<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended November 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
COMMISSION FILE NUMBER 333-56575
------------------------
MORGAN STANLEY AIRCRAFT FINANCE
(Exact Name of Registrant as specified in trust agreement)
DELAWARE
(State or other jurisdiction of incorporation or organization)
<TABLE>
<S> <C> <C>
7359 MORGAN STANLEY AIRCRAFT FINANCE 13-3375162
(SIC Code) C/O WILMINGTON TRUST COMPANY (I.R.S. Employer Identification
1100 NORTH MARKET STREET No.)
RODNEY SQUARE NORTH
WILMINGTON, DELAWARE 19890-0001
ATTENTION: CORPORATE TRUST ADMINISTRATION
(302) 651-1000
</TABLE>
(Addresses and telephone numbers, including area codes, of Registrant's
principal executive offices)
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
- -------------------------------------------- --------------------------------------------
- -------------------------------------------- --------------------------------------------
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
None
- --------------------------------------------------------------------------------
(Title of class)
- --------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 or Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
<TABLE>
<S> <C> <C>
ISSUER CLASS OUTSTANDING AT FEBRUARY 15, 2000
ONE
MORGAN STANLEY AIRCRAFT FINANCE BENEFICIAL INTEREST
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
MORGAN STANLEY AIRCRAFT FINANCE
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 30
Item 3. Legal Proceedings........................................... 30
Item 4. Submission of Matters to a Vote of Security-Holders......... 30
PART II
Item 5. Market for Registrants' Common Equity and Related
Stockholder Matters......................................... 31
Item 6. Selected Consolidated Financial Data........................ 31
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 32
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 42
Item 8. Financial Statements and Supplementary Data................. 44
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 44
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 45
Item 11. Executive Compensation...................................... 52
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 52
Item 13. Certain Relationships and Related Transactions.............. 53
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 54
Appendix 1. Cash Analysis of Financial Condition and Results of
Operations.................................................. A-1
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
INTRODUCTION
Morgan Stanley Aircraft Finance ("MSAF", and together with its
subsidiaries, "MSAF GROUP") is a special-purpose statutory business trust formed
on October 30, 1997 under the laws of Delaware for an unlimited duration for
certain limited purposes. These limited purposes include (1) owning all of the
equity interest in MSA I, which owns 31 aircraft and one engine and Aircraft
SPC-5, Inc. which owns one aircraft (the "AIRCRAFT-OWNING SUBSIDIARIES") and (2)
acquiring, financing, re-financing, owning, leasing, re-leasing, selling,
maintaining and modifying the aircraft and any additional aircraft MSAF Group
acquires in the future. MSAF Group may also enter into certain hedging contracts
as described under "Interest Rate Risk Management", and establish and provide
loans or guarantees to, or in respect of, its subsidiaries and any entities that
may be established or acquired in the future in connection with acquisitions of
additional aircraft. In addition to the Aircraft-Owning Subsidiaries, MSAF has
two further direct subsidiaries, Greenfly (Ireland) Limited and Redfly (UK)
Limited (the "LEASING SUBSIDIARIES").
On March 3, 1998 MSAF Group issued $1,050 million of notes due March 15,
2023 (collectively, the "OLD NOTES") in five subclasses -- Subclass A-1,
Subclass A-2, Subclass B-1, Subclass C-1 and Subclass D-1. On January 18, 1999,
MSAF consummated an exchange offer whereby MSAF Group issued five subclasses of
notes due March 15, 2023 (collectively the "NEW NOTES" and together with the Old
Notes, the "NOTES") in exchange for each subclass of the issued and outstanding
Old Notes. The terms of the New Notes are identical in all material respects to
the Old Notes, except that the New Notes are registered under the Securities Act
of 1933, as amended. MSAF Group issued the Notes pursuant to an indenture
between MSAF and Bankers Trust Company, as trustee (the "TRUSTEE"), dated as of
March 3, 1998 (the "INDENTURE").
MSAF Group's initial portfolio of aircraft assets consists of 32 aircraft
and one engine purchased from International Lease Finance Corporation ("ILFC")
and the related leases. As of February 15, 2000, 31 of MSAF Group's aircraft and
one engine were subject to lease contracts (or in one case, a conditional sale
agreement) with 27 lessees based in 19 countries. The aircraft under three of
the lease contracts have not been delivered to the respective lessees. In two
cases delivery is scheduled for April 1, 2000 and in the other case delivery is
scheduled for March 17, 2000. MSAF Group's one off-lease aircraft is subject to
a non-binding letter of intent for lease.
All of the beneficial interest in MSAF Group is currently owned by Morgan
Stanley Financing Inc. ("MSF"), a wholly-owned subsidiary of Morgan Stanley Dean
Witter & Co. ("MSDW"). MSF may transfer all or a portion of such beneficial
interest to related or unrelated third parties in the future.
Prior to the issuance of the Old Notes, MSAF Group received approximately
$920 million in non-interest bearing loans from MSF which were utilized to
purchase 31 of MSAF Group's 32 aircraft. At the time of the issuance of the Old
Notes, the loans were automatically converted into a beneficial interest and a
beneficial interest distribution of approximately $976 million was paid to MSF.
This beneficial interest distribution included repayment of the interest free
loans and a distribution of approximately $56 million (comprising $21 million in
lease rentals accrued to the date of issuance of the Old Notes with the balance
representing finance and other charges paid to MSF).
In connection with the offering and sale of the Old Notes, MSAF Group paid
approximately $7.1 million in subscription discounts and commissions to
subsidiaries of MSDW.
There are six trustees of MSAF Group (the "TRUSTEES"). One trustee of MSAF
Group is Wilmington Trust Company, the Delaware trustee (the "DELAWARE
TRUSTEE"). Three of the six trustees of MSAF Group and one alternate trustee
(the "CONTROLLING TRUSTEES") are officers of affiliates of MSDW. Two trustees
(the "INDEPENDENT TRUSTEES") are independent from MSDW and are only permitted to
vote in trustee meetings on certain significant decisions relating to insolvency
proceedings. One of the Independent Trustees is a partner of Shearman &
Sterling, a law firm that regularly provides legal services to MSDW and its
affiliates. The controlling or independent trustees or directors, as applicable,
of each Subsidiary are the same persons as the
2
<PAGE> 4
Controlling Trustees and the Independent Trustees, unless otherwise required by
any provisions of local law mandating a particular citizenship for trustees or
directors. Neither MSAF Group nor any of the Aircraft-Owning Subsidiaries has
any employees or executive officers. Accordingly, the Trustees rely upon various
service providers, including affiliates of MSDW, for all asset servicing,
executive and administrative functions pursuant to the respective service
provider agreements. Transactions or proceedings relating to certain insolvency
proceedings of MSAF Group may only be approved by a unanimous vote of all the
Controlling Trustees and Independent Trustees.
MSAF Group's registered office is located at 1100 North Market Street,
Rodney Square North, Wilmington, Delaware 19890-0001 care of Wilmington Trust
Company, attention: Corporate Trust Administration and its telephone number is
1-302-651-1000.
3
<PAGE> 5
RISK FACTORS
The risks and uncertainties described below are not the only ones facing
MSAF. Additional risks and uncertainties not known to us at present, or that we
believe are immaterial today, may also impair our business operations.
If any of the following risks actually occur, we may not be able to make
the required payments on the Notes. In addition, it is possible that the rental
payments under the leases may not be adequate to make the required payments on
the Notes.
This information statement also contains forward-looking statements that
involve risks and uncertainties. In most cases, you can identify forward-looking
statements by terminology such as "may," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of such terms or similar terminology. Our actual results could
differ materially from those anticipated in these forward-looking statements. In
evaluating these statements, you should specifically consider various factors,
including the risks outlined below.
NO SECURITY INTEREST IN AIRCRAFT
Neither the Trustee, the security trustee acting on behalf of the holders
of the Notes (the "NOTEHOLDERS") and each other secured creditor nor any
Noteholder has any security interest, mortgage, charge or other similar interest
in any aircraft. If there is an event of default, they will not be able to sell
the aircraft to repay the Notes or exercise similar remedies which they would
have if they had a security interest in the aircraft. MSAF Group has, however,
pledged to the security trustee as security for MSAF Group's various obligations
(including under the Notes), 100% of the equity in our subsidiaries, the
interests of all MSAF Group members in the leases, any intercompany loans from
MSAF Group to our subsidiaries, any cash contained in the accounts and
investments made with our cash balances.
NO EXECUTIVE MANAGEMENT -- RELIANCE ON THIRD PARTIES TO MANAGE OUR BUSINESS
We have no executive management resources of our own. We therefore rely on
several service providers for the leasing and re-leasing of the portfolio and
all other executive and administrative responsibilities. If these service
providers do not perform their contractual obligations to us, our operations may
suffer and we may not be able to repay the Notes. We can give no assurance that
we will continue our arrangements with these service providers or that the
service providers will continue their relationship with us until the Notes are
paid in full. If a service provider resigns or we terminate its appointment, we
may be unable to find suitable replacement service providers that we can engage
on suitable terms. Additionally, our appointment of replacement service
providers may cause a lowering or withdrawal of the ratings on the Notes. You
should refer to "Management of MSAF Group -- The Servicer"; and "Management of
MSAF Group -- Corporate Management" for detailed information on the
responsibilities delegated to service providers.
CONFLICTS OF INTEREST OF ILFC
ILFC acts as servicer for our portfolio and as such performs certain
services including marketing our current portfolio for lease or sale and
monitoring lessee compliance with lease terms. ILFC, however, manages a large
aircraft portfolio for itself and others and for that reason, it may face
conflicts of interest in managing and marketing our aircraft for re-lease or
sale. The aircraft it manages for others may compete with our portfolio when
they are being marketed for re-lease or sale. ILFC also arranges aircraft
financings and lease transactions and advises many airlines (including some
lessees and potential lessees). If ILFC cannot resolve a conflict of interest,
the conflict could have an adverse effect on our ability to manage, re-lease or
sell the portfolio. In that case, we may be unable to make the required payments
on the Notes.
For a description of ILFC's aircraft management and advisory business, you
should refer to "Management of MSAF Group -- The Servicer."
4
<PAGE> 6
LIMITATION ON ILFC'S LIABILITY
Our servicing agreement with ILFC contains limitations on its liability for
losses caused by its services. There is a risk that we may be unable to recover
from ILFC the amount of any losses they cause in performing the services.
Additionally, ILFC will not be liable to you for any losses caused by its
services.
We describe the liability and other provisions of the servicing agreement
under "Management of MSAF Group -- The Servicer."
CYCLICALITY OF SUPPLY OF AND DEMAND FOR AIRCRAFT AND DEPRESSION OF AIRCRAFT
VALUES
The market for commercial jet aircraft is very cyclical and can produce
sharp increases and decreases in aircraft values and lease rates. Decreases in
aircraft values or lease rates may cause a decrease in our cash flows. Depending
on market conditions, we may be unable to sell or re-lease aircraft on terms
that allow us to make payments on the Notes.
Aircraft values and lease rates depend on various factors that are outside
our control. Such factors include, but are not limited to:
- manufacturer production levels and prices for new aircraft;
- general economic conditions affecting lessee operations;
- used aircraft supply;
- passenger demand;
- retirement and obsolescence of aircraft models;
- manufacturers merging or leaving the aircraft industry;
- interest rates and credit availability;
- fuel and other operating costs;
- re-introduction into service of aircraft previously in storage;
- governmental regulations; and
- lack of capacity in the air traffic control system.
In addition to values for aircraft generally, the value of specific
aircraft may increase or decrease sharply depending on factors that are not
within our control. Such factors include, but are not limited to:
- manufacturer production levels and prices for new aircraft;
- manufacturers merging or leaving the aircraft industry;
- maintenance and operating history of the aircraft;
- number of operators using a type of aircraft;
- legal or regulatory requirements that prevent an aircraft from being
re-leased or sold in the condition that it is in; and
- the discovery of manufacturing defects in an aircraft model.
The value of specific aircraft and the cost of after-market support may
also depend on the condition of the manufacturer. Current competition between
The Boeing Company ("BOEING") and Airbus Industrie G.I.E. ("AIRBUS") is also a
threat to aircraft values. Boeing and Airbus have increased production to an
amount substantially above the long-term requirement implied by industry
forecasts. If production is maintained at this level the increased supply of new
aircraft may depress used aircraft values and lease rates (especially in regions
such as Asia where there has been an oversupply of aircraft). This development
could cause a decrease in our cash flows and adversely affect our ability to
make payments on the Notes.
5
<PAGE> 7
ACTUAL MARKET VALUE MAY BE LESS THAN APPRAISED VALUE
Appraised values for aircraft do not necessarily reflect the market value
we could obtain for aircraft at a specific time. Appraised values are based on
the assumption that there is an "open, unrestricted stable market environment
with a reasonable balance of supply and demand". As we describe above, the
aircraft market is not always stable and there may be supply and demand
imbalances at any one time, especially for specific aircraft types. At the high
point in a cycle, the current market value of some aircraft may be at or above
their appraised value while the current market value of others may be
significantly less than their appraised values. At a low point in the industry
cycle, the current market value of most aircraft types is likely to be less (and
in many cases, much less) than appraised base values. For these reasons, you
should not rely only on appraised values as an indication of the price that we
could obtain if we sold an aircraft.
TECHNOLOGICAL RISKS
The availability of newer, more technologically advanced aircraft or the
introduction of increasingly stringent noise or emissions regulations may make
it more difficult for us to re-lease or sell aircraft. This risk is particularly
significant for us given our need to repay principal and interest on the Notes
over a relatively long period. This will require that many of the aircraft are
leased or sold close to the end of their useful economic life. We expect that
the extent to which we are able to manage these technological risks through
modifications to aircraft and sale of aircraft will be limited.
RISKS RELATING TO ACQUISITION OF ADDITIONAL AIRCRAFT
We may acquire additional aircraft in the future. The cash flows derived
from such additional aircraft, together with the cash flows generated by the
aircraft in our portfolio, are expected to be the primary source of payment of
interest, principal and premium, if any, on the Notes, as well as any new notes
issued in connection with the financing of additional aircraft purchases. ILFC
is not obligated to act as servicer with respect to any additional aircraft we
may acquire. We may need to procure additional servicing arrangements with
respect to any additional aircraft we acquire, and we cannot assure that any
additional servicing arrangements will be with ILFC or on similar terms to the
servicing agreement with ILFC.
OPERATIONAL RESTRICTIONS MAY HARM OUR ABILITY TO COMPETE
The Indenture and our governing corporate documents impose restrictions on
how we operate our business. These restrictions limit our ability to compete
effectively in the aircraft leasing market. For example, we cannot grant
privileged rental rates to airlines in return for equity investments in such
airlines. There are also restrictions on persons to whom we may lease aircraft
to and limits on leasing to lessees in specific geographical regions. Most
competing aircraft lessors do not operate under similar restrictions.
LESSEE PURCHASE OPTIONS MAY BE EXERCISED AT PRICES BELOW NOTE TARGET PRICE FOR
SUCH AIRCRAFT
As of February 15, 2000, six lessees had outstanding options to purchase a
total of eight aircraft (representing 27.01% of the portfolio by appraised value
at November 30, 1999). There is a risk that lessees could exercise these options
and, in particular, at a time when the exercise prices are below the Note target
price for the aircraft being purchased. Any exercise of such options will affect
the amount and timing of principal payments on the Notes.
RISKS RELATING TO AIRCRAFT LIENS
Liens may attach to the aircraft in the course of their operation. These
liens may impair our ability to repossess, re-lease or sell the aircraft. Liens
which secure the payment of airport taxes, customs duties, air navigation
charges (including charges imposed by agencies regulating access to air space,
such as Eurocontrol), landing charges, crew wages, repairer's charges or salvage
attach to the aircraft in the normal course of operation. The amounts which the
liens secure may be substantial and may exceed the value of the aircraft against
which the lien is asserted. In some jurisdictions, a holder of aircraft liens
may have the right to detain,
6
<PAGE> 8
sell or cause the forfeiture of the aircraft. The lessees may not comply with
their obligations under the leases to discharge liens arising during the terms
of the leases.
FAILURE TO MAINTAIN REGISTRATION OF AIRCRAFT
All of the aircraft which are or will be operated must be registered with
an appropriate aviation authority. If an aircraft is operated without a valid
registration, the lessee operator or, in some cases, the owner or lessor, may be
subject to penalties which may result in a lien being placed on the aircraft.
Loss of registration could have other adverse effects, including grounding of
the aircraft and loss of insurance, which may have an adverse effect on our
ability to make payments on the Notes.
INCREASED REGULATION OF AIRCRAFT
The aircraft industry is heavily regulated and aviation authorities may
adopt additional regulations in jurisdictions where our aircraft are registered
or operated. Any additional regulations (especially relating to aircraft noise
and emissions) may cause us to incur significant costs, depress the value of the
aircraft and impair our ability to re-lease the aircraft.
LEASING RISKS
WE MAY NOT BE ABLE TO RE-LEASE AIRCRAFT
We may not be able to re-lease the aircraft upon expiration of the leases
without incurring significant downtime or without adverse effect on the rental
rates that we are able to obtain, especially during any period of downturn in
demand for aircraft on operating lease. If we cannot re-lease the aircraft we
may not have enough cash to make payments on the Notes. Even if we can re-lease
the aircraft we may be unable to receive favorable rental rates, especially if
there is reduced demand for aircraft on operating lease. Our ability to re-
lease aircraft and obtain acceptable lease payments and terms may suffer because
of:
- economic conditions affecting the airline industry,
- the supply of competing aircraft and demand for particular types,
- lessor competition, and
- restrictions on our re-leasing flexibility under the Indenture.
The number and types of aircraft that we must place with lessees because of
lease expirations through November 30, 2004 are presented in the table below,
which shows the years in which the leases are contracted to expire, assuming
that (1) an existing non-binding letter of intent for lease, for one of our
aircraft which is currently off-lease, results in a lease agreement in
accordance with its terms, (2) no lease terminates prematurely and (3) there are
no sales of aircraft or purchases of additional aircraft. See "-- Risks Relating
to Acquisition of Additional Aircraft" above and "-- Lease Termination and
Aircraft Repossession" below. We will need to re-lease more aircraft if any
aircraft become available through premature terminations of leases.
7
<PAGE> 9
MSAF GROUP LEASE PLACEMENT REQUIREMENT AT FEBRUARY 15, 2000
<TABLE>
<CAPTION>
YEAR ENDING NOVEMBER 30,
------------------------------------
AIRCRAFT TYPE 2000 2001 2002 2003 2004
- ------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
A310.................................................... -- -- -- 2 --
A320.................................................... -- -- -- 2 --
A321.................................................... -- -- -- 1 --
B737.................................................... -- 4 1 4 1
B747.................................................... -- -- -- 1 --
B767.................................................... 1 -- -- 1 --
F70..................................................... -- -- -- -- 3
MD82.................................................... -- -- -- -- 1
MD83.................................................... -- 1 -- -- --
Engine.................................................. -- -- 1 -- --
--- --- --- --- ---
Totals................................................ 1 5 2 11 5
=== === === === ===
</TABLE>
As illustrated by the table above, over the next five years we will be
required to re-lease 23 of the aircraft and 1 engine, representing 62.11% of the
portfolio by appraised value at November 30, 1999.
LESSEES MAY NOT PERFORM REQUIRED MAINTENANCE
The standards of maintenance observed by our lessees and the condition of
the aircraft at the time of sale or lease may affect future values and rental
rates from our aircraft. Under the leases, the lessee has the main
responsibility to maintain the aircraft and to comply with all applicable
governmental requirements. Some lessees may experience periodic difficulties in
meeting their maintenance obligations resulting from adverse environmental
conditions or financial and labor difficulties. If a lessee fails to perform
required or recommended maintenance on an aircraft, the aircraft may be grounded
and we may incur substantial costs to restore the aircraft to an acceptable
maintenance condition before sale or re-lease. If our lessees do not perform
their obligation to maintain the aircraft, we may have to fund maintenance work
on the aircraft. Because our maintenance costs are expenses that rank senior to
payments on the Notes, we may be unable to make payments on the Notes if our
maintenance costs were to become sufficiently large. In other cases, we may have
an obligation to reimburse the lessee or pay some or all of the cost of aircraft
maintenance. Our cash resources may not be sufficient both to fund maintenance
requirements and to make payments on the Notes, especially as the aircraft age.
AIRCRAFT INSURANCE MAY NOT BE ADEQUATE
Our lessees have an obligation under the leases to maintain property and
liability insurance covering their operation of the aircraft. We can give no
assurance that this insurance will be adequate to cover any losses or
liabilities that we may incur in our business. For example, the loss or
liability from an aviation accident or other catastrophic event may exceed the
coverage limits in the policy. Other losses may not be covered by the insurance.
