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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended November 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
COMMISSION FILE NUMBER 333-56575
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MORGAN STANLEY AIRCRAFT FINANCE
(Exact Name of Registrant as specified in trust agreement)
DELAWARE
(State or other jurisdiction of incorporation or organization)
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7359 MORGAN STANLEY AIRCRAFT FINANCE 13-3375162
(SIC Code) C/O WILMINGTON TRUST COMPANY (I.R.S. Employer Identification
1100 NORTH MARKET STREET No.)
RODNEY SQUARE NORTH
WILMINGTON, DELAWARE 19890-1000
ATTENTION: CORPORATE TRUST ADMINISTRATION
(302) 651-1000
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(Addresses and telephone numbers, including area codes, of Registrant's
principal executive offices)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT
None
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(Title of class)
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(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 or Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
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ISSUER CLASS OUTSTANDING AT FEBRUARY 1, 1999
ONE
MORGAN STANLEY AIRCRAFT FINANCE BENEFICIAL INTEREST
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MORGAN STANLEY AIRCRAFT FINANCE
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1998
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 27
Item 3. Legal Proceedings........................................... 27
Item 4. Submission of Matters to a Vote of Security-Holders......... 27
PART II
Item 5. Market for Registrants' Common Equity and Related
Stockholder Matters......................................... 28
Item 6. Selected Consolidated Financial Data........................ 28
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 29
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 38
Item 8. Financial Statements and Supplementary Data................. 39
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 39
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 40
Item 11. Executive Compensation...................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 48
Item 13. Certain Relationships and Related Transactions.............. 48
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 49
Appendix 1. Annual Cash Report.......................................... A-1
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Morgan Stanley Aircraft Finance ("MSAF", and together with its
subsidiaries, "MSAF GROUP") 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.
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 (the "TRUSTEE"), dated as of March 3, 1998
(the "INDENTURE").
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 Morgan Stanley
Financing Inc. ("MSF"), a wholly-owned subsidiary of Morgan Stanley Dean Witter
& Co. ("MSDW"). MSF may transfer all or a portion of such beneficial interest to
related or unrelated third parties in the future.
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
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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.
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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."
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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
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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
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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 Report on Form 10-K 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.
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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.
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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
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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. ("MSCI")
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
MSCI designations).
10
<PAGE> 12
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.
11
<PAGE> 13
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.
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.
12
<PAGE> 14
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 (the "APPRAISERS") 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").
13
<PAGE> 15
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.
14
<PAGE> 16
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 ("AIR PACIFIC")......................... 1 6.69%
Unijet Leisure Limited ("UNIJET")(2)........................ 1 6.58
"VARIG", S.A. (Viacao Aerea Rio-Grandense) ("VARIG")........ 1 6.09
TransAer International Airlines Limited ("TRANSAER")........ 1 3.06
Asiana Airlines, Inc. ("ASIANA")............................ 1 5.45
Malev Hungarian Airlines, PLC ("MALEV")..................... 3 4.71
China Airlines, Ltd. ("CHINA AIRLINES")..................... 1 4.93
Flightlease AG ("FLIGHTLEASE")(3)........................... 2 4.91
Alaska Airlines, Inc. ("ALASKA AIRLINES")................... 1 2.74
Onur Air Tasimacilik A.S. ("ONUR AIR")...................... 1 4.33
Aerovias de Mexico, S.A. de C.V. ("AERO MEXICO")............ 1 4.15
Britannia Airways Limited ("BRITANNIA")(4).................. 1 3.53
Flying Colours Airlines Limited ("FLYING COLOURS").......... 1 3.39
Passaredo, Transportes Aeros ("PASSAREDO")(5)............... 1 2.93
Monarch Airlines Limited ("MONARCH")........................ 1 2.96
Transavia Airlines C.V. ("TRANSAVIA")....................... 1 2.90
China Hainan Airlines ("CHINA HAINAN")...................... 1 2.60
Transportes Aereos Portugueses, S.A. ("TAP")................ 1 2.43
Flugleidir H.F. ("ICELANDAIR")(6)........................... 1 2.08
Societe D'Exploitation Aeropostale S.A. ("AEROPOSTALE")..... 1 2.08
Trans World Airlines, Inc. ("TWA").......................... 2 3.76
Air Liberte, S.A. ("AIR LIBERTE")........................... 1 1.89
Caledonian Airways Limited ("CALEDONIAN")(2)................ 1 3.04
Olympic Airways ("OLYMPIC")................................. 1 2.64
Transportes Aereos Ejecutivos S.A. de C.V. ("TAESA")........ 1 2.17
Viasao Aerea Sao Paulo S.A., Brazilian Airlines ("VASP").... 1 2.08
Braathens Sverige AB ("TRANSWEDE").......................... 1 2.03
Koninklijke Luchtvaart Maatschappij N.V. ("KLM")............ 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.) ("SWISS AIR"), 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
("ANSETT").
(5) Passaredo leases the applicable aircraft from Navasota, which is party to a
conditional sale agreement with MSAF Group (the "CONDITIONAL SALE
AGREEMENT"). See "-- The Leases -- Conditional Sale Agreement."
15
<PAGE> 17
(6) The aircraft leased to Icelandair is subleased to Falcon Air AB ("FALCON").
(7) A letter of intent with a new lessee based in the United States was signed
in February 1999.
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 MSCI designations.
16
<PAGE> 18
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>
17
<PAGE> 19
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)
----------
$1,029,437
==========
</TABLE>
- ---------------
(1) Regions are defined according to MSCI 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.
18
<PAGE> 20
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
"SERVICING AGREEMENT").
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 the 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.
19
<PAGE> 21
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 Report on Form 10-K, 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.
20
<PAGE> 22
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 ("NAVASOTA"), 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.
21
<PAGE> 23
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.
22
<PAGE> 24
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 70.0.
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>
23
<PAGE> 25
<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>
24
<PAGE> 26
<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>
25
<PAGE> 27
<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.
26
<PAGE> 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.
ITEM 2. PROPERTIES
MSAF Group has no ownership or leasehold interest in any real property.
MSAF's registered and principal office is located at 1100 North Market
Street, Rodney Square North, Wilmington, Delaware 19890-0001 and its telephone
number is 1-302-651-1000.
