June 2006............ 61.96% 61.01% 40.05%
July 2006............ 61.84% 60.85% 39.74%
August 2006.......... 61.71% 60.70% 39.42%
September 2006....... 61.58% 60.54% 39.10%
October 2006......... 61.45% 60.37% 38.78%
November 2006........ 61.32% 60.21% 38.46%
December 2006........ 61.18% 60.04% 38.14%
January 2007......... 61.05% 59.86% 37.81%
February 2007........ 60.91% 59.69% 37.49%
</TABLE>
A-7
<PAGE> 138
CLASS A CLASS PERCENTAGES (CONTINUED)
<TABLE>
<CAPTION>
CLASS A CLASS A CLASS A
MINIMUM SCHEDULED SUPPLEMENTAL
PAYMENT DATE CLASS CLASS CLASS
OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE
- ------------ ---------- ---------- ------------
<S> <C> <C> <C>
March 2007........... 60.77% 59.51% 37.16%
April 2007........... 60.62% 59.33% 36.83%
May 2007............. 60.47% 59.14% 36.49%
June 2007............ 60.33% 58.96% 36.16%
July 2007............ 60.17% 58.77% 35.82%
August 2007.......... 60.02% 58.57% 35.48%
September 2007....... 59.86% 58.37% 35.14%
October 2007......... 59.71% 58.17% 34.80%
November 2007........ 59.55% 57.97% 34.46%
December 2007........ 59.38% 57.76% 34.12%
January 2008......... 59.22% 57.55% 33.77%
February 2008........ 59.05% 57.34% 33.42%
March 2008........... 58.88% 57.12% 33.07%
April 2008........... 58.70% 56.90% 32.72%
May 2008............. 58.53% 56.68% 32.37%
June 2008............ 58.35% 56.45% 32.01%
July 2008............ 58.17% 56.22% 31.65%
August 2008.......... 57.98% 55.99% 31.30%
September 2008....... 57.80% 55.75% 30.94%
October 2008......... 57.61% 55.51% 30.57%
November 2008........ 57.41% 55.26% 30.21%
December 2008........ 57.22% 55.01% 29.85%
January 2009......... 57.02% 54.76% 29.48%
February 2009........ 56.82% 54.51% 29.11%
March 2009........... 56.62% 54.25% 28.74%
April 2009........... 56.42% 53.99% 28.37%
May 2009............. 56.21% 53.72% 28.00%
June 2009............ 56.00% 53.45% 27.62%
July 2009............ 55.78% 53.18% 27.25%
August 2009.......... 55.57% 52.90% 26.87%
September 2009....... 55.35% 52.62% 26.49%
October 2009......... 55.12% 52.33% 26.11%
November 2009........ 54.90% 52.04% 25.72%
December 2009........ 54.67% 51.75% 25.34%
January 2010......... 54.44% 51.45% 24.95%
February 2010........ 54.21% 51.15% 24.57%
March 2010........... 53.97% 50.85% 24.18%
April 2010........... 53.73% 50.54% 23.79%
May 2010............. 53.49% 50.23% 23.40%
June 2010............ 53.24% 49.91% 23.00%
July 2010............ 53.00% 49.59% 22.61%
August 2010.......... 52.74% 49.27% 22.21%
September 2010....... 52.49% 48.94% 21.81%
October 2010......... 52.23% 48.61% 21.41%
November 2010........ 51.97% 48.27% 21.01%
December 2010........ 51.71% 47.93% 20.61%
January 2011......... 51.44% 47.59% 20.20%
February 2011........ 51.17% 47.24% 19.80%
March 2011........... 50.90% 46.88% 19.39%
April 2011........... 50.62% 46.53% 18.98%
May 2011............. 50.34% 46.17% 18.57%
June 2011............ 50.06% 45.80% 18.16%
July 2011............ 49.78% 45.43% 17.74%
August 2011.......... 49.49% 45.06% 17.33%
September 2011....... 49.20% 44.68% 16.91%
October 2011......... 48.90% 44.29% 16.49%
November 2011........ 48.60% 43.91% 16.07%
</TABLE>
<TABLE>
<CAPTION>
CLASS A CLASS A CLASS A
MINIMUM SCHEDULED SUPPLEMENTAL
PAYMENT DATE CLASS CLASS CLASS
OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE
- ------------ ---------- ---------- ------------
<S> <C> <C> <C>
December 2011........ 48.30% 43.52% 15.65%
January 2012......... 48.00% 43.12% 15.23%
February 2012........ 47.69% 42.72% 14.80%
March 2012........... 47.38% 42.31% 14.38%
April 2012........... 47.07% 41.90% 13.95%
May 2012............. 46.75% 41.49% 13.52%
June 2012............ 46.43% 41.07% 13.09%
July 2012............ 46.10% 40.65% 12.66%
August 2012.......... 45.77% 40.22% 12.23%
September 2012....... 45.44% 39.79% 11.79%
October 2012......... 45.11% 39.35% 11.36%
November 2012........ 44.77% 38.91% 10.92%
December 2012........ 44.43% 38.46% 10.48%
January 2013......... 44.09% 38.01% 10.04%
February 2013........ 43.74% 37.56% 9.60%
March 2013........... 43.39% 37.10% 9.16%
April 2013........... 43.03% 36.63% 8.71%
May 2013............. 42.67% 36.16% 8.27%
June 2013............ 42.31% 35.69% 7.82%
July 2013............ 41.94% 35.21% 7.37%
August 2013.......... 41.58% 34.73% 6.92%
September 2013....... 41.20% 34.24% 6.47%
October 2013......... 40.83% 33.74% 6.02%
November 2013........ 40.45% 33.24% 5.56%
December 2013........ 40.06% 32.74% 5.11%
January 2014......... 39.68% 32.23% 4.65%
February 2014........ 39.29% 31.72% 4.19%
March 2014........... 38.89% 31.20% 3.73%
April 2014........... 38.49% 30.68% 3.27%
May 2014............. 38.09% 30.15% 2.81%
June 2014............ 37.69% 29.61% 2.34%
July 2014............ 37.28% 29.07% 1.88%
August 2014.......... 36.86% 28.53% 1.41%
September 2014....... 36.45% 27.98% 0.94%
October 2014......... 36.03% 27.43% 0.47%
November 2014........ 35.60% 26.87% 0.00%
December 2014........ 35.18% 26.30% 0.00%
January 2015......... 34.74% 25.73% 0.00%
February 2015........ 34.31% 25.16% 0.00%
March 2015........... 33.87% 24.58% 0.00%
April 2015........... 33.43% 23.99% 0.00%
May 2015............. 32.98% 23.40% 0.00%
June 2015............ 32.53% 22.80% 0.00%
July 2015............ 32.07% 22.20% 0.00%
August 2015.......... 31.62% 21.60% 0.00%
September 2015....... 31.15% 20.98% 0.00%
October 2015......... 30.69% 20.37% 0.00%
November 2015........ 30.22% 19.74% 0.00%
December 2015........ 29.74% 19.11% 0.00%
January 2016......... 29.27% 18.48% 0.00%
February 2016........ 28.78% 17.84% 0.00%
March 2016........... 28.30% 17.20% 0.00%
April 2016........... 27.81% 16.54% 0.00%
May 2016............. 27.31% 15.89% 0.00%
June 2016............ 26.81% 15.23% 0.00%
July 2016............ 26.31% 14.56% 0.00%
August 2016.......... 25.81% 13.89% 0.00%
</TABLE>
A-8
<PAGE> 139
CLASS A CLASS PERCENTAGES (CONTINUED)
<TABLE>
<CAPTION>
CLASS A CLASS A CLASS A
MINIMUM SCHEDULED SUPPLEMENTAL
PAYMENT DATE CLASS CLASS CLASS
OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE
- ------------ ---------- ---------- ------------
<S> <C> <C> <C>
September 2016....... 25.30% 13.21% 0.00%
October 2016......... 24.78% 12.52% 0.00%
November 2016........ 24.26% 11.83% 0.00%
December 2016........ 23.74% 11.14% 0.00%
January 2017......... 23.21% 10.44% 0.00%
February 2017........ 22.68% 9.73% 0.00%
March 2017........... 22.15% 9.02% 0.00%
April 2017........... 21.61% 8.30% 0.00%
May 2017............. 21.07% 7.57% 0.00%
June 2017............ 20.52% 6.84% 0.00%
July 2017............ 19.97% 6.10% 0.00%
August 2017.......... 19.41% 5.36% 0.00%
September 2017....... 18.85% 4.61% 0.00%
October 2017......... 18.29% 3.86% 0.00%
November 2017........ 17.72% 3.10% 0.00%
December 2017........ 17.14% 2.33% 0.00%
January 2018......... 16.57% 1.56% 0.00%
February 2018........ 15.98% 0.78% 0.00%
March 2018........... 15.40% 0.00% 0.00%
April 2018........... 14.81% 0.00% 0.00%
May 2018............. 14.21% 0.00% 0.00%
June 2018............ 13.61% 0.00% 0.00%
</TABLE>
<TABLE>
<CAPTION>
CLASS A CLASS A CLASS A
MINIMUM SCHEDULED SUPPLEMENTAL
PAYMENT DATE CLASS CLASS CLASS
OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE
- ------------ ---------- ---------- ------------
<S> <C> <C> <C>
July 2018............ 13.01% 0.00% 0.00%
August 2018.......... 12.40% 0.00% 0.00%
September 2018....... 11.79% 0.00% 0.00%
October 2018......... 11.17% 0.00% 0.00%
November 2018........ 10.55% 0.00% 0.00%
December 2018........ 9.93% 0.00% 0.00%
January 2019......... 9.30% 0.00% 0.00%
February 2019........ 8.66% 0.00% 0.00%
March 2019........... 8.02% 0.00% 0.00%
April 2019........... 7.38% 0.00% 0.00%
May 2019............. 6.73% 0.00% 0.00%
June 2019............ 6.08% 0.00% 0.00%
July 2019............ 5.42% 0.00% 0.00%
August 2019.......... 4.76% 0.00% 0.00%
September 2019....... 4.09% 0.00% 0.00%
October 2019......... 3.42% 0.00% 0.00%
November 2019........ 2.75% 0.00% 0.00%
December 2019........ 2.07% 0.00% 0.00%
January 2020......... 1.38% 0.00% 0.00%
February 2020........ 0.69% 0.00% 0.00%
March 2020........... 0.00% 0.00% 0.00%
</TABLE>
A-9
<PAGE> 140
APPENDIX 6
CLASS B CLASS PERCENTAGES
<TABLE>
<CAPTION>
CLASS B CLASS B CLASS B
MINIMUM SCHEDULED SUPPLEMENTAL
PAYMENT DATE CLASS CLASS CLASS
OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE
- ------------ ---------- ---------- ------------
<S> <C> <C> <C>
Closing.............. 8.96% 8.96% 8.96%
April 1998........... 8.96% 8.96% 8.96%
May 1998............. 8.96% 8.96% 8.96%
June 1998............ 8.96% 8.96% 8.96%
July 1998............ 8.96% 8.96% 8.96%
August 1998.......... 8.96% 8.96% 8.96%
September 1998....... 8.96% 8.96% 8.96%
October 1998......... 8.96% 8.96% 8.95%
November 1998........ 8.96% 8.96% 8.95%
December 1998........ 8.96% 8.96% 8.95%
January 1999......... 8.96% 8.96% 8.94%
February 1999........ 8.96% 8.96% 8.94%
March 1999........... 8.96% 8.96% 8.93%
April 1999........... 8.96% 8.96% 8.93%
May 1999............. 8.96% 8.96% 8.92%
June 1999............ 8.96% 8.96% 8.91%
July 1999............ 8.96% 8.96% 8.90%
August 1999.......... 8.96% 8.96% 8.89%
September 1999....... 8.96% 8.96% 8.88%
October 1999......... 8.96% 8.96% 8.87%
November 1999........ 8.96% 8.96% 8.86%
December 1999........ 8.96% 8.96% 8.85%
January 2000......... 8.96% 8.96% 8.84%
February 2000........ 8.96% 8.96% 8.82%
March 2000........... 8.96% 8.96% 8.81%
April 2000........... 8.96% 8.96% 8.79%
May 2000............. 8.96% 8.96% 8.78%
June 2000............ 8.96% 8.96% 8.76%
July 2000............ 8.96% 8.96% 8.74%
August 2000.......... 8.96% 8.96% 8.72%
September 2000....... 8.96% 8.96% 8.71%
October 2000......... 8.96% 8.96% 8.69%
November 2000........ 8.95% 8.95% 8.67%
December 2000........ 8.95% 8.95% 8.64%
January 2001......... 8.95% 8.95% 8.62%
February 2001........ 8.95% 8.95% 8.60%
March 2001........... 8.95% 8.95% 8.57%
April 2001........... 8.95% 8.95% 8.55%
May 2001............. 8.95% 8.95% 8.52%
June 2001............ 8.94% 8.94% 8.50%
July 2001............ 8.94% 8.94% 8.47%
August 2001.......... 8.94% 8.94% 8.44%
September 2001....... 8.94% 8.94% 8.41%
October 2001......... 8.94% 8.93% 8.38%
November 2001........ 8.93% 8.93% 8.35%
December 2001........ 8.93% 8.93% 8.32%
January 2002......... 8.93% 8.92% 8.28%
February 2002........ 8.92% 8.92% 8.25%
March 2002........... 8.92% 8.92% 8.22%
April 2002........... 8.92% 8.91% 8.18%
May 2002............. 8.92% 8.91% 8.14%
June 2002............ 8.91% 8.90% 8.11%
July 2002............ 8.91% 8.90% 8.07%
August 2002.......... 8.90% 8.89% 8.03%
September 2002....... 8.90% 8.89% 7.99%
October 2002......... 8.90% 8.88% 7.95%
November 2002........ 8.89% 8.88% 7.90%
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS B CLASS B
MINIMUM SCHEDULED SUPPLEMENTAL
PAYMENT DATE CLASS CLASS CLASS
OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE
- ------------ ---------- ---------- ------------
<S> <C> <C> <C>
December 2002........ 8.89% 8.87% 7.86%
January 2003......... 8.88% 8.86% 7.82%
February 2003........ 8.88% 8.86% 7.77%
March 2003........... 8.87% 8.85% 7.72%
April 2003........... 8.87% 8.84% 7.68%
May 2003............. 8.86% 8.83% 7.63%
June 2003............ 8.85% 8.82% 7.58%
July 2003............ 8.85% 8.81% 7.53%
August 2003.......... 8.84% 8.81% 7.48%
September 2003....... 8.83% 8.80% 7.43%
October 2003......... 8.83% 8.78% 7.37%
November 2003........ 8.82% 8.77% 7.32%
December 2003........ 8.81% 8.76% 7.26%
January 2004......... 8.81% 8.75% 7.21%
February 2004........ 8.80% 8.74% 7.15%
March 2004........... 8.79% 8.73% 7.09%
April 2004........... 8.78% 8.71% 7.03%
May 2004............. 8.77% 8.70% 6.97%
June 2004............ 8.76% 8.68% 6.91%
July 2004............ 8.75% 8.67% 6.85%
August 2004.......... 8.74% 8.65% 6.79%
September 2004....... 8.73% 8.64% 6.72%
October 2004......... 8.72% 8.62% 6.66%
November 2004........ 8.71% 8.60% 6.59%
December 2004........ 8.70% 8.58% 6.52%
January 2005......... 8.69% 8.56% 6.45%
February 2005........ 8.68% 8.55% 6.38%
March 2005........... 8.66% 8.52% 6.31%
April 2005........... 8.65% 8.50% 6.24%
May 2005............. 8.64% 8.48% 6.17%
June 2005............ 8.62% 8.46% 6.09%
July 2005............ 8.61% 8.44% 6.02%
August 2005.......... 8.60% 8.41% 5.94%
September 2005....... 8.58% 8.39% 5.87%
October 2005......... 8.57% 8.36% 5.79%
November 2005........ 8.55% 8.33% 5.71%
December 2005........ 8.53% 8.31% 5.63%
January 2006......... 8.52% 8.28% 5.55%
February 2006........ 8.50% 8.25% 5.46%
March 2006........... 8.48% 8.22% 5.38%
April 2006........... 8.47% 8.19% 5.29%
May 2006............. 8.45% 8.16% 5.21%
June 2006............ 8.43% 8.12% 5.12%
July 2006............ 8.41% 8.09% 5.03%
August 2006.......... 8.39% 8.05% 4.94%
September 2006....... 8.37% 8.02% 4.85%
October 2006......... 8.35% 7.98% 4.76%
November 2006........ 8.33% 7.94% 4.67%
December 2006........ 8.31% 7.90% 4.57%
January 2007......... 8.29% 7.86% 4.48%
February 2007........ 8.26% 7.82% 4.38%
March 2007........... 8.24% 7.78% 4.29%
April 2007........... 8.22% 7.73% 4.19%
May 2007............. 8.19% 7.69% 4.09%
June 2007............ 8.17% 7.64% 3.99%
July 2007............ 8.14% 7.59% 3.88%
August 2007.......... 8.12% 7.54% 3.78%
</TABLE>
A-10
<PAGE> 141
CLASS B CLASS PERCENTAGES (CONTINUED)
<TABLE>
<CAPTION>
CLASS B CLASS B CLASS B
MINIMUM SCHEDULED SUPPLEMENTAL
PAYMENT DATE CLASS CLASS CLASS
OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE
- ------------ ---------- ---------- ------------
<S> <C> <C> <C>
September 2007....... 8.09% 7.49% 3.68%
October 2007......... 8.06% 7.44% 3.57%
