<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 333-56575
------------------------------------
MORGAN STANLEY AIRCRAFT FINANCE
Exact Name of Registrant as specified in trust agreement
<TABLE>
<S> <C>
DELAWARE 13-3375162
(State or other jurisdiction I.R.S. Employer
of incorporation or organization) Identification Number
</TABLE>
C/O WILMINGTON TRUST COMPANY
1100 NORTH MARKET STREET,
RODNEY SQUARE NORTH
WILMINGTON, DELAWARE
19890-0001
(302-651-1000)
(Address and telephone number, including area code, of
Registrant's principal executive office)
------------------------------------
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 [ ]
------------------------------------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
OUTSTANDING AT
ISSUER CLASS JUNE 30, 2000
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Morgan Stanley Aircraft Finance............................ Beneficial Interest One
-------------------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
MORGAN STANLEY AIRCRAFT FINANCE
FORM 10-Q FOR THE QUARTER ENDED MAY 31, 2000
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION............................... 2
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).................... 2
-- Interim Condensed Consolidated Financial Statements
(Unaudited)............................................ 2
-- Notes to the Interim Condensed Consolidated Financial
Statements (Unaudited)................................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................. 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK......................................... 23
PART II. OTHER INFORMATION.................................. 25
ITEM 1. NOT APPLICABLE
ITEM 2. NOT APPLICABLE
ITEM 3. NOT APPLICABLE
ITEM 4. NOT APPLICABLE
ITEM 5. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................... 25
SIGNATURES.................................................. 26
INDEX TO EXHIBITS........................................... 27
APPENDIX I. CASH ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...................... 28
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 31, NOV 30,
2000 1999
----------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 60,739 $ 35,119
Receivables:
Lease income, net......................................... 3,353 1,908
Investment income and other............................... 302 161
Aircraft under operating leases, net........................ 1,893,619 886,051
Investment in capital lease, net............................ -- 18,300
Underwriting and other issuance related costs, net of
amortization.............................................. 25,435 15,935
---------- ----------
Total Assets................................................ $1,983,448 $ 957,474
========== ==========
LIABILITIES AND BENEFICIAL INTERESTHOLDER'S EQUITY / (DEFICIT)
Payables:
Interest payable to Noteholders........................... $ 5,836 $ 2,481
Deferred rental income...................................... 14,265 5,318
Liability for maintenance................................... 114,883 57,437
Other liabilities........................................... 25,617 11,376
Notes payable:
Subclass A-1.............................................. -- 400,000
Subclass A-2.............................................. 223,428 234,533
Subclass A-3.............................................. 580,000 --
Subclass A-4.............................................. 200,000 --
Subclass A-5.............................................. 387,486 --
Subclass B-1.............................................. 88,583 91,023
Subclass B-2.............................................. 75,000 --
Subclass C-1.............................................. 99,780 99,987
Subclass C-2.............................................. 55,000 --
Subclass D-1.............................................. 110,000 110,000
---------- ----------
1,979,878 1,012,155
---------- ----------
Commitments and contingencies
Beneficial Interestholder's Equity / (Deficit):
Beneficial Interest....................................... 1 1
Deemed Contribution / (Distribution)...................... 62,706 (15,305)
Accumulated Deficit....................................... (59,137) (39,377)
---------- ----------
Total Beneficial Interestholder's Equity / (Deficit)...... 3,570 (54,681)
---------- ----------
Total Liabilities and Beneficial Interestholder's
Equity/(Deficit).......................................... $1,983,448 $ 957,474
========== ==========
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
2
<PAGE> 4
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MAY 31, MAY 31,
------------------- ------------------
2000 1999 2000 1999
-------- -------- -------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Lease income, net.................................. $52,567 $32,045 $ 78,283 $59,133
Investment income on collection account............ 973 450 1,512 881
------- ------- -------- -------
Total revenues..................................... 53,540 32,495 79,795 60,014
------- ------- -------- -------
Expenses:
Interest expense................................... 30,873 16,046 46,118 32,395
Depreciation expense............................... 22,961 11,765 34,726 23,530
Operating expenses:
Service provider and other fees................. 5,572 2,244 7,254 4,291
Maintenance and other aircraft related costs.... 4,028 1,926 11,457 2,998
------- ------- -------- -------
Total expenses..................................... 63,434 31,981 99,555 63,214
------- ------- -------- -------
Net (loss) / income.................................. $(9,894) $ 514 $(19,760) $(3,200)
======= ======= ======== =======
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
3
<PAGE> 5
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
MAY 31, 2000 MAY 31, 1999
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net loss.................................................. $ (19,760) $ (3,200)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation expense -- aircraft under operating leases... 34,726 23,530
Amortization of underwriting and other issuance related
costs.................................................. 2,951 559
Provision for doubtful accounts........................... 1,113 6,021
Changes in assets and liabilities:
Receivables:
Investment income and other.......................... (141) 10
Lease income......................................... (282) (2,564)
Investment in capital lease............................ (58) (365)
Liability for maintenance.............................. 5,716 3,158
Interest payable to Noteholders........................ 3,355 (214)
Deferred rental income................................. 309 (2,070)
Other liabilities...................................... 3,200 (2,417)
---------- --------
Net cash provided by operating activities................... 31,129 22,448
---------- --------
Cash flows from investing activities
Purchase of net assets from MS Financing Inc., net of cash
acquired............................................... (876,793) --
---------- --------
Net cash used for investing activities...................... (876,793) --
---------- --------
Cash flows from financing activities
Proceeds from issuance of notes payable, net of issuance
costs.................................................. 1,297,550 --
Repayment of Subclass A-1 notes........................... (400,000) --
Repayments of notes payable............................... (26,266) (19,883)
---------- --------
Net cash provided by/(used for) financing activities........ 871,284 (19,883)
---------- --------
Net increase in cash and cash equivalents................... 25,620 2,565
Cash and cash equivalents at beginning of period............ 35,119 34,850
---------- --------
Cash and cash equivalents at end of period.................. $ 60,739 $ 37,415
========== ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
In connection with the acquisition of certain net assets from MS Financing
Inc., MSAF Group received a capital contribution of $78.0 million (see Note 12).
See Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
4
<PAGE> 6
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
BENEFICIAL INTERESTHOLDER'S EQUITY / (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
BENEFICIAL
BENEFICIAL DEEMED ACCUMULATED INTEREST
INTEREST DISTRIBUTION DEFICIT (DEFICIT)
---------- ------------ ----------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance at November 30, 1998................ $ 1 $(15,305) $(31,445) $(46,749)
Net loss.................................... -- -- (3,200) (3,200)
-------- -------- -------- --------
Balance at May 31, 1999..................... $ 1 $(15,305) $(34,645) $(49,949)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
TOTAL
DEEMED BENEFICIAL
BENEFICIAL DISTRIBUTION/ ACCUMULATED INTEREST
INTEREST CONTRIBUTION DEFICIT (DEFICIT)
---------- ------------- ----------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance at November 30, 1999................ $ 1 $(15,305) $(39,377) $(54,681)
Net loss.................................... -- -- (19,760) (19,760)
Capital Contribution from MS Financing
Inc....................................... -- 78,011 -- 78,011
-------- -------- -------- --------
Balance at May 31, 2000..................... $ 1 $ 62,706 $(59,137) $ 3,570
======== ======== ======== ========
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
5
<PAGE> 7
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
Morgan Stanley Aircraft Finance ("MSAF") is a special purpose 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. At May 31,
2000, all of the beneficial interest of MSAF Group was owned by MSDW Aircraft
Holdings ("MSDWAH"), a wholly-owned subsidiary of MS Financing Inc. ("MSF"). MSF
is 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, MSDWAH, MSF or any person other than
MSAF Group.
The interim condensed 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 interim condensed consolidated financial
statements are prudent and reasonable. Actual results could differ materially
from these estimates.
All material intercompany transactions have been eliminated.
The interim condensed consolidated financial statements should be read in
conjunction with MSAF Group's consolidated financial statements and notes
thereto as of and for the fiscal year ended November 30, 1999. The interim
condensed consolidated financial statements reflect all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for the fair statement of the results for the interim period. The
results of operations for interim periods are not necessarily indicative of
results for the entire year.
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. As issued,
SFAS No. 133 was effective for fiscal years beginning after June 15, 1999. In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of FASB Statement No.
133". SFAS No. 137 deferred the effective date of SFAS No. 133 for one year to
fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities -- an amendment of FASB Statement No. 133". MSAF Group is in the
process of evaluating the impact of adopting SFAS No. 133, as amended by SFAS
No. 138.
NOTE 2 -- 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 May 31, 2000 MSAF
Group had leased 59 aircraft and one engine to 41 lessees in 25 countries.
Certain 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 May 31, 2000, 17 of MSAF Group's aircraft
were leased to lessees domiciled in certain emerging market nations, including
those located in Eastern Europe, the Middle East, Latin America and Asia. The
exposure of MSAF Group's aircraft to particular
6
<PAGE> 8
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --
(CONTINUED)
countries and customers is managed partly through concentration limits and
partly through obtaining security from lessees by way of deposits.
NOTE 3 -- AIRCRAFT
<TABLE>
<CAPTION>
MAY 31, 2000 NOV 30, 1999
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Stage 3 Aircraft and one engine:
Cost........................................................ $2,014,324 $972,030
Less: Accumulated depreciation.............................. (120,705) (85,979)
---------- --------
$1,893,619 $886,051
========== ========
</TABLE>
During the three month period ended May 31, 2000, MSAF Group acquired a
portfolio of 29 commercial aircraft from MSF (see Note 12). In addition, during
the three month period ended May 31, 2000, an aircraft that was previously
subject to a sales-type capital lease was repossessed and the related lease was
terminated (see Note 4). This aircraft has been included as a component of
aircraft cost as of the date of repossession.
<TABLE>
<CAPTION>
MAY 31, 2000 NOV 30, 1999
------------- ------------
<S> <C> <C>
FLEET ANALYSIS:
On lease for a further period of:
More than five years........................................ 8 9
From one to five years...................................... 41 20
Less than one year.......................................... 11 3
---------- --------
Total aircraft portfolio (including one engine) on lease.... 60 32
========== ========
</TABLE>
At May 31, 2000 there were three non-revenue earning aircraft in MSAF
Group's portfolio. One of these was subject to a lease agreement and two were
subject to non-binding letters of intent for lease. At November 30, 1999 there
was one non-revenue earning aircraft in MSAF Group's portfolio.
NOTE 4 -- INVESTMENT IN CAPITAL LEASE
<TABLE>
<CAPTION>
MAY 31, 2000 NOV 30, 1999
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Minimum lease payments receivable........................... $ -- $ 28,733
Less: Unearned income....................................... -- (10,433)
---------- --------
Net investment in capital lease............................. $ -- $ 18,300
========== ========
</TABLE>
The lessee associated with this capital lease had been experiencing severe
financial difficulties during fiscal 1999, due to the economic uncertainty in
Latin America and the devaluation of the Brazilian currency in January 1999. In
August 1999, MSAF Group and the lessee agreed to modify the terms of the capital
lease by increasing the total rental payments to be received and by extending
the lease term.
The lessee's financial difficulties continued in fiscal 2000. As a result,
in April 2000, International Lease Finance Corporation ("ILFC"), the servicer of
MSAF Group's aircraft portfolio, repossessed the aircraft from the lessee and
terminated the capital lease contract. Accordingly, MSAF Group's net investment
in the capital lease as of the date of termination of $17.0 million has been
reclassified to "Aircraft under operating leases, net" (see Note 3).
7
<PAGE> 9
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --
(CONTINUED)
NOTE 5 -- LEASE INCOME RECEIVABLE
Lease income receivable was as follows:
<TABLE>
<CAPTION>
MAY 31, 2000 NOV 30, 1999
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Lease income receivable..................................... $ 4,685 $ 2,271
Less: Allowance for doubtful accounts....................... (1,332) (363)
---------- --------
Lease income receivable, net................................ $ 3,353 $ 1,908
========== ========
</TABLE>
Activity in the allowance for doubtful accounts was as follows:
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
MAY 31, 2000 MAY 31, 1999
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance, beginning of period................................ $ 363 $ 553
Provision for doubtful accounts............................. 1,113 3,134
Amounts written-off......................................... (144) --
---------- --------
Balance, end of period...................................... $ 1,332 $ 3,687
========== ========
</TABLE>
NOTE 6 -- LIABILITY FOR MAINTENANCE
Activity in the liability for maintenance account was as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
MAY 31, 2000 FISCAL 1999
------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance, beginning of period................................ $ 57,437 $ 52,489
Liabilities assumed from MSF................................ 51,730 --
Collections from lessees.................................... 8,725 17,709
Reimbursements to lessees................................... (8,109) (11,872)
Net accruals and transfers.................................. 5,100 (889)
-------- --------
Balance, end of period...................................... $114,883 $ 57,437
======== ========
</TABLE>
NOTE 7 -- NOTES PAYABLE
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. During fiscal 1999, MSAF Group 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. With the exception of MSAF
Group, the Notes are not obligations of, or guaranteed by, MSDW or any of its
subsidiaries, including MSDWAH and MSF.
On March 15, 2000, MSAF Group completed an offering of $1,310 million of
securitized notes (the "New Notes") on a basis exempt from registration under
the Securities Act of 1933, as amended. MSAF Group used the net proceeds from
the New Notes to finance in part the purchase of the 29 commercial aircraft from
MSF, to fund an increase of $5 million in cash and cash equivalents used for
liquidity purposes (see "Financial Resources and Liquidity -- Liquidity Reserve
Amount") and to redeem all $400 million of its Subclass A-1 notes. The New Notes
rank equally in right of payment of principal and interest with the
8
<PAGE> 10
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
corresponding subclasses of MSAF Group's existing Notes. With the exception of
MSAF Group, the New Notes are not obligations of, or guaranteed by, MSDW or any
of its subsidiaries, including MSDWAH and MSF.
MSAF Group is obligated to use its best efforts to consummate an exchange
offer (the "Exchange Offer") pursuant to which the New Notes would be exchanged
for substantially similar securities issued pursuant to an effective
registration statement under the Securities Act of 1933. If the Exchange Offer
is not consummated or a registration statement is not declared effective on or
prior to December 10, 2000, thereafter an additional incremental interest amount
will accrue on each subclass of the New Notes, at an annual rate of 0.50%. Such
additional incremental interest will be payable until the date that the Exchange
Offer is consummated or until such time as MSAF Group causes a shelf
registration statement with respect to resales of the New Notes to become
effective.
Underwriting and financing costs which were incurred in connection with the
issuance of the Notes and the New Notes are being amortized over the expected
life of the borrowing to which they relate.
The repayment terms of each subclass of the Notes and the New 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 refinancing 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 and the New Notes are listed below:
<TABLE>
<CAPTION>
INITIAL
PRINCIPAL
AMOUNT EXPECTED FINAL FINAL MATURITY
SUBCLASS (IN THOUSANDS) INTEREST RATE PAYMENT DATE DATE
-------- -------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C>
Subclass A-2.......... $340,000 LIBOR + 0.35% Sept. 15, 2005 March 15, 2023
Subclass A-3.......... 580,000 LIBOR + 0.52% March 15, 2002 March 15, 2025
Subclass A-4.......... 200,000 LIBOR + 0.54% March 15, 2003 March 15, 2025
Subclass A-5.......... 400,000 LIBOR + 0.58% June 15, 2008 March 15, 2025
Subclass B-1.......... 100,000 LIBOR + 0.65% March 15, 2013 March 15, 2023
Subclass B-2.......... 75,000 LIBOR + 1.05% March 15, 2007 March 15, 2025
Subclass C-1.......... 100,000 6.90% March 15, 2013 March 15, 2023
Subclass C-2.......... 55,000 9.60% October 15, 2016 March 15, 2025
Subclass D-1.......... 110,000 8.70% March 15, 2014 March 15, 2023
</TABLE>
If the Subclass A-3, A-4 or B-2 notes are not repaid on or before their
respective Expected Final Payment Dates, MSAF Group will pay additional interest
of 1.00% per annum on the Subclass A-3 and A-4 notes and 1.50% per annum on the
Subclass B-2 notes, until such notes are repaid in full.
The dates on which principal repayments on the Notes and the New 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 are available
for distribution and are paid in accordance with the priorities specified in the
Indenture relating to the Notes and the New Notes.
Cash paid for interest on the Notes and the New Notes amounted to $41.7
million for the six month period ended May 31, 2000 as compared to $29.7 million
for the six month period ended May 31, 1999. The interest expense for Fiscal
2000 is not comparable to Fiscal 1999, as the New Notes were not issued until
March 15, 2000.
The estimated fair value of MSAF Group's outstanding notes payable was
$1,787.3 million and $902.9 million at May 31, 2000 and November 30, 1999,
respectively.