There is also a risk that our lessees will not perform their insurance
obligations to us, which may mean that insurance will not be available to us. In
either case, we may be unable to make payments on the Notes if insurance
proceeds do not cover losses or liabilities we may incur.
WE MAY BE UNABLE TO OBTAIN REQUIRED LICENSES AND APPROVALS
If we cannot obtain required government licenses and approvals, we may be
unable to re-lease or sell aircraft. In that case, our cash flows may be
insufficient to make payments on the Notes. Several leases require specific
licenses, consents or approvals. These include consents from governmental or
regulatory authorities to certain lease payments and to the import, re-export or
de-registration of the aircraft. There is a significant risk that subsequent
legal and administrative changes will increase such requirements or that a
consent, once given, will be withdrawn. We may not receive consents needed in
connection with future re-leasing or sale of an aircraft.
8
<PAGE> 10
RISK OF LESSEES IN WEAK FINANCIAL CONDITION
There is a significant risk that the lessees may default on their
obligations under the leases. If lessees do not make rent and maintenance
payments or are significantly in arrears, we will be unable to make payments on
the Notes. The ability of each lessee to perform its obligations under its lease
will depend primarily on its financial condition. A lessee's financial condition
may be affected by various factors beyond their control, including competition,
fare levels, passenger demand, operating costs, the cost and availability of
finance, economic conditions in the countries where the lessees operate and
environmental and other governmental regulation of the air transportation
business. As a general matter, weakly capitalized airlines are more likely than
well capitalized airlines to seek operating leases and at any point in time,
investors should expect varying numbers of lessees to be experiencing payment
difficulties. Many of our lessees are in a weak financial position. You should
expect this to be the case with future lessees. As a result, a large proportion
of lessees may consistently be significantly in arrears in their rental payments
or maintenance payments.
In certain cases, MSAF Group may respond to the needs of lessees in
financial difficulty by, in certain instances, restructuring the applicable
leases. Such restructurings may involve reduced rental payments for a specified
period (which may be several months). In addition, certain restructurings may
involve the voluntary termination of a lease prior to its expiration and the
arrangement of subleases from the lessee to another aircraft operator.
As of February 15, 2000, five current lessees were in arrears. The five
aircraft on lease to these lessees represented approximately 15.49% of the
appraised value of the portfolio at November 30, 1999. The total amount of
rental payments, maintenance reserves, and other miscellaneous amounts due with
respect to these five lessees amounted to approximately $2.7 million. MSAF Group
holds security deposits of $2.2 million against these arrears. The weighted
average number of days past due of such arrears was 57 days. In addition to the
current arrears of $2.7 million, $6.7 million of rental and maintenance payments
(before set-off of security deposits of $2.9 million) was owed to MSAF Group
from four of its former lessees. One Brazilian lessee owed $4.4 million of this
amount.
In March 1999, MSAF Group reached an agreement with one of the lessees,
VASP, to defer $0.5 million of arrears owed at that time. Repayment of the
arrears plus interest was scheduled to begin in August 1999 and end in January
2000. On February 10, 2000, VASP made a payment of $1.3 million in full
settlement of their current and deferred arrears up to January 31, 2000. As of
February 15, 2000, VASP had not made its payment of $0.2 million due on February
1, 2000. The aircraft on lease to VASP is a B737-300 and represents 2.08% of the
portfolio by appraised value at November 30, 1999.
In August 1999, we agreed to restructure the arrears of a Brazilian lessee,
Passaredo. The restructured amount of $3.7 million was capitalized as a note
payable and added to the lessee's conditional sale agreement loan balance, with
an extension of the term of the loan. The aircraft on lease to this lessee is an
A310-300 and represents 2.90% of the portfolio by appraised value at November
30, 1999. In conjunction with this restructuring, the obligations under this
lease were transferred to a new Brazilian entity, B.R.A. Transportes Aereos,
which replaced Passaredo as lessee. As of February 15, 2000, $0.4 million of
current arrears under the new agreement were due and unpaid.
In February 2000, Canadian Airlines announced a debt restructuring and
moratorium plan. The plan will result in a suspension of payments of
approximately $135 million to lenders and aircraft lessors, including MSAF
Group. The amounts will be repaid on a basis to be negotiated. According to a
statement by the lessee, the payment schedule is expected to resume in late
April 2000, following approval of the plan by all interested parties. The
lessee's rental payment for the month of February of $0.3 million was due and
unpaid at February 15, 2000. MSAF Group holds a security deposit of $0.3 million
for this aircraft, an A320-200 that represented 3.13% of the portfolio by
appraised value at November 30, 1999.
In January 2000, we reached an agreement with TransAer to defer $0.4
million of rental arrears and $0.1 million of maintenance reserves arrears.
Repayment of the rental arrears plus interest is scheduled to be made over a
five week period beginning on June 16, 2000. Repayment of the maintenance
reserves arrears plus interest is scheduled to be made in three monthly
installments beginning on June 1, 2000. At February 15,
9
<PAGE> 11
2000, the total current maintenance reserves arrears owed by TransAer was $0.1
million. MSAF Group holds security deposits of $0.6 million against the deferred
and current arrears. The aircraft on lease to the lessee, an A320-200,
represented 3.21% of the portfolio by appraised value at November 30, 1999.
One of the five lessees in arrears, Air Alfa, is based in Turkey. At
February 15, 2000, the total rental and maintenance arrears owed by this lessee
was $1.7 million against which MSAF Group holds a security deposit of $0.7
million. The aircraft represents 4.17% of the appraised value of the portfolio
at November 30, 1999. The obligations of Air Alfa under the lease are guaranteed
by its parent company, Kombassan Holdings, and the servicer has instituted legal
steps in Turkey to enforce the guarantee.
The current level of defaults and lessee arrears should not be seen as
representative of future defaults and arrears particularly if economic
conditions deteriorate. Defaults and amounts in arrears may increase as the
market for aircraft on operating lease experiences further cyclical downturns,
particularly in regions such as Asia, Russia and Latin America which have
experienced acute economic difficulties.
EMERGING MARKET RISKS
"Emerging markets" are countries that have poorly developed economies that
are vulnerable to economic and political problems, such as significant
fluctuations in Gross Domestic Product, interest rates and currency exchange
rates, civil disturbances, governmental instability, nationalization and
expropriation of private assets, and the imposition of taxes or other charges by
governments. The resulting instability may affect the ability of lessees that
operate in these emerging markets to meet their lease obligations and they may
be more likely to default than lessees that operate in developed economies. At
February 15, 2000, nine lessees representing 33.72% of the portfolio by
appraised value at November 30, 1999, operated in "emerging markets" according
to the Morgan Stanley Capital International ("MSCI") designations that we follow
under our indenture. In addition, one lessee representing 6.98% of the portfolio
by appraised value at November 30, 1999 operated in markets which may be
considered to be emerging markets but was categorized as "Other" by the MSCI
classification: Air Pacific (Fiji). In total we lease 40.70% of our portfolio to
10 lessees operating in emerging markets.
As of February 15, 2000, three of the five current lessees that are in
arrears, representing 9.15% of the portfolio by appraised value at November 30,
1999, were based in emerging markets. The amounts outstanding with respect to
rental payments, maintenance reserves and other miscellaneous amounts due from
these three lessees was $2.3 million. We hold security deposits of $1.4 million
against these arrears. The weighted average number of days past due for such
arrears was 56 days. The prior arrears of one of these lessees, based in Brazil,
was restructured and capitalized as a note payable. See "-- Recent Developments
- -- Latin America".
Five of our former lessees whose leases terminated early due to defaults
were based in emerging markets. In each case, ILFC was able to repossess the
aircraft without recourse to legal action. These five lessees were based in
Brazil, Mexico, Turkey, Guyana and Russia.
RISK OF REGIONAL ECONOMIC DOWNTURNS AFFECTING LESSEES' FINANCIAL CONDITION
There is a significant risk that the economic conditions in the regions
where our lessees operate will affect their ability to meet their lease
obligations. The commercial aviation industry is very sensitive to general
economic conditions. Since air travel is largely discretionary, the industry
tends to suffer severe financial difficulties during slow economic periods.
Below is a discussion of the regional concentrations of our lessees and the
economic characteristics of the various regions that may impact the lessees'
financial condition. The regions discussed below are based on designations
published by MSCI.
European Concentration
At February 15, 2000, twelve lessees representing 40.33% of the aircraft by
appraised value at November 30, 1999 were operators based in Europe with nine
lessees representing 29.05% based in "developed" Europe and three lessees
representing 11.28% based in "emerging" Europe and Middle East.
10
<PAGE> 12
Seven of the twelve European lessees, representing 30.80% of the portfolio
by appraised value at November 30, 1999, are primarily charter airlines, which
are vulnerable to any downturn in the tourism industry. The remaining five
operate predominantly scheduled services.
European scheduled carriers currently are experiencing a slower economic
period and greater competition than in previous years and are suffering from
over expansion. A recession or other worsening of economic conditions in any
European country may adversely affect the European lessees' ability to meet
their financial and other obligations. Competitive pressures from continuing
deregulation of the airline industry by the European Union may also adversely
affect European lessees' operations and their ability to meet their obligations
under the leases.
Two of the five current lessees in arrears are based in Europe, one in
Turkey and one in Ireland. The lessee based in Turkey operates one aircraft,
representing 4.17% of the portfolio by appraised value at November 30, 1999.
This carrier operates charter flights which are heavily dependent on foreign
tourists traveling to Turkey. Damage caused by an earthquake in August 1999 and
any decrease in tourist traffic may adversely affect the ability of this carrier
to operate and meet their obligations under the lease.
In addition, three of our lessees, representing 9.80% of the portfolio by
appraised value at November 30, 1999, are based in Europe (Iceland and Malta),
although these countries are classified as "Other" by MSCI.
Latin American Concentration
At February 15, 2000, three lessees representing 9.33% of the aircraft by
appraised value at November 30, 1999 were based in Latin America. The financial
prospects for lessees in Latin America will depend on the level of political
stability and economic activity and policies in the region. Developments in
other "emerging markets" may also affect the economies of Latin American
countries and the entire region.
During 1999, Brazil experienced significant downturns in its economy and
financial markets, with large decreases in financial asset prices and, since it
devalued its currency on January 13, 1999, dramatic decreases in the value of
its currency. As of February 15, 2000 two lessees representing 4.98% of the
aircraft by appraised value at November 30, 1999 operate in Brazil.
Two of the five current lessees in arrears are based in Latin America, both
in Brazil. In addition, since March 1998, MSAF Group has leased a total of five
aircraft to five lessees in Latin America. There have been two negotiated
repossessions, one in Brazil and one in Mexico, and two other lessees
restructured their arrears, both in Brazil.
In March 1999, MSAF Group reached an agreement with one of the lessees,
VASP, to defer $0.5 million of arrears owed at that time. Repayment of the
arrears plus interest was scheduled to begin in August 1999 and end in January
2000. On February 10, 2000, VASP made a payment of $1.3 million in full
settlement of their current and deferred arrears up to January 31, 2000. As of
February 15, 2000, VASP had not made its payment of $0.2 million due on February
1, 2000. The aircraft on lease to VASP is a B737-300 and represents 2.08% of the
portfolio by appraised value at November 30, 1999.
In August 1999, MSAF Group agreed to restructure the arrears of the second
Brazilian lessee, Passaredo. The total rental payments, maintenance reserves and
default interest owed amounted to $3.7 million. The restructured amounts were
capitalized as a note payable and added to the lessee's conditional sale
agreement loan balance, with an extension of the term of the loan. At February
15, 2000, $0.4 million of current arrears under the new agreement, which
represents approximately 36 days of rental, were due and unpaid. The aircraft on
lease to this lessee is an A310-300 and represents 2.90% of the portfolio by
appraised value at November 30, 1999. In conjunction with this restructuring,
the obligations under this lease were transferred to a new Brazilian entity,
B.R.A. Transportes Aereos, which replaced Passaredo as lessee.
A former Brazilian lessee, VARIG, negotiated an early termination of its
lease of a B747-300 aircraft in July 1999. The lease was scheduled to expire in
April 2003. The total amount of rental payments and maintenance reserves due
under this lease to 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 terms of the
11
<PAGE> 13
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. The first payment of $0.4
million under this agreement was due and paid in October 1999. Maintenance work
including repairs to the engines is almost completed and the aircraft is
scheduled to be delivered to the new lessee in March 2000. The current market
for widebody aircraft (such as the B747-300) in general is weak due to an over
supply of capacity caused by Asian crisis. This aircraft represents 5.15% of the
portfolio by appraised value at November 30, 1999.
A former Mexican lessee, TAESA, defaulted on its obligations under its
lease of a B737-400 aircraft, and the aircraft was repossessed in December 1999.
The lease was scheduled to expire in May 2000. The total amount of rental
payments and maintenance reserves due under the lease at the date of
repossession was $0.6 million. This amount was partially offset by a security
deposit of $0.5 million. The aircraft is currently undergoing maintenance work
prior to re-leasing to a new lessee. This aircraft represents 2.30% of the
portfolio by appraised value at November 30, 1999. On February 21, 2000, a court
in Mexico declared TAESA bankrupt. It is uncertain whether MSAF Group will be
able to recover the $0.1 million outstanding from TAESA.
Continued weakness in the value of the Brazilian real, as well as general
deterioration in the Brazilian economy, will mean that Brazilian lessees may be
unable to generate sufficient revenues in Brazilian currency to pay the U.S.
dollar-denominated rental payments under the lease. More importantly, financial
and economic problems in Brazil could spread throughout Latin America and other
"emerging" economies including Mexico, where one of our lessees, representing
4.35% of the portfolio by appraised value at November 30, 1999, operates.
Asia Pacific Concentration
At February 15, 2000, four lessees with respect to 17.83% of the aircraft
by appraised value at November 30, 1999 were based in the Asia Pacific region,
with one lessee, representing 4.72% based in "developed" Pacific markets and
three lessees, representing 13.11% based in "emerging" Asian markets. None of
the lessees in the Asia and Pacific regions are currently in arrears.
Trading conditions in Asia's civil aviation industry have been adversely
affected by the severe economic and financial difficulties experienced in the
region. The economies of the region have experienced acute difficulties
resulting in many business failures, significant depreciation of local
currencies against the U.S. dollar, downgrading of sovereign and corporate
credit ratings and internationally organized financial stability measures. A
continuation of this downturn in the region's economies may further undermine
business confidence, reduce demand for air travel and adversely affect the Asian
lessees' operations and their ability to meet their obligations.
In addition, one of our Asia Pacific lessees, representing 6.98% of the
portfolio by appraised value at November 30, 1999, is based in Fiji. This
country is classified as "Other" by MSCI.
North American Concentration
At February 15, 2000, four lessees with respect to 13.43% of the aircraft
by appraised value at November 30, 1999 were based in North America. One of the
five current lessees in arrears is based in North America.
In the recent past, several North American passenger airlines have filed
Chapter 11 bankruptcy proceedings and several major U.S. airlines have ceased
operations altogether, including a former lessee of MSAF Group. Airline
profitability in the region has begun to deteriorate due to the increase in the
cost of aviation fuel and increased competition from low-cost, low-fare air
carriers. In conjunction with an inability to reduce labor and other costs to
sustainable levels, these factors put pressure on North American airline profit
margins and, in some cases, financial viability.
12
<PAGE> 14
LEASE TERMINATION AND AIRCRAFT REPOSSESSION
If a lessee defaults, we have the right to terminate the lease and
repossess the aircraft under the terms of each lease. However, it may be
difficult, expensive and time-consuming to enforce our rights if the lessee
contests such termination or is bankrupt or under court protection. ILFC may
incur significant costs on our behalf in trying to repossess an aircraft and in
performing maintenance work necessary to make the aircraft available for
re-lease or sale. Further, our efforts to repossess an aircraft may be limited
by the laws of the local jurisdiction which may delay or prevent us from
repossessing an aircraft following a lessee's default.
RISKS RELATING TO PAYMENTS ON THE NOTES
ACTUAL EXPERIENCE MAY NOT MATCH OUR ASSUMPTIONS
We have determined the expected final payment dates for the Notes based on
assumptions about our future cash flows and interest and operating costs and
possible future economic conditions. The purpose of these assumptions is to
illustrate the payment provisions of the Notes. Many of these assumptions relate
to future political, economic and market conditions (for example, lease rates)
that are outside our control and are difficult or impossible to predict. Other
assumptions relate to future events (for example, maintenance payments) that
depend on the actions of lessees or others with whom we conduct business. For
this reason, it is highly unlikely that our experience in the future will be
consistent with these assumptions. As a result, we are highly likely to be
unable to make payments on the Notes at the times and in the amounts that the
assumptions indicate.
SUBORDINATION PROVISIONS
Expenses and certain other payments are senior in priority of payment to
the Notes and are paid out before any payments are made on the Notes. Under
certain circumstances, the rights of the Noteholders, as holders of each
subclass of Notes, to receive payments of principal in respect of such subclass
of Notes and to exercise remedies upon default will be subordinated to the
rights of the Noteholders with respect to the most senior subclass of Notes then
outstanding. If an event of default with respect to any subclass of Notes occurs
under the Indenture, the security trustee has the exclusive right to exercise
and enforce any and all remedies with respect to the collateral held by MSAF
Group. Therefore, if an event of default occurs, the holders of each subclass of
Notes will not be permitted to enforce certain rights until all amounts owing
under any more senior Notes outstanding and certain other amounts have been paid
in full.
CAPITAL MARKETS RISKS
WE MAY BE UNABLE TO REFINANCE THE SUBCLASS A-1 NOTES
The subclass A-1 Notes will reach their expected final payment date on
March 15, 2000. We plan to refinance the subclass A-1 Notes by issuing
refinancing notes on that date. The refinancing notes will rank equally with the
other class A Notes but the interest rate, principal payment provisions and
other terms will be different. Our ability to refinance the subclass A-1 Notes
will depend on many factors outside our control. These factors include general
conditions in the capital markets and the markets' perception of the commercial
aviation industry, the aircraft leasing business generally or our own
performance. If we cannot refinance the subclass A-1 Notes on acceptable terms,
we may not be able to repay the subclass A-1 Notes by their expected final
payment date. This may also delay repayment of principal on the class B, class C
and class D Notes and may result in lower market prices for the Notes.
BANKRUPTCY RISKS
We have taken steps to structure MSAF Group to ensure that our assets are
not consolidated with MSDW's or any of its affiliates' assets or otherwise
become available to MSDW's or any of its affiliates' creditors in any bankruptcy
or insolvency proceeding involving MSDW.
If MSDW or any of its affiliates becomes bankrupt or insolvent, there is a
legal risk that a court or other authority could decide that these steps were
not effective to insulate our assets from MSDW's assets. As a
13
<PAGE> 15
result, the aircraft and our other assets could become available to repay both
MSDW's creditors and our creditors, including our Noteholders. We could also
lose all of our rights in the aircraft and our other assets. In either case, it
may be impossible to repay amounts outstanding under the Notes.
TAX RISKS
Neither the Trustee nor MSAF Group will make any additional payments to
Noteholders in respect of any withholding or deduction required to be made by
applicable law with respect to payments made on the Notes. In the event that
MSAF Group is or will be required to make a withholding or deduction, it will
use reasonable efforts to avoid the application of such withholding taxes and
may in certain circumstances redeem the Notes in the event such withholding
taxes cannot be avoided. In the event that any withholding taxes are imposed
with respect to the Notes and MSAF Group does not redeem the Notes, the net
amount of interest received by Noteholders will be reduced by the amount of the
withholding or deduction.
MSAF Group believes that it will not become subject to any material taxes
in any of the jurisdictions in which any of the lessees are organized or operate
under the present tax laws of such jurisdictions. However, there can be no
assurance that other leases to which MSAF Group may become a party as a result
of the re-leasing of the aircraft or acquisition of additional aircraft will not
result in the imposition of withholding or other taxes.
14
<PAGE> 16
THE PORTFOLIO
Substantially all of the assets of MSAF consist of 100% of the beneficial
interest in MSA I, 100% of the issued and outstanding capital stock of Aircraft
SPC-5, Inc. and the leasing subsidiaries and certain loans made to MSA I and
Aircraft SPC-5, Inc. MSAF indirectly owns (1) the aircraft, (2) the rights under
the related leases, and (3) cash and cash equivalents on deposit.
APPRAISALS
The most recent appraisals of the value of each aircraft were obtained as
of November 30, 1999. During the year appraisals were also obtained as of June
30, 1999. As of November 30, 1999, our portfolio had an aggregate appraised
value of $953.1 million. Under our indenture, we are required, at least once
each year and in any case no later than October 31 of each year, to deliver to
the trustee appraisals of the base value of each of the aircraft in our
portfolio from at least three independent appraisers that are members of the
International Society of Transport Aircraft Trading or any similar organization.