November 2007........ 8.03% 7.39% 3.47%
December 2007........ 8.01% 7.33% 3.36%
January 2008......... 7.98% 7.28% 3.25%
February 2008........ 7.95% 7.22% 3.14%
March 2008........... 7.92% 7.16% 3.03%
April 2008........... 7.89% 7.10% 2.91%
May 2008............. 7.86% 7.04% 2.80%
June 2008............ 7.82% 6.98% 2.69%
July 2008............ 7.79% 6.91% 2.57%
August 2008.......... 7.76% 6.85% 2.45%
September 2008....... 7.72% 6.78% 2.34%
October 2008......... 7.69% 6.71% 2.22%
November 2008........ 7.65% 6.64% 2.09%
December 2008........ 7.62% 6.56% 1.97%
January 2009......... 7.58% 6.49% 1.85%
February 2009........ 7.54% 6.41% 1.73%
March 2009........... 7.50% 6.34% 1.60%
April 2009........... 7.47% 6.26% 1.47%
May 2009............. 7.43% 6.18% 1.35%
June 2009............ 7.39% 6.09% 1.22%
July 2009............ 7.34% 6.01% 1.09%
August 2009.......... 7.30% 5.92% 0.95%
September 2009....... 7.26% 5.83% 0.82%
October 2009......... 7.22% 5.74% 0.69%
November 2009........ 7.17% 5.65% 0.55%
December 2009........ 7.13% 5.55% 0.42%
January 2010......... 7.08% 5.46% 0.28%
February 2010........ 7.03% 5.36% 0.14%
March 2010........... 6.99% 5.26% 0.00%
April 2010........... 6.94% 5.15% 0.00%
May 2010............. 6.89% 5.05% 0.00%
June 2010............ 6.84% 4.94% 0.00%
July 2010............ 6.79% 4.83% 0.00%
August 2010.......... 6.74% 4.72% 0.00%
September 2010....... 6.68% 4.61% 0.00%
October 2010......... 6.63% 4.49% 0.00%
November 2010........ 6.58% 4.37% 0.00%
December 2010........ 6.52% 4.25% 0.00%
January 2011......... 6.46% 4.13% 0.00%
February 2011........ 6.41% 4.00% 0.00%
March 2011........... 6.35% 3.88% 0.00%
April 2011........... 6.29% 3.74% 0.00%
May 2011............. 6.23% 3.61% 0.00%
June 2011............ 6.17% 3.48% 0.00%
July 2011............ 6.11% 3.34% 0.00%
August 2011.......... 6.04% 3.20% 0.00%
September 2011....... 5.98% 3.06% 0.00%
October 2011......... 5.92% 2.91% 0.00%
November 2011........ 5.85% 2.76% 0.00%
December 2011........ 5.78% 2.61% 0.00%
January 2012......... 5.72% 2.46% 0.00%
February 2012........ 5.65% 2.30% 0.00%
March 2012........... 5.58% 2.14% 0.00%
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS B CLASS B
MINIMUM SCHEDULED SUPPLEMENTAL
PAYMENT DATE CLASS CLASS CLASS
OCCURRING IN PERCENTAGE PERCENTAGE PERCENTAGE
- ------------ ---------- ---------- ------------
<S> <C> <C> <C>
April 2012........... 5.51% 1.98% 0.00%
May 2012............. 5.43% 1.81% 0.00%
June 2012............ 5.36% 1.65% 0.00%
July 2012............ 5.29% 1.48% 0.00%
August 2012.......... 5.21% 1.30% 0.00%
September 2012....... 5.13% 1.13% 0.00%
October 2012......... 5.06% 0.95% 0.00%
November 2012........ 4.98% 0.76% 0.00%
December 2012........ 4.90% 0.58% 0.00%
January 2013......... 4.82% 0.39% 0.00%
February 2013........ 4.74% 0.20% 0.00%
March 2013........... 4.65% 0.00% 0.00%
April 2013........... 4.57% 0.00% 0.00%
May 2013............. 4.48% 0.00% 0.00%
June 2013............ 4.40% 0.00% 0.00%
July 2013............ 4.31% 0.00% 0.00%
August 2013.......... 4.22% 0.00% 0.00%
September 2013....... 4.13% 0.00% 0.00%
October 2013......... 4.04% 0.00% 0.00%
November 2013........ 3.95% 0.00% 0.00%
December 2013........ 3.85% 0.00% 0.00%
January 2014......... 3.76% 0.00% 0.00%
February 2014........ 3.66% 0.00% 0.00%
March 2014........... 3.56% 0.00% 0.00%
April 2014........... 3.47% 0.00% 0.00%
May 2014............. 3.37% 0.00% 0.00%
June 2014............ 3.26% 0.00% 0.00%
July 2014............ 3.16% 0.00% 0.00%
August 2014.......... 3.06% 0.00% 0.00%
September 2014....... 2.95% 0.00% 0.00%
October 2014......... 2.85% 0.00% 0.00%
November 2014........ 2.74% 0.00% 0.00%
December 2014........ 2.63% 0.00% 0.00%
January 2015......... 2.52% 0.00% 0.00%
February 2015........ 2.40% 0.00% 0.00%
March 2015........... 2.29% 0.00% 0.00%
April 2015........... 2.18% 0.00% 0.00%
May 2015............. 2.06% 0.00% 0.00%
June 2015............ 1.94% 0.00% 0.00%
July 2015............ 1.82% 0.00% 0.00%
August 2015.......... 1.70% 0.00% 0.00%
September 2015....... 1.58% 0.00% 0.00%
October 2015......... 1.46% 0.00% 0.00%
November 2015........ 1.33% 0.00% 0.00%
December 2015........ 1.21% 0.00% 0.00%
January 2016......... 1.08% 0.00% 0.00%
February 2016........ 0.95% 0.00% 0.00%
March 2016........... 0.82% 0.00% 0.00%
April 2016........... 0.69% 0.00% 0.00%
May 2016............. 0.55% 0.00% 0.00%
June 2016............ 0.42% 0.00% 0.00%
July 2016............ 0.28% 0.00% 0.00%
August 2016.......... 0.14% 0.00% 0.00%
September 2016....... 0.00% 0.00% 0.00%
</TABLE>
A-11
<PAGE> 142
APPENDIX 7
CLASS C TARGET PRINCIPAL BALANCES
<TABLE>
<CAPTION>
CLASS C CLASS C
MINIMUM SCHEDULED
PAYMENT DATE TARGET PRINCIPAL TARGET PRINCIPAL
OCCURRING IN BALANCE BALANCE
- ------------ ---------------- ----------------
($) ($)
<S> <C> <C>
Closing.............. 100,000,000 100,000,000
April 1998........... 100,000,000 100,000,000
May 1998............. 100,000,000 100,000,000
June 1998............ 100,000,000 100,000,000
July 1998............ 100,000,000 100,000,000
August 1998.......... 100,000,000 100,000,000
September 1998....... 100,000,000 100,000,000
October 1998......... 100,000,000 100,000,000
November 1998........ 100,000,000 100,000,000
December 1998........ 100,000,000 100,000,000
January 1999......... 100,000,000 100,000,000
February 1999........ 100,000,000 100,000,000
March 1999........... 100,000,000 100,000,000
April 1999........... 100,000,000 100,000,000
May 1999............. 100,000,000 100,000,000
June 1999............ 100,000,000 100,000,000
July 1999............ 100,000,000 100,000,000
August 1999.......... 100,000,000 100,000,000
September 1999....... 100,000,000 100,000,000
October 1999......... 99,999,825 99,996,772
November 1999........ 99,999,043 99,986,794
December 1999........ 99,997,412 99,969,890
January 2000......... 99,994,757 99,945,967
February 2000........ 99,990,934 99,914,956
March 2000........... 99,985,819 99,876,807
April 2000........... 99,979,299 99,831,475
May 2000............. 99,971,272 99,778,925
June 2000............ 99,961,645 99,719,125
July 2000............ 99,950,328 99,652,047
August 2000.......... 99,937,239 99,577,666
September 2000....... 99,922,300 99,495,959
October 2000......... 99,905,436 99,406,905
November 2000........ 99,886,576 99,310,486
December 2000........ 99,865,651 99,206,683
January 2001......... 99,842,596 99,095,480
February 2001........ 99,817,348 98,976,860
March 2001........... 99,789,845 98,850,810
April 2001........... 99,760,027 98,717,316
May 2001............. 99,727,838 98,576,363
June 2001............ 99,693,222 98,427,941
July 2001............ 99,656,123 98,272,036
August 2001.......... 99,616,490 98,108,638
September 2001....... 99,574,270 97,937,736
October 2001......... 99,529,413 97,759,319
November 2001........ 99,481,870 97,573,377
December 2001........ 99,431,592 97,379,901
January 2002......... 99,378,533 97,178,882
February 2002........ 99,322,645 96,970,309
March 2002........... 99,263,883 96,754,176
April 2002........... 99,202,204 96,530,472
May 2002............. 99,137,562 96,299,191
June 2002............ 99,069,916 96,060,325
July 2002............ 98,999,222 95,813,865
August 2002.......... 98,925,439 95,559,804
</TABLE>
<TABLE>
<CAPTION>
($) ($)
CLASS C CLASS C
MINIMUM SCHEDULED
PAYMENT DATE TARGET PRINCIPAL TARGET PRINCIPAL
OCCURRING IN BALANCE BALANCE
- ------------ ---------------- ----------------
<S> <C> <C>
September 2002....... 98,848,527 95,298,136
October 2002......... 98,768,445 95,028,853
November 2002........ 98,685,153 94,751,948
December 2002........ 98,598,612 94,467,415
January 2003......... 98,508,784 94,175,248
February 2003........ 98,415,631 93,875,439
March 2003........... 98,319,115 93,567,983
April 2003........... 98,219,199 93,252,875
May 2003............. 98,115,847 92,930,107
June 2003............ 98,009,023 92,599,674
July 2003............ 97,898,690 92,261,571
August 2003.......... 97,784,815 91,915,791
September 2003....... 97,667,362 91,562,331
October 2003......... 97,546,296 91,201,184
November 2003........ 97,421,584 90,832,345
December 2003........ 97,293,192 90,455,810
January 2004......... 97,161,088 90,071,572
February 2004........ 97,025,237 89,679,628
March 2004........... 96,885,608 89,279,972
April 2004........... 96,742,168 88,872,601
May 2004............. 96,594,886 88,457,508
June 2004............ 96,443,729 88,034,690
July 2004............ 96,288,668 87,604,143
August 2004.......... 96,129,670 87,165,861
September 2004....... 95,966,705 86,719,841
October 2004......... 95,799,743 86,266,077
November 2004........ 95,628,753 85,804,568
December 2004........ 95,453,706 85,335,307
January 2005......... 95,274,572 84,858,290
February 2005........ 95,091,322 84,373,515
March 2005........... 94,903,927 83,880,977
April 2005........... 94,712,357 83,380,672
May 2005............. 94,516,585 82,872,597
June 2005............ 94,316,582 82,356,747
July 2005............ 94,112,319 81,833,119
August 2005.......... 93,903,770 81,301,709
September 2005....... 93,690,906 80,762,514
October 2005......... 93,473,699 80,215,530
November 2005........ 93,252,123 79,660,753
December 2005........ 93,026,151 79,098,181
January 2006......... 92,795,755 78,527,809
February 2006........ 92,560,908 77,949,634
March 2006........... 92,321,585 77,363,654
April 2006........... 92,077,759 76,769,864
May 2006............. 91,829,404 76,168,262
June 2006............ 91,576,494 75,558,844
July 2006............ 91,319,004 74,941,607
August 2006.......... 91,056,907 74,316,549
September 2006....... 90,790,178 73,683,665
October 2006......... 90,518,792 73,042,952
November 2006........ 90,242,724 72,394,409
December 2006........ 89,961,949 71,738,032
January 2007......... 89,676,442 71,073,817
February 2007........ 89,386,179 70,401,762
</TABLE>
A-12
<PAGE> 143
CLASS C TARGET PRINCIPAL BALANCES (CONTINUED)
<TABLE>
<CAPTION>
CLASS C CLASS C
MINIMUM SCHEDULED
PAYMENT DATE TARGET PRINCIPAL TARGET PRINCIPAL
OCCURRING IN BALANCE BALANCE
- ------------ ---------------- ----------------
($) ($)
<S> <C> <C>
March 2007........... 89,091,135 69,721,865
April 2007........... 88,791,286 69,034,121
May 2007............. 88,486,607 68,338,529
June 2007............ 88,177,075 67,635,085
July 2007............ 87,862,666 66,923,788
August 2007.......... 87,543,356 66,204,633
September 2007....... 87,219,121 65,477,618
October 2007......... 86,889,938 64,742,742
November 2007........ 86,555,784 64,000,000
December 2007........ 86,216,635 63,249,391
January 2008......... 85,872,469 62,490,911
February 2008........ 85,523,262 61,724,559
March 2008........... 85,168,991 60,950,331
April 2008........... 84,809,635 60,168,225
May 2008............. 84,445,170 59,378,239
June 2008............ 84,075,573 58,580,370
July 2008............ 83,700,823 57,774,616
August 2008.......... 83,320,898 56,960,973
September 2008....... 82,935,774 56,139,441
October 2008......... 82,545,431 55,310,016
November 2008........ 82,149,846 54,472,696
December 2008........ 81,748,998 53,627,479
January 2009......... 81,342,865 52,774,362
February 2009........ 80,931,424 51,913,343
March 2009........... 80,514,656 51,044,420
April 2009........... 80,092,538 50,167,590
May 2009............. 79,665,050 49,282,851
June 2009............ 79,232,169 48,390,202
July 2009............ 78,793,876 47,489,639
August 2009.......... 78,350,148 46,581,161
September 2009....... 77,900,966 45,664,765
October 2009......... 77,446,308 44,740,449
November 2009........ 76,986,154 43,808,212
December 2009........ 76,520,484 42,868,050
January 2010......... 76,049,276 41,919,962
February 2010........ 75,572,510 40,963,946
March 2010........... 75,090,167 40,000,000
April 2010........... 74,602,225 39,028,121
May 2010............. 74,108,665 38,048,308
June 2010............ 73,609,467 37,060,559
July 2010............ 73,104,610 36,064,870
August 2010.......... 72,594,075 35,061,242
September 2010....... 72,077,843 34,049,671
October 2010......... 71,555,892 33,030,155
November 2010........ 71,028,205 32,002,693
December 2010........ 70,494,760 30,967,283
January 2011......... 69,955,540 29,923,923
February 2011........ 69,410,523 28,872,610
March 2011........... 68,859,692 27,813,343
April 2011........... 68,303,027 26,746,121
May 2011............. 67,740,508 25,670,940
June 2011............ 67,172,117 24,587,800
July 2011............ 66,597,834 23,496,698
August 2011.......... 66,017,641 22,397,633
September 2011....... 65,431,519 21,290,603
October 2011......... 64,839,448 20,175,606
</TABLE>
<TABLE>
<CAPTION>
($) ($)
CLASS C CLASS C
MINIMUM SCHEDULED
PAYMENT DATE TARGET PRINCIPAL TARGET PRINCIPAL
OCCURRING IN BALANCE BALANCE
- ------------ ---------------- ----------------
<S> <C> <C>
November 2011........ 64,241,412 19,052,639
December 2011........ 63,637,389 17,921,703
January 2012......... 63,027,363 16,782,794
February 2012........ 62,411,314 15,635,910
March 2012........... 61,789,225 14,481,051
April 2012........... 61,161,076 13,318,214
May 2012............. 60,526,849 12,147,398
June 2012............ 59,886,527 10,968,601
July 2012............ 59,240,091 9,781,821
August 2012.......... 58,587,523 8,587,057
September 2012....... 57,928,804 7,384,306
October 2012......... 57,263,918 6,173,568
November 2012........ 56,592,845 4,954,840
December 2012........ 55,915,569 3,728,121
January 2013......... 55,232,071 2,493,409
February 2013........ 54,542,333 1,250,702
March 2013........... 53,846,339 0
April 2013........... 53,144,070 0
May 2013............. 52,435,508 0