9
<PAGE> 11
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
NOTE 8 -- LIQUIDITY FACILITIES
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 and the New
Notes. MSAF Group's primary sources of liquidity are cash bank deposits and
letters of credit.
MSAF Group's cash account (the "Collection Account") is primarily funded
through the receipt of rental payments from lessees.
MSAF Group has entered into two credit agreements. Under a Custody and Loan
Agreement (the "ILFC Facility") between ILFC and MSAF Group, 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 $20 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 $30 million.
As of May 31, 2000, the aggregate amount available under the ILFC Facility
and the MSDW Facility was approximately $76.6 million.
NOTE 9 -- DERIVATIVE FINANCIAL INSTRUMENTS
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 leases entered into in the future. In general, an
interest rate exposure with respect to the notes payable arises to the extent
that MSAF Group's fixed and floating interest obligations in respect of the
Notes and the New Notes do not correlate to the mix of fixed and floating rental
payments for different rental periods. This interest rate exposure with respect
to the notes payable can be managed through the use of interest rate swaps and
other derivative instruments. The Subclass A-2, A-3, A-4, A-5, B-1 and B-2 notes
bear floating rates of interest and the Subclass C-1, C-2 and D-1 notes bear
fixed rates of interest. MSAF Group is a party to thirteen interest rate swaps
with Morgan Stanley Capital Services Inc. ("MSCS"), a wholly-owned subsidiary of
MSDW. In eleven of these swaps, MSAF Group pays a fixed monthly coupon and
receives one month LIBOR on a total notional balance of $1,600 million and in
two of these swaps, MSAF Group pays one month LIBOR and receives a fixed monthly
coupon on a total notional balance of $200 million.
Nine of the swaps, having an aggregate notional principal amount of $1,400
million, are accounted for as hedges of the Notes and the New Notes. Under these
swap arrangements, MSAF Group pays fixed and receives 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 hedges, are recognized as adjustments
to 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 May 31, 2000 was
$22.1 million.
The remaining four swaps have an aggregate gross notional principal amount
of $400 million. Under these swap arrangements, MSAF Group pays/receives fixed
and receives/pays floating amounts on a monthly basis. MSAF Group has 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 May 31, 2000,
the fair value of these swaps was $(6.1) million.
10
<PAGE> 12
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --
(CONTINUED)
The change in the fair value of the thirteen interest rate swaps between
February 29, 2000 and May 31, 2000 was due to changes in market interest rates
and payments being made under the swaps when they became due.
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 10 -- 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 the three and
six month period ended May 31, 2000, Cabot Aircraft Services Limited received a
fee for providing these services of $0.3 million and $0.7 million, respectively,
which is calculated as a percentage of the operating lease rentals received.
Morgan Stanley & Co. Incorporated received advisory fees of $0.03 million in the
six month period ended May 31, 2000, and $0.01 million for the three month
period ended May 31, 2000.
Simultaneously with the issuance of the New Notes and the acquisition of
certain net assets from MSF, MSAF Group received a non-cash capital contribution
of $78.0 million from MSF.
In connection with the issuance of the New Notes, MSAF Group paid $5.9
million in subscription discounts and commissions to a subsidiary of MSDW.
MSAF Group's counterparty to its interest rate swap agreements is MSCS, a
wholly-owned subsidiary of MSDW.
In connection with the offering of the New Notes on March 15, 2000, MSF
transferred the beneficial interest of MSAF Group to MSDWAH, a wholly-owned
subsidiary of MSF, and the number of trustees of MSAF Group was increased to
seven.
At May 31, 2000, MSAF Group's management was comprised of seven trustees,
including the Delaware trustee, as MSAF Group has no employees or executive
officers. Four of MSAF Group's seven trustees were employees of MSDW. The three
remaining trustees, including the Delaware trustee, were unaffiliated with MSDW.
NOTE 11 -- COMMITMENTS
MSAF Group did not have any material contractual commitments for capital
expenditures at May 31, 2000.
In accordance with the terms of a second amended and restated 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 contracted and received, in addition to a base fee and certain
incentive-based fees.
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<PAGE> 13
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --
(CONTINUED)
For the initial 32 aircraft and one engine, the Servicing Agreement will
expire on May 26, 2023. For the additional 29 aircraft, the Servicing Agreement
will expire on May 1, 2025. However, each party has the right to terminate the
Servicing Agreement under certain circumstances.
NOTE 12 -- ACQUISITION OF NET ASSETS
During the three month period ended May 31, 2000 MSAF Group acquired a
portfolio of 29 commercial aircraft, as well as certain other assets and
liabilities related to these aircraft, from MSF. The assets and liabilities
acquired have been recorded at MSF's historical book value at the date of
purchase. A summary of the net assets acquired is presented below:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
<S> <C>
Aircraft under operating leases, net of accumulated
depreciation of $30,859................................... $1,025,267
Cash and other assets....................................... 16,701
Deferred rental income...................................... (8,638)
Liability for Maintenance................................... (51,730)
Security Deposits........................................... (7,118)
Interest rate swap contracts (see Note 9)................... (3,922)
----------
Net assets acquired......................................... $ 970,560
==========
</TABLE>
MSAF Group financed the acquisition from the proceeds of the New Notes (see
Note 7) and a capital contribution from MSF.
NOTE 13 -- SUBSEQUENT EVENT
INSURANCE CLAIM
On April 2, 1999, the lease with respect to one B757-200ER with Guyana
Airways was terminated by mutual agreement. Certain of the technical records
were incomplete and/or missing. An insurance claim under MSAF Group's Technical
Records Policy was submitted in respect of the maintenance repairs and services
required to reconstruct the technical records. In June 2000, the insurance claim
was approved and MSAF Group received $3.9 million which will be included in the
interim condensed consolidated statement of operations for the period ending
August 31, 2000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
MSAF is a special purpose business trust that was formed on October 30,
1997 under the laws of Delaware. MSAF Group's 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 and the New 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 and the New 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 and the New Notes will also
depend on the level of its operating expenses, including maintenance obligations
which will increase as the aircraft age, and any unforeseen contingent
liabilities arising.
MSAF Group'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 the
level and volatility of 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 Group'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 MSAF's
indenture, and (iii) the ability of other lessors, who may possess substantially
greater financial resources, to offer leases on more favorable terms than MSAF
Group.
Any statements contained in this management's discussion and analysis of
financial condition and results of operations that are not historical facts, or
that might be considered an opinion or projection, whether expressed or implied,
are meant as, and should be considered, forward-looking statements as that term
is defined in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are based on assumptions and opinions concerning a
variety of known and unknown risks. If any assumptions or opinions prove
incorrect, any forward-looking statements made on that basis may also prove
materially incorrect.
RECENT DEVELOPMENTS
ACQUISITION OF ADDITIONAL AIRCRAFT
During the three month period ended May 31, 2000, MSAF Group acquired a
portfolio of 29 commercial aircraft from MSF. All but one of the 29 aircraft
were delivered on March 15, 2000. The remaining aircraft, a B737-300 on lease to
Lithuanian Airlines, was delivered to MSAF Group on May 1, 2000. The acquisition
was financed by the issuance of additional securitized notes and by a non-cash
capital contribution from MSF.
THE AIRCRAFT
As of May 31, 2000, the total number of aircraft owned by MSAF Group was 61
aircraft plus an engine. As of May 31, 2000, 59 aircraft and the engine were
subject to lease contracts with 41 lessees in 25 countries. As of May 31, 2000,
the aircraft under one of the lease contracts had not been delivered to the
respective lessee, although this aircraft was delivered on June 20, 2000. MSAF
Group's two off-lease aircraft were subject to non-binding letters of intent for
lease.
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<PAGE> 15
LESSEE DIFFICULTIES
As of July 1, 2000, five current lessees were in arrears. The total amount
outstanding and overdue for the five lessees in respect of rental payments,
maintenance reserves and other miscellaneous amounts due under the leases
(excluding restructured arrears not yet due) amounted to $3.1 million. MSAF
Group holds security deposits of $4.9 million against these arrears. The
weighted average number of days past due of such arrears was 39 days.
REGIONAL ANALYSIS OF EXISTING ARREARS
The categorization of countries into geographical regions, Developed
Markets, Emerging Markets and Other is determined using Morgan Stanley Capital
International, Inc. ("MSCI") designations.
EUROPE AND MIDDLE EAST (EMERGING)
One of the five current lessees in arrears, Air Alfa, is based in the
Europe and Middle East (Emerging) region. At July 1, 2000, the total rental and
maintenance arrears owed by this lessee was $0.7 million, against which MSAF
Group holds a security deposit of $0.6 million. In April 2000, ILFC instituted
legal proceedings in Turkey to draw down upon the guarantee and repossess the
aircraft from Air Alfa. Since then, the airline has made certain payments
towards reducing its arrears balance.
EUROPE (DEVELOPED)
One of the five current lessees in arrears, Transaer, is based in the
Europe (Developed) region.
In January 2000, MSAF Group reached an agreement with Transaer to defer
$1.4 million of rental and maintenance obligations. Repayment of the arrears
plus interest is scheduled to be made over a three-month period beginning on
June 1, 2000. At July 1, 2000, $0.7 million of these restructured payments were
due but unpaid. MSAF Group holds security deposits of $1.0 million against
Transaer's arrears.
ASIA (EMERGING)
At July 1, 2000 none of the lessees in this region were in arrears.
PACIFIC (DEVELOPED)
At July 1, 2000 none of the lessees in this region were in arrears.
LATIN AMERICA (EMERGING)
At July 1, 2000 none of the lessees in this region were in arrears.
However, during the three month period ended May 31, 2000, MSAF Group
repossessed two aircraft which were leased in Latin America, both in Brazil.
A former Brazilian lessee, B.R.A., which had been operating one A310-300
subject to a capital lease, defaulted on its obligations under its lease and the
aircraft was repossessed on April 4, 2000. The lease had been scheduled to
expire in July 2007. The total amount of rental payments in arrears at the date
of the repossession was $1.3 million. There was no security deposit held by MSAF
Group to offset against the arrears balance. The aircraft is currently subject
to a non-binding letter of intent and is scheduled to be delivered to a new
lessee based in Singapore in September 2000.
A second former Brazilian lessee, VASP, defaulted on its obligations under
its lease of a B737-300 aircraft and the aircraft was repossessed in May 2000,
following legal proceedings against VASP. The lease was scheduled to expire in
March 2003. The total amount of rental payments in arrears at the date of the
repossession was $0.5 million, against which MSAF Group drew down a security
deposit of $0.7 million. The aircraft is currently subject to a non-binding
letter of intent and is scheduled to be delivered to a new lessee based in
Brazil in July 2000.
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<PAGE> 16
In July 1999, a former Brazilian lessee, VARIG, negotiated early
termination of a B747-300 lease that was scheduled to expire in April 2003. The
total amount of rental payments and maintenance reserves due under this lease
through July 1999, the date of the termination agreement, was $4.8 million,
against which MSAF Group drew down a security deposit of $1.1 million. Under the
provisions of a restructuring agreement, VARIG has agreed to repay arrears of
$4.8 million and approximately $6.0 million for certain maintenance and downtime
costs over the next eight years. Payments to MSAF Group will be made
semi-annually beginning October 15, 1999 with final payment due on October 15,
2007. As of July 1, 2000 VARIG had made all payments due under the restructuring
agreement.
NORTH AMERICA (DEVELOPED)
One of the five current lessees in arrears, TWA, is based in the North
America (Developed) region. At July 1, 2000, the total rental and maintenance
arrears owed by this lessee was $1.1 million, against which MSAF Group holds a
security deposit of $2.0 million.
OTHER
Two of the five current lessees in arrears are based in the Other region.
At July 1, 2000, the total rental and maintenance arrears owed by Iceland
Air was $0.5 million, against which MSAF Group holds a security deposit of $0.6
million.
At July 1, 2000, the total rental and maintenance arrears owed by
Lithuanian Airlines was $0.1 million, against which MSAF Group holds a security
deposit of $0.7 million.
AIRWORTHINESS DIRECTIVE
On May 25, 2000, the U.S. Federal Aviation Administration issued an
Airworthiness Directive relating to fire safety standards in certain types of
aircraft. The Airworthiness Directive, which applies to MSAF Group's one MD-82
and four MD-83 aircraft, requires operators of those aircraft to replace fire
insulation blankets covered with metalized Mylar. Under the leases of the
affected aircraft, all costs of compliance with Airworthiness Directives are the
obligation of the lessees.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MAY 31, 2000,
AND THE THREE MONTHS ENDED MAY 31, 1999
MSAF Group's results of operations for the three months ended May 31, 2000
and the three months ended May 31, 1999 are discussed below. The results are not
directly comparable due to MSAF Group's acquisition of a portfolio of 29
commercial aircraft from MSF.
NET (LOSS)/INCOME
For the three month period ended May 31, 2000, MSAF Group incurred a net
loss of ($9.9) million, as compared to net income of $0.5 million for the three
month period ended May 31, 1999. The decrease primarily reflects higher
interest, depreciation and operating expenses, partially offset by an increase
in rental revenues.
MSAF is a Delaware business trust treated as a branch of MSF for U.S.
federal, state and local income tax purposes. Accordingly, MSAF is not subject
to U.S. federal, state and local income taxes.
LEASE INCOME
Lease income for the three month period ended May 31, 2000 amounted to
$52.6 million as compared to $32.0 million for the three month period ended May
31, 1999. The increase in lease income is primarily due to MSAF Group's
acquisition of 29 commercial aircraft, partially offset by a reduction in lease
revenue associated with aircraft on ground.
15
<PAGE> 17
MSAF Group's operating results for the three month period ended May 31,
2000 included provisions for doubtful accounts totaling $0.2 million. Such
provisions were recorded by MSAF Group due to financial difficulties experienced
by certain of MSAF Group's current lessees, as well as to reserve against
amounts owed to MSAF Group by certain of its former lessees whose aircraft have
already been repossessed (see "Lessee Difficulties"). Provisions for doubtful
accounts were $3.0 million in the three month period ended May 31, 1999. Lease
income may decline in future periods due to potential lessee defaults and
arrears including those discussed above.
MSAF Group records the cash prepayments made by lessees for maintenance as
a component of the liability for maintenance account which appears on the
Interim Condensed 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. No maintenance reserves were released to lease
income in the three month period ended May 31, 2000. In the three month period
ended May 31, 1999, MSAF Group released $1.4 million of excess maintenance
reserves which were received from certain of its former lessees.
INVESTMENT INCOME
Investment income for the three month period ended May 31, 2000 amounted to
$1.0 million as compared to $0.5 million in the three month period ended May 31,
1999. Investment income represents interest income on MSAF Group's cash and cash
equivalents.
Investment income has increased due to a higher level of cash and cash
equivalents. The increase primarily reflects $15.8 million of cash balances
acquired from MSF in connection with MSAF Group's acquisition of 29 commercial
aircraft. Such cash balances primarily consist of security deposits and advance
rental payments made by certain lessees.
INTEREST EXPENSE
Interest expense, including swap costs of $1.2 million, amounted to $30.9
million for the three month period ended May 31, 2000. Interest expense,
including swap costs of $2.1 million, amounted to $16.0 million for the three
month period ended May 31, 1999. Interest expense relates to the interest paid
on the Notes and the New Notes. The increase in interest expense is primarily
due to the New Notes, which were issued on March 15, 2000, coupled with a higher
average interest rate on the existing Notes. The weighted average interest rate
on MSAF Group's notes payable during the three month period ended May 31, 2000
was 6.75% as compared to 5.81% during the three month period ended May 31, 1999.
The average principal balance in respect of MSAF Group's notes payable during
the three month period ended May 31, 2000 was $1,653.2 million as compared to
$965.6 million during the three month period ended May 31, 1999.
MSAF Group is a party to thirteen interest rate swaps with Morgan Stanley
Capital Services Inc. ("MSCS"), a wholly-owned subsidiary of MSDW. In eleven of
these swaps, MSAF Group pays a fixed monthly coupon and receives one month LIBOR
on a notional balance of $1,600 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.
Nine of the swaps, having an aggregate notional principal amount of $1,400
million, are accounted for as hedges of the Notes and the New Notes. Under these
swap arrangements, MSAF Group pays fixed and receives 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 adjustments to interest expense.
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<PAGE> 18
The remaining four swaps have an aggregate gross notional principal amount
of $400 million. Under these swap arrangements, MSAF Group pays/receives fixed
and receives/pays floating amounts on a monthly basis. MSAF Group has 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.
See Item 3, "Quantitative and Qualitative Disclosures About Market Risk"
for more information regarding MSAF Group's swaps positions and hedging policy.