We have obtained appraisals from five such appraisers. We have calculated the
appraised value of each aircraft by removing the highest and the lowest
appraisal and taking the average of the remaining three appraisals.
Our five appraisers, Aircraft Information Services, Inc., BK Associates,
Inc., Airclaims Limited, Morten Beyer and Agnew and Aircraft Value Analysis
Company have provided appraisals of the value of each of our aircraft at normal
utilization rates in an open, unrestricted and stable market, without taking
into account the value of related leases, maintenance reserves or security
deposits as of November 30, 1999, adjusted to account for the reported
maintenance standard of the aircraft. The appraisals were not based on a
physical inspection of the aircraft. Based on the appraisals, the aggregate
values calculated by each of the five Appraisers for the aircraft are $984.7
million in the case of BK Associates, Inc., $994.4 million in the case of
Aircraft Information Services, Inc., $876.5 million in the case of Airclaims
Limited, $891.7 million in the case of Aircraft Value Analysis Company and
$1,004.9 million in the case of Morten Beyer & Agnew, Inc. These appraised
values should not be relied upon as a measure of the market or realizable value
of any aircraft. See "Risk Factors -- Cyclicality of Supply of and Demand for
Aircraft and Depression of Aircraft Values" and "-- Actual Market Value May Be
Less Than Appraised Value."
The appraisals for the portfolio as of November 30, 1999 are set out below.
<TABLE>
<CAPTION>
APPRAISAL OF
-----------------------------------------------------------
AIRCRAFT
ENGINE SERIAL DATE OF AIRCLAIMS INFORMATION MORTEN BEYER
AIRCRAFT TYPE CONFIGURATION NUMBER MANUFACTURE LIMITED BK ASSOCIATES SERVICES AND AGNEW
- ------------- --------------- ------ ----------- ----------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
A300-600R PW 4158 555 Mar-90 $43,820,038 $46,874,794 $50,860,000 $48,210,000
A310-300 JT9D-7R4E1 409 Nov-85 18,668,131 27,022,136 21,300,000 29,499,000
A310-300 JT9D-7R4E1 410 Nov-85 18,736,079 27,403,582 21,820,000 30,501,000
A310-300 JT9D-7R4E1 437 Nov-86 21,316,952 33,262,341 27,820,000 33,419,000
A320-200 CFM 56-5A3 279 Feb-92 28,871,688 31,244,598 28,640,000 31,652,000
A320-200 V2500-A1 393 Feb-93 29,931,935 31,187,247 29,090,000 33,098,000
A320-200 V2500-A1 414 May-93 30,336,415 30,957,449 29,130,000 33,363,000
A321-100 V2530-A5 597 May-96 36,085,390 45,156,750 41,930,000 37,567,000
B737-300 CFM 56-3C1 24299 Nov-88 20,001,225 18,790,300 20,570,000 19,140,000
B737-300 CFM 56-3B2 25161 Feb-92 22,674,379 25,511,536 25,010,000 23,784,000
B737-300 CFM 56-3B2 26295 Dec-93 22,596,442 26,024,250 25,560,000 25,546,000
B737-300 CFM 56-3C1 27635 May-95 25,561,933 28,728,600 28,540,000 27,137,000
B737-300F CFM 56-3B1 23811 Sep-87 19,378,488 19,003,082 21,560,000 19,936,000
B737-300QC CFM 56-3C1 23788 May-87 19,405,573 18,099,500 21,780,000 19,782,000
B737-400 CFM 56-3B2 24234 Oct-88 21,619,354 20,194,364 22,780,000 22,435,000
B737-400 CFM 56-3C1 25104 May-93 25,507,457 26,531,550 27,350,000 27,541,000
B737-400 CFM 56-3C1 25371 Jan-92 24,688,071 24,170,810 26,430,000 25,300,000
B737-500 CFM 56-3B1 25165 Apr-93 20,559,624 17,552,500 19,980,000 20,762,000
B747-300B CF6-80C2 24106 Apr-88 46,632,687 59,943,960 48,480,000 51,991,000
B757-200ER RB211-535-E4 24260 Dec-88 30,423,476 33,021,212 35,580,000 35,424,000
B757-200ER RB211-535-E4-37 24367 Feb-89 28,943,600 31,335,359 36,050,000 33,392,000
B757-200ER PW 2037 26272 Mar-94 33,003,740 42,932,416 44,160,000 42,618,000
B767-200ER CF6-80A 23807 Aug-87 28,838,628 31,079,940 35,160,000 28,539,000
B767-300ER CF6-80C2B6F 24798 Oct-90 49,099,299 53,667,285 56,670,000 57,665,000
B767-300ER CF6-80C2B6F 26256 Apr-93 59,887,960 61,960,315 67,990,000 67,204,000
<CAPTION>
APPRAISAL OF
--------------
AIRCRAFT VALUE APPRAISED
ANALYSIS VALUE AS OF
AIRCRAFT TYPE COMPANY NOVEMBER 30, 1999
- ------------- -------------- -----------------
<S> <C> <C>
A300-600R $39,050,000 $ 46,301,611
A310-300 15,200,000 22,330,089
A310-300 15,550,000 22,653,220
A310-300 21,800,000 27,627,447
A320-200 29,500,000 29,872,095
A320-200 30,170,000 30,429,727
A320-200 30,450,000 30,581,288
A321-100 39,600,000 39,699,000
B737-300 20,400,000 19,847,075
B737-300 24,900,000 24,564,667
B737-300 25,300,000 25,468,667
B737-300 26,200,000 27,292,333
B737-300F 20,100,000 19,804,829
B737-300QC 18,450,000 19,212,524
B737-400 21,600,000 21,884,785
B737-400 25,800,000 26,560,517
B737-400 25,450,000 25,146,024
B737-500 18,600,000 19,713,208
B747-300B 39,870,000 49,034,562
B757-200ER 32,000,000 33,481,737
B757-200ER 30,300,000 31,675,786
B757-200ER 38,750,000 41,433,472
B767-200ER 25,650,000 29,485,856
B767-300ER 48,700,000 53,145,528(1)
B767-300ER 62,300,000 63,821,438
</TABLE>
15
<PAGE> 17
<TABLE>
<CAPTION>
APPRAISAL OF
-----------------------------------------------------------
AIRCRAFT
ENGINE SERIAL DATE OF AIRCLAIMS INFORMATION MORTEN BEYER
AIRCRAFT TYPE CONFIGURATION NUMBER MANUFACTURE LIMITED BK ASSOCIATES SERVICES AND AGNEW
- ------------- --------------- ------ ----------- ----------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
B767-300ER CF6-80C2B4 26260 Sep-94 60,046,996 64,745,045 68,760,000 68,534,000
engine CF6-80C2B6F 704279 Jun-95 5,951,393 6,282,000 5,710,000 4,506,000
F-70 TAY MK620-15 11564 Dec-95 11,880,010 14,100,000 13,410,000 14,331,000
F-70 TAY MK620-15 11565 Feb-96 11,087,025 15,200,000 14,910,000 14,430,000
F-70 TAY MK620-15 11569 Mar-96 11,359,096 15,200,000 14,910,000 14,478,000
MD-82 JT8D-217C 49825 Mar-89 15,323,107 17,318,790 20,750,000 19,528,000
MD-83 JT8D-219 49822 Dec-88 16,903,329 18,823,975 20,080,000 21,431,000
MD-83 JT8D-219 49824 Mar-89 17,375,556 21,362,625 21,660,000 22,143,000
<CAPTION>
APPRAISAL OF
--------------
AIRCRAFT VALUE APPRAISED
ANALYSIS VALUE AS OF
AIRCRAFT TYPE COMPANY NOVEMBER 30, 1999
- ------------- -------------- -----------------
<S> <C> <C>
B767-300ER 66,400,000 66,559,682
engine 4,850,000 5,503,798
F-70 13,450,000 13,653,333
F-70 13,650,000 14,330,000
F-70 14,650,000 14,679,333
MD-82 16,500,000 17,782,263
MD-83 18,400,000 19,101,325
MD-83 18,100,000 20,374,208
------------
Total $953,051,427
============
</TABLE>
- ---------------
(1) This aircraft is not currently capable of extended range missions but ILFC
has agreed to pay for the cost of an extended range modification to the
aircraft upon MSAF's request at any time following the termination or
expiration of the lease for the aircraft. The appraisals of the aircraft
assume that the extended range modification has been carried out.
PORTFOLIO INFORMATION
THE AIRCRAFT
All of the aircraft hold or are capable of holding a noise certificate
issued under Chapter 3 of Volume 1, Part II of Annex 16 of the Chicago
Convention or have been shown to comply with the Stage 3 noise levels set out in
Section 36.5 of Appendix C of Part 36 of the United States Federal Aviation
Regulations ("STAGE 3 AIRCRAFT").
16
<PAGE> 18
The following table sets forth the exposure as of February 15, 2000 of our
portfolio by type of aircraft calculated by reference to the number of aircraft
and their appraised value as of November 30, 1999.
<TABLE>
<CAPTION>
% OF CURRENT
PORTFOLIO BY
APPRAISED VALUE
AS OF
NUMBER OF ENGINE NOVEMBER 30,
MANUFACTURER TYPE OF AIRCRAFT AIRCRAFT BODY TYPE STAGE 1999
- ------------ ---------------- ----------- ---------- ------ --------------------
<S> <C> <C> <C> <C> <C>
Boeing (62.75%)................ 767-200ER 1 Widebody 3 3.09%
767-300ER 3 Widebody 3 19.26
757-200ER 3 Narrowbody 3 11.17
747-300B 1 Widebody 3 5.15
737-300 6 Narrowbody 3 14.29
737-400 3 Narrowbody 3 7.72
737-500 1 Narrowbody 3 2.07
Airbus (26.19%)................ A321-100 1 Narrowbody 3 4.17
A320-200 3 Narrowbody 3 9.54
A310-300 3 Widebody 3 7.62
A300-600R 1 Widebody 3 4.86
McDonnell Douglas
Corporation (6.01%).......... MD82 1 Narrowbody 3 1.87
MD83 2 Narrowbody 3 4.14
Fokker N.V.(4.47%)............. F70 3 Narrowbody 3 4.47
General Electric
Company (0.58%).............. CF6-80C2B6F engine -- 3 0.58
----------- ------
Total........................ 32 + engine 100.00%
=========== ======
</TABLE>
17
<PAGE> 19
The following table sets forth the exposure as of February 15, 2000 of our
portfolio to the lessees calculated by reference to the appraised value as of
November 30, 1999 of the aircraft.
<TABLE>
<CAPTION>
% OF CURRENT
PORTFOLIO BY
APPRAISED VALUE
AS OF
NUMBER OF NOVEMBER 30,
LESSEE(1) AIRCRAFT 1999
- --------- ----------- ---------------
<S> <C> <C>
Air Pacific Limited ("AIR PACIFIC")......................... 1 6.98%
Air 2000 Limited ("AIR 2000")............................... 1 6.70
Air Alfa Airlines, S.A. ("AIR ALFA")........................ 1 4.17
TransAer International Airlines Limited ("TRANSAER")........ 1 3.21
Asiana Airlines, Inc. ("ASIANA")............................ 1 5.58
Malev Hungarian Airlines, PLC ("MALEV")..................... 3 4.47
China Airlines, Limited ("CHINA AIRLINES").................. 1 4.86
Air Malta ("AIR MALTA")..................................... 1 2.57
Alaska Airlines, Inc. ("ALASKA AIRLINES")................... 1 2.79
National Airlines ("NATIONAL").............................. 1 3.50
Aerovias De Mexico, S.A. De C.V. ("AEROMEXICO")............. 1 4.35
Britannia Airways Limited ("BRITANNIA")(2).................. 1 3.09
Flying Colours Airlines Limited ("FLYING COLOURS").......... 2 6.52
B.R.A. Transportes Aereos Ltda. ("B.R.A.")(3)............... 1 2.90
Canadian Airlines International Limited ("CANADIAN")........ 1 3.13
Transavia Airlines C.V. ("TRANSAVIA")....................... 1 2.86
China Hainan Airlines ("CHINA HAINAN")...................... 1 2.67
Flugleidir H.F. ("ICELANDAIR")(4)........................... 1 2.08
Societe D'Exploitation Aeropostale S.A. ("AEROPOSTALE")..... 1 2.02
Trans World Airlines, Inc. ("TWA").......................... 2 4.01
Air Liberte, S.A. ("AIR LIBERTE")........................... 1 2.00
Olympic Airways ("OLYMPIC")................................. 1 2.64
Viasao Aerea Sao Paulo S.A., Brazilian Airlines ("VASP").... 1 2.08
Braathens Sverige AB ("TRANSWEDE").......................... 1 2.07
Flugfelagid Atlanta Hf d/b/a Air Atlanta Icelandic("AIR
ATLANTA ICELANDIC")....................................... 1 5.15
Region Air Alpha (BVI) Limited ("REGION AIR")............... 2 4.72
Koninklijke Luchtvaart Maatschappij N.V. ("KLM")............ engine 0.58
Off-lease(5)................................................ 1 2.30
----------- ------
Total..................................................... 32 + engine 100.00%
=========== ======
</TABLE>
- ---------------
(1) Total number of lessees = 27.
(2) The aircraft leased to Britannia is subleased to Ansett Australia Limited
("ANSETT").
(3) B.R.A. leases the applicable aircraft from Navasota Holdings Inc., which
is party to a conditional sale agreement with MSAF Group (the "CONDITIONAL
SALE AGREEMENT"). See "-- The Leases -- Conditional Sale Agreement."
(4) The aircraft leased to Icelandair is subleased to Falcon Air AB
("FALCON"), based in Sweden.
(5) This aircraft is currently subject to a non-binding letter of intent for
lease with a carrier based in the Middle East.
18
<PAGE> 20
The following table sets forth the exposure as of February 15, 2000 of our
portfolio to countries in which the lessees are domiciled calculated by
reference to the appraised value as of November 30, 1999 of the aircraft.
<TABLE>
<CAPTION>
% OF CURRENT
PORTFOLIO BY
APPRAISED VALUE
AS OF
NUMBER OF NOVEMBER 30,
COUNTRY(1) AIRCRAFT 1999
- ---------- ----------- ---------------
<S> <C> <C>
United Kingdom.............................................. 4 16.31%
Brazil...................................................... 2 4.98
Fiji........................................................ 1 6.98
United States............................................... 4 10.30
Mexico...................................................... 1 4.35
South Korea................................................. 1 5.58
Taiwan...................................................... 1 4.86
Norway...................................................... 1 2.07
Hungary..................................................... 3 4.47
Turkey...................................................... 1 4.17
France...................................................... 2 4.02
The Netherlands............................................. 1 + engine 3.44
Ireland..................................................... 1 3.21
Greece...................................................... 1 2.64
China....................................................... 1 2.67
Malta....................................................... 1 2.57
Iceland..................................................... 2 7.23
Canada...................................................... 1 3.13
Singapore................................................... 2 4.72
Off-lease................................................... 1 2.30(2)
----------- ------
Total..................................................... 32 + engine 100.00%
=========== ======
</TABLE>
- ---------------
(1) Total number of countries = 19.
(2) This aircraft is currently subject to a non-binding letter of intent for
lease, with a carrier based in the Middle East.
The following table sets forth the exposure as of February 15, 2000 of our
portfolio by regions in which the lessees are domiciled calculated by reference
to number of aircraft and their appraised value as of November 30, 1999.
<TABLE>
<CAPTION>
% OF CURRENT
PORTFOLIO BY
APPRAISED VALUE
AS OF
NUMBER OF NOVEMBER 30,
REGION(1) AIRCRAFT 1999
- --------- ----------- ---------------
<S> <C> <C>
Developed Markets
Europe.................................................... 9 + engine 29.05%
North America............................................. 5 13.43
Pacific................................................... 2 4.72
Emerging Markets
Europe and Middle East.................................... 5 11.28
Latin America............................................. 3 9.33
Asia...................................................... 3 13.11
Other....................................................... 4 16.78
Off-lease................................................... 1 2.30(2)
----------- ------
Total..................................................... 32 + engine 100.00%
=========== ======
</TABLE>
- ---------------
(1) Regions are defined according to MSCI designations.
(2) This aircraft is currently subject to a non-binding letter of intent for
lease, with a carrier based in the Middle East.
19
<PAGE> 21
The following table sets forth the exposure as of February 15, 2000 of our
portfolio by year of aircraft manufacture calculated by reference to the
appraised value as of November 30, 1999 of the aircraft. The weighted average
age of the fleet as of November 30, 1999 is approximately 9 years.
<TABLE>
<CAPTION>
% OF CURRENT
PORTFOLIO BY
APPRAISED VALUE
NUMBER OF AS OF NOVEMBER 30,
YEAR OF MANUFACTURE AIRCRAFT 1999
- ------------------- ----------- ----------------------
<S> <C> <C>
1985...................................................... 2 4.72%
1986...................................................... 1 2.90
1987...................................................... 3 7.19
1988...................................................... 5 15.04
1989...................................................... 3 7.33
1990...................................................... 2 10.43
1992...................................................... 3 8.35
1993...................................................... 6 20.63
1994...................................................... 2 11.33
1995...................................................... 2 + engine 4.87
1996...................................................... 3 7.21
----------- ------
Total................................................... 32 + engine 100.00%
=========== ======
</TABLE>
The following table sets forth the exposure as of February 15, 2000 of our
portfolio by seat category calculated by reference to the appraised value of our
aircraft as of November 30, 1999.
<TABLE>
<CAPTION>
% OF CURRENT
PORTFOLIO BY
APPRAISED VALUE
NUMBER OF AS OF NOVEMBER 30,
SEAT CATEGORY AIRCRAFT TYPES AIRCRAFT 1999
------------- -------------- ----------- ----------------------
<S> <C> <C> <C>
51-120................ F-70, B737-500 4 6.55%
121-170............... B737-300/300QC/400, A320-200, MD82/83 14 35.47
171-240............... B757-200, A321-100, B767-200ER,
B767-300ER, A300-600R, A310-300 12 50.18
351+.................. B747-300 1 5.15
Other................. B737-300F, Engine 1 + engine 2.65
----------- ------
Total............... 32 + engine 100.00%
=========== ======
</TABLE>
20
<PAGE> 22
MSAF GROUP PORTFOLIO ANALYSIS
Further particulars of our portfolio as of February 15, 2000 (except for
appraised values, which are as of November 30, 1999) are contained in the table
below.
<TABLE>
<CAPTION>
APPRAISED
VALUE AS OF
NOVEMBER 30,
COUNTRY ENGINE SERIAL DATE OF 1999
REGION(1) OF LESSEE LESSEE TYPE CONFIGURATION NUMBER MANUFACTURE ($000'S)
- --------- --------- ------ ---- ------------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Europe............... France Aeropostale B737-300QC CFM 56-3C1 23788 5/87 $ 19,213
(Developed) France Air Liberte MD83 JT8D-219 49822 12/88 19,101
Norway Transwede B737-500 CFM 56-3B1 25165 4/93 19,713
The Netherlands Transavia B737-300 CFM 56-3C1 27635 5/95 27,292
The Netherlands KLM engine CF6-80C2B6F 704279 6/95 5,504
United Kingdom Britannia B767-200ER CF6-80A 23807 8/87 29,486
United Kingdom Flying Colours A320-200 V2500-Al 393 2/93 30,430
United Kingdom Air 2000 B767-300ER CF6-80C2B6F 26256 4/93 63,821
United Kingdom Flying Colours B757-200ER RB211-535-E4-37 24367 2/89 31,676
Ireland TransAer A320-200 V2500-A1 414 5/93 30,581
North America........ United States Alaska Airlines B737-400 CFM 56-3C1 25104 5/93 26,560
(Developed) United States TWA MD-83 JT8D-219 49824 3/89 20,374
United States TWA MD-82 JT8D-217C 49825 3/89 17,782
National
United States Airlines B757-200ER RB211-535-E4 24260 12/88 33,482
Canada Canadian A320-200 CFM 56-5A3 279 2/92 29,872
Pacific.............. Singapore Region Air A310-300 JT9D-7R4E1 410 11/85 22,653
(Developed) Singapore Region Air A310-300 JT9D-7R4E1 409 11/85 22,330
Europe and
Middle East.......... Hungary Malev F-70 TAY MK620-15 11569 3/96 14,679
(Emerging) Hungary Malev F-70 TAY MK620-15 11565 2/96 14,330
Hungary Malev F-70 TAY MK620-15 11564 12/95 13,653
Turkey Air Alfa A321-100 V2530-A5 597 5/96 39,699
Greece Olympic B737-400 CFM 56-3C1 25371 1/92 25,146
Asia................. China China Hainan B737-300 CFM 56-3C1 26295 12/93 25,469
(Emerging) South Korea Asiana B767-300 CF6-80C2B6F 24798 10/90 53,146
Taiwan China Airlines A300-600R PW 4158 555 3/90 46,302
Latin America........ Brazil B.R.A. A310-300 JT9D-7R4E1 437 11/86 27,627
(Emerging) Brazil VASP B737-300 CFM 56-3B2 24299 11/88 19,847
Mexico Aeromexico B757-200ER PW 2037 26272 3/94 41,433
Other................ Fiji Air Pacific B767-300ER CF6-80C2B4 26260 9/94 66,560
Iceland Icelandair B737-300F CFM 56-3B2 23811 10/87 19,805
Iceland Air Atlanta
Icelandic B747-300B CF6-80C2 24106 4/88 49,035
Malta Air Malta B737-300 CFM 56-3B2 25161 2/92 24,565
Off-lease............ -- -- B737-400 CFM 56-3B2 24234 10/88 21,885
---------
Total $ 953,051
=========
<CAPTION>
% OF CURRENT
PORTFOLIO BY
APPRAISED
VALUE AS OF
NOVEMBER 30,
REGION(1) 1999
- --------- -------------
<S> <C>
Europe............... 2.02%
(Developed) 2.00
2.07
2.86
0.58
3.09
3.20
6.70
3.32
3.21
North America........ 2.79
(Developed) 2.14
1.87
3.50
3.13
Pacific.............. 2.38
(Developed) 2.34
Europe and
Middle East.......... 1.54
(Emerging) 1.50
1.43
4.17
2.64
Asia................. 2.67
(Emerging) 5.58
4.86
Latin America........ 2.90
(Emerging) 2.08
4.35
Other................ 6.98
2.08
5.15
2.57
Off-lease............ 2.30(2)
-----
100.0%
=====
</TABLE>
- ---------------
(1) Regions are defined according to MSCI designations.