For a description of MSAF Group's interest in other property, see "Item 1.
Business -- The Aircraft and Leases."
ITEM 3. LEGAL PROCEEDINGS
Neither MSAF nor any of its subsidiaries is involved in or subject to any
legal or arbitration proceedings relating to claims or amounts which are
material nor is MSAF aware that any such proceedings are pending or threatened.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
27
<PAGE> 29
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of the date of this Report on Form 10-K, all of the beneficial interest
in MSAF is owned by MSF, a wholly owned subsidiary of MSDW and no equity
securities of MSAF are listed on any national exchange or traded in any
established market.
At the time of the issuance of the Old Notes, MSAF paid a beneficial
interest distribution of approximately $976 million to MSF.
For a discussion relating to the beneficial interest distribution and
additional information regarding the corporate governance of MSAF, see "Item 1
Business -- MSAF Group."
ITEM 6. 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 Report on Form 10-K.
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>
28
<PAGE> 30
ITEM 7. 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.
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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 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 aircraft on the ground
("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.
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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 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.
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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. 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.
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FINANCIAL RESOURCES AND LIQUIDITY
You should refer to Appendix 1 for more information regarding the cash
performance of MSAF for the period from March 3, 1998 to November 16, 1998.
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
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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
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,
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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 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.
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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 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
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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 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
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<PAGE> 39
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 (the "INITIAL 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
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<PAGE> 40
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.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this
report. See "Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE> 41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
CONTROLLING AND INDEPENDENT TRUSTEES
The Controlling Trustees and Independent Trustees of MSAF, their respective
ages and principal activities are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Karl Essig................................... 46 Controlling Trustee
Alexander C. Frank........................... 40 Controlling Trustee
A. Maurice Mason............................. 34 Controlling Trustee
C. Scott Peterson............................ 38 Alternate Controlling Trustee
Juan C. O'Callahan........................... 64 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
Morgan Stanley'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.
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
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<PAGE> 42
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 are entitled to participate in all meetings of the
Controlling Trustees but are not entitled to vote on any matter except that the
Independent Trustees are 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.
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 ILFC and the other service providers, including affiliates of MSDW,
for all asset servicing, executive and administrative functions pursuant to the
respective service provider agreements. See "Risk Factors -- No Executive
Management -- Reliance on Third Parties to Manage Our Business." 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.
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 42 of
this report on Form 10-K.
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."
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<PAGE> 43
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;
- 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 Report on Form 10-K 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 Report on Form 10-K 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
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<PAGE> 44
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;
- 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
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<PAGE> 45
- 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 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
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<PAGE> 46
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 ("RULE 13D-3")) 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 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 ("CABOT") 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;
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<PAGE> 47
- 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;
- 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
46
<PAGE> 48
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. 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 instalments, 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.
ITEM 11. EXECUTIVE COMPENSATION
All trustees are 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.
47
<PAGE> 49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not applicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MSAF has had and currently maintains various relationships with MSDW.
First, MSDW acted as a promoter in establishing the entities that comprise MSAF
Group. Second, MSAF Group received approximately $920 million in non-interest
bearing loans from MSF, a wholly owned subsidiary of MSDW, which were utilized
to purchase 31 of the 32 aircraft. Third, MSF holds all of the beneficial
interest in MSAF and at the time of the issuance of the Notes, MSF received a
beneficial interest distribution of approximately $976 million. Fourth, Cabot,
an indirect wholly owned subsidiary of MSDW acts as the Administrative Agent for
MSAF Group. Fifth, the Controlling Trustees of MSAF are three individuals
appointed by a subsidiary of MSDW. Sixth, Morgan Stanley & Co. Incorporated is
acting as financial advisor to MSAF.
48
<PAGE> 50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2). Financial Statements: the response to this portion of Item
14 is submitted as a separate section of this report beginning on page F-1.
(a)(3) and (c). Exhibits:
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*
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 Aircraft Information Services, Inc.**
23.2 Consent of BK Associates, Inc.**
23.3 Consent of Airclaims Limited**
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**
- ---------------
* Incorporated by reference to the Registration Statement on Form S-4 (File No.
333-56575), previously filed with the Securities and Exchange Commission
** Filed herewith
49
<PAGE> 51
(b). Reports on Form 8-K: filed for event dates November 12, 1998,
December 14, 1998 and January 14, 1999 (each relating to the monthly report to
holders of the Notes) and February 12, 1999 (relating to the annual and monthly
reports to holders of the Notes).
(d). Not applicable.
50
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MORGAN STANLEY AIRCRAFT FINANCE
By: /s/ C. SCOTT PETERSON
------------------------------------
C. Scott Peterson
Controlling Trustee
Dated: February 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on February 26, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ KARL ESSIG Controlling Trustee
- -------------------------------------------------------- (principal executive officer)
Karl Essig
/s/ ALEXANDER C. FRANK Controlling Trustee
- -------------------------------------------------------- (principal financial and accounting
Alexander C. Frank officer)
/s/ A. MAURICE MASON Controlling Trustee
- --------------------------------------------------------
A. Maurice Mason
/s/ JUAN C. O'CALLAHAN Independent Trustee
- --------------------------------------------------------
Juan C. O'Callahan
/s/ ALEXANDER C. BANCROFT Independent Trustee
- --------------------------------------------------------
Alexander C. Bancroft
</TABLE>
51
<PAGE> 53
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 Statements 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> 54
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> 55
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> 56
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 30, 1997
FISCAL (DATE OF
YEAR ENDED 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 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
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 57
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 30,
1997 (DATE
FISCAL OF FORMATION)
YEAR ENDED TO
NOVEMBER 30, NOVEMBER 30,
1998 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 expense -- 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> 58
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> 59
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> 60
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 Group's
F-8
<PAGE> 61
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
aircraft 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> 62
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> 63
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 FINAL
SUBCLASS OF NOTE PRINCIPAL AMOUNT INTEREST RATE PAYMENT DATE 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 Notes 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
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.
F-11
<PAGE> 64
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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
F-12
<PAGE> 65
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 payment of approximately $976 million was made in the form of a
distribution on such beneficial interest, comprising the following amounts
(dollars in millions):
F-13
<PAGE> 66
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<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.