June 2013............ 51,720,637 0
July 2013............ 50,999,439 0
August 2013.......... 50,271,896 0
September 2013....... 49,537,991 0
October 2013......... 48,797,707 0
November 2013........ 48,051,027 0
December 2013........ 47,297,933 0
January 2014......... 46,538,409 0
February 2014........ 45,772,437 0
March 2014........... 45,000,000 0
April 2014........... 44,221,082 0
May 2014............. 43,435,665 0
June 2014............ 42,643,733 0
July 2014............ 41,845,269 0
August 2014.......... 41,040,256 0
September 2014....... 40,228,678 0
October 2014......... 39,410,518 0
November 2014........ 38,585,759 0
December 2014........ 37,754,384 0
January 2015......... 36,916,378 0
February 2015........ 36,071,725 0
March 2015........... 35,220,406 0
April 2015........... 34,362,407 0
May 2015............. 33,497,710 0
June 2015............ 32,626,301 0
July 2015............ 31,748,162 0
August 2015.......... 30,863,277 0
September 2015....... 29,971,630 0
October 2015......... 29,073,206 0
November 2015........ 28,167,988 0
December 2015........ 27,255,960 0
January 2016......... 26,337,107 0
February 2016........ 25,411,412 0
March 2016........... 24,478,859 0
April 2016........... 23,539,434 0
May 2016............. 22,593,119 0
June 2016............ 21,639,901 0
</TABLE>
A-13
<PAGE> 144
CLASS C TARGET PRINCIPAL BALANCES (CONTINUED)
<TABLE>
<CAPTION>
CLASS C CLASS C
MINIMUM SCHEDULED
PAYMENT DATE TARGET PRINCIPAL TARGET PRINCIPAL
OCCURRING IN BALANCE BALANCE
- ------------ ---------------- ----------------
($) ($)
<S> <C> <C>
July 2016............ 20,679,761 0
August 2016.......... 19,712,686 0
September 2016....... 18,738,660 0
October 2016......... 17,757,667 0
November 2016........ 16,769,691 0
December 2016........ 15,774,718 0
January 2017......... 14,772,731 0
February 2017........ 13,763,716 0
March 2017........... 12,747,657 0
April 2017........... 11,724,539 0
May 2017............. 10,694,346 0
</TABLE>
<TABLE>
<CAPTION>
($) ($)
CLASS C CLASS C
MINIMUM SCHEDULED
PAYMENT DATE TARGET PRINCIPAL TARGET PRINCIPAL
OCCURRING IN BALANCE BALANCE
- ------------ ---------------- ----------------
<S> <C> <C>
June 2017............ 9,657,064 0
July 2017............ 8,612,676 0
August 2017.......... 7,561,169 0
September 2017....... 6,502,527 0
October 2017......... 5,436,735 0
November 2017........ 4,363,778 0
December 2017........ 3,283,641 0
January 2018......... 2,196,309 0
February 2018........ 1,101,767 0
March 2018........... 0 0
</TABLE>
A-14
<PAGE> 145
APPENDIX 8
CLASS D TARGET PRINCIPAL BALANCES
<TABLE>
<CAPTION>
CLASS D CLASS D
MINIMUM SCHEDULED
PAYMENT DATE TARGET PRINCIPAL TARGET PRINCIPAL
OCCURRING IN BALANCE BALANCE
- ------------ ---------------- ----------------
($) ($)
<S> <C> <C>
Closing.............. 110,000,000 110,000,000
April 1998........... 110,000,000 110,000,000
May 1998............. 110,000,000 110,000,000
June 1998............ 110,000,000 110,000,000
July 1998............ 110,000,000 110,000,000
August 1998.......... 110,000,000 110,000,000
September 1998....... 110,000,000 110,000,000
October 1998......... 110,000,000 110,000,000
November 1998........ 110,000,000 110,000,000
December 1998........ 110,000,000 110,000,000
January 1999......... 110,000,000 110,000,000
February 1999........ 110,000,000 110,000,000
March 1999........... 110,000,000 110,000,000
April 1999........... 110,000,000 110,000,000
May 1999............. 110,000,000 110,000,000
June 1999............ 110,000,000 110,000,000
July 1999............ 110,000,000 110,000,000
August 1999.......... 110,000,000 110,000,000
September 1999....... 110,000,000 110,000,000
October 1999......... 110,000,000 110,000,000
November 1999........ 110,000,000 110,000,000
December 1999........ 110,000,000 110,000,000
January 2000......... 110,000,000 110,000,000
February 2000........ 110,000,000 110,000,000
March 2000........... 110,000,000 110,000,000
April 2000........... 110,000,000 110,000,000
May 2000............. 110,000,000 110,000,000
June 2000............ 110,000,000 110,000,000
July 2000............ 110,000,000 110,000,000
August 2000.......... 110,000,000 110,000,000
September 2000....... 110,000,000 110,000,000
October 2000......... 110,000,000 109,999,467
November 2000........ 110,000,000 109,997,175
December 2000........ 110,000,000 109,992,508
January 2001......... 110,000,000 109,985,035
February 2001........ 110,000,000 109,974,404
March 2001........... 110,000,000 109,960,316
April 2001........... 110,000,000 109,942,503
May 2001............. 110,000,000 109,920,727
June 2001............ 110,000,000 109,894,765
July 2001............ 110,000,000 109,864,413
August 2001.......... 110,000,000 109,829,479
September 2001....... 110,000,000 109,789,782
October 2001......... 110,000,000 109,745,152
November 2001........ 110,000,000 109,695,426
December 2001........ 110,000,000 109,640,449
January 2002......... 110,000,000 109,580,070
February 2002........ 110,000,000 109,514,148
March 2002........... 110,000,000 109,442,544
April 2002........... 109,999,964 109,365,125
May 2002............. 109,999,750 109,281,762
June 2002............ 109,999,231 109,192,330
July 2002............ 109,998,291 109,096,708
August 2002.......... 109,996,824 108,994,779
</TABLE>
<TABLE>
<CAPTION>
($) ($)
CLASS D CLASS D
MINIMUM SCHEDULED
PAYMENT DATE TARGET PRINCIPAL TARGET PRINCIPAL
OCCURRING IN BALANCE BALANCE
- ------------ ---------------- ----------------
<S> <C> <C>
September 2002....... 109,994,732 108,886,428
October 2002......... 109,991,919 108,771,542
November 2002........ 109,988,294 108,650,013
December 2002........ 109,983,767 108,521,734
January 2003......... 109,978,253 108,386,602
February 2003........ 109,971,667 108,244,514
March 2003........... 109,963,927 108,095,372
April 2003........... 109,954,953 107,939,076
May 2003............. 109,944,664 107,775,533
June 2003............ 109,932,985 107,604,647
July 2003............ 109,919,838 107,426,326
August 2003.......... 109,905,147 107,240,481
September 2003....... 109,888,839 107,047,023
October 2003......... 109,870,840 106,845,863
November 2003........ 109,851,078 106,636,915
December 2003........ 109,829,481 106,420,097
January 2004......... 109,805,978 106,195,323
February 2004........ 109,780,499 105,962,511
March 2004........... 109,752,976 105,721,582
April 2004........... 109,723,339 105,472,455
May 2004............. 109,691,520 105,215,053
June 2004............ 109,657,452 104,949,296
July 2004............ 109,621,068 104,675,109
August 2004.......... 109,582,302 104,392,417
September 2004....... 109,541,088 104,101,145
October 2004......... 109,497,362 103,801,220
November 2004........ 109,451,057 103,492,568
December 2004........ 109,402,110 103,175,118
January 2005......... 109,350,458 102,848,800
February 2005........ 109,296,036 102,513,543
March 2005........... 109,238,782 102,169,278
April 2005........... 109,178,633 101,815,937
May 2005............. 109,115,527 101,453,451
June 2005............ 109,049,402 101,081,754
July 2005............ 108,980,197 100,700,779
August 2005.......... 108,907,850 100,310,462
September 2005....... 108,832,301 99,910,736
October 2005......... 108,753,490 99,501,537
November 2005........ 108,671,357 99,082,802
December 2005........ 108,585,840 98,654,468
January 2006......... 108,496,882 98,216,473
February 2006........ 108,404,423 97,768,754
March 2006........... 108,308,404 97,311,250
April 2006........... 108,208,766 96,843,901
May 2006............. 108,105,452 96,366,646
June 2006............ 107,998,402 95,879,426
July 2006............ 107,887,560 95,382,181
August 2006.......... 107,772,867 94,874,854
September 2006....... 107,654,266 94,357,385
October 2006......... 107,531,701 93,829,717
November 2006........ 107,405,114 93,291,793
December 2006........ 107,274,449 92,743,556
January 2007......... 107,139,650 92,184,951
February 2007........ 107,000,660 91,615,920
</TABLE>
A-15
<PAGE> 146
CLASS D TARGET PRINCIPAL BALANCES (CONTINUED)
<TABLE>
<CAPTION>
CLASS D CLASS D
MINIMUM SCHEDULED
PAYMENT DATE TARGET PRINCIPAL TARGET PRINCIPAL
OCCURRING IN BALANCE BALANCE
- ------------ ---------------- ----------------
($) ($)
<S> <C> <C>
March 2007........... 106,857,423 91,036,410
April 2007........... 106,709,884 90,446,364
May 2007............. 106,557,987 89,845,729
June 2007............ 106,401,676 89,234,450
July 2007............ 106,240,898 88,612,474
August 2007.......... 106,075,596 87,979,746
September 2007....... 105,905,716 87,336,215
October 2007......... 105,731,204 86,681,828
November 2007........ 105,552,004 86,016,532
December 2007........ 105,368,064 85,340,276
January 2008......... 105,179,329 84,653,009
February 2008........ 104,985,745 83,954,678
March 2008........... 104,787,259 83,245,234
April 2008........... 104,583,816 82,524,625
May 2008............. 104,375,365 81,792,802
June 2008............ 104,161,850 81,049,716
July 2008............ 103,943,221 80,295,316
August 2008.......... 103,719,423 79,529,553
September 2008....... 103,490,405 78,752,379
October 2008......... 103,256,113 77,963,745
November 2008........ 103,016,495 77,163,603
December 2008........ 102,771,500 76,351,905
January 2009......... 102,521,074 75,528,603
February 2009........ 102,265,166 74,693,649
March 2009........... 102,003,725 73,846,998
April 2009........... 101,736,698 72,988,602
May 2009............. 101,464,034 72,118,414
June 2009............ 101,185,682 71,236,389
July 2009............ 100,901,591 70,342,480
August 2009.......... 100,611,709 69,436,641
September 2009....... 100,315,985 68,518,827
October 2009......... 100,014,369 67,588,993
November 2009........ 99,706,810 66,647,094
December 2009........ 99,393,256 65,693,085
January 2010......... 99,073,659 64,726,922
February 2010........ 98,747,967 63,748,560
March 2010........... 98,416,130 62,757,955
April 2010........... 98,078,099 61,755,064
May 2010............. 97,733,822 60,739,843
June 2010............ 97,383,250 59,712,248
July 2010............ 97,026,334 58,672,237
August 2010.......... 96,663,024 57,619,767
September 2010....... 96,293,270 56,554,794
October 2010......... 95,917,023 55,477,277
November 2010........ 95,534,233 54,387,174
December 2010........ 95,144,852 53,284,441
January 2011......... 94,748,829 52,169,038
February 2011........ 94,346,117 51,040,922
March 2011........... 93,936,666 49,900,053
April 2011........... 93,520,427 48,746,388
May 2011............. 93,097,353 47,579,888
June 2011............ 92,667,393 46,400,510
July 2011............ 92,230,500 45,208,215
August 2011.......... 91,786,625 44,002,962
September 2011....... 91,335,720 42,784,710
October 2011......... 90,877,737 41,553,420
</TABLE>
<TABLE>
<CAPTION>
($) ($)
CLASS D CLASS D
MINIMUM SCHEDULED
PAYMENT DATE TARGET PRINCIPAL TARGET PRINCIPAL
OCCURRING IN BALANCE BALANCE
- ------------ ---------------- ----------------
<S> <C> <C>
November 2011........ 90,412,628 40,309,052
December 2011........ 89,940,344 39,051,565
January 2012......... 89,460,838 37,780,920
February 2012........ 88,974,061 36,497,078
March 2012........... 88,479,967 35,200,000
April 2012........... 87,978,507 33,889,646
May 2012............. 87,469,634 32,565,978
June 2012............ 86,953,300 31,228,957
July 2012............ 86,429,459 29,878,543
August 2012.......... 85,898,062 28,514,700
September 2012....... 85,359,062 27,137,389
October 2012......... 84,812,413 25,746,570
November 2012........ 84,258,067 24,342,208
December 2012........ 83,695,978 22,924,263
January 2013......... 83,126,098 21,492,699
February 2013........ 82,548,380 20,047,477
March 2013........... 81,962,779 18,588,561
April 2013........... 81,369,247 17,115,913
May 2013............. 80,767,737 15,629,496
June 2013............ 80,158,204 14,129,273
July 2013............ 79,540,600 12,615,208
August 2013.......... 78,914,880 11,087,264
September 2013....... 78,280,998 9,545,405
October 2013......... 77,638,906 7,989,594
November 2013........ 76,988,559 6,419,794
December 2013........ 76,329,911 4,835,971
January 2014......... 75,662,916 3,238,088
February 2014........ 74,987,529 1,626,110
March 2014........... 74,303,702 0
April 2014........... 73,611,391 0
May 2014............. 72,910,550 0
June 2014............ 72,201,134 0
July 2014............ 71,483,096 0
August 2014.......... 70,756,391 0
September 2014....... 70,020,974 0
October 2014......... 69,276,800 0
November 2014........ 68,523,823 0
December 2014........ 67,761,998 0
January 2015......... 66,991,281 0
February 2015........ 66,211,625 0
March 2015........... 65,422,986 0
April 2015........... 64,625,320 0
May 2015............. 63,818,580 0
June 2015............ 63,002,723 0
July 2015............ 62,177,704 0
August 2015.......... 61,343,478 0
September 2015....... 60,500,000 0
October 2015......... 59,647,226 0
November 2015........ 58,785,112 0
December 2015........ 57,913,612 0
January 2016......... 57,032,683 0
February 2016........ 56,142,281 0
March 2016........... 55,242,360 0
April 2016........... 54,332,878 0
May 2016............. 53,413,789 0
June 2016............ 52,485,050 0
</TABLE>
A-16
<PAGE> 147
CLASS D TARGET PRINCIPAL BALANCES (CONTINUED)
<TABLE>
<CAPTION>
CLASS D CLASS D
MINIMUM SCHEDULED
PAYMENT DATE TARGET PRINCIPAL TARGET PRINCIPAL
OCCURRING IN BALANCE BALANCE
- ------------ ---------------- ----------------
($) ($)
<S> <C> <C>
July 2016............ 51,546,617 0
August 2016.......... 50,598,446 0
September 2016....... 49,640,492 0
October 2016......... 48,672,713 0
November 2016........ 47,695,064 0