(2) This aircraft is currently subject to a non-binding letter of intent for
lease, with a carrier based in the Middle East.
ACQUISITION OF ADDITIONAL AIRCRAFT
MSAF Group may acquire additional commercial passenger or freight aircraft
from various sellers. Cash flows derived from any additional aircraft and the
related leases will be available to satisfy MSAF Group's payment obligations,
including payments of interest, principal and premium, if any, on the Notes and
any additional notes. There is no limit on the aggregate value of additional
aircraft that may be acquired or on the period in which such additional aircraft
must be acquired. Any acquisition of additional aircraft and related issuance of
additional notes will be subject to certain conditions under the Indenture.
21
<PAGE> 23
THE LEASES
GENERAL
All leases of our aircraft are managed by ILFC pursuant to an incentive fee
based servicing agreement among MSAF Group, Bankers Trust Company, as cash
manager, Cabot, as administrative agent, and ILFC dated as of November 10, 1997
(the "SERVICING AGREEMENT").
The following description relates only to leases in effect as of February
15, 2000 related to the 32 aircraft and one engine in MSAF Group's initial
portfolio (other than one A310 aircraft which is the subject of the Conditional
Sale Agreement. See "-- Conditional Sale Agreement" below). As of February 15,
2000, leases covering 31 aircraft and the engine were in effect. Under three of
the lease contracts, the lessee has not yet taken delivery of the aircraft. In
two cases delivery is scheduled for April 1, 2000 and in the third case delivery
is scheduled for March 17, 2000. MSAF Group's one off-lease aircraft is subject
to a non-binding letter of intent for lease. Any additional leases acquired in
connection with the acquisition of additional aircraft and any future leases
entered into in connection with the re-lease of any aircraft may differ from the
description of the leases set forth below. However, any additional leases or
future leases will be required to comply with the operating covenants under the
Indenture.
Except for the Conditional Sale Agreement, the leases are all fixed-term
operating leases under which MSAF Group generally will retain the benefit, and
bear the risk, of the residual value of the aircraft upon expiry or early
termination of the lease (although in the case of certain aircraft MSAF Group
has granted an option to purchase the aircraft to the lessee or an affiliate
and/or to extend or shorten the term of the related lease. See "-- Lessees'
Options" below). Although the lease documentation is fairly standardized in many
respects, significant variations do exist as a result of negotiation with each
lessee.
LEASE PAYMENTS AND SECURITY
Each lease requires the lessee to pay periodic rentals during the lease
term. Certain of the leases require the lessee to pay periodic amounts by way of
maintenance reserves. See "-- Maintenance and Maintenance Reserves" below.
The lessees are required to make payments to the lessor without set-off or
counterclaim, and each lease includes an obligation of the lessee to gross-up
payments under the lease where payments are subject to certain withholding and
other taxes, although, in certain cases, such amount will be limited to the
extent of the amount that would have been payable, if any, if the lease had
never been transferred from ILFC to MSAF Group. The leases also contain
indemnification of the lessor for certain taxation liabilities (including, in
some leases, value added tax and stamp duties, but generally excluding net
income tax or its equivalent imposed on the lessor) and taxation of indemnity
payments. The lessees also are obliged to pay default interest on any overdue
amounts. In some cases, the lessee may exercise certain remedies if the lessor
breaches its covenant of quiet enjoyment.
Under the leases, the lessees are liable through various operational
indemnities for operating expenses accrued or payable during the term of the
respective lease, which would normally include maintenance, operating, overhaul,
airport and navigation charges, certain taxes, licenses, consents and approvals,
aircraft registration and hull all risks and public liability insurance
premiums. The lessees are obliged to remove liens on the aircraft other than
certain liens permitted under the leases.
Under 30 of the 32 leases, the lessee has provided security for its
obligations. This security is, in the case of 29 leases, in the form of cash
security deposits and, in the case of the remaining lease, in the form of a
letter of credit. In two of the 29 leases where the lessee has provided cash
security deposits, there is also additional security: under one, the lessee has
provided a letter of credit to secure payments to certain aviation authorities
and Eurocontrol; in the other, the lessee has procured the issuance to the
lessor of a general guarantee by its parent company in respect of its payment
and performance obligations. You should refer to "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial Resources
and Liquidity -- ILFC Facility" for a discussion of cash security deposits that
are held by ILFC.
22
<PAGE> 24
RENTALS
All of the rental payments are payable on a fixed rate basis and are not
adjustable by reference to market interest rate changes. Rentals under most of
the leases are payable monthly in advance. Rentals under the balance of the
leases are payable quarterly in advance. All lease payments are currently
payable in U.S. dollars although in the future lease rentals may be payable in
other currencies.
OPERATION OF THE AIRCRAFT
The leases require the lessees to operate the aircraft in compliance with
all laws and regulations applicable to the aircraft. The aircraft generally must
remain in the possession of the lessees, and any subleases of the aircraft
generally must be approved by the lessor. Under most of the leases, the lessees
may enter into charter or "wet lease" arrangements in respect of the aircraft
(i.e., a lease with crew and services provided by the lessee), provided the
lessee does not part with operational control of the aircraft. Under certain
leases, the lessee is permitted to enter into subleases to specified operators
without the lessor's consent, provided certain conditions are met. As of the
date of this Report on Form 10-K, Britannia subleases its aircraft to Ansett
Australia Limited and Icelandair subleases its aircraft to Falcon Air AB (based
in Sweden).
All of the leases permit the lessees to subject the engines, and other
equipment or components in certain cases, to removal or replacement and, in
certain cases, to pooling arrangements (temporary borrowing of equipment), in
some cases with permitted entities (which may include certain manufacturers,
suppliers, other airlines or aircraft operators) without the lessor's consent
but subject to conditions and criteria set forth in the lease. Under all of the
leases, the lessees may deliver possession of the aircraft, engines and other
equipment or components to the manufacturer thereof for testing or similar
purposes, or to a third party for service, maintenance, repair or other work
required or permitted under the lease. The lessor's ability to repossess the
aircraft or engines, equipment or components from any such sublessee,
transferee, manufacturer, or other person may be restricted by liens or similar
rights of detention and by applicable bankruptcy and insolvency laws.
MAINTENANCE AND MAINTENANCE RESERVES
The leases contain detailed provisions specifying maintenance standards and
the required condition of the aircraft upon redelivery. In addition, under
certain of the leases, depending upon the specific maintenance condition of the
aircraft or specified items (airframe, engines, certain components, auxiliary
power unit or landing gear) at redelivery, the lessee may be required to make
certain adjustment payments to the lessor. During the term of each lease, the
lessee is required to ensure that the aircraft is maintained in accordance with
an agreed maintenance program designed to ensure that the aircraft meets
applicable airworthiness and other regulatory requirements in the jurisdiction
in which the aircraft is registered or, in the case of the lease for the spare
engine, the jurisdiction of the lessee. Under the leases, the agreed maintenance
program is generally performed by the lessee. Under most of the leases, the
lessee is required to provide monthly maintenance reserves. In cases where the
lessee has paid maintenance reserves, such payments are used to reimburse the
lessee for significant maintenance charges, including major airframe and engine
overhauls.
Under the balance of the leases there is no provision for the payment of
maintenance reserves. In these cases the lessor must rely on the credit of the
lessee or, if available, any credit support, and the ability of the lessee to
return the aircraft in the condition required by the lease upon termination, to
make any required payments based on the aircraft's return condition upon
termination of the related lease and to perform scheduled maintenance throughout
the lease term.
The lessees are required under the leases to comply with airworthiness
directives ("ADS") of the applicable aviation authorities specified in the
leases and with manufacturer's service bulletins and the lessees primarily bear
the cost of compliance. However, under some of the leases, the lessor may be
required by the lease to contribute to the cost of certain ADs or manufacturer's
service bulletins or to the cost above a specified threshold.
23
<PAGE> 25
LESSEES' OPTIONS
As of February 15, 2000, six lessees had outstanding options to purchase a
total of eight aircraft (representing 27.01% of the portfolio by appraised value
at November 30, 1999). The exercise of these options allows the lessee to
purchase the aircraft either upon expiration of the lease or on a specific
anniversary of the delivery of the aircraft, after specific notice. The duration
of some of the purchase options depends on whether the lessee exercises a
separate option to extend the lease. Assuming that all outstanding lease
extension options are exercised, the latest date on which a purchase option may
be exercised is June 8, 2008 for a purchase on March 8, 2009. Upon the exercise
of a purchase option, in one case the lessor is relieved of an obligation to
contribute to the costs of complying with ADs and, in six cases the leases
provide that the lessor refund unused maintenance reserves and/or security
deposits to the lessee.
As of February 15, 2000, fifteen of the aircraft leases included
outstanding options for the lessee to extend the term of the lease,
(representing 40.22% of the portfolio by appraised value at November 30, 1999).
The rent payable during the extension period under these leases varies from
lease to lease. As of February 15, 2000, five of the aircraft leases,
(representing 12.38% of the portfolio by appraised value at November 30, 1999),
contained provisions under which the relevant lessee could terminate its lease
prior to its scheduled expiration date, subject, in certain instances, to
specified conditions and the payment of a fee.
The engine lease (representing 0.58% of the portfolio by appraised value at
November 30, 1999) has no purchase option. The term of the spare engine lease
may be extended by five successive one-year terms which have not yet been
exercised. At the end of the fifth and sixth years of the term, the lessee may
terminate the spare engine lease with 12 months' notice and payment of a fee.
CONDITIONAL SALE AGREEMENT
MSAF Group has entered into the Conditional Sale Agreement with Navasota
Holdings Inc., a British Virgin Islands corporation ("NAVASOTA"), pursuant to
which MSAF Group will be obliged, assuming that Navasota complies with its
payment and other obligations, to transfer title to an A310 aircraft on July 15,
2007, although Navasota may prepay all purchase price installments under the
Conditional Sale Agreement at any time. Navasota has entered into an operating
lease with B.R.A.. All payments under both the Conditional Sale Agreement and
the B.R.A. lease are unconditionally guaranteed by six Brazilian tour operators
for whose benefit B.R.A. will use the aircraft to operate charter flights. The
present value of all amounts payable with respect to the A310 aircraft
(discounted to February 15, 2000 at 7.5%) is $6.1 million less than the Note
Target Price (as defined in the Indenture) as of February 15, 2000 for that
aircraft.
INDEMNIFICATION AND INSURANCE OF THE AIRCRAFT
GENERAL
The lessees are required under the leases to bear responsibility (through
an operational indemnity) and carry insurance for any liabilities arising out of
the operation of the aircraft, including any liabilities for death or injury to
persons and damage to property that ordinarily would attach to the operator of
the aircraft, subject to customary exclusions. In addition, the lessees are
required to carry other types of insurance that are customary in the air
transportation industry, including all risks aircraft hull and hull war risks
insurance (in each case at a value stipulated in the relevant lease, subject to
adjustment in certain circumstances) and aircraft spares insurance (on a
replacement cost basis), in each case subject to customary deductibles. The
Servicer is required to monitor the performance of the obligations of the
lessees with the insurance provisions of the leases. In addition, MSAF Group
also has in place its own contingent liability coverage. This operates both to
cover a liability that is in excess of the coverage provided by a lessee's
policy and where a lessee's policy lapses for any reason (including an early
termination of a lease and repossession of an aircraft). MSAF's contingent third
party liability insurance covers all of the aircraft and its contingent hull and
hull war risks insurance covers certain of the aircraft. The amount of such
contingent liability policies may or may not be the same as required under the
relevant lease. The amount of third party contingent liability insurance is
subject to certain limitations imposed by the air transportation insurance
industry.
24
<PAGE> 26
If any of the existing insurance policies are canceled or terminated and in
the case of the re-lease of an aircraft, MSAF Group may from time to time engage
insurance experts, to advise and recommend to ILFC, as Servicer, the appropriate
amount of insurance coverage MSAF Group should procure.
LIABILITY INSURANCE
Third party liability insurance is required under the leases for a combined
single limit for bodily injury and property damage in minimum amounts ranging
between $250 million and $900 million for each aircraft. In general, liability
coverage on each aircraft includes third party legal liability, passenger legal
liability, baggage legal liability, cargo legal liability, mail and aviation
general third party (including products) legal liability.
In some jurisdictions liabilities for risks that are insured against by the
lessees also may attach to MSAF Group as owner of the aircraft irrespective of
whether it is in any way responsible for the loss for which liability is
asserted. In addition, claimants may assert claims against MSAF Group on the
basis of alleged responsibility for a loss, even if such claim is not ultimately
sustained. Under the leases, the lessees are currently obligated to indemnify
the lessor against claims, including the costs of defending against such claims,
by third parties against them for such liabilities while the aircraft are owned
by MSAF and under lease to the lessees.
The indemnified losses include both operating costs relating to the actual
operation of the aircraft as well as losses to persons and property resulting
from the operation of the aircraft. The latter types of losses are generally
covered by the lessees' liability insurance.
AIRCRAFT PROPERTY INSURANCE
In addition to liability insurance, the lessees are obligated under the
leases to carry other types of insurance that are customary in the air
transportation industry, including all risks aircraft hull and hull war risks
insurance (in each case at a value stipulated in the relevant lease, subject to
adjustment in certain circumstances) and aircraft spares insurance (on a
replacement cost basis), in each case subject to customary deductibles. In
addition to such stipulated lease value coverage obtained by the lessees, MSAF
Group has also purchased declining "total loss only" coverage with respect to
certain aircraft. As of February 15, 2000, in no case was the sum of the
stipulated lease value and MSAF Group's additional coverage in place for all
risks aircraft hull and hull war risks insurances less than 100% of the
appraised value as of November 30, 1999 of the applicable aircraft, and on
average the sum of such coverages in place for each aircraft was approximately
128% of the appraised value as of November 30, 1999 of the applicable aircraft.
In most cases, the lessor is permitted to increase the insured value above the
stipulated lease value consistent with industry practice with the lessee being
responsible for any increased premium that results. Permitted deductibles range
from $100,000 to $1,000,000; however, the deductible generally applies only in
the case of a partial loss. In the case of a total loss of an aircraft, no
deductible would be applied against the insurance proceeds received.
The leases include provisions defining an event of loss or a casualty
occurrence such that where a total loss of the airframe occurs, with or without
loss of the engines installed on the airframe, the agreed value is payable by
the lessee. This payment is generally funded with insurance proceeds. However,
the air transportation insurance industry practice is to treat only a loss of
greater than 75% of the value of the aircraft, including the engines, as a total
loss. In such a case, the lessee would be responsible for the payment of the
difference between the insurance proceeds and the stipulated lease value. Where
insurance proceeds do cover a total loss, most leases require the lessor to pay
to the lessee the balance of the insurance proceeds received under the hull all
risks or war risks policy after deduction of all amounts payable by the lessee
to the lessor under the lease.
All insurance certificates contain a breach of warranty endorsement so that
the additional insureds continue to be protected even if the lessee violates one
or more of the terms, conditions or warranties of the insurance policies,
provided that such additional insured has not caused, contributed to or
knowingly condoned such breach.
25
<PAGE> 27
The insurance advisor will confirm to MSAF Group, among other things, that
the insurance requirements currently detailed in the insurance certificates meet
customary practices.
The leases require the lessee to maintain as part of its hull war and
allied perils insurance coverage for confiscation or requisition of the
applicable aircraft (including confiscation or requisition by the relevant state
of registration), although in certain countries (including France and the
People's Republic of China) such insurance may not be obtainable.
THE LESSEES
As of February 15, 2000, there were 27 lessees in 19 countries.
PAYMENT HISTORY
As a general matter, weakly capitalized airlines are more likely than well
capitalized airlines to seek operating leases and at any point in time,
investors should expect varying numbers of lessees to be experiencing payment
difficulties.
As of February 15, 2000, five current lessees were in arrears. The total
amount of rental payments, maintenance reserves and other miscellaneous amounts
due under the leases with respect to these five lessees amounted to $2.7
million. MSAF Group holds security deposits of $2.2 million against these
arrears. The weighted average number of days past due of such arrears was 57
days.
In addition to the current arrears of $2.7 million, $6.7 million of rental
and maintenance payments (before set-off of security deposits of $2.9 million)
was owed to MSAF Group from four of its former lessees as of February 15, 2000.
One Brazilian lessee owed $4.4 million of this amount. As of February 15, 2000,
three of the four aircraft had been re-leased to other carriers and the fourth
aircraft was subject to a non-binding letter of intent for lease.
In certain cases, MSAF Group may respond to the needs of lessees in
financial difficulty by, in certain instances, restructuring the applicable
leases. Such restructurings may involve reduced rental payments for a specified
period (which may be several months). In addition, certain restructurings may
involve the voluntary termination of a lease prior to its expiration and the
arrangement of subleases from the lessee to another aircraft operator.
DESCRIPTION OF THE LESSEES
The table below sets forth certain available information with respect to
the country of domicile, first year of operation, service type, nature of
ownership and fleet size and composition of each lessee as of February 15, 2000.
See "-- Portfolio Information" above for additional tables setting forth the
exposure of the aircraft (as a percentage of appraised value as of November 30,
1999) to each lessee and the countries in which the lessees are domiciled.