DEPRECIATION
Depreciation expense for the three month period ended May 31, 2000 amounted
to $23.0 million as compared to $11.8 million in the three month period ended
May 31, 1999. The increase is attributable to MSAF Group's acquisition of 29
commercial aircraft.
OPERATING EXPENSES
Service Provider and Other Fees. Service provider and other fees for the
three month period ended May 31, 2000 were $5.6 million as compared to $2.2
million in the three month period ended May 31, 1999. The increase in the three
month period ended May 31, 2000 reflects certain fees and expenses incurred in
connection with MSAF Group's acquisition of 29 commercial aircraft from MSF. The
increase also reflects a higher aircraft servicing fee paid to ILFC, which
amounted to $2.0 million in the three month period ended May 31, 2000 and $1.3
million in the three month period ended May 31, 1999. The higher fees paid to
ILFC in the three month period ended May 31, 2000 reflected the increased fleet
size as a result of the acquisition of 29 commercial aircraft.
Maintenance and Other Aircraft Related Costs. Maintenance and other
aircraft related costs for the three month period ended May 31, 2000 were $4.0
million as compared to $1.9 million for the three month period ended May 31,
1999. The increase was primarily attributable to certain maintenance and
redelivery costs incurred by MSAF Group associated with two aircraft previously
leased to Oman Air and provisions for certain maintenance and redelivery costs
associated with the aircraft previously subject to a sales-type capital lease
(see "Lessee Difficulties").
Included within maintenance and other aircraft related costs were
insurance, re-leasing and other costs incurred in the three month period ended
May 31, 2000, which amounted to $0.4 million, as compared to $0.6 million for
the three month period ended May 31, 1999. It is expected that re-leasing costs
will increase over the next several months due to costs relating to
reconfiguring aircraft for new lessees upon redelivery.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MAY 31, 2000,
AND THE SIX MONTHS ENDED MAY 31, 1999
MSAF Group's results of operations for the six months ended May 31, 2000
and the six months ended May 31, 1999 are discussed below. The results are not
directly comparable due to MSAF Group's acquisition of a portfolio of 29
commercial aircraft from MSF.
NET LOSS
For the six month period ended May 31, 2000, MSAF Group incurred a net loss
of ($19.8) million as compared to a net loss of ($3.2) million for the six month
period ended May 31, 1999. The increase in net loss reflects higher interest,
depreciation and operating expenses, partially offset by an increase in rental
revenues.
LEASE INCOME
Lease income for the six month period ended May 31, 2000 amounted to $78.3
million as compared to $59.1 million for the six month period ended May 31,
1999. The increase in lease income is primarily due to MSAF Group's acquisition
of 29 commercial aircraft, partially offset by a reduction in lease revenue
associated with aircraft on ground.
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<PAGE> 19
MSAF Group's operating results for the six month period ended May 31, 2000
included provisions for doubtful accounts totaling $1.1 million. Such provisions
were recorded by MSAF Group due to financial difficulties experienced by certain
of MSAF Group's former lessees whose aircraft have already been repossessed (see
"Lessee Difficulties"). Provisions for doubtful accounts were $6.0 million in
the six month period ended May 31, 1999. Lease income may decline in future
periods due to potential lessee defaults and arrears including those discussed
above.
INVESTMENT INCOME
Investment income for the six month period ended May 31, 2000 amounted to
$1.5 million as compared to $0.9 million in the six month period ended May 31,
1999. Investment income represents interest income on MSAF Group's cash and cash
equivalents.
Investment income has increased due to a higher level of cash and cash
equivalents in connection with MSAF Group's acquisition of 29 commercial
aircraft.
INTEREST EXPENSE
Interest expense, including swap costs of $0.9 million, amounted to $46.1
million for the six month period ended May 31, 2000. Interest expense, including
swap costs of $2.9 million, amounted to $32.4 million for the six month period
ended May 31, 1999. Interest expense relates to the interest paid on the Notes
and the New Notes. The increase in interest expense is primarily due to the New
Notes, which were issued on March 15, 2000, coupled with a higher average
interest rate on the existing Notes. The weighted average interest rate on MSAF
Group's notes payable during the six month period ended May 31, 2000 was 6.66%
as compared to 6.05% during the six month period ended May 31, 1999. The average
principal balance in respect of MSAF Group's notes payable during the six month
period ended May 31, 2000 was $1,377.4 million as compared to $969.7 million
during the six month period ended May 31, 1999.
DEPRECIATION
Depreciation expense for the six month period ended May 31, 2000 amounted
to $34.7 million as compared to $23.5 million in the six month period ended May
31, 1999. The increase is attributable to MSAF Group's acquisition of 29
commercial aircraft.
OPERATING EXPENSES
Service Provider and Other Fees. Service provider and other fees for the
six month period ended May 31, 2000 were $7.3 million as compared to $4.3
million in the six month period ended May 31, 1999. The increase in the six
month period ended May 31, 2000 reflects certain fees and expenses incurred in
connection with MSAF Group's acquisition of 29 commercial aircraft from MSF. The
increase also reflects a higher aircraft servicing fee paid to ILFC, which
amounted to $3.0 million in the six month period ended May 31, 2000 and $2.7
million in the six month period ended May 31, 1999. The higher fees paid to ILFC
in the six month period ended May 31, 2000 reflected the increased fleet size as
a result of the acquisition of 29 commercial aircraft, partially offset by a
reduction in fees due to the lower rental revenues generated by the remainder of
the fleet as a result of aircraft on ground during the period.
Maintenance and Other Aircraft Related Costs. Maintenance and other
aircraft related costs for the six month period ended May 31, 2000 were $11.5
million as compared to $3.0 million for the six month period ended May 31, 1999.
The increase was primarily attributable to certain maintenance and redelivery
costs incurred by MSAF Group associated with two aircraft previously leased to
Oman Air, one previously leased to TAESA and provisions for certain maintenance
and redelivery costs associated with the aircraft previously subject to a
sales-type capital lease with B.R.A. (see "Lessee Difficulties").
Included within maintenance and other aircraft related costs were
insurance, re-leasing and other costs incurred in the six month period ended May
31, 2000, which amounted to $0.8 million, as compared to
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<PAGE> 20
$1.2 million for the six month period ended May 31, 1999. It is expected that
re-leasing costs will increase over the next several months due to costs
relating to reconfiguring aircraft for new lessees upon redelivery.
FINANCIAL RESOURCES AND LIQUIDITY
Refer to Appendix 1 for additional information regarding the cash
performance of MSAF Group for the period from February 16, 2000 to May 15, 2000.
LIQUIDITY
MSAF Group's cash and cash equivalents at May 31, 2000 were $60.7 million.
Of this amount, $30 million represents the cash portion of the Liquidity Reserve
Amount (as defined below) and $30.7 million represents rental, and maintenance
receipts and cash held for accrued expenses.
In addition to the $30 million cash portion at May 31, 2000, the Liquidity
Reserve Amount also contained $76.6 million of undrawn credit and liquidity
facilities from MSDW and ILFC.
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 interest
rates of the Notes and the New Notes, the effectiveness of MSAF Group's interest
rate hedging policies and whether MSAF Group will be able to refinance certain
subclasses of notes that may not be repaid with lease cash flows.
Net cash provided by operating activities in the six month period ended May
31, 2000 amounted to $31.1 million, principally reflecting non-cash depreciation
expense of $34.7 million, a net loss of ($19.8) million and an increase in the
liability for maintenance account of $5.7 million.
Net cash provided by operating activities in the six month period ended May
31, 1999 amounted to $22.4 million, principally reflecting non-cash depreciation
expense of $23.5 million, a net loss of ($3.2) million and an increase in the
provision for doubtful accounts of $6.0 million.
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES
Net cash used for investing activities in the six month period ended May
31, 2000, amounted to $876.8 million which was used to purchase a portfolio of
29 commercial aircraft, as well as certain other assets and liabilities related
to these aircraft, from MSF. MSAF Group did not utilize any cash for investing
activities in the six month period ended May 31, 1999.
Net cash provided by financing activities in the six month period ended May
31, 2000 amounted to $871.3 million, primarily reflecting the proceeds from the
offering of the New Notes and repayment of the subclass A-1 notes.
Net cash used for financing activities in the six month period ended May
31, 1999 amounted to $19.9 million, reflecting repayments of principal on the
Notes.
INDEBTEDNESS
MSAF Group's indebtedness primarily consisted of the Notes and the New
Notes in the amount of $1,819.3 million at May 31, 2000.
LIQUIDITY RESERVE AMOUNT
The "LIQUIDITY RESERVE AMOUNT" is intended to serve as a source of
liquidity for MSAF Group's maintenance reimbursement obligations, security
deposit return obligations, operating expenses, contingent liabilities and Note
obligations. The Liquidity Reserve Amount may be funded with cash and 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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<PAGE> 21
debt is rated P-1 by Moody's Investors Service, A-1+ by Standard & Poor's, or
F1+ by Fitch 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 $118.4 million on May 31,
2000. The "MINIMUM LIQUIDITY RESERVE AMOUNT" may be funded with cash and with
Eligible Credit Facilities and was approximately $30 million on May 31, 2000.
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 MSAF's controlling trustees
in light of changes in, among other things, 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 class of 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 and the New 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" refer to 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" refer to 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 the New
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 and the New 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 airworthi-
20
<PAGE> 22
ness directives, repossessing and re-leasing 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
and the New Notes.
If at any time the aggregate outstanding principal balance of the Notes and
the New Notes is less than or equal to the Liquidity Reserve Amount, the balance
of funds, if any, in the Collection Account will be distributed in accordance
with the priority of payments.
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 portfolio except (i) amounts that ILFC
determines in good faith to be no longer held on behalf of a lessee, whether
upon expiry of or default under the applicable lease or otherwise (ii) any cash
security deposits in an amount exceeding three months' rent with respect to a
single aircraft and paid by a single lessee and (iii) certain security deposits
that ILFC has transferred to MSAF Group. ILFC will retain any interest accruing
on amounts of aircraft security deposits that it holds.
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 and the New Notes. ILFC's obligation to make
such amounts available shall be limited to the ILFC facility commitment, which
was approximately $46.6 million on May 31, 2000. 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, the sum
of (A) $20 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) after either of those events, $20 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 1, 2025, (ii) a sale of all the aircraft, and (iii) the repayment or
defeasance of all MSAF Group's debt.
ILFC's short-term unsecured debt is currently rated P-1 by Moody's, A-1+ by
Standard & Poor's and F1+ by Fitch, so it is an Eligible Provider. 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.
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 and
the New 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
21
<PAGE> 23
(i) $30 million minus (ii) 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 MSAF's controlling trustees as an
Eligible Provider. MSDW's short-term unsecured debt is currently rated P-1 by
Moody's, A-1+ by Standard & Poor's and F1+ by Fitch.
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 MSAF's 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.
22
<PAGE> 24
ITEM 3. 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 payable and the derivative
instruments used to manage interest rate risk.
The terms of each subclass of the Notes and the New Notes, including the
outstanding principal amount and estimated fair value as of May 31, 2000 were as
follows:
<TABLE>
<CAPTION>
OUTSTANDING ESTIMATED
PRINCIPAL AMOUNT ANNUAL FAIR VALUE
AT MAY 31, INTEREST RATE EXPECTED FINAL FINAL AT MAY 31,
SUBCLASS OF NOTE 2000 (PAYABLE MONTHLY) PAYMENT DATE MATURITY DATE 2000
---------------- ---------------- ----------------- ------------------ -------------- ----------
($000'S) ($000'S)
<S> <C> <C> <C> <C> <C>
Subclass A-2......... $223,428 LIBOR + 0.35% September 15, 2005 March 15, 2023 $222,450
Subclass A-3......... 580,000 LIBOR + 0.52% March 15, 2002 March 15, 2025 580,634
Subclass A-4......... 200,000 LIBOR + 0.54% March 15, 2003 March 15, 2025 200,281
Subclass A-5......... 387,486 LIBOR + 0.58% June 15, 2008 March 15, 2025 388,212
Subclass B-1......... 88,583 LIBOR + 0.65% March 15, 2013 March 15, 2023 87,213
Subclass B-2......... 75,000 LIBOR + 1.05% March 15, 2007 March 15, 2025 75,270
Subclass C-1......... 99,780 6.90% March 15, 2013 March 15, 2023 85,858
Subclass C-2......... 55,000 9.60% October 15, 2016 March 15, 2025 53,857
Subclass D-1......... 110,000 8.70% March 15, 2014 March 15, 2023 93,500
</TABLE>
INTEREST RATE RISK MANAGEMENT
MSAF Group's policy is not to be adversely exposed to material movements in
interest rates. MSAF Group's leasing revenues are generated primarily from
rental payments, which 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 interest obligations in respect of its
notes payable do not correlate with rental payments for different rental
periods, including rental payments attributable to existing and future leases.
Future leases are relevant because the duration of MSAF Group's obligations
under its floating rate notes is significantly longer than the duration of lease
income under its fixed rate leases. MSAF Group currently manages this exposure
by entering into swaps. In the future MSAF Group may also use other derivative
instruments. Currently, MSAF Group's aim is to manage the exposure created by
its floating interest rate obligations given that future lease rates on new
leases may not be repriced at levels which fully reflect changes in market
interest rates in the previous lease period. Accordingly MSAF Group's current
swap portfolio tries to minimize the risk created by its longer term floating
interest rate obligations and measures that risk by reference to the duration of
those obligations and the expected sensitivity of future lease rates to future
market interest rates.
The controlling trustees are responsible for reviewing and approving the
overall interest rate management policies and transaction authority limits. MSAF
Group's financial advisor, Morgan Stanley & Co. Incorporated, assists MSAF Group
in developing and implementing its interest rate risk management policies.
23
<PAGE> 25
CURRENT SWAP PORTFOLIO
As of May 31, 2000, MSAF Group was a party to thirteen interest rate swaps
with MSCS. In eleven of these swaps MSAF Group paid a fixed monthly coupon and
received one month LIBOR and in two of these swaps MSAF Group paid one month
LIBOR and received a fixed monthly coupon on the notional balances as set out
below:
<TABLE>
<CAPTION>
ESTIMATED
FAIR VALUE
NOTIONAL FIXED MONTHLY FIXED MONTHLY AT MAY 31,
BALANCE EFFECTIVE DATE MATURITY DATE PAY RATE RECEIVE RATE 2000
-------- ----------------- ----------------- ------------- ------------- ----------
($000'S) (%) (%) ($000'S)
<S> <C> <C> <C> <C> <C>
300,000.. November 12, 1997 November 15, 2000 6.1325 -- $ 1,360
200,000.. November 12, 1997 November 15, 2002 6.2150 -- 5,582
200,000.. November 12, 1997 November 15, 2004 6.2650 -- 9,205
150,000.. November 12, 1997 November 15, 2007 6.3600 -- 9,734
50,000.. November 12, 1997 November 15, 2009 6.4250 -- 3,664
150,000.. February 19, 1998 November 15, 2007 -- 5.860 (14,042)
50,000.. February 19, 1998 November 15, 2009 -- 5.905 (5,434)
100,000.. January 24, 2000 November 22, 2006 7.3365 -- 798
100,000.. January 24, 2000 November 22, 2009 7.4450 -- 483
100,000.. January 24, 2000 November 22, 2011 7.4600 -- 371
100,000.. January 24, 2000 November 22, 2014 7.3550 -- 1,584
100,000.. January 24, 2000 November 22, 2019 7.3690 -- 1,700
200,000.. February 25, 2000 February 25, 2002 7.1200 -- 1,037
</TABLE>
POLICY REVIEW
MSAF Group regularly reviews its hedging requirements. In the future, MSAF
Group expects to enter into further swaps or unwind part or all of the existing
and any future swaps. In addition, if MSAF Group acquires additional aircraft,
it may rebalance its swap portfolio.
COUNTERPARTIES
MSAF Group will monitor counterparty risk 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 may consist of the affiliates of major U.S. and European
financial institutions (including special-purpose derivative vehicles) which
have credit ratings, or which provide collateralization arrangements, consistent
with maintaining the credit ratings of MSAF Group's notes payable.
24
<PAGE> 26
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K: During the three-month period to which this report
relates, MSAF filed the following Reports on Form 8-K, on the dates
indicated:
(i) March 13, 2000 (containing a monthly report to holders of the Notes);
(ii) April 14, 2000 and May 11, 2000 (each containing a monthly report to
holders of the Notes and the New Notes);
(iii) March 16, 2000 (containing definitive information relating to the
effect of the issuance of the New Notes on certain characteristics of
the Notes); and
(iv) May 30, 2000 (containing financial statements with respect to and pro
forma financial information relating to its acquisition of 29 aircraft
on March 15, 2000).
25
<PAGE> 27
SIGNATURES
Pursuant to the requirements 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.