December 2016........ 46,707,501 0
January 2017......... 45,709,982 0
February 2017........ 44,702,462 0
March 2017........... 43,684,897 0
April 2017........... 42,657,245 0
May 2017............. 41,619,462 0
June 2017............ 40,571,504 0
July 2017............ 39,513,328 0
August 2017.......... 38,444,891 0
September 2017....... 37,366,149 0
October 2017......... 36,277,060 0
November 2017........ 35,177,581 0
December 2017........ 34,067,667 0
January 2018......... 32,947,277 0
February 2018........ 31,816,367 0
March 2018........... 30,674,894 0
April 2018........... 29,522,816 0
May 2018............. 28,360,089 0
</TABLE>
<TABLE>
<CAPTION>
($) ($)
CLASS D CLASS D
MINIMUM SCHEDULED
PAYMENT DATE TARGET PRINCIPAL TARGET PRINCIPAL
OCCURRING IN BALANCE BALANCE
- ------------ ---------------- ----------------
<S> <C> <C>
June 2018............ 27,186,671 0
July 2018............ 26,002,519 0
August 2018.......... 24,807,591 0
September 2018....... 23,601,843 0
October 2018......... 22,385,234 0
November 2018........ 21,157,720 0
December 2018........ 19,919,260 0
January 2019......... 18,669,810 0
February 2019........ 17,409,329 0
March 2019........... 16,137,774 0
April 2019........... 14,855,103 0
May 2019............. 13,561,273 0
June 2019............ 12,256,242 0
July 2019............ 10,939,969 0
August 2019.......... 9,612,411 0
September 2019....... 8,273,526 0
October 2019......... 6,923,272 0
November 2019........ 5,561,607 0
December 2019........ 4,188,489 0
January 2020......... 2,803,877 0
February 2020........ 1,407,728 0
March 2020........... 0 0
</TABLE>
A-17
<PAGE> 148
APPENDIX 9
POOL FACTORS
<TABLE>
<CAPTION>
PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS
OCCURRING IN A-1 A-2 B-1 C-1 D-1
------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
March 3, 1998........ 100.00% 100.00% 100.00% 100.00% 100.00%
April 1998........... 100.00% 97.42% 99.52% 100.00% 100.00%
May 1998............. 100.00% 96.44% 99.21% 100.00% 100.00%
June 1998............ 100.00% 95.22% 98.91% 100.00% 100.00%
July 1998............ 100.00% 94.50% 98.60% 100.00% 100.00%
August 1998.......... 100.00% 93.49% 98.28% 100.00% 100.00%
September 1998....... 100.00% 92.26% 97.97% 100.00% 100.00%
October 1998......... 100.00% 91.52% 97.66% 100.00% 100.00%
November 1998........ 100.00% 90.49% 97.34% 100.00% 100.00%
December 1998........ 100.00% 89.30% 97.03% 100.00% 100.00%
January 1999......... 100.00% 88.60% 96.71% 100.00% 100.00%
February 1999........ 100.00% 87.77% 96.39% 100.00% 100.00%
March 1999........... 100.00% 86.56% 96.07% 100.00% 100.00%
April 1999........... 100.00% 85.67% 95.75% 100.00% 100.00%
May 1999............. 100.00% 84.98% 95.42% 100.00% 100.00%
June 1999............ 100.00% 83.59% 95.10% 100.00% 100.00%
July 1999............ 100.00% 82.68% 94.77% 100.00% 100.00%
August 1999.......... 100.00% 81.96% 94.45% 100.00% 100.00%
September 1999....... 100.00% 80.55% 94.12% 100.00% 100.00%
October 1999......... 100.00% 79.63% 93.79% 100.00% 100.00%
November 1999........ 100.00% 78.90% 93.46% 99.99% 100.00%
December 1999........ 100.00% 77.46% 93.12% 99.97% 100.00%
January 2000......... 100.00% 76.50% 92.79% 99.95% 100.00%
February 2000........ 100.00% 75.74% 92.46% 99.91% 100.00%
March 2000........... 100.00% 74.28% 92.12% 99.88% 100.00%
April 2000........... 100.00% 73.31% 91.78% 99.83% 100.00%
May 2000............. 100.00% 72.52% 91.44% 99.78% 100.00%
June 2000............ 100.00% 71.05% 91.10% 99.72% 100.00%
July 2000............ 100.00% 70.05% 90.76% 99.65% 100.00%
August 2000.......... 100.00% 69.26% 90.42% 99.58% 100.00%
September 2000....... 100.00% 67.77% 90.07% 99.50% 100.00%
October 2000......... 100.00% 66.77% 89.72% 99.41% 100.00%
November 2000........ 100.00% 65.99% 89.28% 99.31% 100.00%
December 2000........ 100.00% 64.82% 88.93% 99.21% 99.99%
January 2001......... 100.00% 63.63% 88.58% 99.10% 99.99%
February 2001........ 100.00% 62.64% 88.23% 98.98% 99.98%
March 2001........... 100.00% 61.39% 87.87% 98.85% 99.96%
April 2001........... 100.00% 60.34% 87.52% 98.72% 99.95%
May 2001............. 100.00% 59.25% 87.16% 98.58% 99.93%
June 2001............ 100.00% 58.00% 86.71% 98.43% 99.90%
July 2001............ 100.00% 56.93% 86.35% 98.27% 99.88%
August 2001.......... 100.00% 55.85% 85.99% 98.11% 99.84%
September 2001....... 100.00% 54.56% 85.63% 97.94% 99.81%
October 2001......... 100.00% 53.50% 85.17% 97.76% 99.77%
November 2001........ 100.00% 52.41% 84.81% 97.57% 99.72%
December 2001........ 100.00% 51.10% 84.45% 97.38% 99.67%
January 2002......... 100.00% 50.05% 83.99% 97.18% 99.62%
February 2002........ 100.00% 48.95% 83.62% 96.97% 99.56%
March 2002........... 100.00% 47.61% 83.25% 96.75% 99.49%
April 2002........... 100.00% 46.54% 82.79% 96.53% 99.42%
May 2002............. 100.00% 45.42% 82.42% 96.30% 99.35%
June 2002............ 100.00% 44.13% 81.95% 96.06% 99.27%
July 2002............ 100.00% 43.02% 81.58% 95.81% 99.18%
August 2002.......... 100.00% 41.93% 81.11% 95.56% 99.09%
September 2002....... 100.00% 40.60% 80.74% 95.30% 98.99%
October 2002......... 100.00% 39.51% 80.27% 95.03% 98.88%
</TABLE>
<TABLE>
<CAPTION>
PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS
OCCURRING IN A-1 A-2 B-1 C-1 D-1
------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
November 2002........ 100.00% 38.40% 79.89% 94.75% 98.77%
December 2002........ 100.00% 37.08% 79.42% 94.47% 98.66%
January 2003......... 100.00% 35.98% 78.95% 94.18% 98.53%
February 2003........ 100.00% 34.85% 78.57% 93.88% 98.40%
March 2003........... 100.00% 33.58% 78.09% 93.57% 98.27%
April 2003........... 100.00% 32.51% 77.62% 93.25% 98.13%
May 2003............. 100.00% 31.34% 77.15% 92.93% 97.98%
June 2003............ 100.00% 30.19% 76.68% 92.60% 97.82%
July 2003............ 100.00% 29.02% 76.20% 92.26% 97.66%
August 2003.......... 100.00% 27.84% 75.81% 91.92% 97.49%
September 2003....... 100.00% 26.68% 75.34% 91.56% 97.32%
October 2003......... 100.00% 25.52% 74.77% 91.20% 97.13%
November 2003........ 100.00% 24.35% 74.30% 90.83% 96.94%
December 2003........ 100.00% 23.16% 73.82% 90.46% 96.75%
January 2004......... 100.00% 21.16% 71.52% 90.07% 96.54%
February 2004........ 100.00% 20.05% 71.06% 89.68% 96.33%
March 2004........... 100.00% 18.90% 70.60% 89.28% 96.11%
April 2004........... 100.00% 17.84% 70.06% 88.87% 95.88%
May 2004............. 100.00% 16.73% 69.59% 88.46% 95.65%
June 2004............ 100.00% 15.66% 69.05% 88.03% 95.41%
July 2004............ 100.00% 14.55% 68.59% 87.60% 95.16%
August 2004.......... 100.00% 13.47% 68.05% 87.17% 94.90%
September 2004....... 100.00% 12.37% 67.59% 86.72% 94.64%
October 2004......... 100.00% 11.29% 67.05% 86.27% 94.36%
November 2004........ 100.00% 10.21% 66.51% 85.80% 94.08%
December 2004........ 100.00% 9.12% 65.97% 85.34% 93.80%
January 2005......... 100.00% 8.02% 65.43% 84.86% 93.50%
February 2005........ 100.00% 6.90% 64.96% 84.37% 93.19%
March 2005........... 100.00% 5.75% 64.35% 83.88% 92.88%
April 2005........... 100.00% 4.65% 63.81% 83.38% 92.56%
May 2005............. 100.00% 3.52% 63.27% 82.87% 92.23%
June 2005............ 100.00% 2.41% 62.73% 82.36% 91.89%
July 2005............ 100.00% 1.28% 62.19% 81.83% 91.55%
August 2005.......... 100.00% 0.18% 61.58% 81.30% 91.19%
September 2005....... 99.21% 0.00% 61.05% 80.76% 90.83%
October 2005......... 98.25% 0.00% 60.44% 80.22% 90.46%
November 2005........ 97.31% 0.00% 59.83% 79.66% 90.08%
December 2005........ 96.35% 0.00% 59.30% 79.10% 89.69%
January 2006......... 95.43% 0.00% 58.69% 78.53% 89.29%
February 2006........ 94.50% 0.00% 58.09% 77.95% 88.88%
March 2006........... 93.52% 0.00% 57.49% 77.36% 88.46%
April 2006........... 92.61% 0.00% 56.89% 76.77% 88.04%
May 2006............. 91.68% 0.00% 56.29% 76.17% 87.61%
June 2006............ 90.79% 0.00% 55.62% 75.56% 87.16%
July 2006............ 89.87% 0.00% 55.02% 74.94% 86.71%
August 2006.......... 88.98% 0.00% 54.36% 74.32% 86.25%
September 2006....... 88.07% 0.00% 53.77% 73.68% 85.78%
October 2006......... 87.15% 0.00% 53.11% 73.04% 85.30%
November 2006........ 86.25% 0.00% 52.46% 72.39% 84.81%
December 2006........ 85.33% 0.00% 51.81% 71.74% 84.31%
January 2007......... 84.43% 0.00% 51.16% 71.07% 83.80%
February 2007........ 83.53% 0.00% 50.51% 70.40% 83.29%
March 2007........... 82.58% 0.00% 49.86% 69.72% 82.76%
April 2007........... 81.69% 0.00% 49.16% 69.03% 82.22%
May 2007............. 80.76% 0.00% 48.52% 68.34% 81.68%
June 2007............ 79.86% 0.00% 47.82% 67.64% 81.12%
</TABLE>
A-18
<PAGE> 149
POOL FACTORS (CONTINUED)
<TABLE>
<CAPTION>
PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS
OCCURRING IN A-1 A-2 B-1 C-1 D-1
------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
July 2007............ 78.94% 0.00% 47.12% 66.92% 80.56%
August 2007.......... 78.03% 0.00% 46.43% 66.20% 79.98%
September 2007....... 77.12% 0.00% 45.74% 65.48% 79.40%
October 2007......... 76.19% 0.00% 45.06% 64.74% 78.80%
November 2007........ 75.27% 0.00% 44.38% 64.00% 78.20%
December 2007........ 74.35% 0.00% 43.64% 63.25% 77.58%
January 2008......... 73.41% 0.00% 42.97% 62.49% 76.96%
February 2008........ 72.48% 0.00% 42.24% 61.72% 76.32%
March 2008........... 71.51% 0.00% 41.52% 60.95% 75.68%
April 2008........... 70.57% 0.00% 40.80% 60.17% 75.02%
May 2008............. 69.70% 0.00% 40.09% 59.38% 74.36%
June 2008............ 68.83% 0.00% 39.38% 58.58% 73.68%
July 2008............ 67.96% 0.00% 38.62% 57.77% 73.00%
August 2008.......... 67.09% 0.00% 37.92% 56.96% 72.30%
September 2008....... 66.23% 0.00% 37.18% 56.14% 71.59%
October 2008......... 65.37% 0.00% 36.44% 55.31% 70.88%
November 2008........ 64.52% 0.00% 35.70% 54.47% 70.15%
December 2008........ 63.68% 0.00% 34.92% 53.63% 69.41%
January 2009......... 62.84% 0.00% 34.20% 52.77% 68.66%
February 2009........ 62.01% 0.00% 33.43% 51.91% 67.90%
March 2009........... 61.12% 0.00% 32.72% 51.04% 67.13%
April 2009........... 60.33% 0.00% 31.97% 50.17% 66.35%
May 2009............. 59.52% 0.00% 31.22% 49.28% 65.56%
June 2009............ 58.72% 0.00% 30.43% 48.39% 64.76%
July 2009............ 57.90% 0.00% 29.70% 47.49% 63.95%
August 2009.......... 57.10% 0.00% 28.93% 46.58% 63.12%
September 2009....... 56.30% 0.00% 28.17% 45.66% 62.29%
October 2009......... 55.49% 0.00% 27.42% 44.74% 61.44%
November 2009........ 54.69% 0.00% 26.67% 43.81% 60.59%
December 2009........ 53.88% 0.00% 25.89% 42.87% 59.72%
January 2010......... 53.06% 0.00% 25.16% 41.92% 58.84%
February 2010........ 52.25% 0.00% 24.40% 40.96% 57.95%
March 2010........... 51.41% 0.00% 23.65% 40.00% 57.05%
April 2010........... 50.60% 0.00% 22.86% 39.03% 56.14%
May 2010............. 49.76% 0.00% 22.13% 38.05% 55.22%
June 2010............ 48.94% 0.00% 21.37% 37.06% 54.28%
July 2010............ 48.11% 0.00% 20.61% 36.06% 53.34%
August 2010.......... 47.27% 0.00% 19.87% 35.06% 52.38%
September 2010....... 46.44% 0.00% 19.14% 34.05% 51.41%
October 2010......... 45.59% 0.00% 18.38% 33.03% 50.43%
November 2010........ 44.75% 0.00% 17.64% 32.00% 49.44%
December 2010........ 43.92% 0.00% 16.92% 30.97% 48.44%
January 2011......... 43.09% 0.00% 16.22% 29.92% 47.43%
February 2011........ 42.29% 0.00% 15.49% 28.87% 46.40%
March 2011........... 41.46% 0.00% 14.81% 27.81% 45.36%
April 2011........... 40.72% 0.00% 14.08% 26.75% 44.31%
</TABLE>
<TABLE>
<CAPTION>
PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS
OCCURRING IN A-1 A-2 B-1 C-1 D-1
------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
May 2011............. 39.99% 0.00% 13.39% 25.67% 43.25%
June 2011............ 39.25% 0.00% 12.71% 24.59% 42.18%
July 2011............ 38.52% 0.00% 12.02% 23.50% 41.10%
August 2011.......... 37.79% 0.00% 11.34% 22.40% 40.00%
September 2011....... 37.06% 0.00% 10.67% 21.29% 38.90%
October 2011......... 36.32% 0.00% 9.99% 20.18% 37.78%
November 2011........ 35.58% 0.00% 9.32% 19.05% 36.64%
December 2011........ 34.83% 0.00% 8.66% 17.92% 35.50%
January 2012......... 34.09% 0.00% 8.03% 16.78% 34.35%
February 2012........ 33.36% 0.00% 7.37% 15.64% 33.18%
March 2012........... 32.62% 0.00% 6.74% 14.48% 32.00%
April 2012........... 31.88% 0.00% 6.12% 13.32% 30.81%
May 2012............. 31.16% 0.00% 5.49% 12.15% 29.61%
June 2012............ 30.41% 0.00% 4.92% 10.97% 28.39%
July 2012............ 29.63% 0.00% 4.33% 9.78% 27.16%
August 2012.......... 28.83% 0.00% 3.73% 8.59% 26.00%
September 2012....... 27.98% 0.00% 3.18% 7.38% 24.91%
October 2012......... 27.15% 0.00% 2.62% 6.17% 23.71%
November 2012........ 26.34% 0.00% 2.06% 4.95% 22.44%
December 2012........ 25.54% 0.00% 1.54% 3.73% 21.07%
January 2013......... 24.74% 0.00% 1.02% 2.49% 19.66%
February 2013........ 23.94% 0.00% 0.51% 1.25% 18.22%
March 2013........... 23.12% 0.00% 0.00% 0.00% 16.90%
April 2013........... 21.92% 0.00% 0.00% 0.00% 15.56%
May 2013............. 20.91% 0.00% 0.00% 0.00% 14.21%
June 2013............ 19.91% 0.00% 0.00% 0.00% 12.84%
July 2013............ 18.91% 0.00% 0.00% 0.00% 11.47%
August 2013.......... 17.91% 0.00% 0.00% 0.00% 10.08%
September 2013....... 16.94% 0.00% 0.00% 0.00% 8.68%
October 2013......... 16.01% 0.00% 0.00% 0.00% 7.26%
November 2013........ 15.07% 0.00% 0.00% 0.00% 5.84%
December 2013........ 14.14% 0.00% 0.00% 0.00% 4.40%
January 2014......... 13.22% 0.00% 0.00% 0.00% 2.94%
February 2014........ 12.31% 0.00% 0.00% 0.00% 1.48%
March 2014........... 11.38% 0.00% 0.00% 0.00% 0.00%
April 2014........... 10.14% 0.00% 0.00% 0.00% 0.00%
May 2014............. 8.89% 0.00% 0.00% 0.00% 0.00%
June 2014............ 7.63% 0.00% 0.00% 0.00% 0.00%
July 2014............ 6.36% 0.00% 0.00% 0.00% 0.00%