<TABLE>
<CAPTION>
BEGAN SERVICE OPERATING
LESSEE DOMICILE OPERATION TYPE OWNERSHIP FLEET(1)
- ------ -------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Aeromexico Mexico 1934 Scheduled Cintra (90%) 9 B757-200
Staff (10%) 3 B767-200ER
2 B767-300ER
2 DC-9-31
15 DC-9-32
13 MD-82
10 MD-83
4 MD-87
10 MD-88
Aeropostale France 1986 Chartered and Groupe Air France (50%) 3 B737-200CA
Postal Groupe La Poste (50%) 15 B737-300QC
1 B737-200QC
2 A300-B4-100F
</TABLE>
26
<PAGE> 28
<TABLE>
<CAPTION>
BEGAN SERVICE OPERATING
LESSEE DOMICILE OPERATION TYPE OWNERSHIP FLEET(1)
- ------ -------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Air 2000 United Kingdom 1986 Scheduled and First Choice Holidays (100%) 4 A320-230
Chartered 5 A321-210
13 B757-200
3 B767-300ER
Air Alfa Turkey 1992 Chartered Kombassan Holidays (100%) 2 A300-B4-100
2 A300-620R
3 A321-130
Air Atlanta Icelandic Iceland 1986 Chartered and Arngrimur Johannsson and 1 B747-200B
Net leases Thora Gudmundsdottir- 2 B747-300
Johannsson (100%)
Air Pacific Fiji 1951 Scheduled Government of Fiji (51%) 1 B737-700
Qantas (46%) 2 B747-200B
Air New Zealand (1.3%) 1 B767-300ER
Others (1.4%) 2 B737-800
Pacific Islands 1 EMB-120
governments (0.3%)
Air Liberte France 1987 Scheduled and British Airways (74%) 11 Fokker 100
Chartered Groupe Bullore (26%) 1 ATR 42
2 DC-10-30
1 DC-10-30ER
2 MD-82
10 MD-83
4 F-28-2000
Air Malta Malta 1973 Scheduled and Maltese Government (96.4%) 2 A320-210
Chartered Middle Sea Insurance (3.3%) 2 B737-200A
Casser and Cooper 6 B737-300
(Holidays) Ltd (0.3%) 1 B737-400
Alaska Airlines United States 1932 Scheduled Public (100%) 40 B737-400
of America and Freight 4 B737-200C
4 B737-200QC
5 MD-82
28 MD-83
7 B737-700
Asiana South Korea 1988 Scheduled Kumho Group (54.2%) 19 B737-400
(all cargo) Pacific Investment Capital, 3 B737-500
and Chartered UBS S.A., 8 B747-400
Korean Development Bank, 4 B747-400F
Korea Long Term Credit Bank 9 B767-300
(45.8%) 1 B767-300ER
1 B767-300 ERF
3 A321-230
B.R.A. Brazil 1999 Chartered Private (100%) 1 A310-300
Britannia United Kingdom 1961 Chartered Thomson Travel Holdings 22 B757-200
(100%) 4 B767-200EM
2 B767-200ER
4 B737-800
7 B767-300ER
Canadian Canada 1986 Scheduled and Canadian Airlines Corp (75%) 13 A320-210
Freight Aurora Airline Investment 38 B737-200A
Inc (AMR Corp) (25%) 6 B737-200C
4 B747-400
14 B767-300ER
4 DC10-30
3 DC10-30ER
31 Fokker 28
10 Dash 8-100
14 Dash 8-300
</TABLE>
27
<PAGE> 29
<TABLE>
<CAPTION>
BEGAN SERVICE OPERATING
LESSEE DOMICILE OPERATION TYPE OWNERSHIP FLEET(1)
- ------ -------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
China Airlines Taiwan 1959 Scheduled, China Civil Aviation 12 A300-620R
Chartered and Development Foundation 10 B737-800
Freight (71.1%) 8 B747-200SF
Others (28.9%) 12 B747-400
2 MD-11
2 Beechjet 400
2 B747-400F
2 B747-200F
China Hainan China 1991 Scheduled and American Aviation 5 B737-300
Executive Investment (25%) 7 B737-400
Charters Other (69.7%) 5 B737-800
Hainan Provincial Government 7 Metro 23
(5.3%) 1 Learjet-60
1 Hawker 800
1 Beechjet 400
2 Dornier 328
Flying Colours United Kingdom 1995 Chartered Thomas Cook Travel Group 11 B757-200
Ltd (100%)
Icelandair Iceland 1937 Scheduled and Public (100%) 1 B737-300F
Freight 3 B737-400
6 B757-200
1 B757-200PF
KLM The Netherlands 1919 Scheduled and Other (75%) 19 B737-300
Freight Government of the 19 B737-400
Netherlands (25%) 8 B747-200B
2 B747-200SF
3 B747-300
20 B747-400
12 B767-300ER
10 MD-11
4 B737-800
3 ATR 72-200
2 BAe 146-300
17 Fokker 100
9 Fokker 50
Malev Hungary 1946 Scheduled and Government of Hungary 3 B737-200A
Chartered (96.8%) 4 B737-300
Municipalities (2.7%) 2 B737-400
Other (0.5%) 2 B737-500
2 B767-200ER
6 Fokker 70
5 TU-154
National Airlines United States of 1998 Scheduled Rio Hotel, Harrah 11 B757-200
America Entertainments and Wexford
Management (100%)
Olympic Greece 1957 Scheduled Government of Greece 2 A300-600R
(100%) 11 B737-200A
1 B747-200B
12 B737-400
4 A340-310
4 ATR 42-300
7 ATR 72-200
2 B717-200
6 Fairchild 228
1 A300-B4-200
1 B737-300
1 A300-B4-100
</TABLE>
28
<PAGE> 30
<TABLE>
<CAPTION>
BEGAN SERVICE OPERATING
LESSEE DOMICILE OPERATION TYPE OWNERSHIP FLEET(1)
- ------ -------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Region Air Singapore 1988 Chartered Hotel Properties Ltd (100%) 1 Beechjet 1900C
1 Beechjet 1900D
1 DHC 6-100
1 Raytheon 130
1 Raytheon 377
TransAer Ireland 1991 Chartered Translift Holding (100%) 1 A300-B4-200
1 A320-230
Transavia The Netherlands 1965 Scheduled and KLM (80%) 6 B737-300
Chartered Nationale Investeringsbank 4 B757-200
(20%) 4 737-800
Transwede Norway 1946 Scheduled and Braganza (33.4%) 5 B737-400
Chartered Other (31.2%) 20 B737-500
KLM (30%) 8 B737-700
Bramora (5.4%) 1 B737-300
4 Fokker 100
10 BAe-146-200
TWA United States of 1930 Scheduled Public (65%) 10 B727-200A
America Employees (30%) 27 B757-200
Prince Al-Waleed bin Talal 10 B767-200EM
(5%) 6 B767-300ER
16 DC-9-31
12 DC-9-32
1 DC-9-33CF
40 MD-82
64 MD-83
VASP Brazil 1933 Scheduled Employees and Canhedo Group 3 A300-B2-200FF
(60%) 6 B737-200
Sao Paolo State 1 B737-200F
Government (40%) 1 B737-200C
7 B737-300
5 B727-200F
7 MD-11
13 737-200A
1 737-200CA
</TABLE>
- ---------------
(1) Includes the operating fleet of the lessee's wholly owned subsidiaries.
Source: Airclaims Limited, and BACK Associates, Inc.
29
<PAGE> 31
ITEM 2. PROPERTIES
MSAF Group has no ownership or leasehold interest in any real property.
MSAF Group's registered and principal office is located at 1100 North
Market Street, Rodney Square North, Wilmington, Delaware 19890-0001 and its
telephone number is 1-302-651-1000.
For a description of MSAF Group's interest in other property, see "Item 1.
Business -- The Aircraft and Leases."
ITEM 3. LEGAL PROCEEDINGS
Neither MSAF Group nor any of its subsidiaries is involved in or subject to
any legal or arbitration proceedings relating to claims or amounts which are
material nor is MSAF Group aware that any such proceedings are pending or
threatened.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
30
<PAGE> 32
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of the date of this Report on Form 10-K, all of the beneficial interest
in MSAF Group is owned by MSF, a wholly owned subsidiary of MSDW and no equity
securities of MSAF Group are listed on any national exchange or traded in any
established market.
At the time of the issuance of the Old Notes, MSAF Group paid a beneficial
interest distribution of approximately $976 million to MSF.
For a discussion relating to the beneficial interest distribution and
additional information regarding the corporate governance of MSAF Group, see
"Item 1 Business -- MSAF Group."
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data in the following table have been
derived from, and should be read in conjunction with, MSAF Group's consolidated
financial statements as of and for the fiscal year ended November 30, 1999, as
of and for the fiscal year ended November 30, 1998 and for the period from
October 30, 1997 (date of formation) to November 30, 1997, including the notes
thereto (the "FINANCIAL STATEMENTS") appearing elsewhere in this Report on Form
10-K. MSAF Group's Financial Statements have been audited by Deloitte & Touche
LLP, independent auditors.
<TABLE>
<CAPTION>
PERIOD FROM
FISCAL YEAR FISCAL YEAR OCTOBER 30, 1997
ENDED ENDED (DATE OF FORMATION)
NOVEMBER 30, 1999 NOVEMBER 30, 1998 TO NOVEMBER 30, 1997
-------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Lease income, net.................. $ 114,651 $120,005 $ 4,747
Investment income on collection
account......................... 1,845 2,156 --
--------- -------- ---------
Total revenues..................... 116,496 122,161 4,747
--------- -------- ---------
Expenses:
Interest expense................... 63,584 50,533 --
Depreciation expense............... 47,060 38,876 43
Operating expenses:
Service provider and other
fees.......................... 8,568 9,534 --
Maintenance and other aircraft
related costs................. 5,216 2,969 --
--------- -------- ---------
Total expenses..................... 124,428 101,912 43
--------- -------- ---------
Net (loss)/income.................... $ (7,932) $ 20,249 $ 4,704
========= ======== =========
STATEMENT OF CASH FLOWS DATA:
Net cash provided by operating
activities......................... $ 43,607 $ 83,941 $ --
Net cash used for investing
activities......................... -- (887,315) (66,370)
Net cash (used for)/provided by
financing activities............... (43,338) 838,224 66,370
</TABLE>
31
<PAGE> 33
<TABLE>
<CAPTION>
NOVEMBER 30, 1999 NOVEMBER 30, 1998
-------------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 35,119 $ 34,850
Total Assets.......................................... 957,474 1,010,492
Total Liabilities..................................... 1,012,155 1,057,241
Total Beneficial Interestholder's Deficit............. (54,681) (46,749)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The MSAF Group entities were organized in late 1997 and since that time
their principal business activity has been the acquisition of aircraft and the
placement of such aircraft on operating lease. MSAF Group's future business is
expected to consist principally of aircraft operating lease activities,
acquisitions of additional aircraft and sales of aircraft. Cash flows generated
from such activities will be used to service interest and principal on the
Notes, any refinancing notes and any additional notes but only after various
expenses of MSAF Group have been paid for, including any taxes, obligations to
lessees including maintenance obligations, fees and expenses of ILFC and other
service providers and payments to MSAF Group's interest rate swap
counterparties.
MSAF Group's ability to generate sufficient cash from its aircraft assets
to service the Notes will depend primarily on (i) the rental rates it can
achieve on leases and the lessees' ability to perform according to the terms of
those leases and (ii) the prices it can achieve on any aircraft sales. MSAF
Group's ability to service the Notes will also depend on the level of its
operating expenses, including maintenance obligations which will increase as the
aircraft age, and on any unforeseen contingent liabilities arising.
RECENT DEVELOPMENTS
ACQUISITION OF ADDITIONAL AIRCRAFT
During the second quarter of Fiscal 2000, MSAF Group intends to acquire a
portfolio of 29 commercial aircraft from certain subsidiaries of MSDW. During
Fiscal 1999, MSDW acquired two Fokker-50 aircraft from an affiliate of GE
Capital Corporation and 27 aircraft from ILFC. MSAF Group intends to finance
this acquisition by issuing additional notes.
APPRAISED VALUES AT NOVEMBER 30, 1999
The most recent appraisals of the value of each aircraft were obtained as
of November 30, 1999 with total appraised value of the aircraft at November 30,
1999 equal to $953.1 million. The appraisals at November 30, 1999 did not
indicate a decline in value sufficiently in excess of the value decline assumed
under the terms of the Notes to require excess cash flows to be redirected to
the Class A Notes pursuant to the scheduled principal payment amount for the
Class A Notes under the Indenture. The next annual appraisals are due to occur
no later than October 31, 2000.
LESSEE DIFFICULTIES
As of February 15, 2000, five current lessees were in arrears. The aircraft
on lease to the five lessees in arrears represent 15.49% of the portfolio by
appraised value at November 30, 1999. The total amount of rental payments,
maintenance reserves and other miscellaneous amounts due under the leases with
respect to these lessees amounted to approximately $2.7 million. MSAF Group
holds security deposits of $2.2 million against these arrears. The weighted
average number of days past due of such arrears was 57 days.
In addition, as of February 15, 2000, an aggregate of $6.7 million (before
set-off of security deposits of $2.9 million) was owed to MSAF Group from four
of its former lessees. One Brazilian lessee owed
32
<PAGE> 34
$4.4 million of this amount. In three cases, MSAF Group has re-leased the
aircraft to other carriers. A fourth aircraft is subject to a non-binding letter
of intent for lease, with a carrier based in the Middle East.
REGIONAL ANALYSIS OF EXISTING ARREARS
The categorization of countries into geographical regions, Developed
Markets, Emerging Markets and Other is determined using MSCI designations.
EUROPE AND MIDDLE EAST (EMERGING)
MSAF Group currently leases 11.28% 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, Air Alfa, is based in Turkey. At February 15, 2000, the
total rental and maintenance arrears owed by this lessee was $1.7 million
against which MSAF Group holds a security deposit of $0.7 million. The aircraft
represents 4.17% of the appraised value of the portfolio at November 30, 1999.
The obligations of Air Alfa under the lease are guaranteed by its parent
company, Kombassan Holdings, and the servicer has instituted legal steps in
Turkey to enforce the guarantee.
A former lessee based in Turkey defaulted on its obligations under its
leases and the aircraft was repossessed in April 1999. The lease was scheduled
to expire in May 2000. The total amount of rental payments and maintenance
reserves due under the lease at the date of repossession was $2.1 million,
against which MSAF Group retained a security deposit of $0.7 million. The former
lessee repaid $1.2 million of its arrears, and the aircraft was re-leased to
another Turkish carrier.
EUROPE (DEVELOPED)
MSAF Group currently leases 29.05% of the portfolio by appraised value at
November 30, 1999 in the Europe (Developed) region. At February 15, 2000, one of
the five current lessees in arrears is based in Ireland. In January 2000, MSAF
Group reached an agreement with TransAer to defer $0.5 million of rental and
maintenance obligations. Repayment of the rental arrears plus interest is
scheduled to be made over a five week period beginning on June 16, 2000.
Repayment of the maintenance reserve plus interest is scheduled to be made in
three monthly installments beginning on June 1, 2000. MSAF Group holds security
deposits of $0.6 million against TransAer's deferred and current arrears. At
February 15, 2000, the total current maintenance reserves arrears owed by
TransAer was $0.1 million. The aircraft represents 3.21% of the appraised value
of the portfolio at November 30, 1999.
ASIA (EMERGING)
MSAF Group currently leases 13.11% of the portfolio by appraised value at
November 30, 1999 in the Asia (Emerging) region. At February 15, 2000, none of
these lessees were in arrears.
LATIN AMERICA (EMERGING)
MSAF Group currently leases 9.33% of the portfolio in the Latin America
(Emerging) region (4.35% in Mexico and 4.98% in Brazil) by appraised value of
the portfolio at November 30, 1999. Two of the five current lessees in arrears
are based in Latin America, both in Brazil. In addition, since March 1998, MSAF
Group has leased a total of five aircraft to five lessees in Latin America. Two
of those aircraft have been repossessed, one in Brazil and one in Mexico, and
two other lessees restructured their arrears, both in Brazil.
Brazil has experienced significant downturns in its economy and financial
markets, with large decreases in financial asset prices, and, since it devalued
its currency on January 13, 1999, dramatic decreases in the value of its
currency.
The rental arrears of a current Brazilian lessee, VASP, representing 2.08%
of the portfolio by appraised value at November 30, 1999, were restructured in
March 1999. Repayment of the arrears plus interest was scheduled to begin in
August 1999 and end in January 2000. On February 10, 2000 the lessee made a
payment of $1.3 million in full settlement of its current and deferred arrears
up to January 31, 2000. As of February 15, 2000, VASP had not yet made its
rental payment of $0.2 million due on February 1, 2000.
33
<PAGE> 35
The second current Brazilian lessee, which accounts for 2.90% of the
appraised value of the portfolio at November 30, 1999, has been operating one
A310-300 subject to a capital lease. In August 1999, MSAF Group and the lessee
agreed to modify the terms of the existing capital lease by increasing the total
rental payments to be received and by extending the lease term. As of February
15, 2000, $0.4 million of current arrears, representing approximately 36 days of
rental, were due and unpaid.
In July 1999, a Brazilian former lessee 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 to 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. The former lessee, under the
provisions of a restructuring agreement, 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. The first payment of $0.4 million under this agreement was due and paid in
October 1999. Maintenance work on this aircraft (including repairs to the
engines) is almost completed and the aircraft is scheduled to be delivered to
the new lessee on March 17, 2000. The re-leasing market for the B747-300
aircraft has recently been severely hit by overcapacity in the widebody market
in general and for this aircraft type in particular. According to Airclaims,
there are currently 79 B747-300 aircraft in the world fleet, of which 20 are
currently available for lease. The new lease rate for this aircraft is
approximately 20% of the previous rental reflecting the significant fall in
demand for this aircraft type and the current oversupply. Future lease rentals
for this aircraft will in part depend on the state of the Asian economies, where
demand for these aircraft and other widebodies has been strongest in the past.
This aircraft represents 5.15% of the portfolio by appraised value at November
30, 1999.
A former Mexican lessee defaulted on its obligations under its lease of a
B737-400 aircraft and the aircraft was repossessed in December 1999. The lease
was scheduled to expire in May 2000. The total amount of rental payments and
maintenance reserves due under the lease at the date of repossession was $0.6
million. This amount was partially offset by a security deposit of $0.5 million.
The aircraft is currently undergoing maintenance work prior to re-leasing to a
new lessee. This aircraft represents 2.30% of the portfolio by appraised value
at November 30, 1999. On February 21, 2000, a court in Mexico declared TAESA
bankrupt. It is uncertain whether MSAF Group will be able to recover the $0.1
million outstanding from TAESA.
NORTH AMERICA (DEVELOPED)
MSAF Group currently leases 13.43% of the portfolio by appraised value at
November 30, 1999 in the North America (Developed) region. At February 15, 2000,
one of the five current lessees in arrears was based in North America. On
February 2, 2000, Canadian Airlines announced a debt restructuring and
moratorium plan. The plan will result in a suspension of payments of
approximately $135 million to lenders and aircraft lessors, including MSAF
Group. The amounts will be repaid on a basis to be negotiated. According to a
statement by the lessee, the payment schedule is expected to resume in late
April 2000, following approval of the plan by all interested parties. As of
February 15, 2000, the lessee owed $0.3 million in rental and maintenance
obligations. MSAF Group holds a security deposit of $0.3 million in respect of
this lessee. The aircraft represents 3.13% of the appraised value of the
portfolio at November 30, 1999.
OTHER
MSAF Group currently leases 16.78% of the portfolio by appraised value at
November 30, 1999 in the "Other" region. As of February 15, 2000, none of these
lessees were in arrears.
A lease with Guyana Airways was terminated by agreement on April 2, 1999
with rental arrears of $1.3 million. The total costs of redelivery were $5.6
million in excess of amounts received in settlement from Guyana Airways. The
aircraft is a B757-200 and accounts for 3.50% of the appraised value of the
portfolio at November 30, 1999. The aircraft was re-leased to National Airlines,
a U.S. carrier, in June 1999.
34
<PAGE> 36
NEW AIRCRAFT SAFETY STANDARDS
The United States Federal Aviation Administration ("FAA") recently issued
two Notices of Proposed Rule Making ("NPRM"). One NPRM, issued on August 11,
1999, relates to fire safety standards in certain types of aircraft. As
proposed, the resulting Airworthiness Directive ("AD"), which would apply to
MSAF Group's MD-82 and MD-83 aircraft, would require operators of those aircraft
to replace the current fire insulation blankets. The second NPRM, issued on
October 28, 1999, relates to improving fuel tank safety in certain types of
aircraft. As proposed, the resulting AD, which would apply to almost all of MSAF
Group's aircraft, would require operators of those aircraft to develop and
implement an FAA approved maintenance and inspection program for fuel tanks. It
is not currently known whether these NPRMs will result in ADs. Under the leases
for the aircraft that would be affected, all costs of compliance with ADs are
the obligations of the lessees.
INSPECTIONS OF MD-80S
On February 11, 2000, following an accident involving a MD-83 aircraft, the
FAA issued an AD covering DC-9 (MD-83), MD-88, MD-90 and B717 aircraft. The AD
required inspection of the stabilization equipment on these aircraft types
within three days. MSAF Group owns one MD-82 and two MD-83 aircraft,
representing 6.01% of the portfolio by appraised value at November 30, 1999.
Under the leases of the affected aircraft, all costs of compliance with the AD
are the obligation of the lessees.
The Servicer has confirmed that it believes that all of MSAF Group's MD-82
and MD-83 aircraft were inspected in accordance with instructions of this AD.
The terms of MSAF Group's leases do not require the lessees to report to MSAF
Group their actions to comply with ADs.
RESULTS OF OPERATIONS -- YEAR ENDED NOVEMBER 30, 1999
MSAF Group's results of operations for the year ended November 30, 1999
("FISCAL 1999") are not directly comparable to those of the year ended November
30, 1998 ("FISCAL 1998") as MSAF Group did not own its aircraft portfolio
throughout Fiscal 1998. In addition, the Notes were issued on March 3, 1998 and
accordingly, MSAF Group did not incur any interest expense for the first three
months of Fiscal 1998.