Date: July 14, 2000
MORGAN STANLEY AIRCRAFT FINANCE
By: /s/ ALEXANDER FRANK
------------------------------------
Alexander Frank
Signatory Trustee
26
<PAGE> 28
MORGAN STANLEY AIRCRAFT FINANCE
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
27
<PAGE> 29
APPENDIX I
MORGAN STANLEY AIRCRAFT FINANCE
CASH ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD FROM MARCH 2000 TO MAY 2000
28
<PAGE> 30
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
I BACKGROUND AND GENERAL INFORMATION............................................... 30
II(a) COMPARISON OF ACTUAL CASH FLOWS VERSUS THE 1998 BASE CASE FOR MARCH 2000......... 32
II(b) COMPARISON OF ACTUAL CASH FLOWS VERSUS THE 2000 BASE CASE FOR
APRIL / MAY 2000................................................................. 41
III OTHER FINANCIAL DATA............................................................. 50
IV RECENT DEVELOPMENTS.............................................................. 51
APPENDICES....................................................................... 57
</TABLE>
29
<PAGE> 31
I BACKGROUND AND GENERAL INFORMATION
Morgan Stanley Aircraft Finance ("MSAF"), a Delaware business trust, is a
special purpose vehicle which owns aircraft subject to operating leases. Under
the terms of its Indenture, MSAF may acquire additional aircraft and sell
aircraft from the fleet. Any acquisition of additional aircraft will be subject
to certain confirmations with respect to the Notes from rating agencies and
compliance with certain operating covenants of MSAF set out in the Indenture.
INITIAL PORTFOLIO
On March 3, 1998, MSAF issued $1,050 million of Notes in connection with its
acquisition of 33 aircraft plus an engine with a total appraised value at
September 30, 1997 of $1,115.5 million from International Lease Finance
Corporation ("ILFC"). All but one of the 33 aircraft was acquired by MSAF.
NEW ISSUANCE
On March 15, 2000, MSAF refinanced the A-1 subclass Notes of $400 million as
part of a total issuance of $1,310 million of New Notes in five subclasses (A-3,
A-4, A-5, B-2 and C-2). In addition to the refinancing of the A-1 subclass,
these Notes were issued in association with MSAF's acquisition of 29 aircraft
with a total appraised value of $1,047.8 million as of November 30, 1999 from a
subsidiary of Morgan Stanley Dean Witter & Co. ("MSDW"). MSDW acquired two
aircraft from an affiliate of GE Capital Corporation on March 19, 1999 and 27
aircraft from ILFC on August 6, 1999.
COMBINED PORTFOLIO
As a result, the overall size of the combined aircraft fleet is now 61 aircraft
plus an engine with a total appraised value of $2,000.9 million as of November
30, 1999. As of July 1, 2000, MSAF had 60 lease contracts in effect with 41
lessees based in 25 countries and two aircraft were off-lease as shown in
Appendix A attached.
MANAGEMENT DISCUSSION AND ANALYSIS
The discussion and analysis that follows in Section II is based on the results
of MSAF and its subsidiaries as a single entity (collectively the "MSAF GROUP")
for the reporting periods from March 2000 to May 2000.
Section II (a) covers the one-month period, March 2000, prior to the New
Issuance and the aircraft acquisition on March 15, 2000 and therefore relates to
the Initial Portfolio of 32 aircraft and engine only. The March 2000 cash flows
are compared against the 1998 Base Case.
For the purposes of this report, "MARCH 2000", referred to in Section II (a)
shall comprise information from the monthly cash report dated March 15, 2000.
The financial data in this reports includes cash receipts from February 10, 2000
(first day of the Collection Period for the March 2000 Report) up to March 9,
2000 (last day of the Collection Period for the March 2000 Report). It also
includes payments made by MSAF Group between February 16, 1999 and up to March
15, 2000 (the Note Payment Date for the March 2000 Report).
30
<PAGE> 32
Section II (b) covers the two month period, April / May 2000, after the New
Issuance and the aircraft acquisition on March 15, 2000 and therefore relates to
the Combined Portfolio of 61 aircraft plus an engine. The April / May 2000 cash
flows are compared against the 2000 Base Case.
For the purposes of this report, "APRIL / MAY 2000", referred to in Section II
(b), shall comprise information from the monthly cash reports dated April 15,
2000 through to May 15, 2000. The financial data in these reports includes cash
receipts from March 10, 2000 (first day of the Collection Period for the April /
May 2000 Report) up to May 9, 2000 (last day of the Collection Period for the
April / May 2000 Report). It also includes payments made by MSAF Group between
March 16, 2000 and up to May 15, 2000 (the Note Payment Date for the April / May
2000 Report).
The discussion and analysis in Section III -- "Recent Developments" relates to
the combined fleet of 61 aircraft plus an engine.
MSAF Group'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. These include
the level and volatility of interest rates, the availability of credit, fuel
costs and both general and regional economic conditions affecting lessee
operations and trading. Other factors to consider are manufacturer production
levels, passenger demand, retirement and obsolescence of aircraft models,
manufacturers exiting or entering the market or ceasing to produce aircraft
types or re-introduction into service of aircraft previously in storage. In
addition, state regulations and air traffic control infrastructure constraints,
such as limitations on the number of landing slots, can also impact the
operating leasing market.
MSAF Group's ability to compete against other lessors is determined, in part, by
the composition of its fleet in terms of mix, relative age and popularity of
aircraft type. In addition, operating restrictions imposed by the Indenture, and
the ability of other lessors, who may possess substantially greater financial
resources, to offer leases on more favorable terms than MSAF Group, may also
impact MSAF Group's ability to compete against other lessors.
31
<PAGE> 33
II(a) COMPARISON OF ACTUAL CASH FLOWS VERSUS THE 1998 BASE CASE
FOR MARCH 2000
The February 20, 1998 Offering Memorandum (the "OFFERING MEMORANDUM") and the
November 4, 1998 Prospectus (the "PROSPECTUS") for the Notes contain assumptions
in respect of MSAF Group's future cash flows and cash expenses (the "1998 BASE
CASE"). For the purpose of this report, "NET CASH COLLECTIONS" is defined as
Total Cash Collections less Total Cash Expenses, Accrued Expenses, Interest
Payments, Swap Payments and Exceptional Items. A discussion of the Cash
Collections, Cash Expenses, Accrued Expenses, Interest Payments, Swap Payments,
Exceptional Items and Principal Payments is given below and should be read in
conjunction with the analysis in Appendix B.
CASH COLLECTIONS
"Total Cash Collections" include Net Lease Rentals (Contracted Lease Rentals
plus Movement in Current Arrears Balance less Net Stress-related Costs),
Interest Earned, Drawings from Expense Account and Net Maintenance.
<TABLE>
<CAPTION>
CASH COLLECTIONS ACTUAL BASE CASE VARIANCE
$ M $ M $ M
------ --------- --------
<S> <C> <C> <C>
Lease Rentals 12.2 12.2 --
- Renegotiated Leases (0.1) -- (0.1)
- Rental Resets (0.4) -- (0.4)
---- ---- ----
CONTRACTED LEASE RENTALS 11.7 12.2 (0.5)
Movement in Current Arrears Balance 0.2 -- 0.2
Net Stress Related Costs (1.1) (0.5) (0.6)
---- ---- ----
NET LEASE RENTALS 10.8 11.7 (0.9)
Interest Earned 0.1 0.1 0.0
Drawings from Expense Account 1.2 -- 1.2
Net Maintenance (0.2) -- (0.2)
---- ---- ----
TOTAL CASH COLLECTIONS 11.9 11.8 0.1
==== ==== ====
</TABLE>
In March 2000, MSAF Group generated approximately $11.9 million in Total Cash
Collections, $0.1 million more than assumed in the 1998 Base Case. This
difference is due to a combination of the factors set out below (the numbers in
square brackets refer to the line item number shown in Appendix B).
[2] RENEGOTIATED LEASES
Renegotiated Leases refers to the loss in rental revenue caused by a lessee
negotiating a reduction in the lease rental. Typically, this can be a
permanent reduction over the remaining lease term in exchange for other
contractual concessions. In March 2000, the amount of revenue loss
attributed to Renegotiated Leases of $0.1 million is due to a 14% reduction
from the 1998 Base Case rental on a B767-300ER on lease to Air Pacific. The
new rental was reset at the then prevailing market rate for B767-300ERs in
exchange for a lease extension.
32
<PAGE> 34
[3] RENTAL RESETS
Rental Resets is a measure of the loss in rental revenue when new lease
rates are lower than those assumed in the 1998 Base Case. In March 2000, no
new leases were written, however, lost revenue attributable to lease resets
in previous quarters amounted to $0.4 million. The loss primarily relates
to the decline in rentals received for two A310-300s. See Section IV --
"Recent Developments" for a discussion of current re-leasing events.
[4] CONTRACTED LEASE RENTALS
Contracted Lease Rentals represents the current contracted lease rental
rollout which equates to the 1998 Base Case Lease Rentals less adjustments
for Renegotiated Leases and Rental Resets. For March 2000, Contracted Lease
Rentals were $11.7 million, $0.5 million less than assumed in the 1998 Base
Case. The difference is due to losses from renegotiated leases and rental
resets as discussed above.
[5] MOVEMENT IN CURRENT ARREARS BALANCE
Current Arrears are the total contracted lease rentals outstanding from
current lessees at a given date and excludes any amounts classified as Bad
Debts. The current arrears balance at the start of the March 2000 payment
period was $3.4 million versus $3.2 million at the end of the March 2000
payment period, a decrease in arrears of $0.2 million.
<TABLE>
<CAPTION>
CURRENT CURRENT MOVEMENT
ARREARS ARREARS IN CURRENT SECURITY
AIRCRAFT 2/15/00 3/15/00 ARREARS DEPOSITS
TYPE COUNTRY $ M $ M $ M HELD
-------- ------- ------- ------- --------- --------
<S> <C> <C> <C> <C> <C>
A320-200 Canada 0.2 0.5 (0.3) 0.3
A310-300 Brazil 0.4 0.7 (0.3) --
B737-300 Brazil 1.6 0.5 1.1 0.7
A321-100 Turkey 0.9 1.2 (0.3) 0.7
A320-200 Ireland 0.3 0.3 0.0 0.5
--- --- --- ---
TOTAL 3.4 3.2 0.2 2.2
=== === === ===
</TABLE>
As at March 15, 2000, five lessees were in arrears, owing $3.2 million,
against which MSAF Group held security deposits of $2.2 million. See
Section IV -- "Recent Developments" for information on the current level of
arrears as of July 1, 2000.
NET STRESS-RELATED COSTS
Net Stress-related Costs is a combination of all the factors which can
cause actual lease rentals received to differ from the Contracted Lease
Rentals. The 1998 Base Case assumed net stress-related costs equal to 4.5%
of the 1998 Base Case Lease Rentals.
33
<PAGE> 35
NET STRESS RELATED COSTS ACTUAL BASE CASE VARIANCE
$ M $ M $ M
------ --------- --------
Bad Debts --
Security Deposits Drawn Down --
Restructured Arrears (0.1)
AOG (1.2)
Other Leasing Income 0.3
Repossession Costs (0.1)
---- ---- ----
NET STRESS RELATED COSTS (1.1) (0.5) (0.6)
==== ==== ====
For the March 2000 Payment Period, net stress-related costs amounted to
$1.1 million (9.0% of 1998 Base Case Lease Rentals) compared to $0.5
million assumed in the 1998 Base Case, a variance of $0.6 million that is
due to the following six factors described in items [6] to [11] below.
[6] BAD DEBTS AND [7] SECURITY DEPOSITS DRAWN DOWN
Bad Debts are rental arrears owed by lessees who have defaulted and which
are deemed irrecoverable. These arrears are partially offset by the draw
down of security deposits held and amounts subsequently recovered from the
defaulted lessee.
In March 2000, no arrears were transferred to Bad Debts and no security
deposits were drawn down. See Section IV -- "Recent Developments" for
information on the current level of Bad Debts as of July 1, 2000.
[8] RESTRUCTURED ARREARS
Restructured Arrears refer to current arrears that have been capitalized
and restructured into a note payable, which is repaid over an agreed
period. Losses from restructured leases were $0.1 million in March 2000 and
were due to a restructuring of arrears and lease payments of two lessees.
See Section IV -- "Recent Developments" for information on the current
level of Restructured Arrears as of July 1, 2000.
[9] AIRCRAFT ON GROUND ("AOG")
AOG is defined as the Base Case Lease Rental lost when an aircraft is
off-lease and non-revenue earning.
AOG Analysis for March 2000
<TABLE>
<CAPTION>
AIRCRAFT TYPE OLD LESSEE NEW LESSEE LOST RENTAL
------------- ---------- ---------- -----------
$ M
<S> <C> <C> <C> <C>
1 B747-300 VARIG Air Atlanta Icelandic 0.8
2 A310-300 Oman Air Region Air 0.1
3 A310-300 Oman Air Region Air 0.1
4 B737-400 TAESA LOI 0.2
---
TOTAL 1.2
===
</TABLE>
34
<PAGE> 36
The impact of AOG downtime amounted to $1.2 million during March 2000.
This was in respect of four aircraft; one B747-300 previously on lease to
VARIG which terminated early, two A310-300s previously on lease to Oman
Air which terminated as scheduled and one B737-400 previously on lease to
TAESA which terminated early. See Section IV -- "Recent Developments"
below for information on the current level of AOG costs as of July 1,
2000.
[10] OTHER LEASING INCOME
Other leasing income consists of miscellaneous income received in
connection with a lease other than contracted rentals, maintenance
receipts and security deposits, such as early termination payments or
default interest. In March 2000, other leasing income amounted to $0.3
million.
[11] REPOSSESSION COSTS
Repossession costs consist of legal and aircraft technical costs incurred
as a result of repossessing an aircraft. In March 2000, repossession costs
amounted to $0.1 million, which consists of consultancy fees incurred
during the repossession of a B737-400 previously on lease to TAESA.
[13] NET LEASE RENTALS
Net Lease Rentals is Contracted Lease Rentals plus the movement in Current
Arrears Balance less Net Stress-related Costs. In March 2000, net lease
rentals amounted to $10.8 million, $0.9 million less than assumed in the
1998 Base Case. The variance was attributable to the combined effect of
lower contracted lease rentals, the decrease in current arrears and an
increase in net stress-related costs discussed above.
[14] INTEREST EARNED
Interest earned relates to interest received on cash balances held in the
Collection and Expense Accounts. Cash held in the Collection Account in
March 2000 consisted of the cash liquidity reserve amount of $25.0 million
plus the intra-month cash balances for all the rentals and maintenance
payments collected prior to the monthly payment date. The Expense Account
contains cash set aside to pay for expenses which are expected to be
payable over the next three months ("Accrued Expenses"). The average
interest rate for the period was 5.75%, the same as assumed in the 1998
Base Case. In March 2000, interest earned amounted to $0.1 million the
same as assumed in the 1998 Base Case.
[15] DRAWINGS FROM EXPENSE ACCOUNT
The Expense Account contains cash set aside each month from current cash
collections to pay for expenses which are expected to be payable over the
next three months. The level of Accrued Expenses is set each month by the
Administrative Agent. In March 2000, $1.2 million was drawn from the
Expense Account to pay for current expenses. The 1998 Base Case makes no
assumption as to the level of Accrued Expenses. Accrued Expenses are
discussed separately as line item number [28] in the Net Cash Collections
section below.
35
<PAGE> 37
[16] NET MAINTENANCE
Net maintenance refers to maintenance receipts less any maintenance
reimbursements paid to lessees. In March 2000, actual maintenance receipts
amounted to $0.9 million and maintenance expenditure amounted to $1.1
million, generating negative net maintenance of $0.2 million.
Maintenance expenditure included costs incurred in the overhaul of the
airframe for two A310-300s. The 1998 Base Case makes no assumptions for
net maintenance as it assumes that, over time, maintenance receipts will
equal maintenance expenditure. However, it is unlikely that in any
particular Note Payment Period, maintenance receipts will exactly equal
maintenance expenditure.
36
<PAGE> 38
CASH EXPENSES
"Total Cash Expenses" include Aircraft Operating Expenses and Selling, General
and Administrative ("SG&A") Expenses. In March 2000, total cash expenses were
$0.6 million, $0.6 million lower than the 1998 Base Case, which assumed total
cash expenses of $1.2 million.
<TABLE>
<CAPTION>
TOTAL CASH EXPENSES ACTUAL BASE CASE VARIANCE
$ M $ M $ M
------ --------- --------
<S> <C> <C> <C>
Aircraft Operating Expenses (0.1) (0.4) 0.3
SG&A Expenses (0.5) (0.8) 0.3
---- ---- ---
TOTAL CASH EXPENSES (0.6) (1.2) 0.6
==== ==== ===
</TABLE>
The difference is due to a combination of lower Aircraft Operating Expenses and
SG&A Expenses as discussed below.