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........................................ $18,082 $ 702 $ 88 $ 1,377
======= ======= ======= =======
</TABLE>
F-14
<PAGE> 67
APPENDIX 1
-- 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-1
<PAGE> 68
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-2
<PAGE> 69
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 cost 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-3
<PAGE> 70
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 lessees 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-4
<PAGE> 71
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 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
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-5
<PAGE> 72
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 COLLECTIONS
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........................... (5,461,058) (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......................... (1,353,285) (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........... 27,143,085 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-6
<PAGE> 73
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 Porfolio Value..................... 103.3%
</TABLE>
A-7
<PAGE> 74
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
REGION (1) CURRENT LESSEE CURRENT LESSEE TYPE CONFIGURATION NUMBER MANUFACTURE VALUE (2)
---------- -------------- -------------- ---------- --------------- ------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 Europe France Air Liberte MD-83 JT8D-219 49822 Dec-88 19,433
2 (Developed) France Aeropostale B737-3S3QC CFM 56-3C1 23788 May-87 21,420
3 Greece OlympicAirways B737-4Q8 CFM 56-3C1 25371 Jan-92 27,137
4 Netherlands KLM engine CF6-80C2B6F 704279 Jun-95 5,593
5 Netherlands Transavia B737-3K2 CFM 56-3C1 27635 May-95 29,863
6 Ireland TransAer A320-200 V2500-A1 414 May-93 31,503
7 Portugal TAP B737-382 CFM 56-3B2 25161 Feb-92 25,020
8 Sweden Transwede SAFE B737-548 CFM 56-3B1 25165 Apr-93 20,860
9 Switzerland Flightlease A310-300 JT9D-7R4E1 409 Nov-85 25,210
(3)
10 Switzerland Flightlease A310-300 JT9D-7R4E1 410 Nov-85 25,377
(3)
11 UK Britannia/Ansett B767-204ER CF6-80A 23807 Aug-87 36,390
12 UK Caledonian A320-200 V2500-A1 393 Feb-93 31,310
13 UK Monarch A320-200 V2500-A1 279 Feb-92 30,467
14 UK Unijet B767-39HER CF6-80C2B6F 26256 Apr-93 67,767
15 UK Flying B757-28A RB211-535-E4-37 24367 Feb-89 34,870
Colours(2)
16 North America USA Alaska B737-4Q8 CFM 56-3C1 25104 May-93 28,210
17 (Developed) USA TWA MD-83 JT8D-219 49824 Mar-89 20,423
18 USA TWA MD-82 JT8D-217C 49825 Mar-89 18,270
19 Europe Hungary Malev F-70 TAY MK620-15 11564 Dec-95 15,627
20 and Middle East Hungary Malev F-70 TAY MK620-15 11565 Feb-96 16,353
21 (Emerging) Hungary Malev F-70 TAY MK620-15 11569 Mar-96 16,460
22 Turkey Onur Air A321-100 V2530-A5 597 May-96 44,623
23 Asia Korea Asiana B767-300 CF6-80C2B6F 24798 Oct-90 56,127
24 (Emerging) Taiwan China Airlines A300-600R A300-600R 555 Mar-90 50,720
25 China China Hainan B737-3Q8 CFM 56-3C1 26295 Dec-93 26,783
26 Latin America Brazil Passeredo A310-300 JT9D-7R4E1 437 Nov-86 30,183
27 (Emerging) Brazil Varig B747-341B CF6-80C2 24106 Apr-88 62,673
28 Brazil VASP B737-3Q8 CFM-3B2 24299 Nov-88 21,407
29 Mexico Aero Mexico B757-2Q8 PW 2037 26272 Mar-94 42,727
30 Mexico TAESA B737-4Q8 CFM 56-3B2 24234 Oct-88 22,340
31 Other Fiji Air Pacific B767-3X2ER CF6-80C2B4 26260 Sep-94 68,913
32 Iceland IcelandAir B737-3S3F CFM 56-3B2 23811 Oct-87 21,423
33 Off lease Off lease Off lease B757-28A RB211-535-E4 24260 Dec-88 33,953
---------
Total 1,029,437
=========
<CAPTION>
% OF % PER
TOTAL REGION
------ ------
<S> <C> <C>
1 1.9%
2 2.1%
3 2.6%
4 0.5%
5 2.9%
6 3.1%
7 2.4%
8 2.0%
9 2.4%
10 2.5%
11 3.5%
12 3.0%
13 3.0%
14 6.6%
15 3.4%
42.0%
16 2.7%
17 2.0%
18 1.8%
6.5%
19 1.5%
20 1.6%
21 1.6%
22 4.3%
9.0%
23 5.5%
24 4.9%
25 2.6%
13.0%
26 2.9%
27 6.1%
28 2.1%
29 4.2%
30 2.2%
17.4%
31 6.7%
32 2.1%
8.8%
33 3.3% 3.3%
------ ------
100% 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-8
<PAGE> 75
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF DOCUMENT NUMBERED PAGE
- ------- ----------------------- -------------
<C> <S> <C>
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*
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 Aircraft Information Services, Inc.**
23.2 Consent of BK Associates, Inc.**
23.3 Consent of Airclaims Limited**
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>
- ---------------
* Incorporated by reference to the Registration Statement on Form S-4 (File No.
333-56575), previously filed with the Securities and Exchange Commission
** Filed herewith
<PAGE> 1
Exhibit 23.1
Aircraft Information Services, Inc.
CONSENT OF APPRAISER
We consent to the use of our report dated October 5, 1998 and to the references
to our firm in the Morgan Stanley Aircraft Finance Form 10-K to be filed with
the Securities and Exchange Commission.
Dated: February 26, 1999
AIRCRAFT INFORMATION SERVICES, INC.
By: /s/ John D. McNicol
------------------------------------
Name: John D. McNicol
Title: VP -- Appraisals & Forecasts
<PAGE> 1
Exhibit 23.2
BK Associates, Inc.
CONSENT OF APPRAISER
We consent to the use of our report dated October 28, 1998 and to the references
to our firm in the Morgan Stanley Aircraft Finance Form 10-K to be filed with
the Securities and Exchange Commission.