NET (LOSS)/INCOME
MSAF Group incurred a net loss of $7.9 million in Fiscal 1999 as compared
to net income of $20.2 million in Fiscal 1998. The decrease in net income
primarily reflects higher levels of interest expense, depreciation expense and
maintenance and other aircraft related costs in Fiscal 1999.
MSAF Group is a Delaware business trust treated as a branch of MSF for U.S.
Federal, state and local income tax purposes. As such, MSAF Group is not subject
to U.S. Federal, state and local income taxes.
LEASE INCOME
Lease income for Fiscal 1999 amounted to $114.7 million as compared to
$120.0 million in Fiscal 1998. MSAF Group's lease income for Fiscal 1999 were
adversely affected by provisions for doubtful accounts aggregating $6.4 million.
Such provisions were recorded by MSAF Group due to financial difficulties
experienced by certain of its existing 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 amounted to $0.7 million for Fiscal 1998. The increase in provisions
for doubtful accounts were partially offset by an increase in lease revenues, as
MSAF Group did not own all of the aircraft throughout Fiscal 1998.
Lease income also includes certain maintenance reserve amounts which are
received from certain of MSAF Group's lessees. MSAF Group records the cash
prepayments made by lessees for maintenance as a component of the liability for
maintenance account which appears on the Consolidated Balance Sheets. When the
lessee incurs maintenance expenditures, MSAF Group must return a corresponding
amount of the prepayment to the lessee. At this time, MSAF Group will forward
cash to the lessee, with a corresponding
35
<PAGE> 37
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.
INVESTMENT INCOME
MSAF Group earned investment income of $1.8 million in Fiscal 1999 as
compared to $2.2 million in Fiscal 1998. Investment income has declined as the
excess cash held in March 1998 was utilized to acquire an additional aircraft
during Fiscal 1998, as well as the return of excess cash to investors in respect
of an undelivered aircraft.
INTEREST EXPENSE
Interest expense, including swap costs of $5.3 million as compared to $2.2
million in Fiscal 1998, amounted to $63.6 million in Fiscal 1999 as compared to
$50.5 million in Fiscal 1998. Interest expense relates to the cost of the Notes
which were issued on March 3, 1998. The weighted average interest rate on the
Subclass A-1 to D-1 Notes during Fiscal 1999 was 6.03% as compared to 6.33% in
Fiscal 1998. The average debt in respect of the Subclass A-1 to D-1 Notes
outstanding during Fiscal 1999 was $956.0 million as compared to $1,012.2
million in Fiscal 1998. Interest expense is higher in Fiscal 1999 because the
Notes were issued on March 3, 1998 and accordingly, MSAF Group did not incur any
interest expense for the first three months of Fiscal 1998.
MSAF Group is a party to seven interest rate swaps with Morgan Stanley
Capital Services Inc. ("MSCS"), a wholly-owned subsidiary of MSDW. In five of
these swaps, MSAF Group pays a fixed monthly coupon and receives one month LIBOR
on a notional balance of $900 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.
MSAF Group was a party to one additional interest rate swap with MSCS with
a notional balance of $100 million that matured on November 15, 1999. In that
swap MSAF Group paid a fixed monthly coupon and received one month LIBOR.
All eight original swaps were originally entered into by MSCS, with an
internal swaps desk as the counterparty, on November 12, 1997 and February 19,
1998, respectively. On March 3, 1998, all eight of the original swaps were
assigned to MSAF Group by MSCS and on such date such swaps had an aggregate fair
value of approximately $(15.3) million. No consideration was paid to or received
by MSAF Group in connection with the assumption of these swap positions. MSAF
Group has recorded the assumption of these interest rate swaps at their fair
value by recognizing a liability within other liabilities in its Consolidated
Balance Sheets, with a corresponding charge to deemed distribution, a component
of Beneficial Interestholder's Deficit.
Three of the original swaps assumed from MSCS having an aggregate notional
principal amount of $700 million are accounted for as hedges of its obligations
under the Notes. Under these swap arrangements MSAF Group will pay fixed and
receive floating amounts on a monthly basis. The fair value of the liability
assumed relating to those swaps which are being accounted for as hedges is being
deferred and recognized when the offsetting gain or loss is recognized on the
hedged transaction. This amount and the differential payable or receivable on
such interest rate swap contracts, to the extent such swaps are deemed to be
effective hedges for accounting purposes, are recognized as an adjustment to
interest expense. The portion of these swaps not deemed to be hedges for
accounting purposes are accounted for on a mark-to-market basis with changes in
fair value reflected in interest expense.
The remaining four swaps assumed by MSAF Group have an aggregate gross
notional principal amount of $400 million. Under these swap arrangements, MSAF
Group will pay/receive fixed and receive/pay floating amounts on a monthly
basis. MSAF Group determined that these swaps do not qualify for hedge
36
<PAGE> 38
accounting. The fair value of the liability assumed related to these swaps is
accounted for on a mark-to-market basis with changes in fair value reflected in
interest expense.
Notwithstanding the different accounting treatments for the various swaps,
all eight swaps were required to hedge MSAF Group's interest rate exposure on an
economic basis. In November 1997, MSAF Group had contracted to purchase the
aircraft and their associated fixed rate leases but, prior to the time of
pricing the Notes, was exposed to movements in interest rates with respect to
its anticipated liabilities under the Notes. Accordingly, in November 1997, six
swaps with a notional balance of $1,000 million were entered into by MSCS under
which MSAF Group would pay fixed amounts and receive floating amounts. Once the
Notes were priced in February 1998, MSAF Group could determine that to hedge the
interest rate exposure associated with its variable rate debt it required swaps
with a notional balance of approximately $800 million. Accordingly, in February
1998, MSCS entered into re-balancing swaps with a notional amount of $200
million under which MSAF Group would pay floating amounts and receive fixed
amounts.
The net economic effect of assigning all eight swaps with a gross notional
amount of $1.2 billion to MSAF Group on March 3, 1998 was to fix MSAF Group's
interest rate liability at November 12, 1997, shortly after the date MSAF Group
incurred its exposure to movements in interest rates when it agreed to purchase
the aircraft with associated fixed rate leases. See "Interest Rate Risk
Management" under Item 7A below for more information regarding MSAF Group's
swaps positions and hedging policy.
DEPRECIATION
The charge for depreciation in Fiscal 1999 amounted to $47.1 million as
compared to $38.9 million in Fiscal 1998. The increase in Fiscal 1999 reflects
that MSAF Group did not own all of the aircraft throughout the entire Fiscal
1998 period.
OPERATING EXPENSES
Service Provider and Other Fees. Service provider and other fees for
Fiscal 1999 were $8.6 million as compared to $9.5 million in Fiscal 1998. The
most significant element in both periods was the aircraft servicing fee paid to
ILFC, which amounted to $5.2 million in Fiscal 1999, and $6.0 million in Fiscal
1998. The fee paid in Fiscal 1998 included an initial upfront fee of $2.0
million paid to ILFC at the inception of the Servicing Agreement. MSAF Group's
service provider expenses also included $1.6 million in respect of
administrative agency and cash management fees in Fiscal 1999 as compared to
$1.3 million in Fiscal 1998. These fees were lower in Fiscal 1998 as MSAF Group
did not own all of the aircraft throughout that period.
Maintenance and Other Aircraft Related Costs. Maintenance and other
aircraft related costs in Fiscal 1999 amounted to $5.2 million as compared to
$3.0 million in Fiscal 1998. The increase in Fiscal 1999 primarily reflected
additional maintenance and redelivery costs incurred by MSAF Group associated
with an aircraft previously leased to Guyana Airways. Such costs were necessary
to prepare the aircraft for a new lessee (see "Lessee Difficulties"). In the
next six months it is likely that maintenance disbursements will increase due to
an increase in the number of anticipated maintenance events.
Included within maintenance and other aircraft related costs were
insurance, re-leasing and other costs which amounted to $2.5 million in Fiscal
1999 as compared to $1.0 million in Fiscal 1998. The increase reflects a higher
level of re-leasing events during Fiscal 1999. It is expected that re-leasing
costs will increase proportionately over the next several months due to costs
relating to reconfiguring aircraft for new lessees upon redelivery.
RESULTS OF OPERATIONS -- YEAR ENDED NOVEMBER 30, 1998
MSAF Group's results of operations for Fiscal 1998 and the period from
October 30, 1997 (date of formation) to November 30, 1997 ("FISCAL 1997") are
discussed below. The results for Fiscal 1998 and Fiscal 1997 are not directly
comparable since Fiscal 1997 only reflects one month of operations.
37
<PAGE> 39
NET INCOME
Net income for Fiscal 1998 was $20.2 million. Fiscal 1997's net income was
$4.7 million.
LEASE INCOME
Lease income for Fiscal 1998 amounted to $120.0 million. Many of the
aircraft were not owned by MSAF Group for the entire year. During the year,
there was a loss in lease rental revenues caused by four aircraft on the ground
("AOG") ($2.0 million). Four aircraft had been repossessed from Western Pacific
Airlines, Transaero and Pan Am Airlines (formerly Carnival) but were all subject
to signed lease agreements as of November 30, 1998. The four aircraft were
placed on lease with Olympic Airways, VASP, TAESA and Flying Colours. Part of
the AOG period was spent performing maintenance work on all four aircraft prior
to re-leasing.
Lease income for Fiscal 1997 was $4.7 million, primarily reflecting a gain
of $4.6 million relating to an aircraft leased to a customer under a sales-type
capital lease.
INVESTMENT INCOME
MSAF Group earned investment income of $2.2 million in Fiscal 1998.
Investment income is expected to decline in future periods because excess cash
has now either been used to acquire the aircraft or refunded to investors in
respect of one undelivered aircraft.
INTEREST EXPENSE
Interest expense, including swap costs of $2.2 million, amounted to $50.5
million in Fiscal 1998. Interest expense relates to the cost of the Notes which
were issued on March 3, 1998 and, therefore, only outstanding for approximately
nine months in the period. The weighted average interest rate on the Subclass
A-1 to D-1 Notes during Fiscal 1998 was 6.33% and the average debt in respect of
the Subclass A-1 to D-1 Notes outstanding during Fiscal 1998 was $1,012.2
million.
DEPRECIATION
The charge for depreciation in Fiscal 1998 amounted to $38.9 million. The
charge is expected to be proportionately higher in future periods given that
MSAF Group did not own all of the aircraft throughout Fiscal 1998.
Depreciation expense was $0.04 million in Fiscal 1997, which was
attributable to the three aircraft owned by MSAF Group during that period.
OPERATING EXPENSES
Service Provider and Other Fees. Service provider and other fees for
Fiscal 1998 were $9.5 million. The most significant element was the aircraft
servicing fee paid to ILFC, which amounted to $6.0 million for the year and
included an initial upfront fee of $2.0 million paid to ILFC at the inception of
the Servicing Agreement. A significant portion of the fees payable to ILFC are
calculated as a percent of rental revenue actually received. Accordingly, the
fees paid to ILFC reflected the lower rental revenue caused by AOGs and
undelivered aircraft during the period. MSAF Group's service provider expenses
also included $1.3 million in respect of administrative agency and cash
management fees.
Maintenance and Other Aircraft Related Costs. Maintenance and other
aircraft related costs in Fiscal 1998 amounted to $3.0 million. These costs
reflected additional maintenance work that was performed on the four aircraft
which were repossessed. This work included an airframe structural check for
certain of the aircraft and the installation of new landing gear.
Included within maintenance and other aircraft related costs were
insurance, re-leasing and other costs incurred in Fiscal 1998, which amounted to
approximately $1.0 million.
38
<PAGE> 40
FINANCIAL RESOURCES AND LIQUIDITY
See Appendix 1 for more information regarding the cash performance of MSAF
Group for the year ended November 30, 1999.
LIQUIDITY
MSAF Group's cash and cash equivalents balances at November 30, 1999 were
$35.1 million. Of this amount, $25 million represents the cash portion of the
Liquidity Reserve Amount (as defined below) and $10.1 million represents rental
and maintenance receipts and cash held for accrued expenses.
In addition to the $25 million cash portion at November 30, 1999, the
Liquidity Reserve Amount also contained $40.4 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 cost of the
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 Fiscal 1999 amounted to $43.6
million, principally reflecting non-cash depreciation expense of $47.1 million,
a net loss of ($7.9) million, and provision for doubtful accounts of $6.4
million.
Net cash provided by operating activities in Fiscal 1998 amounted to $83.9
million, principally reflecting non-cash depreciation expense of $38.9 million,
net income of $20.2 million, and changes in maintenance liabilities of $13.2
million and deferred rental income of $7.4 million.
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES
In Fiscal 1999, MSAF Group did not utilize any cash for investing
activities while in Fiscal 1998, cash of $887.3 million was used to acquire
aircraft.
In Fiscal 1999, the $43.3 million of cash used for financing activities
reflected repayments of principal on the Notes. In Fiscal 1998, net cash flows
provided by financing activities were $838.2 million, reflecting proceeds
received from the issuance of Notes, repayment of borrowings from MSF and
repayments of principal on the Notes.
INDEBTEDNESS
MSAF Group's indebtedness primarily consisted of the Subclass A-1 to D-1
Notes in the amount of $935.5 million at November 30, 1999. You should refer to
"Interest Rate Risk Management" for a presentation of the outstanding principal
amounts and estimated fair values of each subclass of Notes as of November 30,
1999.
The Liquidity Reserve Amount was approximately $65.4 million on November
30, 1999. The "MINIMUM LIQUIDITY RESERVE AMOUNT" may be funded with cash and
with Eligible Credit Facilities and was approximately $15 million on November
30, 1999. The Liquidity Reserve Amount and the Minimum Liquidity Reserve Amount
may be increased or decreased from time to time for any reason (including upon
acquisitions of additional aircraft) by an action of the Controlling Trustees in
light of changes in, inter alia, the condition of the Aircraft, the terms and
conditions of the leases, the financial condition of the lessees, sales of
aircraft and prevailing industry conditions; provided that MSAF Group will
obtain confirmation in advance in writing from the rating agencies that any
proposed reduction in the Liquidity Reserve Amount or the Minimum Liquidity
Reserve Amount will not result in a lowering or withdrawal by any of the rating
agencies of their respective ratings of any Notes.
39
<PAGE> 41
If the balance of cash on deposit, together with the amount available for
drawing under any Eligible Credit Facilities, should fall below the Liquidity
Reserve Amount at any time (including as a result of MSAF Group's determination
that the Liquidity Reserve Amount should be increased, as required by the rating
agencies or otherwise), MSAF Group may continue to make all payments, and any
credit or liquidity enhancement facilities may be drawn to fund such payments,
including required payments on the Notes, which rank prior to, or equally with,
payments of the minimum principal payment amount on the class D Notes under the
Indenture and any Permitted Accruals other than in respect of Modification
Payments, provided that the balance of cash on deposit, together with the amount
available for drawing under any Eligible Credit Facilities, does not fall below
the Minimum Liquidity Reserve Amount at its then current level. "MODIFICATION
PAYMENTS" are any capital expenditures for the purpose of effecting any optional
improvement or modification of any aircraft, or for the optional conversion of
any aircraft from a passenger aircraft to a freighter or mixed-use aircraft, for
the purpose of purchasing or otherwise acquiring any engines or parts outside of
the ordinary course of business. "PERMITTED ACCRUALS" are amounts in respect of
expenses and costs that are not regular, monthly recurring expenses, including
Modification Payments and refinancing expenses, if any, anticipated to become
due and payable in any future interest accrual period. However, the balance of
cash on deposit, together with the amount available for drawing under any
Eligible Credit Facilities, may fall below the Minimum Liquidity Reserve Amount
at its then current level and MSAF Group may continue to make payments of, and
any credit or liquidity enhancement facilities may be drawn to fund such
payments, all accrued and unpaid interest on any subclass of the most senior
class of Notes then outstanding to avoid an event of default, with respect to
the Notes and, on the final maturity date of any subclass thereof, principal of,
any subclass of the most senior class of Notes then outstanding to avoid an
event of default with respect to the Notes.
Amounts drawn under any Eligible Credit Facility will either be repayable
at the third level in the priority of payments, as set forth in the Indenture
before the First Collection Account Top-Up (any such facility, a "PRIMARY
ELIGIBLE CREDIT FACILITY") or at the 11th level in the priority of payments,
before the Second Collection Account Top-Up (any such facility, a "SECONDARY
ELIGIBLE CREDIT FACILITY"). The "FIRST COLLECTION ACCOUNT TOP-UP" is the amount,
if positive, equal to (A) the Minimum Liquidity Reserve Amount less (B) amounts
available for drawing under any Primary Eligible Credit Facilities. The "SECOND
COLLECTION ACCOUNT TOP-UP" is the amount, if positive, equal to (A) the
Liquidity Reserve Amount less (B) an amount equal to cash amounts reserved at
the third level in the priority of payments plus amounts available for drawing
under any Eligible Credit Facilities.
The Liquidity Reserve Amount and the Minimum Liquidity Reserve Amount have
been determined largely based on an analysis of historical experience,
assumptions regarding MSAF Group's future experience and the frequency and cost
of certain contingencies in respect of the aircraft currently owned by MSAF
Group, and are intended to provide liquidity for meeting the cost of maintenance
obligations and non-maintenance, aircraft-related contingencies such as removing
regulatory liens, complying with ADs, repossessing and releasing aircraft. In
analyzing the future impact of these costs, assumptions have been made regarding
their frequency and amount based upon historical experience. There can be no
assurance, however, that historical experience will prove to be relevant in the
future or that actual cash received by MSAF Group in the future will not be
significantly less than that assumed. Any significant variation may materially
adversely affect the ability of MSAF Group to make payments of interest and
principal on the Notes.
ILFC FACILITY
Under the ILFC facility, ILFC will hold certain security deposits with
respect to the aircraft currently owned by MSAF Group as custodian for the
benefit of the MSAF Group. ILFC will hold all cash security deposits paid with
respect to the aircraft in MSAF Group's initial portfolio other than, (i)
amounts determined in good faith by ILFC to be no longer held on behalf of a
lessee, whether upon expiry of or default under the applicable lease or
otherwise, and (ii) any cash security deposits in an amount exceeding three
months' rent with respect to a single aircraft and paid by a single lessee. Any
interest accruing on amounts of aircraft security deposits that are being held
by ILFC will generally accrue for the benefit of ILFC.
40
<PAGE> 42
In addition, under the ILFC facility, ILFC will make loans to MSAF Group
which MSAF Group may use for the same purposes as those for which the Liquidity
Reserve Amount may be applied as discussed above under "-- Liquidity Reserve
Amount," including to pay interest and minimum principal payment amounts payable
under the Indenture on the Notes. ILFC's obligation to make such amounts
available shall be limited to the ILFC facility commitment which was
approximately $30.4 million on November 30, 1999. The ILFC facility commitment
shall be equal to, (i) at any time before an early termination of the Servicing
Agreement for a reason other than a sale of all the aircraft in MSAF Group's
current portfolio or the repayment or defeasance of MSAF Group's debt (a
"FACILITY REDUCTION EVENT"), the sum of, (A) $10 million plus, (B) total
security deposits held by ILFC for the benefit of MSAF Group at such time minus,
(C) all drawings previously made by MSAF Group under the ILFC facility and
required to be repaid to ILFC but not repaid at such time, and (ii) at any time
from and after a Facility Reduction Event, $10 million minus all ILFC facility
drawn amounts required to be repaid to ILFC but not repaid at such time.
The ILFC facility is a Secondary Eligible Credit Facility and, accordingly,
on the Note payment date following any drawing on the ILFC facility, MSAF Group
will be obligated, to the extent there are available collections remaining after
payment of the minimum principal payment amount on the class D Notes under the
Indenture, to repay ILFC facility drawn amounts to ILFC, together with interest
accrued thereon at 3% per annum, calculated on the basis of a 360-day year
consisting of twelve 30-day months and compounded daily.
ILFC's agreement to provide the ILFC facility will expire on the earliest
of, (i) May 26, 2023, (ii) a sale of all the aircraft in MSAF Group's initial
portfolio, and (iii) the repayment or defeasance of all MSAF Group's debt.
At any time and for so long as ILFC is not an Eligible Provider, ILFC's
obligations under the ILFC facility will be supported by an Eligible Credit
Facility satisfactory to MSAF Group provided by an Eligible Provider at ILFC's
expense (a "BACK-UP FACILITY").
MSAF Group may borrow under the ILFC facility, (i) in order to pay interest
and minimum principal payment amounts on the Notes, (ii) upon a downgrade in the
short-term unsecured debt rating of the provider of the Back-Up Facility such
that it is no longer an Eligible Provider, and (iii) upon failure by the
provider of the Back-Up Facility to renew the Back-Up Facility (the events
described in clause (ii) and (iii), each, a "SUSPENSION EVENT"). If for any
reason ILFC fails to make any loan requested when due, MSAF Group may draw on
the Back-Up Facility.