AIRCRAFT OPERATING EXPENSES include all operational costs related to the leasing
of an aircraft including costs of insurance, re-leasing and other overhead
costs. In March 2000, Aircraft Operating Expenses were $0.1 million compared to
$0.4 million per the 1998 Base Case, which assumes these costs to be 3.5% of the
1998 Base Case Lease Rentals.
[18] INSURANCE
No insurance costs were incurred in March 2000.
[19] RE-LEASING AND OTHER OVERHEAD COSTS
Re-leasing and other overhead costs consist of miscellaneous re-delivery
and leasing costs associated with re-leasing events. In March 2000 these
costs were $0.1 million.
SG&A EXPENSES relate to fees paid to the Aircraft Servicer and to other service
providers. In March 2000, SG&A Expenses were $0.5 million or $0.3 million lower
than assumed in the 1998 Base Case. The variance is described in items numbered
[21] and [23] below.
[21] AIRCRAFT SERVICER FEES
The Aircraft Servicer Fees are defined as amounts paid to the Aircraft
Servicer, ILFC, in accordance with the terms of the Servicing Agreement.
In March 2000, the total Aircraft Servicer fee paid was $0.3 million,
$0.2 million lower than assumed in the 1998 Base Case, reflecting lower
actual rentals achieved relative to 1998 Base Case Lease Rentals.
37
<PAGE> 39
Aircraft Servicer Fees consist of:
<TABLE>
<CAPTION>
$ M
---
<S> <C>
Base Fee 0.1
Rent Collected Fee 0.1
Rent Contracted Fee 0.1
Incentive Fee 1999/2000* 0.0
---
TOTAL SERVICER FEE 0.3
</TABLE>
*For financial year ended November 30, 2000
The Base Fee is a fixed amount per month per aircraft and changes only
as aircraft are acquired or sold. The Rent Contracted Fee is equal to 1%
of all rentals contracted. The Rent Collected Fee is equal to 1% of all
rentals received. The Incentive fee is 10% of all cash flow received
above a targeted annual amount set at the beginning of each financial
year. No incentive fee was payable to ILFC in March 2000 for the
financial year ended November 2000.
[23] OTHER SERVICER FEES
Other Servicer Fees relate to fees and expenses paid to other service
providers including the Administrative Agent, Financial Advisor, legal
advisors, accountants and Independent Trustees. In March 2000, Other
Servicer Fees amounted to $0.2 million as compared to an assumed expense
of $0.3 million in the 1998 Base Case, a positive variance of $0.1
million. The variance is due primarily to lower than expected
Administrative Agent fees and other overhead costs. The Administrative
Agent fee is equal to 1.5% of rentals collected and declined in line
with the reduced rentals actually received.
38
<PAGE> 40
NET CASH COLLECTIONS
"NET CASH COLLECTIONS" equals Total Cash Collections less Total Cash Expenses,
Accrued Expenses, Interest Payments, Swap Payments and Exceptional Items.
<TABLE>
<CAPTION>
NET CASH COLLECTIONS ACTUAL BASE CASE VARIANCE
$ M $ M $ M
------ --------- --------
<S> <C> <C> <C>
Total Cash Collections 11.9 11.8 0.1
Total Cash Expenses (0.6) (1.2) 0.6
Accrued Expenses (0.8) -- (0.8)
Interest Payments (4.9) (4.9) --
Swap Payments (0.4) (0.5) 0.1
Exceptional Items -- -- --
---- ---- -----
NET CASH COLLECTIONS 5.2 5.2 0.0
==== ==== =====
</TABLE>
[26] TOTAL CASH COLLECTIONS
As discussed above in line items [1] to [17] above in Cash Collections,
MSAF Group generated approximately $11.9 million in Total Cash
Collections, $0.1 million more than assumed in the 1998 Base Case.
[27] TOTAL CASH EXPENSES
As discussed above in line items [18] to [25] above in Cash Expenses, MSAF
Group incurred approximately $0.6 million in Total Cash Expenses, $0.6
million less than assumed in the 1998 Base Case.
[28] ACCRUED EXPENSES
Accrued Expenses represent the level of cash set aside in the Expense
Account each month to pay for expenses which are expected to be payable
over the next 3 months. In March 2000, $0.8 million was added to the
Closing Expense Account balance of $4.9 million (a total of to $5.7
million) to fund future expenses, primarily maintenance.
[29] INTEREST PAYMENTS AND [30] SWAP PAYMENTS
In March 2000, interest payments to Noteholders amounted to $4.9 million,
which was in line with the 1998 Base Case. While the total debt balance
outstanding during the quarter was lower than expected in the 1998 Base
Case, the interest payments were increased due to a higher than assumed
LIBOR rate. The LIBOR rate for March 2000 was 5.89% versus an assumed
LIBOR rate of 5.75%. The higher interest costs were offset by a reduction
in the amount of swap payments. MSAF paid $0.4 million in swap costs, $0.1
million less than assumed in the 1998 Base Case.
[31] EXCEPTIONAL ITEMS
Exceptional items refer to cash flows that occur infrequently and are
outside the normal business activities of MSAF. There were no exceptional
cash flows in March 2000.
39
<PAGE> 41
[33] PRINCIPAL PAYMENTS
In the First Quarter 2000, total principal payments to Noteholders
amounted to $5.2 million, the same as assumed in the 1998 Base Case.
40
<PAGE> 42
II(b) COMPARISON OF ACTUAL CASH FLOWS VERSUS THE 2000 BASE CASE FOR
APRIL / MAY 2000
The March 8, 2000 Offering Memorandum for the New Notes contain assumptions in
respect of MSAF Group's future cash flows and cash expenses (the "2000 BASE
CASE"). For the purpose of this report, "NET CASH COLLECTIONS" is defined as
Total Cash Collections less Total Cash Expenses, Accrued Expenses, Interest
Payments, Swap Payments and Exceptional Items. A discussion of the Cash
Collections, Cash Expenses, Accrued Expenses, Interest Payments, Swap Payments,
Exceptional Items and Principal Payments is given below and should be read in
conjunction with the analysis in Appendix C.
CASH COLLECTIONS
"Total Cash Collections" include Net Lease Rentals (Contracted Lease Rentals
plus Movement in Current Arrears Balance less Net Stress-related Costs),
Interest Earned, Drawings from Expense Account and Net Maintenance.
<TABLE>
<CAPTION>
TOTAL CASH COLLECTIONS ACTUAL BASE CASE VARIANCE
$ M $ M $ M
------ --------- --------
<S> <C> <C> <C>
Lease Rentals 44.5 44.5 --
- Renegotiated Leases -- -- --
- Rental Resets -- -- --
----- ---- ----
CONTRACTED LEASE RENTALS 44.5 44.5 --
Movement in Current Arrears Balance (0.9) -- (0.9)
Net Stress Related Costs (2.0) (2.0) --
----- ---- ----
NET LEASE RENTALS 41.6 42.5 (0.9)
Interest Earned 0.6 0.4 0.2
Drawings from Expense Account 5.1 -- 5.1
Net Maintenance (3.1) -- (3.1)
----- ---- ----
TOTAL CASH COLLECTIONS 44.2 42.9 1.3
===== ==== ====
</TABLE>
In April / May 2000, MSAF Group generated approximately $44.2 million in Total
Cash Collections, $1.3 million more than assumed in the 2000 Base Case. This
difference is due to a combination of the factors set out below (the numbers in
brackets refer to the line item number shown in Appendix C).
[2] RENEGOTIATED LEASES
Renegotiated Leases refers to the loss in rental revenue caused by a
lessee negotiating a reduction in the lease rental. Typically, this can be
a permanent reduction over the remaining lease term in exchange for other
contractual concessions. In April / May 2000, one lease was renegotiated
resulting in a small decrease in the present value of the rental cash
flows over the lease term. The new rental was agreed in exchange for an
extension of the lease term.
[3] RENTAL RESETS
Rental Resets is a measure of the loss in rental revenue when new lease
rates are
41
<PAGE> 43
lower than those assumed in the 2000 Base Case. In April / May 2000, no
new leases were written. See Section IV -- "Recent Developments" for a
discussion of current re-leasing events as at July 1, 2000.
[4] CONTRACTED LEASE RENTALS
Contracted Lease Rentals represents the current contracted lease rental
rollout which equates to the 2000 Base Case Lease Rentals less adjustments
for Renegotiated Leases and Rental Resets. For April / May 2000,
Contracted Lease Rentals were $44.5 million, in line with rentals assumed
in the 2000 Base Case.
[5] MOVEMENT IN CURRENT ARREARS BALANCE
Current Arrears is the total contracted lease rentals outstanding from
current lessees at a given date and excludes any amounts classified as Bad
Debts. The current arrears balance at the New Issuance date (March 15,
2000) was assumed to be nil versus $1.5 million at the end of April / May
2000, a difference in arrears of $0.9 million.
<TABLE>
<CAPTION>
AIRCRAFT COUNTRY CURRENT ARREARS CURRENT ARREARS MOVEMENT IN SECURITY
TYPE 3/15/00 5/15/00 CURRENT ARREARS DEPOSITS HELD
-------- ------- --------------- --------------- --------------- -------------
$ M $ M $ M $ M
<S> <C> <C> <C> <C> <C>
A310-300 Brazil 0.0 0.7 0.7 0.0
B737-300 USA 0.0 0.2 0.2 0.2
--- --- --- ---
TOTAL 0.0 0.9 0.9 0.2
=== === === ===
</TABLE>
As at May 15, 2000, two lessees were in arrears, owing $0.9 million,
against which MSAF Group held security deposits of $0.2 million. One of
the two lessees, B.R.A., based in Brazil, defaulted in April / May 2000
and the aircraft was repossessed. Rental arrears, associated with the
lessee, at the time of the repossession totaled $1.3 million are now
deemed irrecoverable and will be re-classified from Current Arrears to Bad
Debts. See the discussion on Bad Debts below.
ACTUAL CURRENT ARREARS AND BASE CASE ARREARS
The Movement in Current Arrears Balance measures the difference in arrears
balances between the start of the new Base Case, March 15, 2000, and May
15, 2000. For the purposes of the Base Case only, any arrears owed by
lessees as at March 15, 2000 were assumed to be zero. Actual current
arrears were $3.2 million as at March 15, 2000 and these pertain to the
Initial Portfolio only. Actual Current Arrears as at May 15, 2000 were
$3.6 million and relate to the Combined Portfolio. See Section IV --
"Recent Developments" for information on the current level of arrears as
of July 1, 2000 which covers total arrears owed by lessees.
NET STRESS-RELATED COSTS
Net Stress-related Costs is a combination of all the factors which can
cause actual lease rentals received to differ from the Contracted Lease
Rentals. The 2000 Base Case assumed net stress-related costs equal to 4.5%
of the 2000 Base Case Lease Rentals.
42
<PAGE> 44
\
<TABLE>
<CAPTION>
NET STRESS RELATED COSTS ACTUAL BASE CASE VARIANCE
------ --------- --------
$ M $ M $ M
<S> <C> <C> <C>
Bad Debts --
Security Deposits Drawn Down --
Restructured Arrears --
AOG (0.7)
Other Leasing Income (1.2)
Repossession Costs (0.1)
---- ---- ---
NET STRESS RELATED COSTS (2.0) (2.0) 0.0
==== ==== ===
</TABLE>
For April / May 2000, net stress-related costs amounted to $2.0 million
(4.5% of 2000 Base Case Lease Rentals), in line with the 2000 Base Case
assumptions. A detailed analysis of net stress-related costs is provided
in item [6] to [11] below.
[6] BAD DEBTS AND [7] SECURITY DEPOSITS DRAWN DOWN
Bad Debts are rental arrears owed by lessees who have defaulted and which
are deemed irrecoverable. These arrears are partially offset by the draw
down of security deposits held and amounts subsequently recovered from the
defaulted lessee.
In April / May 2000, no amounts were written off and no security deposits
were drawn down. See Section IV -- "Recent Developments" for information
on the current level of Bad Debts as of July 1, 2000.
[8] RESTRUCTURED ARREARS
Restructured arrears refer to current arrears that have been capitalized
and restructured into a note payable, which is repaid over an agreed
period. There were no losses from restructured arrears in April / May
2000. See Section IV -- "Recent Developments" for information on the
current level of Restructured Arrears as of July 1, 2000.
[9] AIRCRAFT ON GROUND ("AOG")
AOG is defined as the Base Case Lease Rental lost when an aircraft is
off-lease and non-revenue earning.
AOG Analysis for April / May 2000
<TABLE>
<CAPTION>
AIRCRAFT TYPE OLD LESSEE NEW LESSEE LOST RENTAL
------------- ---------- ---------- -----------
$ M
<S> <C> <C> <C> <C>
1 A310-300 Oman Air Region Air 0.2
2 B737-400 TAESA LOI 0.5
----
TOTAL 0.7
====
</TABLE>
The impact of AOG downtime amounted to $0.7 million during April / May
2000. This was in respect of two aircraft; one A310-300 previously on
lease to Oman Air and terminated as scheduled and one B737-400 previously
on lease to TAESA and terminated early. See Section IV -- "Recent
Developments" below for information on the current level of AOG costs as
of July 1, 2000.
43
<PAGE> 45
[10] OTHER LEASING INCOME
Other leasing income consists of miscellaneous income received in
connection with a lease other than contracted rentals, maintenance
receipts and security deposits, such as early termination payments or
default interest. In April / May 2000, other leasing income amounted to a
negative $1.2 million which relates to rentals which the Base Case assumed
would be received in this period but are due in the following month.
[11] REPOSSESSION COSTS
Repossession costs consist of legal and aircraft technical costs incurred
as a result of repossessing an aircraft. In April / May 2000, repossession
costs amounted to $0.1 million, which primarily related to consultancy
fees incurred during the repossession of the B747-300 previously on lease
to VARIG.
[13] NET LEASE RENTALS
Net Lease Rentals is Contracted Lease Rentals plus the Movement in Current
Arrears Balance less Net Stress-related Costs. In April / May 2000, net
lease rentals amounted to $41.6 million, $0.9 million less than assumed in
the 2000 Base Case. The variance was primarily attributable to the
increase in current arrears discussed above.
[14] INTEREST EARNED
Interest earned relates to interest received on cash balances held in the
Collection and Expense Accounts. Cash held in the Collection Account in
April / May 2000 consisted of the cash liquidity reserve amount of $30.0
million plus the intra-month cash balances for all the rentals and
maintenance payments collected prior to the monthly payment date. The
Expense Account contains cash set aside to pay for expenses which are
expected to be payable over the next three months. The average interest
rate for the two-month period was 5.93%, slightly less than the 5.97%
assumed in the 2000 Base Case. In April / May 2000, interest earned
amounted to $0.6 million, $0.2 million more than assumed in the 2000 Base
Case. The difference is due primarily to interest earned on the Aircraft
Purchase Account prior to the acquisition of the Lithuanian B737-300 on
May 1, 2000.
[15] DRAWINGS FROM EXPENSE ACCOUNT
The Expense Account contains cash set aside each month from current cash
collections to pay for expenses which are expected to be payable over the
next three months. The level of Accrued Expenses is set each month by the
Administrative Agent. In April / May 2000, $5.1 million was drawn from the
Expense account to pay current expenses. The 2000 Base Case makes no
assumption as to the level of Accrued Expenses. Accrued Expenses are
discussed separately as line item number [28] in the Net Cash Collections
section below.
[16] NET MAINTENANCE
44
<PAGE> 46
Net maintenance refers to maintenance receipts less any maintenance
reimbursements paid to lessees. In April / May 2000, actual maintenance
receipts amounted to $4.0 million and maintenance expenditure amounted to
$7.1 million, generating negative net maintenance of $3.1 million.
Maintenance expenditure included costs incurred in the overhaul of two
engines on a B747-300 repossessed from Varig ($2.0 million), the overhaul
of two A310-300 airframes previously on lease to Oman air ($2.8 million)
and the reimbursement from reserves for the overhaul of two engines ($2.0
million). The 2000 Base Case makes no assumptions for net maintenance as
it assumes that, over time, maintenance receipts will equal maintenance
expenditure. However, it is unlikely that in any particular Note Payment
Period, maintenance receipts will exactly equal maintenance expenditure.
45
<PAGE> 47
CASH EXPENSES
"Total Cash Expenses" include Aircraft Operating Expenses and SG&A Expenses. In
April / May 2000, total cash expenses were $2.6 million, $0.4 million higher
than the 2000 Base Case, which assumed total cash expenses of $2.2 million.