Dated: February 26, 1999
BK ASSOCIATES, INC.
By: /s/ John F. Keitz
------------------------------------
Name: John F. Keitz
Title: President
<PAGE> 1
Exhibit 23.3
Airclaims, Limited
CONSENT OF APPRAISER
We consent to the use of our report dated October 8, 1998 and to the references
to our firm in the Morgan Stanley Aircraft Finance Form 10-K to be filed with
the Securities and Exchange Commission.
Dated: February 26, 1999
AIRCLAIMS LIMITED
By: /s/ Edward Pieniazek
-----------------------------------
Name: Edward Pieniazek
Title: Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1998 AND
THE CONSOLIDATED BALANCE SHEET AS OF NOVEMBER 30, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> NOV-30-1998
<CASH> 34,850
<SECURITIES> 0
<RECEIVABLES> 5,810
<ALLOWANCES> (689)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 972,030
<DEPRECIATION> (38,919)
<TOTAL-ASSETS> 1,010,492
<CURRENT-LIABILITIES> 0
<BONDS> 978,881
0
0
<COMMON> 1
<OTHER-SE> (46,750)
<TOTAL-LIABILITY-AND-EQUITY> 1,010,492
<SALES> 120,005
<TOTAL-REVENUES> 122,161
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 51,379
<LOSS-PROVISION> 689
<INTEREST-EXPENSE> 50,533
<INCOME-PRETAX> 20,249
<INCOME-TAX> 0
<INCOME-CONTINUING> 20,249
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,249
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
Exhibit 99.1
[AISI LOGO]
05 October 1998
Mr. Kieran O'Keefe
Morgan Stanley Aircraft Finance ("MSAF")
c/o Wilmington Trust
One Rodney Square
PO Box 551
Wilmington, Delaware 19899
USA
Subject: Adjusted Base Market Value Opinion - 32 Aircraft and
1 Spare Engine Fleet
AISI File number: A8S058BVO
Reference: (a) Morgan Stanley Facsimile Message, 05 October 1998
(b) 1st Year AISI Valuation Report A7S041BVO, December 1997
Dear Mr. O'Keefe:
In response to your request, Aircraft Information Services, Inc. (AISI) is
pleased to offer our opinion to Morgan Stanley Aircraft Finance ("MSAF") of the
adjusted base market values of the 32 aircraft and 1 spare engine fleet as
identified in Table I (the 'Aircraft').
1. METHODOLOGY AND DEFINITIONS
The standard terms of reference for commercial aircraft value are 'half-life
base market value' and 'half-life current market value' of an 'average'
aircraft. Base value is a theoretical value that assumes a balance market while
current value is the value in the real market; both assume a hypothetical
average aircraft condition. AISI value definitions are consistent with the
current definitions of the International Society of Transport Aircraft Trading
(ISTAT), those of 01 January 1994. AISI is a member of that organization and
employs an ISTAT Certified and Senior Certified Aircraft Appraiser.
AISI defines a 'base value' as that of a transaction between equally willing
and informed buyer and seller, neither under compulsion to buy or sell, for a
single unit cash transaction with no hidden value or liability, and with supply
and demand of the sale item roughly in balance. Base values are typically given
for aircraft in 'new' condition, 'average half-life' condition, or in a
specifically described condition unique to a single aircraft at a specific
time. An 'average' aircraft is an operable airworthy aircraft in average
physical condition and with average accumulated flight hours and cycles, with
clear title and standard unrestricted certificate of
Headquarters, 26072 Merit Circle, Suite 123, Laguna Hill, CA 92653
TEL:949-582-8888 FAX: 949-582-887 E-MAIL: [email protected]
<PAGE> 2
[AISI LOGO]
05 October 1998
AISI File No. A8S058BVO
Page -2-
airworthiness, and registered in an authority which does not represent a
penalty to aircraft value or liquidity, with no damage history and with
inventory configuration and level of modification which is normal for its
intended use and age. AISI assumes average condition unless otherwise specified
in this report. 'Half-life' condition assumes that every component or
maintenance service which has a prescribed interval that determines its service
life, overhaul interval or interval between maintenance services, is at a
condition which is one-half of the total interval. It should be noted that AISI
and ISTAT value definitions apply to a transaction involving a single
aircraft, and that transactions involving more than one aircraft are often
executed at considerable and highly variable discounts to a single aircraft
price, for a variety of reasons relating to an individual buyer or seller.
AISI defines a 'current market value', which is synonymous with the older
term 'fair market value' as that value which reflects the real market
conditions, whether at, above or below the base value conditions. Assumption of
a single unit sale and definitions of aircraft condition, buyer/seller
qualifications and type of transaction remain unchanged from that of base value.
Current market value takes into consideration the status of the economy in which
the aircraft is used, the status of supply and demand for the particular
aircraft type, the value of recent transactions and the opinions of informed
buyers and sellers. Current market value assumes that there is no short term
time constraint to buy or sell.
AISI encourages the use of base values to consider historical trends, to
establish a consistent baseline for long term value comparisons and future
value considerations, or to consider how actual market values vary from
theoretical base values. Base values are less volatile than current market
values and tend to diminish regularly with time. Base values are normally
inappropriate to determine near term values. AISI encourages the use of current
market values to consider the probable near term value of an aircraft.
AISI determines an 'adjusted market value' by determining the value of
known deviations from half-life condition, which may be better or worse than
half-life condition, and to account for better or worse than average physical
condition, and the inclusion of additional equipment, or absence of standard
equipment.
No physical inspection of the Aircraft or their essential records was made
by AIS for the purposes of this report, nor has any attempt been made to verify
information provided to us, which is assumed to be correct and applicable to the
Aircraft.
<PAGE> 3
[AISI LOGO]
05 October 1998
AISI File No. A8S058BVO
Page -3-
2. VALUATION
Our opinion of the adjusted base market value of the Aircraft is derived from
information and specifications supplied by Morgan Stanley in reference (a) and
(b). Adjustments are calculated in accordance with standard AISI methods.
Adjustments are calculated only where there is sufficient information to do so,
or where reasonable assumptions can be made.