In the event of a loan by ILFC, or a drawing on the Back-Up Facility, in a
Suspension Event (a "SUSPENSION DRAWING"), MSAF Group will hold the drawing
proceeds and such proceeds will comprise part of the cash portion of the
Liquidity Reserve Amount. In the event of any drawing, the obligation to
reimburse the provider of the Back-Up Facility shall be solely ILFC's obligation
and the provider of the Back-Up Facility shall have no recourse to MSAF Group
for any such amounts that are not reimbursed by ILFC. Immediately following and
after giving effect to any Suspension Drawing, ILFC shall set off and apply the
security deposits held by it on the date of such Suspension Drawing on MSAF
Group's behalf against the principal amount of any ILFC facility drawn amounts
then outstanding, which shall be deemed repaid in the amount of such set-off and
application. After giving effect to such set-off and application, MSAF Group
shall be obliged to repay only up to $10 million of any outstanding ILFC
facility drawn amounts unless and until ILFC has procured, at its expense, a
replacement Back-Up Facility acceptable to MSAF Group. MSAF Group shall be
obliged to pay interest on the proceeds of a Suspension Drawing at 3% per annum,
calculated on the basis of a 360-day year consisting of twelve 30-day months and
compounded daily.
MSDW FACILITY
Under the MSDW facility, MSDW will make loans to MSAF Group which MSAF
Group may use for the same purposes as those for which the Liquidity Reserve
Amount may be applied as discussed above under "-- Liquidity Reserve Amount,"
including to pay interest and minimum principal payment amounts on the Notes.
MSDW's obligation to make such amounts available shall be limited to the MSDW
facility commitment. The MSDW facility commitment, at any time, shall be equal
to the sum of, (A) $10 million
41
<PAGE> 43
minus, (B) all drawings previously made by MSAF Group under the MSDW facility
and not repaid at such time.
The MSDW facility is a Secondary Eligible Credit Facility and, accordingly,
on the Note payment date following any drawing on the MSDW facility, MSAF Group
will be obligated, to the extent that there are Available Collections remaining
after payment of the minimum principal payment amount on the class D Notes, to
repay MSDW facility drawn amounts to MSDW, together with interest accrued
thereon at 3% per annum, calculated on the basis of a 360-day year consisting of
twelve 30-day months and compounded daily.
MSDW's agreement to provide the MSDW facility will expire on the earlier
of, (i) a sale of all the aircraft, and (ii) the repayment or defeasance of all
MSAF Group's debt. MSDW has been designated by the Controlling Trustees as an
Eligible Provider. MSDW's long-term unsecured debt is currently rated Aa3 by
Moody's Investors Service ("Moody's"), A+ by Standard & Poor's and AA by Duff &
Phelps Credit Rating Co. ("DCR").
OTHER FACILITIES
There are currently no Primary Eligible Credit Facilities in place. MSAF
Group may put in place other Eligible Credit Facilities from time to time, each
of which shall be designated by the Controlling Trustees as a Primary Eligible
Credit Facility or a Secondary Eligible Credit Facility. In addition, MSAF Group
may from time to time put in place other credit or liquidity enhancement
facilities which are not Eligible Credit Facilities. Amounts drawn under any
such other facilities are repayable at the 11th level in the order of
priorities, before the Second Collection Account Top-Up.
YEAR 2000
MSAF Group has not suffered any adverse impact on its business and results
of operations resulting from information technology upon which its lessees and
service providers rely not being year 2000 compliant. No instances of
non-compliance with year 2000 have been reported to MSAF Group by any of its
lessees or service providers.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
MSAF Group's principal market risk exposure is to changes in interest
rates. This exposure arises from its Notes and the derivative instruments used
by MSAF Group to manage interest rate risk.
The terms of each subclass of the Notes, including the outstanding
principal amount and estimated fair value as of November 30, 1999 are as
follows:
<TABLE>
<CAPTION>
OUTSTANDING ESTIMATED FAIR
PRINCIPAL AMOUNT ANNUAL VALUE AT
AT NOVEMBER 30, INTEREST RATE EXPECTED FINAL PAYMENT FINAL MATURITY NOVEMBER 30,
SUBCLASS OF NOTE 1999 (PAYABLE MONTHLY) DATE DATE 1999
- ---------------- ---------------- ----------------- ---------------------- -------------- --------------
($000'S) ($000'S)
<S> <C> <C> <C> <C> <C>
Subclass A-1 $400,000 LIBOR + 0.21% March 15, 2000 March 15, 2023 $399,800
Subclass A-2 234,533 LIBOR + 0.35% September 15, 2005 March 15, 2023 234,298
Subclass B-1 91,023 LIBOR + 0.65% March 15, 2013 March 15, 2023 86,289
Subclass C-1 99,987 6.90% March 15, 2013 March 15, 2023 86,239
Subclass D-1 110,000 8.70% March 14, 2014 March 15, 2023 96,250
</TABLE>
INTEREST RATE RISK MANAGEMENT
The leasing revenues of MSAF Group are generated primarily from rental
payments. Rental payments are currently entirely fixed but may be either fixed
or floating with respect to future leases. In general, an interest rate exposure
arises to the extent that MSAF Group's fixed and floating interest obligations
in respect of the Notes do not correlate to the mix of fixed and floating rental
payments for different rental periods. This
42
<PAGE> 44
interest rate exposure can be managed through the use of interest rate swaps and
other derivative instruments. The subclass A-1, A-2 and B-1 Notes bear floating
rates of interest and the subclass C-1 and D-1 Notes bear fixed rates of
interest.
MSAF Group is a party to seven interest rate swaps with MSCS. In five of
these swaps MSAF Group pays a fixed monthly coupon and receives one month LIBOR
and in two of these swaps MSAF Group pays one month LIBOR and receives a fixed
monthly coupon on the notional balances as set out below:
<TABLE>
<CAPTION>
ESTIMATED
FAIR VALUE AT
NOTIONAL FIXED MONTHLY FIXED MONTHLY NOVEMBER 30,
BALANCE EFFECTIVE DATE MATURITY DATE PAY RATE RECEIVE RATE 1999
- -------- ----------------- ----------------- ------------- ------------- -------------
($000'S) (%) (%) ($000'S)
<C> <S> <C> <C> <C> <C>
300,000 November 12, 1997 November 15, 2000 6.1325 -- (71)
200,000 November 12, 1997 November 15, 2002 6.2150 -- 1,726
200,000 November 12, 1997 November 15, 2004 6.2650 -- 3,596
150,000 November 12, 1997 November 15, 2007 6.3600 -- 3,807
50,000 November 12, 1997 November 15, 2009 6.4250 -- 1,504
150,000 February 19, 1998 November 15, 2007 -- 5.860 (8,456)
50,000 February 19, 1998 November 15, 2009 -- 5.905 (3,397)
</TABLE>
MSAF Group was a party to one additional interest rate swap with MSCS with
a notional balance of $100 million that matured on November 15, 1999. In that
swap MSAF Group paid a fixed monthly coupon and received one month LIBOR.
All eight original swaps were originally entered into by MSCS with an
internal swaps desk as the counterparty on November 12, 1997 and February 19,
1998, respectively. On March 3, 1998, all eight of the above swaps were assigned
to MSAF Group by MSCS. Although MSAF Group's floating rate liability at March 3,
1998 was approximately $800 million (after the repayment of principal due to the
undelivered aircraft), the net economic effect of assigning all eight swaps to
MSAF Group with an aggregate notional amount of $1.2 billion was to fix the
interest rate liability at the November 12, 1997 interest rate. MSAF Group
required this certainty both in furtherance of its interest rate risk management
policy not to be adversely exposed to material movements in interest rates from
November 12, 1997 (shortly after MSAF Group entered into the asset purchase
agreement with ILFC for the acquisition of the aircraft and related fixed rate
leases) and, by fixing the principal liabilities relating to the transaction, to
facilitate the structuring of the transaction.
MSAF Group regularly reviews its interest rate risk management
requirements. In the future MSAF Group expects to seek to enter into additional
swaps or sell at market value or unwind part or all of the initial and any
future swaps in order to rebalance the fixed and floating mix of interest
obligations (including those arising as a result of previous interest rate swaps
entered into) and the fixed and floating mix of rental payments.
Through the use of interest rate swaps, and other interest rate hedging
products, it is MSAF Group's policy not to be adversely exposed to material
movements in interest rates. MSAF Group's interest rate management strategy will
need to be rebalanced with any acquisition of additional aircraft to reflect the
adjusted mix of fixed and floating rate rental payments arising from any such
acquisition. There can be no assurance, however, that MSAF Group's interest rate
risk management strategies will be effective in this regard. Any change to MSAF
Group's policy with regard to its dealing in interest rate hedging products will
be subject to periodic review by the rating agencies.
The Controlling Trustees are responsible for reviewing and approving the
overall interest rate management policies and transaction authority limits.
Counterparty risk is monitored on an ongoing basis. Counterparties will be
subject to the prior approval of the Controlling Trustees. MSAF Group's
counterparties are currently all affiliates of MSDW. Future counterparties may
consist primarily of the affiliates of major United States and European
financial institutions (including special-purpose derivative vehicles) which
have
43
<PAGE> 45
credit ratings, or which provide collateralization arrangements, consistent with
maintaining the ratings of the Notes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this
report. See "Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
44
<PAGE> 46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
CONTROLLING AND INDEPENDENT TRUSTEES
The Controlling Trustees and Independent Trustees of MSAF Group, their
respective ages and principal activities are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Karl Essig................................... 48 Controlling Trustee
Alexander C. Frank........................... 42 Controlling Trustee
A. Maurice Mason............................. 36 Controlling Trustee
C. Scott Peterson............................ 39 Alternate Controlling Trustee
Juan C. O'Callahan........................... 66 Independent Trustee
Alexander C. Bancroft........................ 62 Independent Trustee
</TABLE>
Karl Essig is a Managing Director and the co-head of the Global Securitized
Products Group at MSDW. Mr. Essig joined MSDW in August of 1980 and has worked
in the London, New York and Tokyo offices on corporate finance, capital markets,
derivatives and securitization transactions. In 1986 he founded Morgan Stanley's
Asset-Backed Finance Group which he headed for five years. In 1992, Mr. Essig
established the International Securitisation Group, focusing on transactions in
Europe and Asia, and during 1999 was appointed co-head of the worldwide
business. Mr. Essig is a graduate of Stanford University and the Yale School of
Management.
Alexander C. Frank is a Managing Director in the Corporate Treasury
Department, and the Treasurer of MSDW. Mr. Frank joined MSDW in 1985 and has
worked in the New York and London offices, in the firm's Corporate Treasury and
Corporate Tax Departments. In 1990 he established Morgan Stanley Treasury's
European Capital and Financing activity in London. In 1993 Mr. Frank assumed
responsibility for the firm's Global Capital and Finance function and became the
Treasurer for North and South American activities. In 1998, Mr. Frank was
appointed Treasurer of MSDW. Mr. Frank is a graduate of Dartmouth College and
the University of Michigan School of Business Administration.
A. Maurice Mason is a Managing Director in the Aircraft Group at Morgan
Stanley & Co. International Limited. He joined MSDW's Investment Banking
Division in 1994 where he was responsible for MSDW's corporate finance
activities in the European transportation sector. Prior to joining MSDW, he
spent over six years in the capital markets group at GPA Group plc. Mr. Mason
received a BA, BAI degree from Trinity College, Dublin.
C. Scott Peterson is a Managing Director in the Aircraft Group at Morgan
Stanley & Co. International Limited. Mr. Peterson joined MSDW in 1988 in the
Fixed Income Division. In 1989 he established the Equipment Finance Group to
focus on transactions backed by aircraft and other capital equipment and led
both the Equipment Finance and Liability Management Groups until his transfer to
London in 1996. Mr. Peterson is a graduate of Oregon State University and The
Wharton School.
Juan C. O'Callahan is principal of JOCR, an aviation consultancy based in
Connecticut. He joined The Boeing Company in 1961 after a career as a fighter
pilot with the United States Marine Corps and has since worked at Pacific Air
Lines, World Airways and GPA Group plc (having founded TAI, a forecasting and
valuation consultancy that was acquired by GPA in 1982). He has served on the
boards of America West Inc., Avitas Inc., Pembroke Capital Limited and WorldCorp
Inc. Mr. O'Callahan is a graduate of the University of Pittsburgh, where he
obtained a BSc in Aeronautical Engineering.
Alexander C. Bancroft is a partner of the law firm of Shearman & Sterling.
He specializes in the legal aspects of the financing of aircraft and other
transportation equipment. He joined Shearman & Sterling in 1964 after military
service and became a partner in 1973. Mr. Bancroft is a graduate of Harvard
College and Harvard Law School.
45
<PAGE> 47
The Independent Trustees are entitled to participate in all meetings of the
Controlling Trustees but are only entitled to vote on any action (i) to cause
MSAF Group or any subsidiary of MSAF Group to institute any proceeding seeking
liquidation or insolvency or similar proceeding, (ii) to consent to any
liquidation, insolvency or similar proceeding instituted against MSAF Group or
any subsidiary of MSAF Group, (iii) to take certain other actions related to
insolvency matters, and (iv) to sell, transfer, or otherwise dispose of,
directly or indirectly, any aircraft where the proceeds received from such sale
or transfer are less then certain targets set forth in the Indenture, and the
unanimous consent of all the Controlling Trustees and the Independent Trustees
shall be required to take any action specified in clauses (i), (ii) or (iii)
above.
As is common with many other special purpose companies, MSAF Group will not
have any employees or executive officers. Accordingly, the Controlling Trustees
will rely upon ILFC and the other service providers, including affiliates of
MSDW, for all asset servicing, executive and administrative functions pursuant
to the respective service provider agreements. See "Risk Factors -- No Executive
Management -- Reliance on Third Parties to Manage Our Business." Certain
individuals other than the Controlling Trustees and the Independent Trustees
listed above may serve as controlling or independent trustees or directors of
various subsidiaries of MSAF Group where provisions of local law mandate a
particular citizenship for trustees or directors.
THE SERVICER
ILFC and its affiliates cannot be held responsible for any liabilities of
MSAF Group or its affiliates, including any payments due to you on the Notes.
ILFC provides services under the servicing agreement to MSAF Group (except
where a substitute servicer may perform the services as described below). The
Servicing Agreement details ILFC's:
- various duties for the management and administration of our aircraft and
the related leases;
- aircraft marketing activities; and
- initial aircraft management-related obligations in connection with
offers and sales by MSAF of refinancing notes or additional notes.
ILFC provides the services in accordance with the express terms of its
Servicing Agreement with MSAF which, inter alia, provides that ILFC will act in
accordance with applicable law and with directions given by MSAF Group from time
to time in accordance with the Servicing Agreement. In addition, under the
Servicing Agreement, ILFC agrees to perform its services in accordance with the
ILFC Services Standard and the ILFC Conflicts Standard, as defined on page 47 of
this report on Form 10-K.
The duties and obligations of ILFC are limited to those expressly set forth
in the Servicing Agreement and ILFC will not have any fiduciary or other implied
duties or obligations to MSAF Group or any other person, including any
Noteholder.
In addition to managing the aircraft, ILFC also manages aircraft assets
owned by ILFC and other third parties. In the course of conducting such
activities, ILFC will from time to time have conflicts of interest in performing
its obligations on behalf of MSAF Group. See "Risk Factors -- Conflicts of
Interest of ILFC."
Pursuant to the Servicing Agreement, ILFC will not be liable to MSAF Group
for any losses arising (i) as a result of an aircraft sold, leased or purchased
on less favorable terms than might have been achieved at any time, provided such
transactions were entered into on the basis of a commercial decision of ILFC, or
(ii) in respect of ILFC's obligation to apply the ILFC Conflicts Standard in
respect of its performance of the services, except, in either situation, in the
case of wilful misconduct or fraud on the part of ILFC. See "Risk Factors --
Limitation on ILFC's Liability."
AIRCRAFT SERVICES
ILFC has agreed to:
- engage and maintain the necessary staff and supporting resources
required to perform its services;
46
<PAGE> 48
- grant MSAF Group and its agent, access to its information, programs,
records and personnel to enable MSAF Group to monitor its compliance
with the Servicing Agreement and for general MSAF Group business; and
- separate its own funds from the funds of any person within MSAF Group.
ILFC provides a wide range of services to MSAF Group, including:
- lease marketing, such as remarketing, lease drafting, negotiation and
execution;
- aircraft asset management, such as rent collection, aircraft
maintenance, insurance, contract compliance and enforcement against
current lessees, and accepting delivery and redelivery of aircraft;
- current aircraft sales;
- arranging valuations and monitoring and advising MSAF Group on
regulatory developments;
- assisting MSAF Group to stay in compliance with certain covenants under
the Indenture;
- providing MSAF Group with data and information relating to our aircraft
and the commercial aviation industry;
- assistance with any public or private offering and sale of refinancing
notes or additional notes;
- legal and other professional services relating to the lease, sale or
financing of our aircraft, amendment modification or enforcement of our
aircraft lease; and
- periodic reporting of operational, financial and other information on
our aircraft and leases.
OPERATING GUIDELINES
ILFC does not have any fiduciary or other implied duties to you or MSAF
Group, and its obligations are limited to the express terms of the servicing
agreement. In accordance with the express terms of the servicing agreement, ILFC
will act in accordance with applicable law and with MSAF Group's directions.
ILFC may exercise such authority as is necessary to give it a practicable
and working autonomy in performing the services and must also comply with the
following two principal contractual standards in performing its services.
(1) ILFC must perform its services with reasonable care and diligence as
if it were the owner of the aircraft consistent with the customary
commercial practice of a prudent international aircraft lessor in the
management servicing and marketing of commercial jet aircraft and
related assets. This is referred to in this Report on Form 10-K as the
ILFC Services Standard.
(2) If a conflict of interest arises regarding ILFC's management,
servicing or marketing of: (a) any two aircraft or (b) any aircraft
and any other assets owned, managed, serviced or marketed by ILFC,
ILFC is required to notify MSAF Group and perform the services in good
faith. If the two aircraft and other assets owned, managed, serviced
or market by ILFC are substantially similar in terms of objectively
identifiable characteristics that are relevant for the particular
services to be performed, ILFC will not discriminate among the
aircraft or between any of the aircraft and any other aircraft then
owned, managed, serviced or marketed by ILFC on an unreasonable basis.
This is referred to in this Report on Form 10-K as the ILFC Conflicts
Standard.
All transactions to be entered into by ILFC on behalf of MSAF Group (other
than with other persons within MSAF Group) must be at arm's length and on fair
market value terms unless otherwise agreed or directed by MSAF Group. Certain
transactions or matters require the specific approval of MSAF Group, including:
- sales of (or commitments or agreements to sell) aircraft (other than as
required by a lease);
47
<PAGE> 49
- the entering into of any new leases (including renewals or extensions,
unless any such lease had originally been approved) if the lease does
not comply with any applicable operating covenants set forth under
"Description of the Notes -- Operating Covenants";
- terminating any lease or leases to any single lessee with respect to
aircraft then having a value in excess of $100 million;
- unless provided for in the applicable budget, entering into any contract
for the modification or maintenance of aircraft where the costs to be
incurred (A) exceed the greater of (i) the estimated aggregate cost of a
heavy maintenance or structural check for similar aircraft and (ii)
available maintenance reserves or other collateral under the related
lease or (B) are outside the ordinary course of MSAF Group's business;
- entering into any capital commitment or confirming any order or
commitment to acquire or acquiring aircraft or engines on behalf of MSAF
Group, except, with respect to a replacement engine or a spare part for
an aircraft, (A) if provided for in the applicable budget or (B) at such
times and on such terms and conditions as ILFC deems reasonably
necessary or appropriate and in no greater quantity than that which is
required to enable the aircraft to be leased;
- issuing any guarantee on behalf of, or otherwise pledging the credit of,
any person within MSAF Group;
- unless otherwise permitted, entering into any agreement for services to
be provided in respect of aircraft by third parties at MSAF Group's cost
outside the ordinary course of ILFC's business, except to the extent
provided for in the applicable budget;
- incurring or causing to be incurred on behalf of any person within MSAF
Group any liability (actual or contingent), unless contemplated in the
applicable budget, pursuant to a transaction of a type for which MSAF
Group's specific approval is otherwise required, or incurred in the
ordinary course of MSAF Group's business; and
- any transaction with ILFC or any of its affiliates not contemplated in
the Servicing Agreement.
BUDGETS
MSAF Group will adopt an annual and a three-year budget each year for all
aircraft. ILFC has agreed to use best efforts to achieve the annual budget for
each year.