<TABLE>
<CAPTION>
TOTAL CASH EXPENSES ACTUAL BASE CASE VARIANCE
------ --------- --------
$ M $ M $ M
<S> <C> <C> <C>
Aircraft Operating Expenses (0.3) (0.3) --
SG&A Expenses (2.3) (1.9) 0.4
---- ---- ---
TOTAL CASH EXPENSES (2.6) (2.2) 0.4
==== ==== ===
</TABLE>
The difference is due to higher SG&A Expenses as discussed below.
AIRCRAFT OPERATING EXPENSES include all operational costs related to the leasing
of an aircraft including costs of insurance, re-leasing and other overhead
costs. In April / May 2000, Aircraft Operating Expenses amounted to $0.3
million, the same as assumed in the 2000 Base Case, which assumes these costs to
be 0.8% of the 2000 Base Case Lease Rentals.
[18] INSURANCE
Insurance costs of $0.2 million were incurred in April / May 2000 and
relate to the payment of the quarterly premium in respect of the aircraft
contingent insurance programme.
[19] RE-LEASING AND OTHER OVERHEAD COSTS
Re-leasing and other overhead costs consist of miscellaneous re-delivery
and leasing costs associated with re-leasing events. In April / May 2000
these costs amounted to $0.1 million.
SG&A EXPENSES relate to fees paid to the Aircraft Servicer and to other service
providers. In April / May 2000, SG&A Expenses were $2.3 million or $0.4 million
higher than assumed in the 2000 Base Case. The variance is described in items
numbered [21] and [23] below.
[21] AIRCRAFT SERVICER FEES
The Aircraft Servicer Fees are defined as amounts paid to the Aircraft
Servicer, ILFC, in accordance with the terms of the Servicing Agreement.
In April / May 2000, the total Aircraft Servicer fee paid was $1.5
million, in line with 2000 Base Case assumptions.
46
<PAGE> 48
Aircraft Servicer Fees consist of:
<TABLE>
<CAPTION>
$ M
---
<S> <C>
Base Fee 0.5
Rent Collected Fee 0.5
Rent Contracted Fee 0.5
Incentive Fee 1999/2000* 0.0
---
TOTAL SERVICER FEE 1.5
</TABLE>
*For financial year ended November 30, 2000
The Base Fee is a fixed amount per month per aircraft and changes only
as aircraft are acquired or sold. The Rent Contracted Fee is equal to 1%
of all rentals contracted. The Rent Collected Fee is equal to
approximately 1.25% of all rentals received. The Incentive fee applies
to the Initial Portfolio only and is set at 10% of all cash flow
received above a targeted annual amount set at the beginning of each
financial year. No incentive fee was payable to ILFC in April / May 2000
for the financial year ended November 2000.
[23] OTHER SERVICER FEES
Other Servicer Fees relate to fees and expenses paid to other service
providers including the Administrative Agent, Financial Advisor, legal
advisors, accountants and Independent Trustees. In April / May 2000,
Other Servicer Fees amounted to $0.8 million as compared to an assumed
expense of $0.4 million in the 2000 Base Case, a positive variance of
$0.4 million. The variance is due primarily to the payment of the annual
premium for the Directors and Officers insurance coverage ($0.2
million).
47
<PAGE> 49
NET CASH COLLECTIONS
"NET CASH COLLECTIONS" equals Total Cash Collections less Total Cash Expenses,
Accrued Expenses, Interest Payments, Swap Payments and Exceptional Items.
<TABLE>
<CAPTION>
NET CASH COLLECTIONS ACTUAL BASE CASE VARIANCE
$ M $ M $ M
------ --------- --------
<S> <C> <C> <C>
Total Cash Collections 44.2 42.9 1.3
Total Cash Expenses (2.6) (2.2) (0.4)
Accrued Expenses (3.9) -- (3.9)
Interest Payments (21.1) (20.9) (0.2)
Swap Payments (1.6) (1.8) 0.2
Exceptional Items -- -- --
---- ---- ----
NET CASH COLLECTIONS 15.0 18.0 (3.0)
==== ==== ====
</TABLE>
[26] TOTAL CASH COLLECTIONS
As discussed above in line items [1] to [17] above in Cash Collections,
MSAF Group generated approximately $44.2 million in Total Cash
Collections, $1.3 million more than assumed in the 2000 Base Case.
[27] TOTAL CASH EXPENSES
As discussed above in line items [18] to [25] above in Cash Expenses,
MSAF Group incurred approximately $2.6 million in Total Cash Expenses,
$0.4 million more than assumed in the 2000 Base Case.
[28] ACCRUED EXPENSES
Accrued Expenses represent the level of cash set aside in the Expense
Account each month to pay for expenses which are expected to be payable
over the next 3 months. In April / May 2000, $2.9 million was added to
the Closing Expense Account balance of $1.6 million (a total of to $4.5
million) to fund future expenses, primarily maintenance.
[29] INTEREST PAYMENTS AND [30] SWAP PAYMENTS
In April / May 2000, interest payments to Noteholders amounted to $21.1
million. This is $0.2 million higher than the 2000 Base Case, which
assumed interest costs for April / May 2000 to be $20.9 million. The
higher interest cost was due to a higher than assumed debt balance
outstanding during the two month period and a higher than assumed
average LIBOR rate. The average LIBOR rate for April / May 2000 was
6.07% versus an assumed LIBOR rate of 5.97%. The higher interest costs
were offset by a reduction in the amount of swap payments. MSAF paid
$1.6 million in swap costs, $0.2 million less than assumed in the 2000
Base Case.
[31] EXCEPTIONAL ITEMS
Exceptional items refer to cash flows that occur infrequently and are
outside the normal business activities of MSAF. There were no
exceptional cash flows in April / May 2000.
48
<PAGE> 50
[33] PRINCIPAL PAYMENTS
In April / May 2000, total principal payments to Noteholders amounted to
$15.0 million, $3.0 million less than assumed in the 2000 Base Case,
reflecting the lower Net Cash Collections available during this period,
mainly as a result of the higher than expected maintenance costs.
49
<PAGE> 51
III OTHER FINANCIAL DATA
An analysis of MSAF's Performance to Date as of May 15, 2000 versus the
2000 Base Case and details of interest and debt coverage ratios and
Loan-to-Value ratios (LTV's) as of May 15, 2000 are shown in Appendix
D.
CASH
Cash held at May 15, 2000 was $44.7 million. This includes $30.0
million that represents the cash portion of the Liquidity Reserve
Amount at that time. This is a source of liquidity for, among other
things, maintenance obligations, security deposit return obligations,
and cash operating expenses and contingent liabilities. The balance
consists of $10.2 million in lessee security deposits and $4.5 million
in accrued expenses held in the Expense Account in respect of future
maintenance obligations and other costs.
In addition to the $44.7 million cash balance held at May 15, 2000, the
Liquidity Reserve Amount also contained credit and liquidity facilities
provided by MSDW and ILFC aggregating to $78.9 million. Neither of
these facilities was drawn upon in April / May 2000.
AIRCRAFT VALUES
Under the terms of the Notes, MSAF Group is required to obtain new
appraisals of the Base Value of each aircraft from a minimum of three
independent appraisers each year. The annual appraisal must be
delivered to the Trustee no later than October 31 of each year. The
next appraisal is due to deliver to the Trustee no later than October
31, 2000. The current appraisals as of November 30, 1999 are shown in
Appendix A.
A-D NOTE BALANCE
As of May 15, 2000, the aggregate amount of Class A-D Notes outstanding
was $1,819.3 million, approximately $3.0 million higher than assumed in
the 2000 Base Case due to lower than assumed principal repayments with
respect to the Class A-2 and A-5 Notes.
50
<PAGE> 52
IV RECENT DEVELOPMENTS
Information is as of July 1, 2000.
SECURITISATION OF 29 AIRCRAFT
On March 15, 2000, MSAF Group issued additional subclasses of Notes,
amounting to $1,310 million, in association with the refinancing of the
subclass A-1 Note of $400 million and the acquisition, from a
subsidiary of MSDW, of a portfolio of 29 commercial aircraft with an
appraised value of $1,047.8 million as of November 30, 1999. All but
one of the 29 aircraft was delivered on March 15, 2000. The remaining
aircraft, a B737-300 on lease to Lithuanian Airlines, was delivered on
May 1, 2000. The following discussion refers to the portfolio of 62
aircraft assets, which was owned by MSAF Group as of July 1, 2000.
RE-MARKETING TASK FOR PORTFOLIO OF 62 AIRCRAFT ASSETS
As of July 1, 2000, two aircraft from a portfolio of 62 aircraft assets
were off-lease. Both aircraft are currently the subject of non-binding
letters of intent.
SUMMARY
<TABLE>
<CAPTION>
No. of Aircraft
---------------
<S> <C>
No. of Aircraft Assets subject to Lease Agreements 60
No. of Aircraft Assets off-lease 2
---
Total No. of Aircraft Assets 62
---
No. of Aircraft Assets scheduled to expire before Dec 31, 2000 2
No. of Aircraft Assets scheduled to expire in the year to Dec 31, 2001 11
---
Equals Total Near-term re-marketing task 13
---
Of which LOI signed 2
---
</TABLE>
RE-MARKETING TASK: BY NUMBER OF AIRCRAFT
<TABLE>
<CAPTION>
YEAR ENDING 2000 2001 2002 2003 2004 > 2005 TOTAL
----------- ---- ---- ---- ---- ---- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
A300 1 1 2
A310 2 1 3
A320 1 1 3 1 6
A321 1 1 2
A330 1 1
A340 1 1
B737 2 6 1 4 4 3* 20
B747 1 1 2
B757 2 1 5 8
B767 2 1* 1 2 6
F50 2 2
F70 1 2 3
MD82 1 1
MD83 1 1 2 4
Engine 1 1
--- --- --- --- --- --- ---
TOTAL 2 11 8 17 9 15 62
=== === === === === === ===
</TABLE>
*Includes one aircraft currently subject to a non-binding letter of intent.
51
<PAGE> 53
RE-MARKETING TASK: BY APPRAISED VALUE*
<TABLE>
<CAPTION>
YEAR ENDING 2000 2001 2002 2003 2004 > 2005 TOTAL
----------- ----- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
A300 2.55% 2.31% 4.86%
A310 2.25% 1.38% 3.63%
A320 1.52% 1.61% 4.59% 1.49% 9.21%
A321 1.95% 1.98% 3.93%
A330 4.00% 4.00%
A340 4.58% 4.58%
B737 2.37% 6.59% 1.26% 5.13% 4.83% 2.85% 23.03%
B747 4.87% 2.45% 7.32%
B757 3.93% 1.48% 9.67% 15.08%
B767 5.50% 1.47% 3.01% 6.52% 16.50%
F50 0.62% 0.62%
F70 0.68% 1.45% 2.13%
MD82 0.89% 0.89%
MD83 0.95% 0.99% 2.00% 3.94%
Engine 0.28% 0.28%
----- ------ ------ ------ ------ ------ ------
TOTAL 2.37% 16.99% 16.95% 24.74% 12.73% 26.22% 100%
===== ====== ====== ====== ====== ====== ======
</TABLE>
*Appraised Value as at November 30,1999
As of July 1, 2000 47 leases, representing 73.78% of the appraised
value at November 30, 1999 are scheduled to expire before December 31,
2004. As of July 1, 2000 the average remaining term to lease expiry
date, weighted by appraised value at November 30, 1999 was 41 months.
RE-MARKETING TASK FOR AIRCRAFT EXPIRING PRIOR TO DECEMBER 2000
Two leases, representing 2.37% of the appraised value at November 30,
1999 are scheduled to expire before December 31, 2000. One of the two
aircraft, a B737-300, is likely to stay with its current operator and
the Servicer is currently negotiating extended lease terms. The second
aircraft, a B737-400, is not yet subject to a non-binding letter of
intent, however the Servicer is in discussions with a potential
operator.
AIRCRAFT ON GROUND (AOG)
As of July 1, 2000, there are two aircraft on the ground. The two
aircraft are subject to non-binding letters of intent.
AOG ANALYSIS JULY 1, 2000
AIRCRAFT TYPE OLD LESSEE STATUS EXPECTED
RE-LEASE DATE
------------- ---------- ------ -------------
A310-300 B.R.A. Subject to LOI September 2000
B737-300 VASP Subject to LOI August 2000
One A310-300 aircraft was repossessed from B.R.A. in May 2000 and is
currently subject to a non-binding letter of intent.
One B737-300 aircraft was repossessed from VASP in May 2000 and is
currently subject to a non-binding letter of intent.
One B737-400 aircraft which was previously AOG, was released to a new
lessee on June 20, 2000 on a short-term four-month lease.
52
<PAGE> 54
LESSEE DIFFICULTIES
CURRENT AND RESTRUCTURED ARREARS
As of July 1, 2000, five lessees were in arrears. The nine aircraft on
lease to these lessees represented 13.9% of the portfolio by appraised
value at November 30, 1999. The total amount of rental payments and
maintenance reserves that was in arrears with respect to these five
lessees was $3.1 million. MSAF Group holds security deposits of $4.9
million against these arrears. The current arrears amount represents
1.4% of annual lease rental payments. The weighted average number of
days past due of such arrears was 39 days.
In addition to the current arrears mentioned above, one lessee owes an
additional $0.7 million of arrears which were restructured in January
2000 for payment in July and August 2000.
REGIONAL ANALYSIS OF CURRENT ARREARS
The categorization of countries into the geographical regions of
Developed Markets, Emerging Markets and Other is determined using
Morgan Stanley Capital International, Inc. ("MSCI") designations. A
regional analysis of current arrears as of July 1, 2000 is shown below.
<TABLE>
<CAPTION>
%
Appraised No. of No. of No. of Current Security
Region Value Countries Aircraft Lessees Arrears Deposit
------ --------- --------- -------- ------- ------- --------
$ M $ M
<S> <C> <C> <C> <C> <C> <C> <C>
Developed Europe 3.1% 1 2 1 0.7 1.0
North America 5.3% 1 4 1 1.1 2.0
Pacific -- 0 0 0 0 0
Emerging Europe and Middle 2.0% 1 1 1 0.7 0.6
East
Asia -- 0 0 0 0.0 0.0
Latin America -- 0 0 0 0 0
Other Other 3.5% 2 2 2 0.6 1.3
----- --- --- --- --- ---
TOTAL ARREARS 13.9% 5 9 5 3.1 4.9
===== === === === === ===
</TABLE>
EUROPE (DEVELOPED)
MSAF Group currently leases 27.5% of the portfolio by appraised value
at November 30, 1999 in the Europe (Developed) region. One of the five
lessees in arrears is based in this region. In January 2000, Transaer,
a lessee based in Ireland, restructured rental and maintenance arrears
into a note payable of $1.4 million. $0.7 million of these restructured
payments were due but unpaid in June 2000 and are categorized as
current arrears.
Transaer has informed MSAF Group that it will not be able to meet its
payment obligations due in July ($0.5 million) and August 2000 ($0.2
million) under the restructuring agreement. Transaer is meeting its
current obligations under the leases. MSAF Group holds security
deposits of $1.0 million against the deferred arrears. These aircraft,
both A320-200s, represented 3.1% of the portfolio by appraised value at
November 30, 1999.
NORTH AMERICA (DEVELOPED)
MSAF Group currently leases 15.4% of the portfolio by appraised value
at November 30, 1999 in the North America (Developed) region. One of
the five lessees currently in arrears is based in the North America. As
of July 1, 2000,
53
<PAGE> 55
the lessee owed rental arrears of $1.1 million against which MSAF Group
holds security deposits of $2.0 million. This lessee habitually makes
its rental payments approximately one week later than its contracted
due date and therefore this is not deemed to be a receivables issue.
The lessee leases one B757-200, one MD-82 and two MD83s, representing a
total of 5.3% of the portfolio by appraised value at November 30, 1999.
PACIFIC (DEVELOPED)
MSAF Group currently leases 10.0% of the portfolio by appraised value
at November 30, 1999 in the Pacific (Developed) region. As of July 1,
2000, none of these lessees were in arrears.
EUROPE AND MIDDLE EAST (EMERGING)
MSAF Group currently leases 7.7% of the portfolio by appraised value at
November 30, 1999 in the Europe and Middle East (Emerging) region. One
of the five lessees in arrears is based in this region. As of July 1,
2000, Air Alfa owed rental and maintenance arrears of $0.7 million,
against which MSAF Group holds a security deposit of $0.6 million. In
April 2000 the Servicer instituted legal steps in Turkey to draw down
the guarantee and repossess the aircraft from Air Alfa. Since then the
airline has made certain payments towards reducing its arrears balance.
This aircraft, an A321-100, represented 2.0% of the portfolio by
appraised value at November 30, 1999.
ASIA (EMERGING)
MSAF Group currently leases 16.5% of the portfolio by appraised value
at November 30, 1999 in the Asia (Emerging) region. As of July 1, 2000,
none of the lessees in this region were in arrears.