With regard to airframe maintenance, if no time between check/overhaul (TBO) or
time since check/overhaul (TSO) information was provided, and if the total
hours/cycles of the airframe do not exceed the TBO limits then the total
hours/cycles of the airframe were assumed to be the TSO. This is typical of
newer aircraft. If no information was provided and if the TSO could not be
calculated, then half life was assumed.
With regard to the engines, due to the amount of information provided, all
engines are considered to be in half life condition.
All hours and cycle information provided for airframe, C Check, D Check, gear
and engines have been projected from the dates of the Aircraft Specification
sheet supplied in reference (b) to 30 September 1998 based on a daily
utilization factor calculated for each aircraft.
It is our considered opinion that the adjusted base values of the Aircraft as of
30 September 1998 are as follows in Table I subject to the assumptions,
definitions, and disclaimers herein.
<PAGE> 4
Table 1 -- AISI File A8S058BVO -- Report Date 5 October 1998
[Logo]
Values as of 30 September 1998
FLEET VALUATION -- MSAF FLEET
<TABLE>
<CAPTION>
HALF LIFE ADJUSTED
BASE AMOUNT BASE AMOUNT
TYPE MSN DOM YOB ENGINE MTOW 1998 USDOLLARS 1998 USDOLLARS
<S> <C> <C> <C> <C> <C> <C> <C>
A300-600R 555 Mar-90 1990 PW4158 378,530 54,030,000 54,780,000
A310-300 409 Nov-85 1985 *(1) JT9D-7R4E1 330,690 23,500,000 23,090,000
A310-300 410 Nov-85 1985 *(2) JT9D-7R4E1 330,690 23,500,000 23,290,000
A310-322 437 Feb-87 1987 *(3) JT9D-7R4E1 337,304 28,650,000 29,330,000
A320-200 279 Feb-92 1992 CFM56-5A3 169,756 31,010,000 31,160,000
A320-200 393 Feb-93 1993 V2500-A1 166,447 31,980,000 31,980,000
A320-200 414 Mar-93 1993 V2500-A1 166,447 31,980,000 31,980,000
A321-100 597 May-96 1996 V2530-A5 182,982 47,000,000 46,950,000
B737-300 25161 Feb-92 1992 CFM56-3B2 138,500 24,660,000 24,070,000
B737-3K2 27635 May-95 1995 CFM56-3C1 139,000 30,200,000 30,100,000
B737-3Q8 24299 Nov-88 1988 CFM56-3B2 137,000 21,430,000 21,840,000
B737-300 26295 Dec-93 1993 CFM56-3C1 135,000 25,970,000 25,780,000
B737-353F 23811 Sep-87 1987 CFM56-3B2 138,500 22,220,000 22,270,000
B737-300QC 23788 May-87 1987 CFM56-3C1 139,500 22,460,000 22,410,000
B737-4Q8 24234 Oct-88 1988 CFM56-3B2 143,500 23,700,000 23,700,000
B737-4Q8 25104 May-93 1993 CFM56-3C1 143,500 28,850,000 28,480,000
B737-4Q8 25371 Jan-92 1992 CFM56-3C1 150,000 27,860,000 27,860,000
B737-500 25165 Apr-93 1993 CFM56-3B1 121,254 20,390,000 19,990,000
B747-300 24106 Apr-88 1988 CF6-80C2B1 833,000 65,600,000 65,740,000
B757-200ER 24367 Feb-89 1989 RB211-535E4 250,000 38,200,000 38,020,000
B757-200ER 24260 Dec-88 1988 RB211-535E4 250,000 36,600,000 37,110,000
B757-200ER *(4) 26272 Mar-94 1994 PW2037 230,000 47,250,000 47,140,000
B757-200ER *(5) 23807 Aug-87 1987 CF6-80A 345,000 42,650,000 43,200,000
B767-300ER *(6) 24798 Oct-90 1990 CF6-80C2B6F 345,000 62,670,000 62,670,000
B767-300ER 26256 Apr-93 1993 CF6-80C2B6F 407,000 74,090,000 74,360,000
B767-300ER 26260 Sep-94 1994 CF6-80C2B4 380,000 75,730,000 75,390,000
Fokker 70 11564 Dec-95 1995 TAY MK620-15 80,997 14,660,000 14,650,000
Fokker 70 11565 Feb-96 1996 TAY MK620-15 80,997 16,320,000 16,290,000
Fokker 70 11569 Mar-96 1996 TAY MK620-15 80,997 16,320,000 16,280,000
MD-82 *(7) 49825 Mar-89 1989 JT8D-217C 149,500 *(7) 20,500,000 20,120,000
MD-83 49822 Dec-88 1988 JT8D-219 160,000 21,730,000 21,110,000
MD-83 49824 Mar-89 1989 *(8) JT8D-219 160,000 22,500,000 22,770,000
Engine 704279 Jan-95 1995 CF6-80C2B6F Basic QEC 5,210,000 5,210,000
--------------------------------------------------------------------------------------
Total $1,079,420,000 $1,079,120,000
======================================================================================
</TABLE>
* Notes: (1) Manufacturer's data shows as a 1986 year of build aircraft.
Clients data indicates 1985 YOB.
(2) Manufacturer's data shows as a 1986 year of build aircraft.
Clients data indicates 1985 YOB.
(3) Manufacturer's data shows as a 1987 year of build aircraft.
Clients data indicates 1986 YOB.
(4) Manufacturer's data shows as a B757-200 NON ER aircraft. Clients
data indicates -200ER.
(5) Manufacturer's data shows as a B767-200 NON ER. Clients data
indicates converted to -200ER.
(6) Although manufacturer's data shows this as a B767-300 NON ER
aircraft, client advises there are funds provided attached as
asset value sufficient for ER capacity.
(7) Manufacturer's data shows as an MD-83 aircraft / 160,000 lb MTOW.
Clients data indicates MD-82.
(8) Manufacturer's data shows as a 1988 year of build aircraft.
Clients data indicates 1989 YOB.
<PAGE> 5
[AISI LOGO]
05 October 1998
AISI File No. A8S058BVO
Page -4-
Unless otherwise agreed by Aircraft Information Services, Inc. (AISI) in
writing, this report shall be for the sole use of the client/addressee. This
report is offered as a fair and unbiased assessment of the subject aircraft or
equipment. AISI has no past, present, or anticipated future interest in the
subject aircraft or equipment. The conclusions and opinions expressed in this
report are based on published information, information provided by others,
reasonable interpretations and calculations thereof and are given in good faith.