August 2014.......... 5.10% 0.00% 0.00% 0.00% 0.00%
September 2014....... 3.82% 0.00% 0.00% 0.00% 0.00%
October 2014......... 2.57% 0.00% 0.00% 0.00% 0.00%
November 2014........ 1.31% 0.00% 0.00% 0.00% 0.00%
December 2014........ 0.04% 0.00% 0.00% 0.00% 0.00%
January 2015......... 0.00% 0.00% 0.00% 0.00% 0.00%
</TABLE>
A-19
<PAGE> 150
APPENDIX 10
EXTENDED POOL FACTORS
<TABLE>
<CAPTION>
PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS
OCCURRING IN A-1 A-2 B-1 C-1 D-1
- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
March 3, 1998........ 100.00% 100.00% 100.00% 100.00% 100.00%
April 1998........... 100.00% 99.08% 100.00% 100.00% 100.00%
May 1998............. 100.00% 98.41% 100.00% 100.00% 100.00%
June 1998............ 100.00% 97.73% 100.00% 100.00% 100.00%
July 1998............ 100.00% 97.06% 100.00% 100.00% 100.00%
August 1998.......... 100.00% 96.38% 100.00% 100.00% 100.00%
September 1998....... 100.00% 95.70% 100.00% 100.00% 100.00%
October 1998......... 100.00% 94.98% 100.00% 100.00% 100.00%
November 1998........ 100.00% 94.30% 100.00% 100.00% 100.00%
December 1998........ 100.00% 93.61% 100.00% 100.00% 100.00%
January 1999......... 100.00% 92.92% 100.00% 100.00% 100.00%
February 1999........ 100.00% 92.22% 100.00% 100.00% 100.00%
March 1999........... 100.00% 91.49% 100.00% 100.00% 100.00%
April 1999........... 100.00% 90.79% 99.52% 100.00% 100.00%
May 1999............. 100.00% 90.09% 99.21% 100.00% 100.00%
June 1999............ 100.00% 89.35% 98.91% 100.00% 100.00%
July 1999............ 100.00% 88.64% 98.60% 100.00% 100.00%
August 1999.......... 100.00% 87.90% 98.28% 100.00% 100.00%
September 1999....... 100.00% 87.18% 97.97% 100.00% 100.00%
October 1999......... 100.00% 86.44% 97.66% 100.00% 100.00%
November 1999........ 100.00% 85.72% 97.34% 100.00% 100.00%
December 1999........ 100.00% 84.96% 97.03% 100.00% 100.00%
January 2000......... 100.00% 84.20% 96.71% 100.00% 100.00%
February 2000........ 100.00% 83.45% 96.39% 100.00% 100.00%
March 2000........... 100.00% 82.68% 96.07% 100.00% 100.00%
April 2000........... 100.00% 81.92% 95.75% 100.00% 100.00%
May 2000............. 100.00% 81.15% 95.42% 100.00% 100.00%
June 2000............ 100.00% 80.38% 95.10% 100.00% 100.00%
July 2000............ 100.00% 79.61% 94.77% 100.00% 100.00%
August 2000.......... 100.00% 78.80% 94.45% 100.00% 100.00%
September 2000....... 100.00% 78.02% 94.12% 100.00% 100.00%
October 2000......... 100.00% 77.21% 93.79% 100.00% 100.00%
November 2000........ 100.00% 76.43% 93.46% 100.00% 100.00%
December 2000........ 100.00% 75.61% 93.12% 100.00% 100.00%
January 2001......... 100.00% 74.79% 92.79% 100.00% 100.00%
February 2001........ 100.00% 73.97% 92.46% 100.00% 100.00%
March 2001........... 100.00% 73.15% 92.12% 100.00% 100.00%
April 2001........... 100.00% 72.32% 91.78% 100.00% 100.00%
May 2001............. 100.00% 71.49% 91.44% 100.00% 100.00%
June 2001............ 100.00% 70.66% 91.10% 100.00% 100.00%
July 2001............ 100.00% 69.80% 90.76% 100.00% 100.00%
August 2001.......... 100.00% 68.96% 90.42% 100.00% 100.00%
September 2001....... 100.00% 68.09% 90.07% 100.00% 100.00%
October 2001......... 100.00% 67.22% 89.72% 100.00% 100.00%
November 2001........ 100.00% 66.35% 89.28% 99.99% 100.00%
December 2001........ 100.00% 65.47% 88.93% 99.97% 100.00%
January 2002......... 100.00% 64.60% 88.58% 99.95% 100.00%
February 2002........ 100.00% 63.72% 88.23% 99.91% 100.00%
March 2002........... 100.00% 62.84% 87.87% 99.88% 100.00%
April 2002........... 100.00% 61.92% 87.52% 99.83% 100.00%
May 2002............. 100.00% 61.04% 87.16% 99.78% 100.00%
June 2002............ 100.00% 60.12% 86.71% 99.72% 100.00%
July 2002............ 100.00% 59.20% 86.35% 99.65% 100.00%
August 2002.......... 100.00% 58.28% 85.99% 99.58% 100.00%
September 2002....... 100.00% 57.36% 85.63% 99.50% 100.00%
October 2002......... 100.00% 56.44% 85.17% 99.41% 100.00%
</TABLE>
<TABLE>
<CAPTION>
PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS
OCCURRING IN A-1 A-2 B-1 C-1 D-1
- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
November 2002........ 100.00% 55.48% 84.81% 99.31% 100.00%
December 2002........ 100.00% 54.55% 84.45% 99.21% 99.99%
January 2003......... 100.00% 53.60% 83.99% 99.10% 99.99%
February 2003........ 100.00% 52.64% 83.62% 98.98% 99.98%
March 2003........... 100.00% 51.68% 83.25% 98.85% 99.96%
April 2003........... 100.00% 50.71% 82.79% 98.72% 99.95%
May 2003............. 100.00% 49.75% 82.42% 98.58% 99.93%
June 2003............ 100.00% 48.78% 81.95% 98.43% 99.90%
July 2003............ 100.00% 47.79% 81.58% 98.27% 99.88%
August 2003.......... 100.00% 46.79% 81.11% 98.11% 99.84%
September 2003....... 100.00% 45.79% 80.74% 97.94% 99.81%
October 2003......... 100.00% 44.79% 80.27% 97.76% 99.77%
November 2003........ 100.00% 43.79% 79.89% 97.57% 99.72%
December 2003........ 100.00% 42.79% 79.42% 97.38% 99.67%
January 2004......... 100.00% 37.79% 78.95% 97.18% 99.62%
February 2004........ 100.00% 36.80% 78.57% 96.97% 99.56%
March 2004........... 100.00% 35.83% 78.09% 96.75% 99.49%
April 2004........... 100.00% 34.84% 77.62% 96.53% 99.42%
May 2004............. 100.00% 33.82% 77.15% 96.30% 99.35%
June 2004............ 100.00% 32.83% 76.68% 96.06% 99.27%
July 2004............ 100.00% 31.81% 76.20% 95.81% 99.18%
August 2004.......... 100.00% 30.81% 75.81% 95.56% 99.09%
September 2004....... 100.00% 29.79% 75.34% 95.30% 98.99%
October 2004......... 100.00% 28.74% 74.77% 95.03% 98.88%
November 2004........ 100.00% 27.71% 74.30% 94.75% 98.77%
December 2004........ 100.00% 26.69% 73.82% 94.47% 98.66%
January 2005......... 100.00% 25.64% 71.52% 94.18% 98.53%
February 2005........ 100.00% 24.59% 71.06% 93.88% 98.40%
March 2005........... 100.00% 23.54% 70.60% 93.57% 98.27%
April 2005........... 100.00% 22.49% 70.06% 93.25% 98.13%
May 2005............. 100.00% 21.41% 69.59% 92.93% 97.98%
June 2005............ 100.00% 20.36% 69.05% 92.60% 97.82%
July 2005............ 100.00% 19.28% 68.59% 92.26% 97.66%
August 2005.......... 100.00% 18.21% 68.05% 91.92% 97.49%
September 2005....... 100.00% 17.13% 67.59% 91.56% 97.32%
October 2005......... 100.00% 16.03% 67.05% 91.20% 97.13%
November 2005........ 100.00% 14.93% 66.51% 90.83% 96.94%
December 2005........ 100.00% 13.86% 65.97% 90.46% 96.75%
January 2006......... 100.00% 12.74% 65.43% 90.07% 96.54%
February 2006........ 100.00% 11.64% 64.96% 89.68% 96.33%
March 2006........... 100.00% 10.54% 64.35% 89.28% 96.11%
April 2006........... 100.00% 9.42% 63.81% 88.87% 95.88%
May 2006............. 100.00% 8.30% 63.27% 88.46% 95.65%
June 2006............ 100.00% 7.18% 62.73% 88.03% 95.41%
July 2006............ 100.00% 6.06% 62.19% 87.60% 95.16%
August 2006.......... 100.00% 4.92% 61.58% 87.17% 94.90%
September 2006....... 100.00% 3.78% 61.05% 86.72% 94.64%
October 2006......... 100.00% 2.65% 60.44% 86.27% 94.36%
November 2006........ 100.00% 1.51% 59.83% 85.80% 94.08%
December 2006........ 100.00% 0.35% 59.30% 85.34% 93.80%
January 2007......... 99.33% 0.00% 58.69% 84.86% 93.50%
February 2007........ 98.35% 0.00% 58.09% 84.37% 93.19%
March 2007........... 97.37% 0.00% 57.49% 83.88% 92.88%
April 2007........... 96.37% 0.00% 56.89% 83.38% 92.56%
May 2007............. 95.38% 0.00% 56.29% 82.87% 92.23%
June 2007............ 94.40% 0.00% 55.62% 82.36% 91.89%
</TABLE>
A-20
<PAGE> 151
EXTENDED POOL FACTORS (CONTINUED)
<TABLE>
<CAPTION>
PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS
OCCURRING IN A-1 A-2 B-1 C-1 D-1
- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
July 2007............ 93.39% 0.00% 55.02% 81.83% 91.55%
August 2007.......... 92.40% 0.00% 54.36% 81.30% 91.19%
September 2007....... 91.39% 0.00% 53.77% 80.76% 90.83%
October 2007......... 90.40% 0.00% 53.11% 80.22% 90.46%
November 2007........ 89.40% 0.00% 52.46% 79.66% 90.08%
December 2007........ 88.38% 0.00% 51.81% 79.10% 89.69%
January 2008......... 87.38% 0.00% 51.16% 78.53% 89.29%
February 2008........ 86.37% 0.00% 50.51% 77.95% 88.88%
March 2008........... 85.36% 0.00% 49.86% 77.36% 88.46%
April 2008........... 84.33% 0.00% 49.16% 76.77% 88.04%
May 2008............. 83.32% 0.00% 48.52% 76.17% 87.61%
June 2008............ 82.30% 0.00% 47.82% 75.56% 87.16%
July 2008............ 81.28% 0.00% 47.12% 74.94% 86.71%
August 2008.......... 80.25% 0.00% 46.43% 74.32% 86.25%
September 2008....... 79.23% 0.00% 45.74% 73.68% 85.78%
October 2008......... 78.21% 0.00% 45.06% 73.04% 85.30%
November 2008........ 77.17% 0.00% 44.38% 72.39% 84.81%
December 2008........ 76.15% 0.00% 43.64% 71.74% 84.31%
January 2009......... 75.11% 0.00% 42.97% 71.07% 83.80%
February 2009........ 74.08% 0.00% 42.24% 70.40% 83.29%
March 2009........... 73.06% 0.00% 41.52% 69.72% 82.76%
April 2009........... 72.03% 0.00% 40.80% 69.03% 82.22%
May 2009............. 71.00% 0.00% 40.09% 68.34% 81.68%
June 2009............ 69.96% 0.00% 39.38% 67.64% 81.12%
July 2009............ 68.92% 0.00% 38.62% 66.92% 80.56%
August 2009.......... 67.90% 0.00% 37.92% 66.20% 79.98%
September 2009....... 66.86% 0.00% 37.18% 65.48% 79.40%
October 2009......... 65.82% 0.00% 36.44% 64.74% 78.80%
November 2009........ 64.79% 0.00% 35.70% 64.00% 78.20%
December 2009........ 63.76% 0.00% 34.92% 63.25% 77.58%
January 2010......... 62.72% 0.00% 34.20% 62.49% 76.96%
February 2010........ 61.70% 0.00% 33.43% 61.72% 76.32%
March 2010........... 60.66% 0.00% 32.72% 60.95% 75.68%
April 2010........... 59.63% 0.00% 31.97% 60.17% 75.02%
May 2010............. 58.60% 0.00% 31.22% 59.38% 74.36%
June 2010............ 57.57% 0.00% 30.43% 58.58% 73.68%
July 2010............ 56.55% 0.00% 29.70% 57.77% 73.00%
August 2010.......... 55.51% 0.00% 28.93% 56.96% 72.30%
September 2010....... 54.49% 0.00% 28.17% 56.14% 71.59%
October 2010......... 53.47% 0.00% 27.42% 55.31% 70.88%
November 2010........ 52.44% 0.00% 26.67% 54.47% 70.15%
December 2010........ 51.47% 0.00% 25.89% 53.63% 69.41%
January 2011......... 50.50% 0.00% 25.16% 52.77% 68.66%
February 2011........ 49.54% 0.00% 24.40% 51.91% 67.90%
March 2011........... 48.59% 0.00% 23.65% 51.04% 67.13%
April 2011........... 47.63% 0.00% 22.86% 50.17% 66.35%
May 2011............. 46.67% 0.00% 22.13% 49.28% 65.56%
June 2011............ 45.73% 0.00% 21.37% 48.39% 64.76%
July 2011............ 44.78% 0.00% 20.61% 47.49% 63.95%
August 2011.......... 43.84% 0.00% 19.87% 46.58% 63.12%
September 2011....... 42.89% 0.00% 19.14% 45.66% 62.29%
October 2011......... 41.95% 0.00% 18.38% 44.74% 61.44%
November 2011........ 41.01% 0.00% 17.64% 43.81% 60.59%
December 2011........ 40.08% 0.00% 16.92% 42.87% 59.72%
January 2012......... 39.16% 0.00% 16.22% 41.92% 58.84%
February 2012........ 38.23% 0.00% 15.49% 40.96% 57.95%
March 2012........... 37.31% 0.00% 14.81% 40.00% 57.05%
April 2012........... 36.39% 0.00% 14.08% 39.03% 56.14%
</TABLE>
<TABLE>
<CAPTION>
PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS
OCCURRING IN A-1 A-2 B-1 C-1 D-1
- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
May 2012............. 35.48% 0.00% 13.39% 38.05% 55.22%
June 2012............ 34.58% 0.00% 12.71% 37.06% 54.28%
July 2012............ 33.69% 0.00% 12.02% 36.06% 53.34%
August 2012.......... 32.81% 0.00% 11.34% 35.06% 52.38%
September 2012....... 31.95% 0.00% 10.67% 34.05% 51.41%
October 2012......... 31.13% 0.00% 9.99% 33.03% 50.43%
November 2012........ 30.31% 0.00% 9.32% 32.00% 49.44%
December 2012........ 29.50% 0.00% 8.66% 30.97% 48.44%
January 2013......... 28.70% 0.00% 8.03% 29.92% 47.43%
February 2013........ 27.90% 0.00% 7.37% 28.87% 46.40%
March 2013........... 27.11% 0.00% 6.74% 27.81% 45.36%
April 2013........... 26.31% 0.00% 6.12% 26.75% 44.31%
May 2013............. 25.56% 0.00% 5.49% 25.67% 43.25%
June 2013............ 24.83% 0.00% 4.92% 24.59% 42.18%
July 2013............ 24.11% 0.00% 4.33% 23.50% 41.10%
August 2013.......... 23.40% 0.00% 3.73% 22.40% 40.00%
September 2013....... 22.68% 0.00% 3.18% 21.29% 38.90%
October 2013......... 21.98% 0.00% 2.62% 20.18% 37.78%
November 2013........ 21.31% 0.00% 2.06% 19.05% 36.64%
December 2013........ 20.65% 0.00% 1.54% 17.92% 35.50%
January 2014......... 20.03% 0.00% 1.02% 16.78% 34.35%
February 2014........ 19.43% 0.00% 0.51% 15.64% 33.18%
March 2014........... 18.85% 0.00% 0.00% 14.48% 32.00%
April 2014........... 18.29% 0.00% 0.00% 13.32% 30.81%
May 2014............. 17.75% 0.00% 0.00% 12.15% 29.61%
June 2014............ 17.22% 0.00% 0.00% 10.97% 28.39%
July 2014............ 16.68% 0.00% 0.00% 9.78% 27.16%
August 2014.......... 16.15% 0.00% 0.00% 8.59% 26.00%
September 2014....... 15.63% 0.00% 0.00% 7.38% 24.91%
October 2014......... 15.12% 0.00% 0.00% 6.17% 23.71%
November 2014........ 14.60% 0.00% 0.00% 4.95% 22.44%
December 2014........ 14.10% 0.00% 0.00% 3.73% 21.07%
January 2015......... 13.59% 0.00% 0.00% 2.49% 19.66%
February 2015........ 13.10% 0.00% 0.00% 1.25% 18.22%
March 2015........... 12.61% 0.00% 0.00% 0.00% 16.90%
April 2015........... 12.15% 0.00% 0.00% 0.00% 15.56%
May 2015............. 11.70% 0.00% 0.00% 0.00% 14.21%
June 2015............ 11.26% 0.00% 0.00% 0.00% 12.84%
July 2015............ 10.82% 0.00% 0.00% 0.00% 11.47%
August 2015.......... 10.39% 0.00% 0.00% 0.00% 10.08%
September 2015....... 9.97% 0.00% 0.00% 0.00% 8.68%
October 2015......... 9.56% 0.00% 0.00% 0.00% 7.26%
November 2015........ 9.17% 0.00% 0.00% 0.00% 5.84%
December 2015........ 8.79% 0.00% 0.00% 0.00% 4.40%
January 2016......... 8.42% 0.00% 0.00% 0.00% 2.94%
February 2016........ 8.05% 0.00% 0.00% 0.00% 1.48%
March 2016........... 7.69% 0.00% 0.00% 0.00% 0.00%