LATIN AMERICA (EMERGING)
MSAF Group currently leases 5.0% of the portfolio in Latin America (all
in Mexico) by appraised value at November 30, 1999. None of the lessees
currently in arrears are based in Latin America. However the two
aircraft repossessed during the quarter were leased in Latin America
and had been in arrears. See the Bad Debts Section below.
OTHER
MSAF Group currently leases 15.6% of the portfolio by appraised value
at November 30, 1999 in the Other region. Two of the five lessees
currently in arrears are based in the Other region.
As of July 1, 2000, one lessee, based in Iceland, owed rental and
maintenance reserves of $0.5 million, against which MSAF Group holds a
security deposit of $0.6 million. This is a B747-300 and represented
2.5% of the portfolio by appraised value at November 30, 1999. The
other lessee is based in Lithuania and as at July 1, 2000 maintenance
reserves of $0.1 million, against which MSAF Group holds a security
deposit of $0.7 million. This is a B737-300 and represented 1.0% of the
portfolio by appraised value at November 30, 1999. The lessee is
experiencing financial difficulties and its ability to meet future
payment obligations under the lease remain uncertain.
54
<PAGE> 56
BAD DEBTS
In addition to the current arrears of $3.1 million and restructured
arrears of $0.7 million, as of July 1, 2000, $1.3 million of rental and
maintenance payments due to MSAF Group remain unpaid from one of its
former lessees.
ANALYSIS OF BAD DEBTS BALANCE AS OF JULY 1, 2000
<TABLE>
<CAPTION>
Repossession Date Aircraft Former Country Bad Debts Bad Debts Security Total
Type Lessee Total Recovered Deposits
----------------- -------- ------ ------- --------- --------- -------- -----
$ M $ M $ M $ M
<S> <C> <C> <C> <C> <C> <C> <C>
May 2000 A310-300 B.R.A. Brazil (1.3) 0.0 0.0 (1.3)
May 2000 B737-300 VASP Brazil (0.5) 0.0 0.7 0.2
---- --- --- ----
TOTAL (1.8) 0.0 0.7 (1.1)
---- --- --- ----
</TABLE>
A former Brazilian lessee, B.R.A., defaulted on its obligations under
its lease of an A310-300 aircraft and the aircraft was repossessed in
May 2000. The lease was scheduled to expire in July 2007. The total
amount of rental payments due under the lease at the date of the
repossession was $1.3 million. There was no security deposit held by
MSAF Group to offset against the arrears balance. The aircraft is
currently subject to a non-binding letter of intent and is scheduled to
deliver to a new lessee in September 2000. This aircraft represents
approximately 1.4% of the portfolio by appraised value at November 30,
1999.
A second Brazilian lessee, VASP, defaulted on its obligations under its
lease of a B737-300 aircraft and the aircraft was repossessed on May
19, 2000 following legal proceedings against VASP. The lease was
scheduled to expire in March 2003. The total amount of rental payments
due under the lease at the date of the repossession was $0.5 million
against which we drew down a security deposit of $0.7 million. The
aircraft is currently subject to a non-binding letter of intent and is
scheduled to deliver to a new lessee in August 2000. This aircraft
represents approximately 1.0% of the portfolio by appraised value at
November 30, 1999.
NOTE PAYABLE
A former Brazilian lessee, VARIG, negotiated an early termination of
its lease of a B747-300 aircraft in July 1999. The total amount of
rental payments and maintenance reserves due under this lease, at the
date of the termination agreement, was $4.8 million against which we
drew down a security deposit of $1.1 million. Under the terms of the
termination agreement, VARIG is scheduled to repay $10.8 million over
eight years to offset arrears of $4.8 million and approximately $6.0
million for maintenance and downtime costs. Provided no default has
occurred by October 2005 under this note payable, the total remaining
payments will be reduced by approximately $1.1 million on a pro-rata
basis between October 2005 and October 2007, the scheduled final
payment date under the note. As of July 1, 2000 VARIG had made all
payments due under the note payable. This aircraft represents
approximately 2.5% of the portfolio by appraised value at November 30,
1999.
INSURANCE CLAIM
On April 2, 1999, one B757-200ER on lease to Guyana Airways was
terminated by agreement. Certain of the technical records were
incomplete and/or missing. An insurance claim under our Technical
Records policy was submitted in
55
<PAGE> 57
respect of the maintenance work, repairs and services required to
reconstruct the technical records. The insurance claim was approved and
MSAF Group received $3.9 million in June 2000 to partially offset the
substantial maintenance costs incurred in the Guyana repossession.
AIRWORTHINESS DIRECTIVE
On May 25, 2000, the United States Federal Aviation Administration
issued an Airworthiness Directive relating to fire safety standards in
certain types of aircraft. The Airworthiness Directive, which applies
to our one MD-82 and four MD-83 aircraft, together representing 4.8% of
our portfolio by appraised value at November 30, 1999, requires
operators of those aircraft to replace fire insulation blankets covered
with metalized Mylar. Under the leases of the affected aircraft, all
costs of compliance with Airworthiness Directives are the obligation of
the lessees.
56
<PAGE> 58
MORGAN STANLEY AIRCRAFT FINANCE PORTFOLIO ANALYSIS APPENDIX A
JULY 1, 2000
<TABLE>
<CAPTION>
REGION (1) COUNTRY OF LESSEE LESSEE TYPE
---------- ----------------- ------ ----
<S> <C> <C> <C>
1 EUROPE France Air Liberte MD-83
2 (Developed) France L'Aeropostale B737-300QC
3 Ireland Aer Lingus A330-300
4 Ireland TransAer A320-200
5 Ireland TransAer A320-200
6 The Netherlands KLM Engine
7 The Netherlands KLM Cityhopper F50
8 The Netherlands KLM Cityhopper F50
9 The Netherlands Transavia B737-300
10 Norway Braathens B737-500
11 Norway Braathens B737-500
12 Spain Air Europa B737-400
13 United Kingdom Air 2000 B757-200ER
14 United Kingdom Air 2000 B767-300ER
15 United Kingdom Britannia B757-200ER
16 United Kingdom Britannia B767-200ER
17 United Kingdom JMC Airlines A320-200
18 United Kingdom JMC Airlines B757-200ER
19 United Kingdom Monarch A320-200
subtotal
20 NORTH AMERICA Canada Canada 3000 A320-200
21 (Developed) Canada Air Canada A320-200
22 United States of America Alaska Airlines B737-400
23 United States of America Alaska Airlines B737-400
24 United States of America Continental B737-300
25 United States of America National Airlines B757-200ER
26 United States of America Southwest B737-300
27 United States of America Southwest B737-300
28 United States of America TWA B757-200ER
29 United States of America TWA MD-83
30 United States of America TWA MD-82
31 United States of America TWA MD-83
subtotal
32 PACIFIC Hong Kong Cathay Pacific B747-400
33 (Developed) New Zealand Air New Zealand B767-300ER
34 Singapore Regionair A310-300
35 Singapore Regionair A310-300
subtotal
36 EUROPE AND Czech Republic Travel Service a.s., B737-400
37 MIDDLE EAST Greece Olympic B737-400
38 (Emerging) Hungary Malev F70
39 Hungary Malev F70
40 Hungary Malev F70
41 Turkey Air Alfa A321-100
42 Turkey Pegasus B737-400
subtotal
43 ASIA China China Hainan B737-300
44 (Emerging) South Korea Asiana B767-300ER
45 South Korea Asiana B767-300ER
46 South Korea Asiana B737-400
47 South Korea Asiana B737-400
48 Taiwan China Airlines A300-600R
49 Taiwan China Airlines A300-600R
50 Taiwan F.E.A.T. B757-200ER
subtotal
51 LATIN AMERICA Mexico Aeromexico B757-200ER
52 (Emerging) Mexico Aeromexico MD-83
53 Mexico Mexicana B757-200ER
subtotal
54 OTHER Fiji Air Pacific B767-300ER
55 Iceland Icelandair B737-300
56 Iceland Air Atlanta Icelandic B747-300
57 Macau Air Macau A321-100
58 Malta Air Malta B737-300
59 Mauritius Air Mauritius A340-300
60 Lithuania Lithuanian Airlines B737-300
subtotal
61 AVAILABLE FOR LEASE AOG AOG A310-300
62 AOG AOG B737-300
subtotal
</TABLE>
<TABLE>
<CAPTION>
APPRAISED
VALUE AS OF
SERIAL NOV 30, 1999
REGION (1) ENGINE CONFIGURATION NUMBER DATE OF MANUFACTURE ($MM) % OF FLEET REGIONAL
---------- ---------------------- ------ ------------------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
1 EUROPE JT8D-219 49822 Dec-88 19.1 1.0%
2 (Developed) CFM 56-3C1 23788 May-87 19.2 1.0%
3 CF6-80E1 54 Apr-94 80.0 4.0%
4 V2500-A1 414 May-93 30.6 1.5%
5 V2500-A1 428 May-94 32.1 1.6%
6 CF6-80C2B6F 704279 Jul-95 5.5 0.3%
7 PW100-125B 20233 Oct-91 6.2 0.3%
8 PW100-125B 20232 Oct-91 6.3 0.3%
9 CFM 56-3C1 27635 May-95 27.3 1.4%
10 CFM 56-3B1 25165 Apr-93 19.7 1.0%
11 CFM 56-3C1 26304 Sep-94 21.2 1.1%
12 CFM 56-3C1 24707 Jun-91 24.7 1.2%
13 RB211-535-E4 23767 Apr-87 29.7 1.5%
14 CF6-80C2B6F 26256 Apr-93 63.8 3.2%
15 RB211-535-E4-37 26266 Feb-93 41.2 2.1%
16 CF6-80A 23807 Aug-87 29.5 1.5%
17 V2500-A1 393 Feb-93 30.4 1.5%
18 RB211-535-E4-37 24367 Feb-89 31.7 1.6%
19 CFM 56-5A3 446 Oct-93 30.5 1.5%
subtotal 27.5%
20 NORTH AMERICA CFM 56-5A3 397 Mar-93 30.8 1.5%
21 (Developed) CFM 56-5A3 279 Feb-92 29.9 1.5%
22 CFM 56-3C1 25104 May-93 26.6 1.3%
23 CFM 56-3C1 25105 Jul-93 26.6 1.3%
24 CFM 56-3B1 26309 Dec-94 26.3 1.3%
25 RB211-535-E4 24260 Dec-88 33.5 1.7%
26 CFM 56-3B1 23255 Jun-85 14.4 0.7%
27 CFM 56-3B1 23256 Jul-85 15.3 0.8%
28 PW 2037 28160 Jul-96 47.8 2.4%
29 JT8D-219 49657 Apr-88 19.6 1.0%
30 JT8D-217C 49825 Mar-89 17.8 0.9%
31 JT8D-219 49824 Mar-89 20.4 1.0%
subtotal 15.4%
32 PACIFIC RB211-252H2/19 24955 Sep-91 97.4 4.9%
33 (Developed) CF6-80C2B6 24875 Jun-91 57.0 2.9%
34 JT9D-7R4E1 409 Nov-85 22.3 1.1%
35 JT9D-7R4E1 410 Nov-85 22.7 1.1%
subtotal 10.0%
36 EUROPE AND CFM 56-3B2 24234 Oct-88 21.9 1.1%
37 MIDDLE EAST CFM 56-3C1 25371 Jan-92 25.1 1.3%
38 (Emerging) TAY MK620-15 11564 Dec-95 13.7 0.7%
39 TAY MK620-15 11565 Feb-96 14.3 0.7%
40 TAY MK620-15 11569 Mar-96 14.7 0.7%
41 V2530-A5 597 May-96 39.7 2.0%
42 CFM 56-3C1 26279 Jun-92 25.7 1.3%
subtotal 7.7%
43 ASIA CFM 56-3C1 26295 Dec-93 25.5 1.3%
44 (Emerging) CF6-80C2B6F 24798 Oct-90 53.1 2.7%
45 CF6-80C2B6F 25132 Feb-92 60.1 3.0%
46 CFM 56-3C1 26291 Aug-93 27.6 1.4%
47 CFM 56-3C1 26308 Oct-94 27.9 1.4%
48 PW 4158 555 Mar-90 46.3 2.3%
49 PW 4158 625 Mar-92 51.1 2.6%
50 PW 2037 25044 May-91 37.5 1.9%
subtotal 16.4%
51 LATIN AMERICA PW 2037 26272 Mar-94 41.4 2.1%
52 (Emerging) JT8D-219 53050 May-90 19.7 1.0%
53 PW 2040 24965 Mar-92 39.1 2.0%
subtotal 5.0%
54 OTHER CF6-80C2B4 26260 Sep-94 66.6 3.3%
55 CFM 56-3B2 23811 Oct-87 19.8 1.0%
56 CF6-80C2 24106 Apr-88 49.0 2.5%
57 V2530-A5 557 Dec-95 38.9 2.0%
58 CFM 56-3B2 25161 Feb-92 24.6 1.2%
59 CFM 56-5C3G 94 Mar-95 91.6 4.6%
60 CFM 56-3B2 24449 Apr-90 21.7 1.1%
subtotal 15.6%
61 AVAILABLE FOR JT9D-7R4E1 437 Nov-86 27.6 1.4%
LEASE CFM 56-3B2 24299 Nov-88 19.8 1.0%
subtotal 2.4%
------- ------ ------
Total 2,000.9 100.0% 100.0%
======= ====== ======
62
</TABLE>
(1) Regions are defined according to the Morgan Stanley Capital
International designations
<TABLE>
<S> <C>
Number of aircraft on lease 60
Number aircraft off-lease 2
Total number of aircraft 62
Number of lessees 41
Number of countries 25
Total developed 52.8%
Total emerging 29.2%
Total other 15.6%
Total AOG 2.4%
------
100.0%
======
</TABLE>
57
<PAGE> 59
Morgan Stanley Aircraft Finance Appendix B
COMPARISON OF ACTUAL CASH FLOWS VERSUS THE 1998 BASE CASE FOR MARCH 2000
<TABLE>
<CAPTION>
AMOUNTS STATED IN MILLIONS OF USD
--------------------------------------------------
ACTUAL ASSUMED VARIANCE
<S> <C> <C> <C> <C> <C>
CASH COLLECTIONS
[1] Lease Rentals 12.2 12.2 (0.0)
[2] - Renegotiated Leases (0.1) -- (0.1)
[3] - Rental Resets (0.4) -- (0.4)
--------------------------------------------------
[4] [1].....[3] CONTRACTED LEASE RENTALS 11.7 12.2 (0.5)
[5] Movement in Current Arrears Balance 0.2 -- 0.2
less Net Stress-related Costs
[6] - Bad Debts --
[7] - Security Deposits Drawn Down --
[8] - Restructured Arrears (0.1)
[9] - Aircraft on Ground ("AOG") (1.2)
[10] - Other Leasing Income 0.3
[11] - Repossession costs (0.1)
--------------------------------------------------
[12] [6]....[11] sub-total (1.1) (0.5) (0.6)
[13] [4]+[5]+[12] NET LEASE RENTALS 10.8 11.7 (0.9)
--------------------------------------------------
[14] Interest Earned 0.1 0.1 (0.0)
--------------------------------------------------
[15] Drawings from Expense Account 1.2 -- 1.2
Maintenance Receipts 0.9 -- 0.9
Maintenance Expenditure (1.1) -- (1.1)
--------------------------------------------------
[16] Net Maintenance (0.2) -- (0.2)
[17] [13] + [14] +[15] + TOTAL CASH COLLECTIONS 11.9 11.8 0.1
[16]
==================================================
CASH EXPENSES
Aircraft Operating Expenses
[18] - Insurance --
[19] - Re-leasing and other overheads (0.1)
--------------------------------------------------
[20] [18]+[19] sub-total (0.1) (0.4) 0.3
SG&A Expenses
[21] Aircraft Servicer Fees
- Base Fee (0.1)
- Rent Collected Fee (0.1)
- Rent Contracted Fee (0.1)
- Incentive Fee --
--------------------------------------------------
[22] sub-total (0.3) (0.5) 0.2
- Cabot (0.1) (0.2) 0.1
- Other (0.1) (0.1) --
--------------------------------------------------
[23] Other Servicer Fees (0.2) (0.3) 0.1
[24] [22]+[23] sub-total (0.5) (0.8) 0.3
[25] [20] +[24] TOTAL CASH EXPENSES (0.6) (1.2) 0.6
==================================================