Such conclusions and opinions are judgments that reflect conditions and values
which are current at the time of this report. The values and conditions reported
upon are subject to any subsequent change. AISI shall not be liable to any party
for damages arising out of reliance or alleged reliance on this report, or for
any parties action or failure to act as a result of reliance or alleged reliance
on this report.
Sincerely,
AIRCRAFT INFORMATION SERVICES, INC.
/s/ John McNicol
- -----------------------
John McNicol
Vice President
Appraisals & Forecasts
<PAGE> 1
Exhibit 99.2
BK Associates, Inc.
1295 Northern Boulevard
Manhasset, New York 11030
(516) 365-6272 o Fax (516) 365-6287
October 28, 1998
Mr. Kieran O'Keefe
Cabot Aircraft Services, Limited
Regus House
Harcourt Centre, Harcourt Road
Dublin 2, Ireland
Dear Kieran:
In response to your request, BK Associates, Inc. is pleased to provide our
updated opinion of the half-time Base Values as of September 30, 1998 of 32
aircraft and one spare engine in the MSAF Group Portfolio. The Aircraft are
identified in the attached table along with our opinion of their base values. We
previously provided our opinion of these aircraft values in our report dated
December 1997.
According to the International Society of Transport Aircraft Trading's
(ISTAT) definition of Base Value, to which BK Associates subscribes, the base
value is the Appraiser's opinion of the underlying economic value of an aircraft
in an open, unrestricted, stable market environment with a reasonable balance of
supply and demand, and assumes full consideration of its "highest and best use".
An aircraft's base value is founded in the historical trend of values and in the
projection of future value trends and presumes an arm's length, cash
transaction between willing, able and knowledgeable parties, acting prudently,
with an absence of duress and with a reasonable period of time available for
marketing.
As the definition implies, Base Values are based on long term trends and
historic value trends that are largely a function of aircraft age, performance
features and the original price. They are not affected by current market
conditions. Thus, as might be expected, the values given in the attached table
are similar to those given in the December 1997 appraisal. The values are
generally slightly lower in recognition of the passage of time and further aging
of the aircraft.
BK Associates, Inc. has no present or contemplated future interest in the
Aircraft, nor any interest that would preclude our making a fair and unbiased
estimate. This appraisal represents the opinion of BK Associates, Inc. and
reflects our best judgment based on the information available to us at the time
of preparation and the time and budget constraints
<PAGE> 2
BK Associates, Inc.
Mr. Kieran O'Keefe
October 28, 1998
Page 2
imposed by the client. It is not given as a recommendation, or as an inducement,
for any financial transaction and further, BK Associates, Inc. assumes no
responsibility or legal liability for any action taken or not taken by the
addressee, or any other party, with regard to the appraised equipment. By
accepting this appraisal, the addressee agrees that BK Associates, Inc. shall
bear no such responsibility or legal liability. This appraisal is prepared for
the use of the addressee and shall not be provided to other parties without the
express consent of the addressee.
Sincerely yours,
BK ASSOCIATES, INC.
/s/ John F. Keitz
John F. Keitz
President
JFK/kf ISTAT Certified Senior Appraiser
Attachment
<PAGE> 3
MSAF Group PORTFOLIO SEPT. 30, 1998
<TABLE>
<CAPTION>
HALF-TIME
ACFT SERIAL MFG. ENGINE BASE VALUE
# TYPE NUMBER YEAR MODEL $ MIL
- -- ---------- ------ ---- --------- ----------
<S> <C> <C> <C> <C> <C>
1 MD83 49822 1988 JT8D-219 20.35
2 B737-3S3QC 23788 1987 CFM56-3C1 20.65
3 B737-4Q8 25371 1992 CFM56-3C1 27.90
4 SPARE 704279 1995 CF6-80C2 5.90
5 B737-3K2 27635 1995 CFM56-3C1 30.45
6 B737-382 25161 1992 CFM56-3B2 27.10
7 B737-548 25165 1993 CFM56-3B1 20.50
8 A310-300 409 1985 JT9D-7R4 28.70
9 A310-300 410 1985 JT9D-7R4 28.70
10 B767-204ER 23807 1987 CF6-80A 33.55
11 A320-200 393 1993 V2500-A1 30.50
12 A320-200 279 1992 CFM56-5A3 31.75
13 B767-39HER 26256 1993 CF6-80C2 66.00
14 A320-200 414 1993 V2500-A1 30.50
15 B737-4Q8 25104 1993 CFM56-3C1 29.10
16 MD83 49824 1989 JT8D-219 21.65
17 MD82 49825 1989 JT8D-217C 19.35
18 F70 11564 1995 TAY 620-15 17.85
19 F70 11565 1996 TAY 620-15 19.20
20 F70 11569 1996 TAY 620-15 19.20
21 B757-28AER 24367 1989 RB211-535E4 35.5O
22 A321-100 597 1996 V2530-A5 48.50
23 B767-38E 24798 1990 CF6-80C2 54.20
24 A300-600R 555 1990 PW4158 49.85
25 B737-3Q8 26295 1993 CFM56-3C1 28.60
26 A310-322 437 1987 JT9D-7R4 34.70
27 B747-341B 24106 1988 CF6-80C2 63.50
28 B737-3Q8 24299 1988 CFM56-3B2 20.95
29 B757-2Q8ER 26272 1994 PW2037 45.80
30 B737-4Q8 24234 1988 CFM56-3B2 21.90
31 B767-3X2ER 26260 1994 CF6-80C2 67.20
32 B757-28AER 24260 1988 RB211-535E4 33.45
33 B737-353F 23811 1987 CFM56-3B2 20.80
--------
TOTAL 1,033.50
========
</TABLE>
<PAGE> 1
Exhibit 99.3
[AIRCLAIMS LOGO]
Our Ref: 98521/CPS
Cabot Aircraft Services Limited, 8th October 1998
Regus House,
Harcourt Centre,
Harcourt Road,
Dublin 2,
Ireland
Attention: Mr Kieran O'Keefe
Dear Sirs,
BASE VALUATION OF MSAF PORTFOLIO
AS AT 30TH SEPTEMBER, 1998
Further to the instructions of your goodselves on 5th October 1998, we are
pleased to be able to provide our opinion of the adjusted 'Base Value' of each
aircraft and the spare engine in the Morgan Stanley Aircraft Finance (MSAF)
portfolio. The point of valuation is 30th September, 1998.