April 2016........... 7.34% 0.00% 0.00% 0.00% 0.00%
May 2016............. 6.99% 0.00% 0.00% 0.00% 0.00%
June 2016............ 6.64% 0.00% 0.00% 0.00% 0.00%
July 2016............ 6.31% 0.00% 0.00% 0.00% 0.00%
August 2016.......... 5.98% 0.00% 0.00% 0.00% 0.00%
September 2016....... 5.66% 0.00% 0.00% 0.00% 0.00%
October 2016......... 5.34% 0.00% 0.00% 0.00% 0.00%
November 2016........ 5.03% 0.00% 0.00% 0.00% 0.00%
December 2016........ 4.72% 0.00% 0.00% 0.00% 0.00%
January 2017......... 4.43% 0.00% 0.00% 0.00% 0.00%
February 2017........ 4.15% 0.00% 0.00% 0.00% 0.00%
</TABLE>
A-21
<PAGE> 152
EXTENDED POOL FACTORS (CONTINUED)
<TABLE>
<CAPTION>
PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS
OCCURRING IN A-1 A-2 B-1 C-1 D-1
- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
March 2017........... 3.90% 0.00% 0.00% 0.00% 0.00%
April 2017........... 3.65% 0.00% 0.00% 0.00% 0.00%
May 2017............. 3.42% 0.00% 0.00% 0.00% 0.00%
June 2017............ 3.19% 0.00% 0.00% 0.00% 0.00%
July 2017............ 2.98% 0.00% 0.00% 0.00% 0.00%
August 2017.......... 2.77% 0.00% 0.00% 0.00% 0.00%
September 2017....... 2.56% 0.00% 0.00% 0.00% 0.00%
October 2017......... 2.37% 0.00% 0.00% 0.00% 0.00%
November 2017........ 2.18% 0.00% 0.00% 0.00% 0.00%
December 2017........ 1.99% 0.00% 0.00% 0.00% 0.00%
January 2018......... 1.81% 0.00% 0.00% 0.00% 0.00%
February 2018........ 1.64% 0.00% 0.00% 0.00% 0.00%
March 2018........... 1.48% 0.00% 0.00% 0.00% 0.00%
April 2018........... 1.34% 0.00% 0.00% 0.00% 0.00%
May 2018............. 1.22% 0.00% 0.00% 0.00% 0.00%
June 2018............ 1.11% 0.00% 0.00% 0.00% 0.00%
July 2018............ 1.01% 0.00% 0.00% 0.00% 0.00%
August 2018.......... 0.92% 0.00% 0.00% 0.00% 0.00%
September 2018....... 0.82% 0.00% 0.00% 0.00% 0.00%
</TABLE>
<TABLE>
<CAPTION>
PAYMENT DATE SUBCLASS SUBCLASS SUBCLASS SUBCLASS SUBCLASS
OCCURRING IN A-1 A-2 B-1 C-1 D-1
- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
October 2018......... 0.74% 0.00% 0.00% 0.00% 0.00%
November 2018........ 0.65% 0.00% 0.00% 0.00% 0.00%
December 2018........ 0.58% 0.00% 0.00% 0.00% 0.00%
January 2019......... 0.51% 0.00% 0.00% 0.00% 0.00%
February 2019........ 0.44% 0.00% 0.00% 0.00% 0.00%
March 2019........... 0.38% 0.00% 0.00% 0.00% 0.00%
April 2019........... 0.33% 0.00% 0.00% 0.00% 0.00%
May 2019............. 0.28% 0.00% 0.00% 0.00% 0.00%
June 2019............ 0.24% 0.00% 0.00% 0.00% 0.00%
July 2019............ 0.20% 0.00% 0.00% 0.00% 0.00%
August 2019.......... 0.16% 0.00% 0.00% 0.00% 0.00%
September 2019....... 0.12% 0.00% 0.00% 0.00% 0.00%
October 2019......... 0.10% 0.00% 0.00% 0.00% 0.00%
November 2019........ 0.07% 0.00% 0.00% 0.00% 0.00%
December 2019........ 0.05% 0.00% 0.00% 0.00% 0.00%
January 2020......... 0.03% 0.00% 0.00% 0.00% 0.00%
February 2020........ 0.01% 0.00% 0.00% 0.00% 0.00%
March 2020........... 0.00% 0.00% 0.00% 0.00% 0.00%
</TABLE>
A-22
<PAGE> 153
APPENDIX 11
APPRAISED VALUES OF INITIAL AIRCRAFT AT SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
NUMBER OF SERIAL APPRAISED VALUE
INITIAL LESSEE AIRCRAFT NUMBER AT SEPTEMBER 30, 1998
- -------------- ----------- ------ ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Aeropostale................. 1 23788 $ 21,420
Air Liberte................. 1 49822 19,433
Olympic..................... 1 25371 27,137
TAP......................... 1 25161 25,020
Transwede................... 1 25165 20,860
Flightlease................. 1 410 25,377
Flightlease................. 1 409 25,210
Transavia................... 1 27635 29,863
KLM......................... engine 704279 5,593
Britannia................... 1 23807 36,390
Caledonia................... 1 393 31,310
Monarch..................... 1 279 30,467
Unijet...................... 1 26256 67,767
TransAer.................... 1 414 31,503
Alaska Airlines............. 1 25104 28,210
TWA......................... 1 49824 20,423
TWA......................... 1 49825 18,270
Malev....................... 1 11569 16,460
Malev....................... 1 11565 16,353
Malev....................... 1 11564 15,627
Transaero................... 1 24367 34,870
Onur Air.................... 1 597 44,623
China Hainan................ 1 26295 26,783
Asiana...................... 1 24798 56,127
China Airlines.............. 1 555 50,720
Varig....................... 1 24106 62,673
Passaredo................... 1 437 30,183
VASP........................ 1 24299 21,407
Aero Mexico................. 1 26272 42,727
TAESA....................... 1 24234 22,340
Air Pacific................. 1 26260 68,913
Icelandair.................. 1 23811 21,423
Guyana Airways.............. 1 24260 33,953
----------- ----------
32 + engine $1,029,437
==========
</TABLE>
A-23
<PAGE> 154
APPENDIX 12
ANNUAL CASH REPORT
MANAGEMENT DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BACKGROUND
On March 3, 1998, Morgan Stanley Aircraft Finance ("MSAF"), a Delaware
business trust, issued $1,050 million of Notes in five subclasses -- Subclass
A-1, Subclass A-2, Subclass B-1, Subclass C-1 and Subclass D-1 (the "NOTES").
The Notes were issued in connection with MSAF's agreement to acquire 33 aircraft
plus a spare engine with a total appraised value at September 30, 1997 of
$1,115.51 million from International Lease Finance Corporation ("ILFC").
As of November 16, 1998, all but one of the 33 aircraft had been acquired
by MSAF. The undelivered aircraft was a B737-400 on lease to the Turkish
national carrier, THY, with an appraised value of $28.82 million. Pursuant to
the indenture relating to the Notes (the "INDENTURE"), MSAF decided not to
substitute this aircraft but to distribute to Noteholders $26.0 million which
represents that portion of the proceeds from the offering of the Notes relating
to this aircraft on June 15, 1998. As a result, the overall size of the aircraft
fleet is now 32 aircraft plus a spare engine with a revised total appraised
value at September 30, 1997 of $1,086.7 million. Applying the declining value
assumption, the total appraised value was $1,058.1 million at November 16 1998.
The value of the portfolio according to the most recent appraisal at September
30, 1998 was $1,029.4 million. See "Aircraft Values" below. As of February 1,
1999, 31 aircraft plus the engine were subject to leases with 28 lessees in 18
countries as shown in Schedule A attached and one aircraft was available for
lease.
The assets of MSAF consist principally of 100% of the beneficial interest
in MSA I and 100% of the share capital of SPC-5 Inc., Greenfly (Ireland) Limited
and Redfly (UK) Limited. MSA I currently owns 31 aircraft plus the spare engine
and SPC-5 Inc. currently owns one aircraft. The discussion and analysis which
follows is based on the results of MSAF and its subsidiaries as a single entity
(collectively the "MSAF GROUP").
GENERAL
MSAF Group is a special purpose vehicle which owns aircraft subject to
operating leases and, in certain instances, a finance lease. MSAF may also make
aircraft acquisitions and aircraft sales. MSAF intends to acquire additional
commercial passenger or freight aircraft from various sellers and will finance
the acquisition of such aircraft by issuing additional notes. Any acquisition of
further aircraft will be subject to certain confirmations with respect to the
Notes from the Rating Agencies and compliance with certain operating covenants
of MSAF set out in the Indenture.
MSAF's cash receipts and disbursements are determined, in part, by the
overall economic condition of the operating leasing market. The operating
leasing market, in turn, is affected by various cyclical factors including
interest rates, the availability of credit, fuel costs and general and regional
economic conditions affecting lessee operations and trading, manufacturer
production levels; passenger demand; retirement and obsolescence of aircraft
models; manufacturers exiting or entering the market or ceasing to produce
aircraft types; re-introduction into service of aircraft previously in storage;
governmental regulation; and air traffic control infrastructure constraints such
as limitations on the number of landing slots.
MSAF's ability to compete against other lessors is determined, in part, by
(i) the composition of its fleet in terms of mix, relative age and popularity of
the aircraft types; (ii) operating restrictions imposed by the Indenture, and
(iii) the ability of other lessors, who may possess substantially greater
financial resources, to offer leases on more favorable terms than MSAF.
This report presents information for the period from and including March 3,
1998 to and including the Note Payment Date on November 16, 1998. The financial
data includes payments made by MSAF on
A-24
<PAGE> 155
November 16, 1998 but only includes receipts up to November 9, 1998 which was
the calculation date for the Note Payment date on November 16, 1998.
CASH FLOW PERFORMANCE RELATIVE TO THE ASSUMPTIONS
The February 20, 1998 Offering Memorandum (the "OFFERING MEMORANDUM")
contains assumptions in respect of MSAF's future cash flows and cash expenses
(the "ASSUMPTIONS"). In the period from March 3, 1998 to November 16, 1998, MSAF
generated approximately $10.9 million in net cash collections in excess of the
Assumptions, principally due to higher than expected net maintenance revenues.
CASH COLLECTIONS
"CASH COLLECTIONS" comprise lease rental payments, maintenance reserve
payments by lessees and cash interest paid on MSAF's cash balances. The Offering
Memorandum assumed Cash Collections for the period from March 3, 1998 to
November 16, 1998 of $90.9 million. Total Cash Collections achieved in this
period were $102.4 million, a positive difference of $11.5 million. This
difference is due to a combination of factors set out below.
Gross lease rentals. Cash Collections relating to gross lease rentals for
the period from March 3, 1998 to November 16, 1998 amounted to $87.5 million or
approximately $6.6 million less than the $94.2 million assumed in the Offering
Memorandum. The variance is due to lessee rental arrears of $3.3 million, and a
further $3.3 million primarily related to outstanding restructured payments, bad
debts and lost revenue due to aircraft on ground. See "Developments -- Lessee
Difficulties" below.
Repossession and other stress related costs (net of security deposits
applied). Repossession and other stress related costs (net of security deposits
applied) for the period from March 3, 1998 to November 16, 1998 amounted to an
inflow of $0.6 million, compared to a cost of $4.3 million in assumed stress
related costs for this period. The inflow of $0.6 million reflects the
application of security deposits of $1.6 million partially offset by
repossession costs of $1.0 million. The repossession costs incurred relate to
four aircraft which were repossessed since March 3, 1998. As of November 16,
1998, all four aircraft were subject to signed lease agreements with new
lessees. The costs were almost entirely in respect of maintenance work required
to restore the aircraft to a condition acceptable for delivery to new lessees.
Net lease rentals. The Offering Memorandum assumes a 4.5% reduction in
gross lease rentals due to certain stress related costs (repossession costs, AOG
costs and arrearages) ("NET LEASE RENTALS"). For the period from March 3, 1998
to November 16, 1998, assumed Net Lease Rentals were $89.9 million. Actual Net
Lease Rentals for the period were $88.0 million, $1.9 million less than the
Assumptions principally because of lower than assumed gross lease rentals, which
were partially offset by lower than assumed repossession and other stress
related costs. It is likely that net lease rentals will decrease significantly
in Financial Year ("FY") 1999 due to potential lessee defaults and lessee
arrears. See "Developments -- Lessee Difficulties" below.
Maintenance receipts. In the period from March 3, 1998 to November 16,
1998, maintenance receipts were $11.4 million, exceeding maintenance
disbursements of $3.1 million by $8.1 million. The Offering Memorandum assumes
that maintenance receipts will equal maintenance disbursements over the term of
the Notes, and therefore, maintenance receipts and maintenance disbursements are
both assumed to be zero in each Note Payment Period. In any particular Note
Payment Period, however, there will be actual maintenance receipts and
disbursements and it is unlikely that maintenance receipts will equal
maintenance disbursements in any such period.
Interest received. Actual interest received for the period from March 3,
1998 to November 16, 1998 was $2.0 million compared to $1.0 million assumed in
the Offering Memorandum for the same period. The difference is due to a
combination of two offsetting factors. First, actual interest received includes
interest received on amounts in the Expense Account and interim balances in the
Collection Account which are not included in the Offering Memorandum
assumptions. Second and partially offsetting the impact of these higher
A-25
<PAGE> 156
cash balances on which interest has been earned, the Offering Memorandum assumed
a reinvestment rate of 5.75% while the average reinvestment rate for the period
was approximately 5.41%.
Other cash received. Other cash received for the period from March 3, 1998
to November 16, 1998 was approximately $1.0 million or $1.0 million more than
assumed in the Offering Memorandum. Other cash received consists primarily of a
fee paid to MSAF in respect of the early termination of a lease and default
interest and late charges.