NET CASH COLLECTIONS
[26] [17] Total Cash Collections 11.9 11.8 0.1
[27] [25] Total Cash Expenses (0.6) (1.2) 0.6
[28] Accrued Expenses (0.8) -- (0.8)
[29] Interest Payments (4.9) (4.9) 0.0
[30] Swap Payments (0.4) (0.5) 0.1
[31] Exceptional Items -- -- --
--------------------------------------------------
[32] [26]...[31] TOTAL 5.2 5.2 0.0
==================================================
[33] PRINCIPAL PAYMENTS
subclass A1 -- -- --
subclass A2 4.8 4.8 --
subclass A3 -- -- --
subclass A4 -- -- --
subclass A5 -- -- --
subclass B1 0.3 0.3 --
subclass B2 -- -- --
subclass C1 0.1 0.1 --
subclass C2 -- -- --
subclass D1 -- -- --
--------------------------------------------------
TOTAL 5.2 5.2 --
==================================================
DEBT BALANCES AS AT MARCH 15, 2000
subclass A1 400.0 400.0 --
subclass A2 224.7 232.0 (7.3)
subclass B1 89.7 89.7 (0.0)
subclass C1 99.9 99.9 --
subclass D1 110.0 110.0 --
--------------------------------------------------
TOTAL 924.3 931.6 (7.3)
--------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
% OF 1998 BASE CASE
----------------------------------------
ACTUAL ASSUMED VARIANCE
<S> <C> <C> <C> <C> <C>
CASH COLLECTIONS
[1] Lease Rentals 100.0% 100.0% 0.0%
[2] - Renegotiated Leases -0.8% 0.0% -0.8%
[3] - Rental Resets -3.3% 0.0% -3.3%
----------------------------------------
[4] [1].....[3] CONTRACTED LEASE RENTALS 95.9% 100.0% -4.1%
[5] Movement in Current Arrears Balance 1.6% 0.0% 1.6%
less Net Stress-related Costs
[6] - Bad Debts 0.0%
[7] - Security Deposits Drawn Down 0.0%
[8] - Restructured Arrears -0.8%
[9] - Aircraft on Ground ("AOG") -9.8%
[10] - Other Leasing Income 2.5%
[11] - Repossession costs -0.8%
----------------------------------------
[12] [6]....[11] sub-total -9.0% -4.5% -4.5%
[13] [4]+[5]+[12] NET LEASE RENTALS 88.5% 95.5% -7.0%
----------------------------------------
[14] Interest Earned 0.8% 1.0% -0.2%
----------------------------------------
[15] Drawings from Expense Account 9.8% 0.0% 9.8%
Maintenance Receipts 7.4% 0.0% 7.4%
Maintenance Expenditure -9.0% 0.0% -9.0%
----------------------------------------
[16] Net Maintenance -1.6% 0.0% -1.6%
[17] [13] + [14] +[15] + TOTAL CASH COLLECTIONS 97.5% 96.5% 1.0%
[16]
========================================
CASH EXPENSES
Aircraft Operating Expenses
[18] - Insurance 0.0%
[19] - Re-leasing and other overheads -0.8%
----------------------------------------
[20] [18]+[19] sub-total -0.3% -3.5% 3.2%
SG&A Expenses
[21] Aircraft Servicer Fees
- Base Fee -1.3%
- Rent Collected Fee -0.8%
- Rent Contracted Fee 0.7%
- Incentive Fee 0.0%
----------------------------------------
[22] sub-total -2.8% -4.1% 1.3%
- Cabot -1.2% -1.4% 0.2%
- Other -0.3% -1.0% 0.7%
----------------------------------------
[23] Other Servicer Fees -1.5% -2.4% 0.9%
[24] [22]+[23] sub-total -4.3% -6.5% 2.2%
[25] [20] +[24] TOTAL CASH EXPENSES -4.6% -10.0% 5.4%
========================================
NET CASH COLLECTIONS
[26] [17] Total Cash Collections 97.5% 96.5% 1.1%
[27] [25] Total Cash Expenses -4.6% -10.0% 5.4%
[28] Accrued Expenses -6.6% 0.0% -6.6%
[29] Interest Payments -40.7% -40.7% 0.0%
[30] Swap Payments -3.1% -3.2% 0.1%
[31] Exceptional Items 0.0% 0.0% 0.0%
----------------------------------------
[32] [26]...[31] TOTAL 42.6% 42.6% 0.0%
========================================
[33] PRINCIPAL PAYMENTS
subclass A1 0.0% 0.0% 0.0%
subclass A2 39.3% 39.3% 0.0%
subclass A3 0.0% 0.0% 0.0%
subclass A4 0.0% 0.0% 0.0%
subclass A5 0.0% 0.0% 0.0%
subclass B1 2.5% 2.5% 0.0%
subclass B2 0.0% 0.0% 0.0%
subclass C1 0.8% 0.8% 0.0%
subclass C2 0.0% 0.0% 0.0%
subclass D1 0.0% 0.0% 0.0%
----------------------------------------
TOTAL 42.6% 42.6% 0.0%
========================================
</TABLE>
58
<PAGE> 60
APPENDIX C
MORGAN STANLEY AIRCRAFT FINANCE COMPARISON OF ACTUAL CASH FLOWS VERSUS THE
2000 BASE CASE FOR APRIL/MAY 2000
<TABLE>
<CAPTION>
AMOUNTS STATED IN MILLIONS OF USD
-----------------------------------------------------------
ACTUAL ASSUMED VARIANCE
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH COLLECTIONS
[1] Lease Rentals 44.5 44.5 --
[2] - Renegotiated Leases -- -- --
[3] - Rental Resets -- -- --
------------------------------------------------------
[4] [1].....[3] CONTRACTED LEASE RENTALS 44.5 44.5 --
-- --
[5] Movement in Current Arrears Balance (0.9) -- (0.9)
less Net Stress-related Costs
[6] - Bad Debts -- -- --
[7] - Security Deposits Drawn Down -- -- --
[8] - Restructured Arrears -- -- --
[9] - Aircraft on Ground ("AOG") (0.7) -- --
[10] - Other Leasing Income (1.2) -- --
[11] - Repossession costs (0.1) -- --
------------------------------------------------------
[12] [6]....[11] sub-total (2.0) (2.0) --
[13] [4]+[5]+[12] NET LEASE RENTALS 41.6 42.5 (0.9)
------------------------------------------------------
[14] Interest Earned 0.6 0.4 0.2
------------------------------------------------------
[15] Drawings from Expense Account 5.1 -- 5.1
Maintenance Receipts 4.0 -- 4.0
Maintenance Expenditure (7.1) -- (7.1)
------------------------------------------------------
[16] Net Maintenance (3.1) -- (3.1)
[17] [13] + [14] +[15] + TOTAL CASH COLLECTIONS 44.2 42.9 1.3
[16]
======================================================
CASH EXPENSES
Aircraft Operating Expenses
[18] - Insurance (0.2)
[19] - Re-leasing and other overheads (0.1)
------------------------------------------------------
[20] [18]+[19] sub-total (0.3) (0.3) --
SG&A Expenses
[21] Aircraft Servicer Fees
- Base Fee (0.5)
- Rent Collected Fee (0.5)
- Rent Contracted Fee (0.5)
- Incentive Fee --
------------------------------------------------------
[22] sub-total (1.5) (1.5) --
- Cabot (0.2) (0.2) --
- Other (0.6) (0.2) (0.4)
------------------------------------------------------
[23] Other Servicer Fees (0.8) (0.4) (0.4)
[24] [22]+[23] sub-total (2.3) (1.9) (0.4)
[25] [20] +[24] TOTAL CASH EXPENSES (2.6) (2.2) (0.4)
======================================================
NET CASH COLLECTIONS
[26] [17] Total Cash Collections 44.2 42.9 1.3
[27] [25] Total Cash Expenses (2.6) (2.2) (0.4)
[28] Accrued Expenses (3.9) -- (3.9)
[29] Interest Payments (21.1) (20.9) (0.2)
[30] Swap Payments (1.6) (1.8) 0.2
[31] Exceptional Items -- -- --
------------------------------------------------------
[32] [26]...[31] TOTAL 15.0 18.0 (3.0)
======================================================
[33] PRINCIPAL PAYMENTS
subclass A2 1.3 2.4 (1.1)
subclass A3 -- -- --
subclass A4 -- -- --
subclass A5 12.5 14.4 (1.9)
subclass B1 1.1 1.1 --
subclass B2 -- -- --
subclass C1 0.1 0.1 --
subclass C2 -- -- --
subclass D1 -- -- --
------------------------------------------------------
TOTAL 15.0 18.0 (3.0)
======================================================
DEBT BALANCES 15-MAY-00 15-MAY-00
------------- --------- ---------
subclass A2 223.4 222.3 1.1
subclass A3 580.0 580.0 --
subclass A4 200.0 200.0 --
subclass A5 387.5 385.6 1.9
subclass B1 88.6 88.6 --
subclass B2 75.0 75.0 --
subclass C1 99.8 99.8 --
subclass C2 55.0 55.0 --
subclass D1 110.0 110.0 --
------------------------------------------------------
TOTAL 1,819.3 1,816.3 3.0
======================================================
</TABLE>
<TABLE>
<CAPTION>
% OF 2000 BASE CASE
--------------------------------------------------
ACTUAL ASSUMED VARIANCE
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH COLLECTIONS
[1] Lease Rentals 100.0% 100.0% 0.0%
[2] - Renegotiated Leases 0.0% 0.0% 0.0%
[3] - Rental Resets 0.0% 0.0% 0.0%
--------------------------------------------------
[4] [1].....[3] CONTRACTED LEASE RENTALS 100.0% 100.0% 0.0%
[5] Movement in Current Arrears Balance -2.0% 0.0% -2.0%
less Net Stress-related Costs
[6] - Bad Debts 0.0%
[7] - Security Deposits Drawn Down 0.0%
[8] - Restructured Arrears 0.0%
[9] - Aircraft on Ground ("AOG") -1.6%
[10] - Other Leasing Income -2.7%
[11] - Repossession costs -0.2%
--------------------------------------------------
[12] [6]....[11] sub-total -4.5% -4.5% 0.0%
[13] [4]+[5]+[12] NET LEASE RENTALS 93.5% 95.5% -2.0%
--------------------------------------------------
[14] Interest Earned 1.3% 1.0% 0.3%
--------------------------------------------------
[15] Drawings from Expense Account 11.5% 0.0% 11.5%
Maintenance Receipts 9.0% 9.0%
Maintenance Expenditure -16.0% -16.0%
--------------------------------------------------
[16] Net Maintenance -7.0% 0.0% -7.0%
==================================================
[17] [13] + [14] +[15] + TOTAL CASH COLLECTIONS 99.3% 96.5% 2.8%
[16]
CASH EXPENSES
Aircraft Operating Expenses
[18] - Insurance -0.5%
[19] - Re-leasing and other overheads -0.3%
--------------------------------------------------
[20] [18]+[19] sub-total -0.8% -0.8% 0.0%
SG&A Expenses
[21] Aircraft Servicer Fees
- Base Fee -1.1%
- Rent Collected Fee -1.1%
- Rent Contracted Fee -1.1%
- Incentive Fee 0.0%
--------------------------------------------------
[22] sub-total -3.4% -3.4% 0.0%
- Cabot -0.4% -0.4% 0.0%
- Other -1.3% -0.4% -0.9%
--------------------------------------------------
[23] Other Servicer Fees -1.7% -0.8% -0.9%
[24] [22]+[23] sub-total -5.1% -4.2% -0.9%
[25] [20] +[24] TOTAL CASH EXPENSES -5.9% -5.0% -0.9%
==================================================
NET CASH COLLECTIONS
[26] [17] Total Cash Collections 99.3% 96.5% 2.8%
[27] [25] Total Cash Expenses -5.9% -5.0% -0.9%
[28] Accrued Expenses -8.8% 0.0% -8.8%
[29] Interest Payments -47.4% -47.0% -0.4%
[30] Swap Payments -3.6% -4.0% 0.4%
[31] Exceptional Items 0.0% 0.0% 0.0%
--------------------------------------------------
[32] [26]...[31] TOTAL 33.7% 40.5% -6.8%
==================================================
[33] PRINCIPAL PAYMENTS
subclass A2 2.9% 5.4% -2.5%
subclass A3 0.0% 0.0% 0.0%
subclass A4 0.0% 0.0% 0.0%
subclass A5 28.1% 32.4% -4.3%
subclass B1 2.5% 2.5% 0.0%
subclass B2 0.0% 0.0% 0.0%
subclass C1 0.2% 0.2% 0.0%
subclass C2 0.0% 0.0% 0.0%
subclass D1 0.0% 0.0% 0.0%
--------------------------------------------------
TOTAL 33.7% 40.5% -6.8%
==================================================
</TABLE>
59
<PAGE> 61
Morgan Stanley Debt Coverage Ratios Appendix D
Aircraft Finance 2nd Quarter -- May 15, 2000
<TABLE>
<CAPTION>
2000
CLOSING ACTUAL BASE CASE VARIANCE
------- ------ --------- --------
<S> <C> <C> <C> <C>
SOURCE OF FUNDS
Net Cash Collections 15.0 18.0 (3.00)
Add Back Interest Payments 21.1 20.9 0.20
Add Back Swap Payments 1.6 1.8 (0.20)
---- ---- -----
a 37.7 40.7 (3.00)
---- ---- -----
APPLICATION OF FUNDS
b Swaps 1.6 1.8 (0.20)
c Class A Interest 15.6 15.4 0.20
d Class A Minimum 4.9 4.9 0.00
e Class B Interest 1.9 1.9 0.00
f Class B Minimum 1.0 1.0 0.00
g Class C Interest 2.0 2.0 0.00
h Class C Minimum -- -- 0.00
I Class D Interest 1.6 1.6 0.00
j Class D Minimum -- -- 0.00
k Class A Scheduled 0.1 0.1 0.00
l Class B Scheduled 0.1 0.1 0.00
m Class C Scheduled 0.1 0.1 0.00
n Class D Scheduled -- -- 0.00
o Permitted Aircraft Modifications -- -- 0.00
p Class A Supplemental 8.8 11.8 (3.00)
---- ---- -----
Total 37.7 40.7 (3.00)
==== ==== =====
</TABLE>
<TABLE>
<S> <C> <C>
[1] Interest Coverage Ratio
Class A 2.19 2.37 = a/(b+c)
Class B 1.57 1.70 = a/(b+c+d+e)
Class C 1.40 1.51 = a/(b+c+d+e+f+g)
Class D 1.32 1.43 = a/(b+c+d+e+f+g+h+i)
[2] Debt Coverage Ratio
Class A 1.31 1.42 = a/(b+c+d+e+f+g+h+i+j+k)
Class B 1.31 1.42 = a/(b+c+d+e+f+g+h+i+j+k+l)
Class C 1.30 1.41 = a/(b+c+d+e+f+g+h+i+j+k+l+m)
Class D 1.30 1.41 = a/(b+c+d+e+f+g+h+i+j+k+l+m+n)
</TABLE>
<TABLE>
<CAPTION>
2000 Base Case Actual 2000 Base Case
Loan-to-Value Ratios 15-Mar-00 15-May-00 15-May-00
-------------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
[3] Assumed Portfolio Value 2,000.9 1,987.1 1,987.1
Cash 30.0 30.0 30.0
- Accrued Expenses 6.0 4.5 4.5
- Security Deposits 7.1 10.2 10.2
subtotal cash 43.1 44.7 44.7
Letters of Credit 82.1 78.9 78.9
------- ------- -------
Total Liquidity Reserve 125.2 123.6 123.6
[4] Total Asset Value 2,126.2 2,109.1 2,109.1
Note Balance
------------
Class A 1,404.7 66.1% 1,390.9 65.9% 1,387.9 65.8%
Class B 164.7 73.8% 163.6 73.7% 163.6 73.6%
Class C 154.9 81.1% 154.8 81.0% 154.8 80.9%
Class D 110.0 86.3% 110.0 86.3% 110.0 86.1%
------- ------- -------
Total 1,834.3 1,819.3 1,816.3
======= ======= =======
</TABLE>
[1] Interest Coverage Ratio is equal to Net Cash Collections, before Interest
and swap payments, expressed as a ratio of the swap costs and interest payable
on each subclass of Notes plus the interest and minimum principal payments
payable on each subclass of Notes that rank senior in priority of payment to the
relevant subclass of Notes.
[2] Debt Service Ratio is equal to Net Cash Collections before interest and swap
payments, expressed as a ratio of the interest and minimum and scheduled
principal payments payable on each subclass of Notes plus the interest and
minimum and scheduled principal payments payable on each subclass of Notes that
ranks equally with or senior to the relevant subclass of Notes in the priority
of payments.
[3] Assumed Portfolio Value represents the Inital Appraised Value of each
aircraft in the Portfolio multiplied by the Depreciation Factor at Calculation
date divided by the Depreciation Factor at Closing date.
[4] Total Asset Value is equal to Total Portfolio Value plus Liquidity Reserve
Amount
60