Airclaims' valuation of the portfolio takes into account data supplied by
Morgan Stanley, regarding the specification of the subject aircraft.
Information was also been provided in many cases concerning the airframe and
engine maintenance status of the subject aircraft at various points during 1997.
In order to make adjustments for the maintenance status as at 30th September
1998, we have estimated the utilisation of the aircraft up to that date (based
on the actual hours/cycles flown to mid 98 in most cases). We have also assumed
that the aircraft are following the same maintenance program as advised in 1997
and that the installed engines are the same. On the bases, we have made
adjustments.
We have additionally referred to the data held in the Airclaims CASE Aviation
Database to supplement and complete the data required for the valuation, and
have assumed that, unless otherwise advised, each aircraft is a typical example
of its type, model and age, and is generally in good condition, with all
airworthiness directives and significant service bulletins complied with.
[LOGOS] Airclaims Limited
Cardinal Point, Newall Road, Heathrow Airport, London TW6 2AS
Telephone (44) 181 897 1006 Facsimile (44) 181 897 0300 Telex 934679
http://www.airclaims.co.uk
Registered Head Office as above. Registered in England No. 710284.
VAT Reg. No. 224 1906 87
<PAGE> 2
[AIRCLAIMS LOGO]
VALUATION
As requested, we have provided our value opinion under Base Value scenario.
Airclaims believes it to be very important that value definitions are understood
by all parties and that such values are always considered in conjunction with
their definitions.
BASE VALUE
The Base Values presented in the attached table are based on the definitions as
outlined by the International Society of Transport Aircraft Trading (ISTAT).
ISTAT's definition of Base Value equates in principle to the previously used
appraisal term, Fair Market Value.
The ISTAT definition is as follows:
A Base Value is the Appraiser's opinion of the underlying economic value of an
aircraft in an open, unrestricted, stable market environment with a reasonable
balance of supply and demand, and assumes full consideration of its "highest and
best use". An aircraft's Base Value is founded in the historical trend of values
and in the projection of value trends and presumes an arm's length, cash
transaction between willing, able and knowledgeable parties, acting prudently,
with an absence of duress and with a reasonable period of time available for
marketing.
In most cases, the Base Value of an aircraft assumes its physical condition is
average for an aircraft of its type and age, and its maintenance time status is
at mid-life, mid-time (or benefiting from an above average maintenance status if
it is new or nearly new, as the case may be). In this instance, because of the
relative youth of the portfolio, all the Base Values pertaining to the fleet
have been adjusted for maintenance status where available and appropriate.
No physical inspection of the subject aircraft has been undertaken by Airclaims
in conjunction with this assignment, and no attempt made to verify the
information available to us, which is therefore assumed to be correct as given.
Abbreviations used on the tabulated valuation page includes:
Type Aircraft type, model and variant
MSN Manufacturer's Serial Number
REGN Registration
MTOW Maximum Take-Off Weight
DoM Date of Manufacture
ADJ BV Adjusted Base Value
BV (HL) Half Life Base Value
- --------------------------------------------------------------------------------
98521/CPS Cabot Aircraft Services Limited
08/10/1998 Page 2
<PAGE> 3
[AIRCLAIMS LOGO]
Whilst the tabulated values are given as single figures, it must be borne in
mind that the determination of such values involves a multiplicity of
variables, and that some variation in perceived values must be expected, due to
for example, any potential inaccuracies in the data provided, and also because
the aircraft have been valued 'sight unseen'. In this case we consider that a
tolerance of +/-4% may reasonably apply to the aforementioned calculated values.
Please note that valuations given by Airclaims are valid only as at the date of
issue. Subsequent to that date there may be alterations in the world aviation
market, or in the status and physical condition of the subject aircraft or
other general factors that may affect Airclaims' valuation opinion.
I trust the foregoing is satisfactory and to your requirements.
Yours faithfully,
/s/ Chris Seymour
- ---------------------------
CHRIS SEYMOUR
Senior Analyst
Encl.
- --------------------------------------------------------------------------------
98521/CPS Cabot Aircraft Services Limited
08/10/1998 Page 3
<PAGE> 4
[LOGO]
CONFIDENTIAL
MSAF PORTFOLIO -- BASE VALUATION AS AT 30 SEP 1998
<TABLE>
<CAPTION>
ENGINES MTOW TOTAL TOTAL TOTAL
NO TYPE VAR. MSN REG'N TYPE & VAR (LB) SEATS DoN* HRS CYC AS AT...