OPERATING EXPENSES
"OPERATING EXPENSES" includes all fees, costs or expenses paid by any MSAF
Group member in the course of the business activities permitted to be conducted
by it under the Indenture. The cash outflows in respect of Operating Expenses
shown in the Offering Memorandum were assumed to be $3.3 million for the period
from March 3, 1998 to November 16, 1998. Total cash expenses paid in this period
were approximately $5.5 million, a negative variance of $2.2 million. This
variance is due to a combination of factors set out below.
Operating Expenses
Maintenance. Maintenance disbursements in the period from March 3, 1998 to
November 16, 1998 were approximately $3.1 million and were exceeded by
maintenance receipts of $11.4 million. As discussed above, the Offering
Memorandum assumes that maintenance receipts will equal maintenance
disbursements over the term of the Notes, however, it is unlikely that
maintenance receipts will equal maintenance disbursements in any particular Note
Payment Period. It is likely that maintenance disbursements will increase due to
anticipated engine overhauls and re-leasing expenses which we originally
expected to incur in FY 1998 but which we now expect to incur in FY 1999. There
is approximately $1.4 million currently held in the Expense Account for
projected maintenance expenses over the next three months.
Insurance, re-leasing and other costs. Insurance, re-leasing and other
costs incurred were approximately $1.2 million from March 3, 1998 to November
16, 1998, which was $2.1 million less than the assumed costs of $3.3 million for
the period.
Increase in Accrued Expenses. $1.2 million of accrued expenses was
transferred to the expense account and are expected to be payable in FY 1999.
This $1.2 million represents an increase in accrued expenses from $1.2 million
at March 3, 1998 to $2.4 million. Approximately $1.4 million of the $2.4 million
relates to accrued maintenance expenses while the remaining $1.0 million relates
to accrued insurance, re-leasing and other costs. The Offering Memorandum
assumes there are no accrued expenses.
Selling, General and Administrative
Servicer fees. Fees paid to ILFC, as Servicer, during the period from
March 3, 1998 to November 16, 1998 amounted to $2.6 million, which is $0.6
million lower than the assumed costs of $3.2 million for the period. A
significant portion of the Servicer fees are calculated as a percent of rental
revenue actually received. The slightly lower fees resulted from the lower
rental revenue caused by rental arrears.
Other service provider fees and overhead. Other service provider fees and
overhead amounted to $1.4 million for the period from March 3, 1998 to November
16, 1998, $0.9 million below the assumed amount of $2.3 million for the period
principally due to a lower than assumed Administrative Agent's fee because of
lower rental revenue caused by rental arrears.
Exceptional Item. MSAF received an exceptional cash inflow of $27.1
million which includes cash released from the Aircraft Purchase Account and
breakage costs in respect of the non-delivery of the THY aircraft.
NOTE PAYMENTS
Interest payments. Actual interest payments to Noteholders net of swap
effects have been $0.3 million higher compared with assumed interest payments
net of swap effects for the period from March 3, 1998 to
A-26
<PAGE> 157
November 16, 1998. Lower interest payments caused by lower than assumed interest
rates and greater than assumed principal distributions on the A-2 Notes in the
March 3, 1998 to November 16, 1998 period were partially offset by increased
swap payments.
Principal payments. Total principal distributions in the period from March
3, 1998 to November 16, 1998 were $71.1 million, an excess of $10.6 million over
assumed total debt amortization, reflecting the higher than assumed net cash
collections as discussed above. The principal amortization payments were made
with respect to the A-2 Notes.
OTHER FINANCIAL DATA
CASH
Cash held at November 16, 1998 was $27.4 million. Of this amount, $25
million represents the cash portion of the Liquidity Reserve Amount (which is
used as a source of liquidity for, among other things, maintenance obligations,
security deposit return obligations, cash operating expenses and contingent
liabilities) and $2.4 million represents accrued expenses and is held in the
Expense Account. The $2.4 million of accrued expenses is in respect of likely
maintenance and re-leasing expenses expected to fall due in the next quarter.
In addition to the $25 million cash portion at November 16, 1998, the
Liquidity Reserve Amount also contained $41.2 million of undrawn credit and
liquidity facilities from Morgan Stanley Dean Witter & Co. and ILFC.
AIRCRAFT VALUES
At September 30, 1997, the total appraised value of the 33 aircraft and the
spare engine that MSAF originally agreed to acquire from ILFC was $1,115.5
million. Giving effect to the non-delivery of the THY aircraft the revised
appraised value is $1,086.7 million and applying the declining value assumption,
the total appraised value of MSAF Group's 32 aircraft and spare engine was
$1,058.3 million at November 16, 1998.
Under the terms of the Notes, MSAF is obliged to obtain annual appraisals
of the Base Value of each aircraft from three independent appraisers by October
31 of each year. Generally, where the appraisals indicate a Base Value decline
significantly in excess of the value decline assumed under the terms of the
Notes, excess cash flow is redirected to the extent required to the Class A
Notes via the Class A Scheduled Principal Payment Amount. The most recent
appraisals occurred in September 30, 1998 and the next are due to occur no later
than October 31, 1999. A copy of the most recent Appraisals is attached in
Schedule A. The appraised value of the fleet as at September 30, 1998 was
$1,029.4 million versus an assumed value of $1,058.3 million as at November 16,
1998, a negative variance of 2.8%. As the variance of 2.8% was within the
permitted 5% band, there was no requirement to redirect excess cash flow to the
Class A Notes.
A-D NOTE BALANCE
As of November 16, 1998, the aggregate amount of Class A-D Notes
outstanding was $978.9 million, approximately $10.6 million lower than assumed
due to higher than assumed principal repayments with respect to the Class A-2
Notes.
DEVELOPMENTS
LESSEE DIFFICULTIES
As of February 1, 1999, two lessees were in arrears. The aircraft on lease
to the two leases in arrears represent approximately 7.2% of the appraised value
of the portfolio at September 30, 1998. The amounts outstanding and overdue for
the two lessees in respect of Rental Payments, Maintenance Reserves and other
miscellaneous amounts due under the Leases (net of default interest and certain
cash in transit) with respect to these lessees amounted to approximately $3.4
million. The weighted average number of days past due of such arrears was 70.0
days.
A-27
<PAGE> 158
Since August 31, 1998, two lessees have been terminated early. The two
early lease terminations were uncontested by the lessees. One of the two
aircraft has been re-leased to a new lessee. The second aircraft is undergoing
maintenance work prior to remarketing.
EUROPE/MIDDLE EAST
In light of the severe economic and financial difficulties being
experienced in Russia, the Servicer agreed to terminate the Transaero lease
early and repossess the aircraft. The aircraft represents 3.4% of the appraised
value of the portfolio at September 30, 1998. Arrears owed by Transaero were
restructured as part of the early termination agreement and are scheduled for
repayment in full by April 1999. As of February 1, 1999, Transaero was in
arrears on the restructured arrears payments. The aircraft has been re-leased to
Flying Colours, a UK based charter airline. MSAF will incur maintenance and
modification costs estimated at approximately $2.1 million as part of the
restoration and delivery of this aircraft to the new lessee.
One lessee in the Europe/Middle East region (representing 4.3% of the
appraised value of the portfolio at September 30, 1998) has consistently been in
arrears. The lease rental and maintenance reserves were restructured in March
1998 and the restructured amounts have now been repaid in full, however, the
lessee continues to be in arrears with subsequent lease payments.
ASIA
During the period from March 3, 1998 to November 16, 1998, the economies of
Asia were severely affected by economic and financial difficulties. Currently,
MSAF leases 13.0% of its fleet in the Asia Pacific Region (5.5% in South Korea,
4.9% in Taiwan and 2.6% in China) and 6.7% in Pacific and Other regions (6.7% in
Fiji) by appraised value of the portfolio at September 30, 1998. As of November
16, 1998 none of these lessees were in arrears although severe financial
difficulties have been reported for certain other air carriers in the region.
One of the lessees restructured its lease payments which will result in a lower
rental payment over the remaining lease term.
LATIN AMERICA
The downturn in Asia and Russia has recently begun to undermine business
confidence in Latin America and to adversely affect the economies of Latin
American countries. As of February 1, 1999, MSAF leases 17.5% of its fleet in
Latin America (6.4% in Mexico and 11.1% in Brazil) by appraised value of the
portfolio at September 30, 1998.
In January 1999, Brazil decided to float its currency on the international
currency market which resulted in a devaluation of its exchange rate and
increased exchange rate volatility. One of MSAF's Brazilian lessees, which
accounts for 6.25% of the appraised value of the portfolio at September 30,
1998, has requested a short-term stay in lease payments during the current
period of exchange rate volatility. The rentals arrears of a second Brazilian
lessee, which accounts for 2.93% of the appraised value of the portfolio at
September 30, 1998, were recently restructured in December 1998, and the lessee
is in arrears with respect to the restructured payments amounts as well as
subsequent lease payments.
In January 1999, the Servicer agreed with Guyana Airways to terminate the
lease early and repossess the aircraft. As part of the agreement, Guyana has
agreed to repay all arrears and costs of redelivery. The Guyana aircraft is a
B757-200 and accounts for 3.3% of the appraised value of the portfolio at
September 30, 1998.
EXCHANGE OFFER
MSAF filed a registration statement with the Securities and Exchange
Commission (the "SEC") with respect to an exchange offer for exchange notes with
terms virtually identical to the Notes which was declared effective on January
12, 1999. The Exchange Offer was consummated on January 18, 1999. MSAF paid an
additional coupon of 50 basis points on each of the subclasses of debt during
the period from November 30, 1998 to January 18, 1999, as required under the
terms of the Notes.
A-28
<PAGE> 159
COMPARISON OF EXPECTED YEAR TO DATE CASH FLOWS VERSUS PROSPECTUS
FIGURES REFLECT ACTUAL CASH FLOWS TO NOVEMBER 16TH, 1998
<TABLE>
<CAPTION>
YEAR TO DATE
-------------------------------------------------------------------------------
% OF PROSPECTUS GROSS LEASE REVENUES
ACTUAL TO PROSPECTUS* --------------------------------------
PERIOD ENDING 16-NOV-98 DATE TO DATE VARIANCE ACTUAL PROSPECTUS* VARIANCE
- ----------------------- ----------- ----------- ---------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
CASH COLLECTION
Gross Lease Rentals.... 87,472,422 94,119,394 (6,646,972) 92.9% 100.0% -7.1%
Repossession and other
Stress Related
Costs................ 554,517 (4,235,373) 4,789,890 0.6% -4.5% 5.1%
----------- ----------- ---------- ------- ------- -----
Net Lease Rentals...... 88,026,939 89,884,021 (1,857,082) 93.5% 95.5% -2.0%
Maintenance Receipts... 11,365,830 11,365,830 12.1% 0.0% 12.1%
Interest Received...... 2,000,944 980,819 1,020,126 2.1% 1.0% 1.1%
Other Cash Received.... 958,980 958,980 1.0% 0.0% 1.0%
----------- ----------- ---------- ------- ------- -----
TOTAL CASH RECEIVED.... 102,352,693 90,864,840 11,487,853 108.7% 96.5% 12.2%
CASH EXPENSES
Cash Operating Expenses
- -- Maintenance......... (3,089,846) (3,089,846) -3.3% 0.0% -3.3%
- -- Insurance,
re-leasing and other
costs................ (1,203,577) (3,294,179) 2,090,602 -1.3% -3.5% 2.2%
- -- (increase)/decrease
in Accrued
Expenses............. (1,167,635) (1,167,635) -1.2% 0.0% -1.2%
----------- ----------- ---------- ------- ------- -----
subtotal............... (3,061,058) (3,294,179) (2,166,880) -5.8% -3.5% -2.3%
SG&A
- -- Servicer Fees....... (2,619,251) (3,246,685) 627,433 -2.8% -3.4% 0.7%
- -- Other Servicer
provider fees and
Overhead............. (1,853,285) (2,301,940) 948,655 -1.4% -2.4% 1.0%
----------- ----------- ---------- ------- ------- -----
subtotal............... (3,972,536) (5,548,625) 1,576,089 -4.2% -5.9% 1.7%
----------- ----------- ---------- ------- ------- -----
TOTAL CASH EXPENSES.... (9,433,594) (8,842,804) (590,791) -10.0% -9.4% -0.6%
----------- ----------- ---------- ------- ------- -----
NET CASH COLLECTIONS... 92,919,099 82,022,037 10,897,062 98.7% 87.1% 11.6%
----------- ----------- ---------- ------- ------- -----
EXCEPTIONAL ITEMS
- -- THY Note
Distribution......... 37,143,085 27,143,085 0 28.8% 28.8% 0.0%
----------- ----------- ---------- ------- ------- -----
TOTAL NET CASH
COLLECTIONS.......... 120,062,184 109,165,122 10,897,062 127.6% 116.0% 11.6%
----------- ----------- ---------- ------- ------- -----
Interest Payments (Net
of Swap effects)..... 48,943,477 48,684,214 259,262 52.0% 51.7% 0.3%
Principal Payments
A-1.................... 0 0 0 0.0% 0.0% 0.0%
A-2.................... 65,938,115 55,300,316 10,637,799 70.1% 58.8% 11.3%
B-1.................... 5,180,591 5,180,591 (0) 5.5% 5.5% 0.0%
C-1.................... 0 0 0 0.0% 0.0% 0.0%
D-1.................... 0 0 0 0.0% 0.0% 0.0%
----------- ----------- ---------- ------- ------- -----
subtotal............... 71,118,706 60,480,907 10,637,799 75.6% 64.3% 11.3%
----------- ----------- ---------- ------- ------- -----
TOTAL PAYMENTS TO
NOTEHOLDERS.......... 120,062,183 109,165,122 10,897,061 127.6% 116.0% 11.6%
----------- ----------- ---------- ------- ------- -----
Beneficial Interest
Distributions........ 0 0 0 0.0% 0.0% 0.0%
</TABLE>
- ---------------
* Prospectus Cash Collections and Cash Expenses have been adjusted for
non-delivery of THY Aircraft, msn 25272.
A-29
<PAGE> 160
COMPARISON OF EXPECTED YEAR TO DATE CASH FLOWS VERSUS PROSPECTUS
FIGURES REFLECT ACTUAL CASH FLOWS TO NOVEMBER 16TH, 1998
<TABLE>
<CAPTION>
COVERAGE RATIOS
----------------------------------------------------------------------
CLOSING PROSPECTUS* ACTUAL
------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
a Net Cash Collections...... 109,165,122 120,462,183
b Swaps..................... 2,456,861 3,224,932
c Class A Interest.......... 30,280,177 29,816,388
d Class A Minimum........... 22,188,410 15,221,945
e Class B Interest.......... 4,418,176 4,373,156
f Class B Minimum........... 5,180,591 5,180,591
g Class C Interest.......... 4,830,000 4,830,000
h Class C Minimum........... -- --
i Class D Interest......... 6,699,000 6,699,000
j Class D Minimum.......... -- --
k Class A Scheduled......... -- --
l Class B Scheduled........ -- --
m Class C Scheduled.......... -- --
n Class D Scheduled......... -- --
o Permitted Aircraft
Modifications............. -- 400,000
p Class A Supplemental...... 33,111,906 50,716,171
------------- -------------
Total................... 109,165,122 120,462,183
------------- -------------
INTEREST COVERAGE RATIO
Class A...................... 3.61 4.04
Class B...................... 1.92 2.44
Class C...................... 1.63 2.03
Class D...................... 1.48 1.82
DEBT COVERAGE RATIO
Class A...................... 1.48 1.82
Class B...................... 1.48 1.82
Class C...................... 1.48 1.82
Class D...................... 1.48 1.82
LOAN-TO-VALUE RATIOS
Assumed Portfolio Value...... 1,115,510,000 1,058,252,331
Adjusted Portfolio Value..... 1,024,330,507
Liquidity Reserve Amount
Of which -- Cash............. 25,000,000 25,000,000 27,400,000
-- Letters of
Credit held..... 40,000,000 41,226,351 41,226,351
------------- ------------- -------------
Subtotal................... 65,000,000 66,226,351 68,626,351
Less Lessee Security
Deposits................... (20,000,000) (21,226,351) (21,226,351)
Less Accrued Expenses........ (2,400,000)
------------- ------------- -------------
Subtotal................... 45,000,000 45,000,000 45,000,000
Total Asset Value....... 1,160,510,000 1,103,252,331 1,069,330,507
Note Balances as at 16-Nov-98
Class A...................... 740,000,000 63.8% 684,699,684 62.1% 674,061,885 63.0%
Class B...................... 100,000,000 72.4% 94,819,409 70.7% 94,819,409 71.9%
Class C...................... 100,000,000 81.0% 100,000,000 79.7% 100,000,000 81.3%
Class D...................... 110,000,000 90.5% 110,000,000 89.7% 110,000,000 91.5%
------------- ------------- -------------
Total................... 1,050,000,000 989,519,093 978,881,294
------------- ------------- -------------
Assumed Portfolio Value as a
Percent of Adjusted
Portfolio Value............ 103.3%
</TABLE>
A-30
<PAGE> 161
SCHEDULE A
All amounts in thousands of US dollars unless otherwise stated
FIGURES AS OF FEBRUARY 1, 1999
<TABLE>
<CAPTION>
30-SEP-98
COUNTRY OF ENGINE SERIAL DATE OF ADJUSTED BASE % OF
REGION(1) CURRENT LESSEE CURRENT LESSEE TYPE CONFIGURATION NUMBER MANUFACTURE VALUE(2) TOTAL
----------------- -------------- -------------- ---------- --------------- ------ ----------- ------------- -----
<C> <S> <C> <C> <C> <C> <C> <C> <C> <C>
1 Europe France Air Liberte MD-83 JT8D-219 49822 Dec-88 19,433 1.9%
2 (Developed) France Aeropostale B737-3S3QC CFM 56-3C1 23788 May-87 21,420 2.1%
3 Greece OlympicAirways B737-4Q8 CFM 56-3C1 25371 Jan-92 27,137 2.6%
4 Netherlands KLM engine CF6-BOC2B6F 704279 Jun-95 5,593 0.5%
5 Netherlands Transavia B737-3K2 CFM 56-3C1 27635 May-95 29,863 2.9%
6 Ireland TransAer A320-200 V2500-A1 414 May-93 31,503 3.1%
7 Portugal TAP B737-382 CFM 56-3B2 25161 Feb-92 25,020 2.4%
8 Sweden Transwede SAFE B737-548 CFM 56-3B1 25165 Apr-93 20,860 2.0%
9 Switzerland Flightlease(3) A310-300 JT9D-7R4E1 409 Nov-85 25,210 2.4%
10 Switzerland Flightlease(3) A310-300 JT9D-7R4E1 410 Nov-85 25,377 2.5%
11 UK Britannia/Ansett B767-204ER CF6-80A 23807 Aug-87 36,390 3.5%
12 UK Caledonian A320-200 V2500-A1 393 Feb-93 31,310 3.0%
13 UK Monarch A320-200 V2500-A1 279 Feb-92 30,467 3.0%
14 UK Unijet B767-39HER CF6-80C2B6F 26256 Apr-93 67,767 6.6%
15 UK Flying B757-28A RB211-535-E4-37 24367 Feb-89 34,870 3.4%
Colours(2)
16 North America USA Alaska B737-4Q8 CFM 56-3C1 25104 May-93 28,210 2.7%
17 (Developed) USA TWA MD-83 JT8D-219 49824 Mar-89 20,423 2.0%
18 USA TWA MD-82 JT8D-217C 49825 Mar-89 18,270 1.8%
19 Europe Hungary Malev F-70 TAY MK620-15 11564 Dec-95 15,627 1.5%
20 and Middle East Hungary Malev F-70 TAY MK620-15 11565 Feb-96 16,353 1.6%
21 (Emerging) Hungary Malev F-70 TAY MK620-15 11569 Mar-96 16,460 1.6%
22 Turkey Onur Air A321-100 V2530-A5 597 Mar-96 44,623 4.3%
23 Asia Korea Asiana B767-300 CF6-80C2B6F 24798 Oct-90 56,127 5.5%
24 (Emerging) Taiwan China Airlines A300-600R A300-600R 555 Mar-90 50,720 4.9%
25 China China Hainan B737-3Q8 CFM 56-3C1 26295 Dec-93 26,783 2.6%
26 Latin America Brazil Passeredo A310-300 JT9D-7R4E1 437 Nov-86 30,183 2.9%
27 (Emerging) Brazil Varig B747-341B CF6-80C2 24106 Apr-88 62,673 6.1%
28 Brazil VASP B737-3Q8 CFM-3B2 24299 Nov-88 21,407 2.1%
29 Mexico Aero Mexico B757-2Q8 PW 2037 26272 Mar-94 42,727 4.2%
30 Mexico TAESA B737-4Q8 CFM 56-3B2 24234 Oct-88 22,340 2.2%
31 Other Fiji Air Pacific B767-3X2ER CF6-80C2B4 26260 Sept-94 68,913 6.7%
32 Iceland IcelandAir B737-3S3F CFM 56-3B2 23811 Oct-87 21,423 2.1%
33 Off lease Off lease Off lease B757-28A RB211-535-F4 24260 Dec-88 33,953 33.3%
--------- ----
Total 1,029,437 100%
========= ====
<CAPTION>
% PER
REGION
------
<C> <C>
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
42.0%
16
17
18
6.5%
19
20
21
22
9.0%
23
24
25
13.0%
26
27
28
29
30
17.4%
31
32
8.8%
33 3.3%
----
100%
====
</TABLE>
- ---------------
(1) Regions are defined according to MSCI designations.
(2) Adjusted Base Value is the Base Value of each aircraft as per the September
30, 1998 Appraisal.
A-31
<PAGE> 162
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Third Amended and Restated Trust Agreement (the "Trust Agreement") of
Morgan Stanley Aircraft Finance ("MSAF") dated as of March 3, 1998 provides that
MSAF will indemnify, to the fullest extent permitted by Delaware law, each
trustee (and the officers, directors, employees, heirs, executors or
administrators of such trustee) who was or is a party or is threatened to be
made a party to, or is involved in any threatened, pending or completed action
or suit by or in the right of MSAF to procure a judgment in its favor by reason
of the fact that such person is or was a trustee of MSAF or is or was serving at
the request of MSAF as a trustee, director or officer of another trust,
corporation, partnership, joint venture or other enterprise. MSAF also agreed to
indemnify, to the fullest extent permitted by Delaware law, each trustee of MSAF
from any and all losses, liabilities or expenses that may be imposed on,
incurred by or asserted against any of them arising out of, in connection with
or related to their performance under the Trust Agreement.
ITEM 21. EXHIBITS
(a) Exhibits
The following is a list of exhibits to this Registration Statement:
<TABLE>
<C> <S>
3.1 Certificate of Trust of MSAF*
3.2 Third Amended and Restated Trust Agreement of MSAF dated as
of March 3, 1998*
4.1 Indenture dated as of March 3, 1998 by and among MSAF and
Bankers Trust Company, as Trustee with respect to the Notes*
4.2 Form of Global Note (included in Exhibit 4.1)
4.3 Registration Rights Agreement dated March 3, 1998 by and
between MSAF and Morgan Stanley & Co. International Limited*
5.1 Opinion of Davis Polk & Wardwell as to the legality of the
securities being registered hereby*
8.1 Opinion of Davis Polk & Wardwell as to certain U.S. Federal
income tax matters (included in Exhibit 5.1)
10.1 Administrative Agency Agreement dated as of March 3, 1998
among MSAF, Cabot Aircraft Services Limited, as
Administrative Agent, Bankers Trust Company, as Security
Trustee and each subsidiary of MSAF*
10.2 Cash Management Agreement dated as of March 3, 1998 among
MSAF, Bankers Trust Company, as Security Trustee and as Cash
Manager and each subsidiary of MSAF*
10.3 Financial Advisory Agreement dated as of March 3, 1998
between MSAF and Morgan Stanley & Co. Incorporated, as
Financial Adviser*
10.4 Custody and Loan Agreement dated as of March 3, 1998 among
MSAF, International Lease Finance Corporation and each
subsidiary of MSAF*
10.5 Loan Agreement dated as of March 3, 1998 between MSAF and
Morgan Stanley, Dean Witter, Discover & Co.*
10.6 Security Trust Agreement dated as of March 3, 1998 among
MSAF, Bankers Trust Company, as Security Trustee, as Cash
Manager and as Trustee, Cabot Aircraft Services Limited, as
Administrative Agent and each subsidiary of MSAF*
10.7 Reference Agency Agreement dated as of March 3, 1998 among
MSAF, Bankers Trust Company, as Reference Agent and as
Trustee and Cabot Aircraft Services Limited, as
Administrative Agent*
10.8 Servicing Agreement dated as of November 10, 1997 among
MSAF, International Lease Finance Corporation, Cabot
Aircraft Services Limited, as Administrative Agent and each
subsidiary of MSAF*
</TABLE>
II-1
<PAGE> 163
<TABLE>
<C> <S>
10.9 Asset Purchase Agreement dated as of November 10, 1997
between MSAF and International Lease Finance Corporation*
21.1 Subsidiaries of MSAF*
23.1 Consent of Davis Polk & Wardwell (included in Exhibit 5.1)
23.2 Consent of Aircraft Information Services, Inc.**
23.3 Consent of BK Associates, Inc.**
23.4 Consent of Airclaims Limited**
23.5 Consent of Deloitte & Touche LLP**
24.1 Trustees' Power of Attorney (included in signature pages)
25.1 Statement of Eligibility of Bankers Trust Company, as
Trustee, under the Indenture to be qualified under the Trust
Indenture Act of 1939*
27.1 Financial Data Schedule*
99.1 Appraisal of Aircraft Information Services, Inc. relating to
the Aircraft*
99.2 Appraisal of BK Associates, Inc. relating to the Aircraft*
99.3 Appraisal of Airclaims Limited relating to the Aircraft*
</TABLE>
- ------------------
* Previously filed
** Filed herewith
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of Form S-4, within one business day of receipt of such
request, and to send the incorporated documents by first-class mail or equally
prompt means. This includes information contained in documents filed subsequent
to the effective date of the registration statement throughout the date
responding to the request.
(b) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(c) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each of the registrant's
annual reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of any employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the registration statement shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 20 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(e) The undersigned registrant hereby undertakes to file, during any period
in which offers or sales are being made, a post-effective amendment to this
registration statement:
II-2
<PAGE> 164
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually, or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
II-3
<PAGE> 165
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant, Morgan
Stanley Aircraft Finance, has duly caused this, Post-Effective Amendment No. 1
to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in New York, New York, on March 23, 1999.
MORGAN STANLEY AIRCRAFT FINANCE
By: /s/ C. SCOTT PETERSON
------------------------------------
Signatory Trustee
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the following
capacities on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Controlling Trustee March 23, 1999
- -----------------------------------------------------
Karl Essig
* Controlling Trustee March 23, 1999
- -----------------------------------------------------
Alexander C. Frank
* Controlling Trustee March 23, 1999
- -----------------------------------------------------
A. Maurice Mason
* Independent Trustee March 23, 1999
- -----------------------------------------------------
Juan C. O'Callahan
* Independent Trustee March 23, 1999
- -----------------------------------------------------
Alexander C. Bancroft
Wilmington Trust Company Delaware Trustee
By:
Title:
</TABLE>
*By: /s/ C. SCOTT PETERSON
C. Scott Peterson
Attorney-In-Fact
II-4
<PAGE> 166
EXHIBIT INDEX
<TABLE>
<C> <S>
3.1 Certificate of Trust of MSAF*
3.2 Third Amended and Restated Trust Agreement of MSAF dated as
of March 3, 1998*
4.1 Indenture dated as of March 3, 1998 by and among MSAF and
Bankers Trust Company, as Trustee with respect to the Notes*
4.2 Form of Global Note (included in Exhibit 4.1)
4.3 Registration Rights Agreement dated March 3, 1998 by and
between MSAF and Morgan Stanley & Co. International Limited*
5.1 Opinion of Davis Polk & Wardwell as to the legality of the
securities being registered hereby*
8.1 Opinion of Davis Polk & Wardwell as to certain U.S. Federal
income tax matters (included in Exhibit 5.1)
10.1 Administrative Agency Agreement dated as of March 3, 1998
among MSAF, Cabot Aircraft Services Limited, as
Administrative Agent, Bankers Trust Company, as Security
Trustee and each subsidiary of MSAF*
10.2 Cash Management Agreement dated as of March 3, 1998 among
MSAF, Bankers Trust Company, as Security Trustee and as Cash
Manager and each subsidiary of MSAF*
10.3 Financial Advisory Agreement dated as of March 3, 1998
between MSAF and Morgan Stanley & Co. Incorporated, as
Financial Adviser*
10.4 Custody and Loan Agreement dated as of March 3, 1998 among
MSAF, International Lease Finance Corporation and each
subsidiary of MSAF*
10.5 Loan Agreement dated as of March 3, 1998 between MSAF and
Morgan Stanley, Dean Witter, Discover & Co.*
10.6 Security Trust Agreement dated as of March 3, 1998 among
MSAF, Bankers Trust Company, as Security Trustee, as Cash
Manager and as Trustee, Cabot Aircraft Services Limited, as
Administrative Agent and each subsidiary of MSAF*
10.7 Reference Agency Agreement dated as of March 3, 1998 among
MSAF, Bankers Trust Company, as Reference Agent and as
Trustee and Cabot Aircraft Services Limited, as
Administrative Agent*
10.8 Servicing Agreement dated as of November 10, 1997 among
MSAF, International Lease Finance Corporation, Cabot
Aircraft Services Limited, as Administrative Agent and each
subsidiary of MSAF*
10.9 Asset Purchase Agreement dated as of November 10, 1997
between MSAF and International Lease Finance Corporation*
21.1 Subsidiaries of MSAF*
23.1 Consent of Davis Polk & Wardwell (included in Exhibit 5.1)
23.2 Consent of Aircraft Information Services, Inc.**
23.3 Consent of BK Associates, Inc.**
23.4 Consent of Airclaims Limited**
23.5 Consent of Deloitte & Touche LLP**
24.1 Trustees' Power of Attorney (included in signature pages)
25.1 Statement of Eligibility of Bankers Trust Company, as
Trustee, under the Indenture to be qualified under the Trust
Indenture Act of 1939*
27.1 Financial Data Schedule*
99.1 Appraisal of Aircraft Information Services, Inc. relating to
the Aircraft*
99.2 Appraisal of BK Associates, Inc. relating to the Aircraft*
99.3 Appraisal of Airclaims Limited relating to the Aircraft*
</TABLE>
- ---------------
* Previously filed
** Filed herewith
<PAGE> 1
EXHIBIT 23.2
AIRCRAFT INFORMATION SERVICES, INC.
CONSENT OF APPRAISER
We consent to the use of our reports included herein and the references to our
firm in the Morgan Stanley Aircraft Finance Post-Effective Amendment No. 2 to
Registration Statement on Form S-4 (file no. 333-56575) to be filed with the
Securities and Exchange Commission.
Dated: March 23, 1999
AIRCRAFT INFORMATION SERVICES, INC.
BY: /s/ John D. McNicol
-----------------------------------
Name: John D. McNicol
Title: VP -- Appraisals & Forecasts
<PAGE> 1
EXHIBIT 23.3
BK ASSOCIATES, INC.
CONSENT OF APPRAISER
We consent to the use of our reports dated December 1997 and addressed to Morgan
Stanley Aircraft Finance included herein and to the references to our firm in
the Morgan Stanley Aircraft Finance Post-Effective Amendment No 2 to
Registration Statement on Form S-4 (file no. 333-56575) to be filed with the
Securities and Exchange Commission.
Dated: March 23, 1999
BK ASSOCIATES, INC.
BY: /s/ Richard Britton
------------------------------
Name: Richard Britton
Title: Vice-President
<PAGE> 1
EXHIBIT 23.4
AIRCLAIMS LIMITED
CONSENT OF APPRAISER
We consent to the use of our reports included herein and to the references to
our firm in the Morgan Stanley Aircraft Finance Post-Effective Amendment No. 2
to Registration Statement on Form S-4 (file no. 333-56575) to be filed with the
Securities and Exchange Commission.
Dated March 23, 1999
AIRCLAIMS LIMITED
BY: /s/ L.D. Weal
---------------------------
Name: L.D. Weal
Title: Chief Analyst
<PAGE> 1
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 2 to
Registration Statement No. 333-56575 of Morgan Stanley Aircraft Finance and
Subsidiaries of our report dated January 22, 1998 appearing in the Prospectus,
which is a part of such Registration Statement, and to the reference to us under
the headings "Selected Consolidated Financial Data" and "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
New York, New York
March 19, 1999