- -- ---- ---- --- ----- ------- --- ---- ----- ---- ----- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 MD-80 83 49822 F-GHEB PW JTBD 219 160,000 159 Dec.88 20,604 12,278 31-Jul-98
2 B737 300QC 23788 F-GIXH CFM56 3C1 139,500 126 May-87 25,452 14,942 30-Jun-98
3 B737 400 25371 SX-BKK CFM56 3C1 150,000 159 Jan-92 16,861 8,023 30-Jun-98
4 ENGINE + QEC 704279 -- GE CF6 80C2B6F -- -- 1995
5 B737 300 27635 PH-TSZ CFM56 3C1 139,000 149 May-95 12,338 4,499 30-Jun-98
6 B737 300 25161 CS-TIK CFM56 3B2 138,500 132 Feb-92 18,431 10,631 30-Jun-98
7 B737 500 25165 SE-DUT CFM56 3B1 121,500 117 Apr-93 12,685 11,780 30-Jun-98
8 A310 300 409 HB-IPH PW JT9D 7R4E1 330,750 175 Nov-85 39,244 14,446 31-Jul-98
9 A310 300 410 HB-IPI PW JT9D 7R4E1 330,750 175 Nov-85 40,030 14,489 31-Jul-98
10 B767 200 23897 VH-RMO GE CF6 80A2 345,000 290 Aug-87 38,287 16,282 30-Jun-98
11 A320 200 393 G-CVYD IAE V2500 A1 166,447 156 Feb-93 12,790 5,308 31-Jul-98
12 A320 200 279 G-MONY CFM56 5A3 169,756 160 Feb-92 25,283 9,562 31-Jul-98
13 B767 300ER 26256 G-UKLH GE CF6 80C2B6F 407,000 327 Apr-93 28,650 4,158 30-Jun-98
14 A320 200 414 EI-TLR IAE V2600 A1 166,447 156 Mar-93 11,198 6,276 31-Jul-98
15 B737 400 25104 N771AS CFM56 3C1 143,500 140 Nay-93 18,030 10,784 30-Jun-98
16 MD-80 83 49824 N9420D PW JT8D 219 160,000 130 Mar-89 24,677 18,118 31-Jul-98
17 MD-80 82 49825 N940AS PW JT8D 219 149,500 135 Mar-89 28,683 17,913 31-Jul-98
18 F-70 11564 HA-LMA RR TAY620 15 81,000 75 Dec-95 4,158 2,976 31-Dec-97
19 F-70 11565 HA-LMB RR TAY620 15 81,000 75 Feb-96 4,159 2,927 31-Dec-97
20 F-70 11569 HA-LMC RR TAY620 15 81,000 75 Mat-96 4,051 2,833 31-Dec-97
21 B767 200 24367 N701LF RR RB211 535E4-37 250,000 179 Feb-89 33,861 8,993 30-Jun-98
22 A321 100 597 TC-ON IAE V2530 A5 183,000 220 May-96 6,898 2,622 31-Jul-98
23 B767 300(ER) 24798 HL7264 GE CF6 80C2B6F 345,000 249 Oct-90 22,194 13,592 30-Jun-98
24 A300 600R 555 N888BP PW40DD 4158 378,530 324 Mar-90 19,290 6,078 31-Jul-98
25 B737 300 26295 B-2937 CFM56 3C1 135,000 148 Dec-93 11,836 8,182 30-Jun-98
26 A310 300 437 PP-PSD PW JT9D 7R4E1 337,300 181 Feb-87 46,294 9,494 31-Jul-98
27 B747 300 24106 PP-VOA GE CF6 80C2 833,000 395 Apr-88 45,718 8,745 30-Jun-98
28 B737 300 24299 PP-SFM CFM56 3B2 137,000 138 Nov-88 26,754 14,416 30-Jun-98
29 B757 200 26272 N805AM PW2000 2037 230,000 180 Mar-94 14,294 6,152 30-Jun-98
30 B737 400 24234 XA-TKM CGM56 3B2 143,500 170 Oct-88 25,903 11,603 30-Jun-98
31 B767 300ER 26260 DQ-FJC GE CF6 80G2B6F 407,000 263 Sep-94 16,134 3,388 30-Jun-98
32 B757 200 24260 N757GA RR RB211 535E4 250,000 202 Dec-88 34,044 8,332 30-Jun-98
33 B737 300F 23811 TF-FIE CFM56 3B2 138,500 FRT Sep-87 26,538 14,214 30-Jun-98
</TABLE>
<TABLE>
<CAPTION>
LESSEE/ LESSSEE 30-Sep-98 30-Sep-98 MAINT
NO OPERATOR COUNTRY ADJ.BV BV (HL) ADJ.
- -- -------- ------- --------- --------- ------
<S> <C> <C> <C> <C> <C>
1 AIR LIBERTE FRANCE $16.84m $17.00m -$0.16
2 AEROPOSTALE FRANCE $21,20m $21.17m $0.03
3 OLYMPIC GREECE $25,65m $25.93m -$0.28
4 KLM HOLLAND $ 5.67m $ 5.65m $0.02
5 TRANSAVIA HOLLAND $29.04m $28.87m $0.17
6 TAP AIR PORTUGAL PORTUGAL $23.89m $24.30m -$0.41
7 BRAATHENS SVERIGE SWEDEN $22.09m $22.38m -$0.29
8 FLIGHTLEASE/SWISSAIR SWITZERLAND $23.84m $24.25m -$0.40
9 FLIGHTLEASE/SWISSAIR SWITZERLAND $24.14m $24.25m -$0.18
10 BRITANNIA/ANSETT UK $32.42m $31.98m $0.44
11 CALEDONIAN UK $31,45m $30.85m $0.60
12 MONARCH UK $29.49m $29.57m -$0.08
13 UNIJET/LEISURE INT'L UK $62.94m $62.89m $0.06
14 TRANSAER IRELAND $32.03m $31.44m $0.60
15 ALASKA USA $27.05m $27.05m -$0.03
16 TWA USA $16.85m $16.80m $0.05
17 TWA USA $15.34m $16.18m -$0.83
18 MALEV HUNGARY $14.38m $14.25m $0.13
19 MALEV HUNGARY $13.57m $13.45m $0.12
20 MAKEV HUNGARY $13.90m $13.75m $0.15
21 TRANSAERO RUSSIA $31.09m $31.17m -$0.08
22 ONUR AIR TURKEY $38.42m $38.28m $0.14
23 ASIANA S KOREA $51.51m $51.84m -$0.33
24 CHINA AIRLINES TAIWAN $47.53m $46.88m $0.85
25 CHINA HAINAN PR CHINA $25.97m $26.43m -$0.46
26 PASSAREDO BRAZIL $26.52m $25.44m $1.09
27 VARIG BRAZIL $58.78m $59.10m -$0.32
28 VASP BRAZIL $21.43m $20.48m $0.95
29 AEROMEXICO MEXICO $35.24m $35,49m -$0.25
30 TAESA MEXICO $21.42m $21.51m -$0.09
31 AIR PACIFIC FIJI $64.15m $64.62m -$0.47
32 GUYANAN AIRWAYS GUYANA $31.30m $31.12m $0.18
33 ICELANDAIR ICELAND $21.20m $20.55m $0.65
-------- -------- ------
$956.34m $954.68m $1.67m
======== ======== ======
</TABLE>
Note *Date of Manufacture as per ILCF data
TO BE READ IN CONJUNCTION WITH EXPLANATORY NOTES
Airclaims/96521 08/10/1998 Morgan Stanley Aircraft Finance