MANAGEMENT FEES AND SERVICER EXPENSES
ILFC is paid a retainer fee as follows: $243,000 per month is payable until
November 30, 1999 and approximately $162,000 is payable per month thereafter.
The retainer fee is payable monthly in arrears and is subject to pro rata
reduction for any month in which MSAF Group does not own all the aircraft
currently in our fleet. ILFC also receives a monthly fee equal to 1% of the
aggregate rent due for any month (or portion of a month) plus 1% of the
aggregate rent actually paid for such month.
ILFC will also receive three incentive fees:
- a results-based incentive fee equal to 10% of any excess of actual net
results for any year over a target amount contained in the applicable
annual budget;
- a sales-based fee equal to 1.5% of the lesser of the net proceeds of any
sale and the target amount for the relevant aircraft agreed in advance
by MSAF Group and ILFC; and
- a sales-based incentive fee equal to 5% of any excess of the net
proceeds of an aircraft sale over the target sales price for the
aircraft.
ILFC also will be reimbursed for certain expenses incurred in connection
with its performance of the services. These expenses include, among other
expenses, aircraft maintenance costs and insurance, outside
48
<PAGE> 50
professional advisory fees (including legal fees) and other out of pocket
expenses, all of which in the aggregate may constitute a significant additional
component of MSAF Group's total overhead costs.
TERM AND TERMINATION
The Servicing Agreement is for a term of 25 years expiring on May 26, 2023.
Each party will also have the right to terminate the Servicing Agreement
under certain circumstances. ILFC may terminate the Servicing Agreement if:
- MSAF Group does not pay any amount payable by MSAF Group within five
days of a delinquency notice;
- MSAF Group or any of its subsidiaries shall materially breach any of
their obligations under the Servicing Agreement other than payment
obligations;
- all of the public debt of the MSAF Group is repaid or defeased in full
in accordance with the terms of any Indenture;
- all of the aircraft in MSAF Group's initial portfolio are sold;
- an involuntary proceeding under applicable bankruptcy, insolvency,
receivership or similar law against MSAF Group, any of its subsidiaries
or a substantial part of the property or assets of any person within
MSAF Group, continues undismissed for 120 days or any such person shall
go into liquidation, suffer a receiver or mortgagee to take possession
of all or substantially all of its assets or have an examiner appointed
over it, or a petition or proceeding is presented for any of the
foregoing and not discharged within 120 days; or
- a voluntary proceeding is commenced under bankruptcy, insolvency,
receivership or similar law against MSAF Group or any of its
subsidiaries or MSAF Group or any of its subsidiaries, consents to the
institution of, or fails within 120 days to contest the filing of, any
petition described above, or files an answer admitting the material
allegations of any such petition, or makes a general assignment for the
benefit of its creditors.
MSAF Group may terminate the Servicing Agreement if:
- ILFC materially breaches any of its obligations under the Servicing
Agreement;
- ILFC fails, within a reasonable period of time, to re-lease an aircraft
upon the termination of any lease or to sell an aircraft upon
commercially reasonable written direction from MSAF Group;
- all of the public debt of the MSAF Group is repaid or defeased in full
in accordance with the terms of any Indenture;
- all of the aircraft in MSAF Group's initial portfolio are sold;
- a Rating Decline occurs as a result of a Change of Control. A "RATING
DECLINE" means that the rating of the outstanding senior unsecured
long-term debt securities of the Servicer is decreased below A1 by
Moody's, below A+ by Standard & Poor's or below AA- by DCR, at any time
between (a) the date of public notice of a Change of Control, or of the
intention of ILFC or any person to effect a Change of Control and (b) 90
days after the occurrence of the Change of Control (which period shall
be extended so long as the rating of the outstanding senior unsecured
long-term debt securities of the Servicer is under publicly announced
consideration for possible downgrade by a Rating Agency). A "CHANGE OF
CONTROL" means that either (A) any person or any persons acting together
that would constitute a "group" (a "GROUP") for purposes of Section
13(d) of the Securities Exchange Act of 1934, together with any
affiliates or persons directly or indirectly owning 5% of the
outstanding common stock or equity interest, or of the combined voting
power of the voting stock, of such person ("RELATED PERSONS"), shall
beneficially own (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934 ("RULE 13d-3")) at least 50% of the aggregate
voting power of all classes of voting stock of ILFC, or (B) any person
or Group, together with any affiliates or Related Persons,
49
<PAGE> 51
shall succeed in having a sufficient number of its nominees elected to
the Board of Directors of the Servicer such that such nominees, when
added to any existing director remaining on the Board of Directors of
ILFC after such election who was a nominee of or is an affiliate or
Related Person of such person or Group, will constitute a majority of the
Board of Directors of the Servicer; provided that with respect to both
clauses (A) and (B) above, a Change of Control shall not be deemed to
have occurred if American International Group, Inc. continues to
beneficially own (within the meaning of Rule 13d-3) at least 51% of the
aggregate voting power of all classes of voting stock of the Servicer;
- an involuntary proceeding under applicable bankruptcy, insolvency,
receivership or similar law against ILFC or any of its subsidiaries
continues undismissed for 120 days or ILFC goes into liquidation,
suffers a receiver or mortgagee to take possession of all or
substantially all of its assets or has an examiner appointed over it or
if a petition or proceeding is presented for any of the foregoing and
not discharged within 120 days; or
- a voluntary proceeding is commenced against ILFC under bankruptcy,
insolvency, receivership or similar law or ILFC shall make a general
assignment for the benefit of its creditors.
Except where ILFC terminates the Servicing Agreement because MSAF Group
does not pay ILFC, the Servicing Agreement may not be terminated, unless a
replacement servicer has been appointed and accepted such appointment. In the
event that a replacement servicer has not been appointed within 90 days after
any termination of the Servicing Agreement or resignation by ILFC, ILFC may
petition any court of competent jurisdiction for the appointment of a
replacement servicer.
ASSIGNMENT OF SERVICING AGREEMENT
ILFC, and MSAF Group may not assign their rights and obligations under the
Servicing Agreement without each others prior consent.
PRIORITY OF PAYMENT OF SERVICING FEES AND REIMBURSABLE EXPENDITURES
ILFC's fees and expenses rank senior in priority of payment to all payments
on the Notes.
CORPORATE MANAGEMENT
With regard to the corporate affairs of MSAF Group, the administrative
agent, the cash manager and the financial advisor provide management services to
MSAF Group as follows:
ADMINISTRATIVE AGENT
Cabot Aircraft Services Limited ("CABOT") acts as the administrative agent
of MSAF Group.
Cabot is responsible for providing administrative, accounting, bank account
management and calculation and other services to MSAF Group. Cabot's duties
include:
- monitoring the performance of ILFC (including ILFC's compliance with the
Servicing Agreement) and reporting on such performance to MSAF Group;
- assisting MSAF Group in establishing a program for evaluating ILFC's
performance under the Servicing Agreement;
- acting as liaison with various rating agencies to assess the impact of
management decisions on the ratings of the Notes and coordinating
responses to rating agency questions;
- maintaining on behalf of MSAF Group accounting ledgers and providing on
a quarterly and annual basis draft accounts on a combined basis for MSAF
Group as well as, on a quarterly and annual basis, on an individual
company basis for certain companies. However, MSAF Group retains
responsibility for the ledgers and accounts including all discretionary
decisions and judgments relating to the
50
<PAGE> 52
preparation and maintenance thereof, and MSAF Group retains
responsibility for, and prepares, its financial statements;
- preparing annual budgets and presenting them to MSAF Group for approval;
- authorizing payment of certain bills and expenses;
- to the extent required by MSAF Group or the parties thereto,
coordinating any amendments to the transaction agreements, subject to
the approval of MSAF Group;
- supervising outside counsel and other professional advisers and
coordinating legal and other professional advice received by MSAF Group
other than with respect to any service or matter which is ILFC's
responsibility under the Servicing Agreement;
- preparing and coordinating reports to investors and to the Securities
and Exchange Commission, including preparing press releases and managing
investor relations with the assistance of outside counsel and auditors,
if appropriate;
- preparing for the approval of MSAF Group and filing all required tax
returns with the assistance of outside counsel and auditors, if
appropriate;
- maintaining, or monitoring the maintenance of, the books, records,
registers and associated filings of MSAF Group;
- preparing an agenda and any required papers for meetings of the
governing bodies of the entities within MSAF Group;
- assisting in making aircraft lease, sale and capital investment
decisions;
- overseeing the general operation of the credit facility with ILFC
whereby ILFC has agreed to make loans to MSAF Group to provide MSAF
Group with liquidity necessary to meet its obligations under the Notes;
- overseeing the general operation of the MSDW credit facility whereby
MSDW has agreed to make loans to MSAF Group to provide MSAF Group with
liquidity necessary to meet its obligations under the Notes;
- establishing and maintaining bank accounts;
- advising MSAF Group as to the appropriate levels of the Liquidity
Reserve Amount which is intended to provide a source of liquidity for
(i) MSAF Group's maintenance obligations, (ii) MSAF Group's obligation
to repay lessee security deposits, (iii) certain other contingencies in
respect of the aircraft and (iv) payments of interest and principal on
the Notes;
- informing ILFC of the aggregate deposits in the accounts as required;
- directing withdrawals and transfers from the accounts in accordance with
the Indenture;
- receiving data provided by ILFC with respect to the aircraft and leases;
- calculating certain monthly payments, and all other calculations
otherwise required pursuant to the Indenture;
- providing the Trustee with information required by the Trustee to
provide its reports to the Noteholders; and
- providing additional services upon the request of MSAF Group upon terms
to be agreed at the time of any such request.
Cabot may delegate to a third party one or more of the above administrative
services it is responsible for providing to MSAF Group.
Cabot receives a monthly fee equal to 1.5% of the rental payments made by
the lessees under the leases for such month from MSAF Group in respect of its
services to MSAF Group subject to an annual minimum of $200,000. Cabot is
entitled to indemnification by MSAF Group for, and will be held harmless
against, any loss or liability incurred by Cabot arising out of or in connection
with its provision of administrative services to MSAF Group (other than through
its own deceit, fraud, gross negligence or wilful misconduct or that of its
officers, directors, agents and employees).
51
<PAGE> 53
MSAF Group may remove Cabot at any time on 120 days' written notice.
Cabot may resign on 120 days' written notice in certain circumstances.
CASH MANAGER
Bankers Trust Company acts as the cash manager. Subject to certain
limitations and at the direction of MSAF Group, Bankers Trust is authorized to
invest the funds held by MSAF Group in the Accounts in certain prescribed
investments (the "PERMITTED ACCOUNT INVESTMENTS") on permitted terms.
Bankers Trust devotes the same amount of time and attention to and is
required to exercise the same level of skill, care and diligence in the
performance of its services as a prudent businessperson would in administering
such services on its own behalf. Bankers Trust's annual fees are not expected to
exceed $50,000 per annum. Bankers Trust is entitled to indemnification by MSAF
Group for, and will be held harmless against, any loss or liability incurred by
Bankers Trust (other than through its own gross negligence (or simple negligence
in the handling of funds), deceit, fraud or wilful misconduct or that of its
officers, directors, agents and employees).
MSAF Group may remove Bankers Trust at any time on 90 days' written notice
as long as MSAF Group has engaged another person or entity to perform the
services that were being provided by Bankers Trust. Bankers Trust may resign on
90 days' written notice as long as MSAF Group has engaged another person or
entity to perform the services that were being provided by Bankers Trust.
FINANCIAL ADVISOR
Morgan Stanley & Co. Incorporated acts as the financial advisor.
The financial advisor is responsible for assisting MSAF Group in developing
and implementing its interest rate risk management policies and developing
models for the purposes of analyzing the financial impact of aircraft lease,
sale and capital investment decisions. The financial advisor receives a fee of
$50,000 per annum, payable monthly in arrears in equal instalments, from MSAF
Group in respect of its services to MSAF Group. MSAF Group or the financial
advisor may terminate the Financial Advisory Agreement on 30 days' written
notice.
DELAWARE TRUSTEE
Wilmington Trust Company maintains the books and records, including minute
books and records and trust certificate records, of MSAF Group. Wilmington Trust
makes available telephone, telecopy, telex and post office box facilities and
maintains MSAF Group's principal place of business in Delaware.
ITEM 11. EXECUTIVE COMPENSATION
All trustees are compensated for travel and other expenses incurred by them
in the performance of their duties. MSAF Group will pay each Independent Trustee
$50,000 per annum for their services in such capacity. The Controlling Trustees
appointed by a subsidiary of MSDW as the depositor of MSAF Group will not
receive remuneration from MSAF Group for their services.
The Controlling Trustees have not received any additional cash or non-cash
compensation as salary or bonus for their services as Controlling Trustees. In
the future, however, Controlling Trustees may receive an interest in the
Beneficial Interest. None of the trustees of MSAF Group currently has an
employment contract with MSAF Group.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not applicable.
52
<PAGE> 54
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MSAF Group has had and currently maintains various relationships with MSDW.
First, MSDW acted as a promoter in establishing the entities that comprise MSAF
Group. Second, in Fiscal 1998 MSAF Group received approximately $920 million in
non-interest bearing loans from MSF, a wholly owned subsidiary of MSDW, which
were utilized to purchase 31 of the 32 aircraft. Third, MSF holds all of the
beneficial interest in MSAF Group and at the time of the issuance of the Notes
in Fiscal 1998, MSF received a beneficial interest distribution of approximately
$976 million. Fourth, Cabot, an indirect wholly owned subsidiary of MSDW acts as
the Administrative Agent for MSAF Group. Fifth, the Controlling Trustees and the
Alternate Controlling Trustee of MSAF Group are four individuals appointed by a
subsidiary of MSDW. Sixth, Morgan Stanley & Co. Incorporated is acting as
financial advisor to MSAF Group.
53
<PAGE> 55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2). Financial Statements: the response to this portion of Item
14 is submitted as a separate section of this report beginning on page F-1.
(a)(3) and (c). Exhibits:
3.1 Certificate of Trust of MSAF*
3.2 Third Amended and Restated Trust Agreement of MSAF dated as of March
3, 1998*
4.1 Indenture dated as of March 3, 1998 by and among MSAF and Bankers
Trust Company, as Trustee with respect to the Notes*
4.2 Form of Global Note (included in Exhibit 4.1)
4.3 Registration Rights Agreement dated March 3, 1998 by and between MSAF
and Morgan Stanley & Co. International Limited*
10.1 Administrative Agency Agreement dated as of March 3, 1998 among MSAF,
Cabot Aircraft Services Limited, as Administrative Agent, Bankers Trust
Company, as Security Trustee and each subsidiary of MSAF*
10.2 Cash Management Agreement dated as of March 3, 1998 among MSAF,
Bankers Trust Company, as Security Trustee and as Cash Manager and each
subsidiary of MSAF*
10.3 Financial Advisory Agreement dated as of March 3, 1998 between MSAF
and Morgan Stanley & Co. Incorporated, as Financial Adviser*
10.4 Custody and Loan Agreement dated as of March 3, 1998 among MSAF,
International Lease Finance Corporation and each subsidiary of MSAF*
10.5 Loan Agreement dated as of March 3, 1998 between MSAF and Morgan
Stanley, Dean Witter, Discover & Co.*
10.6 Security Trust Agreement dated as of March 3, 1998 among MSAF, Bankers
Trust Company, as Security Trustee, as Cash Manager and as Trustee,
Cabot Aircraft Services Limited, as Administrative Agent and each
subsidiary of MSAF*
10.7 Reference Agency Agreement dated as of March 3, 1998 among MSAF,
Bankers Trust Company, as Reference Agent and as Trustee and Cabot
Aircraft Services Limited, as Administrative Agent*
10.8 Servicing Agreement dated as of November 10, 1997 among MSAF,
International Lease Finance Corporation, Cabot Aircraft Services
Limited, as Administrative Agent and each subsidiary of MSAF*
10.9 Asset Purchase Agreement dated as of November 10, 1997 between MSAF
and International Lease Finance Corporation*
21.1 Subsidiaries of MSAF*
23.1 Consent of Aircraft Information Services, Inc.**
23.2 Consent of BK Associates, Inc.**
23.3 Consent of Airclaims Limited**
23.4 Consent of Aircraft Value Analysis Company**
23.5 Consent of Morten Beyer and Agnew**
27.1 Financial Data Schedule**
99.1 Appraisal of Aircraft Information Services, Inc. relating to the
Aircraft**
99.2 Appraisal of BK Associates, Inc. relating to the Aircraft**
99.3 Appraisal of Airclaims Limited relating to the Aircraft**
99.4 Appraisal of Aircraft Value Analysis Company relating to the
Aircraft**
99.5 Appraisal of Morten Beyer and Agnew relating to the Aircraft**
- ---------------
* Incorporated by reference to the Registration Statement on Form S-4 (File No.
333-56575), previously filed with the Securities and Exchange Commission
54
<PAGE> 56
** Filed herewith
(b). Reports on Form 8-K: filed for event dates September 13, 1999,
October 14, 1999 and November 12, 1999 (each relating to the monthly report to
holders of the Notes) and November 30, 1999 (relating to the annual appraisal of
the aircraft).
(d). Not applicable.
55
<PAGE> 57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MORGAN STANLEY AIRCRAFT FINANCE
By: /s/ C. SCOTT PETERSON
------------------------------------
C. Scott Peterson
Alternate Controlling Trustee
Dated: February 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on February 28, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ KARL ESSIG Controlling Trustee
- -------------------------------------------------------- (principal executive officer)
Karl Essig
/s/ ALEXANDER C. FRANK Controlling Trustee
- -------------------------------------------------------- (principal financial and accounting
Alexander C. Frank officer)
/s/ A. MAURICE MASON Controlling Trustee
- --------------------------------------------------------
A. Maurice Mason
/s/ JUAN C. O'CALLAHAN Independent Trustee
- --------------------------------------------------------
Juan C. O'Callahan
/s/ ALEXANDER C. BANCROFT Independent Trustee
- --------------------------------------------------------
Alexander C. Bancroft
</TABLE>
56
<PAGE> 58
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Cash Flows....................... F-5
Consolidated Statements of Changes in Beneficial
Interest/(Deficit)........................................ F-6
Notes to the Consolidated Financial Statements.............. F-7
</TABLE>
F-1
<PAGE> 59
REPORT OF INDEPENDENT AUDITORS
To the Trustees of
Morgan Stanley Aircraft Finance and Subsidiaries
We have audited the accompanying consolidated balance sheets of Morgan
Stanley Aircraft Finance and Subsidiaries (the "Group") as of November 30, 1999
and 1998, and the related consolidated statements of operations, cash flows and
changes in beneficial interest/(deficit) for the fiscal years ended November 30,
1999, 1998, and the period from October 30, 1997 (date of formation) to November
30, 1997. These consolidated financial statements are the responsibility of the
Group's trustees. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
trustees, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Group at
November 30, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the fiscal years ended November 30, 1999, 1998, and
the period from October 30, 1997 (date of formation) to November 30, 1997, in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
New York, New York
January 21, 2000
F-2
<PAGE> 60
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NOVEMBER 30, NOVEMBER 30,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 35,119 $ 34,850
Receivables:
Lease income, net......................................... 1,908 3,744
Investment income and other............................... 161 153
Aircraft under operating leases, net........................ 886,051 933,111
Investment in capital lease, net............................ 18,300 21,581
Underwriting and other issuance related costs, net of
amortization.............................................. 15,935 17,053
---------- ----------
Total Assets................................................ $ 957,474 $1,010,492
========== ==========
LIABILITIES AND BENEFICIAL INTERESTHOLDER'S DEFICIT
Payables:
Interest payable to Noteholders........................... $ 2,481 $ 2,655
Deferred rental income...................................... 5,318 7,351
Liability for maintenance................................... 57,437 52,489
Other liabilities........................................... 11,376 15,865
Notes payable:
Subclass A-1.............................................. 400,000 400,000
Subclass A-2.............................................. 234,533 274,062
Subclass B-1.............................................. 91,023 94,819
Subclass C-1.............................................. 99,987 100,000
Subclass D-1.............................................. 110,000 110,000
---------- ----------
1,012,155 1,057,241
---------- ----------
Commitments and contingencies
Beneficial Interestholder's Deficit:
Beneficial Interest....................................... 1 1
Deemed Distribution....................................... (15,305) (15,305)
Accumulated Deficit....................................... (39,377) (31,445)
---------- ----------
Total Beneficial Interestholder's Deficit................. (54,681) (46,749)
---------- ----------
Total Liabilities and Beneficial Interestholder's Deficit... $ 957,474 $1,010,492
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE> 61
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
FISCAL FISCAL OCTOBER 30, 1997
YEAR ENDED YEAR ENDED (DATE OF FORMATION)
NOVEMBER 30, 1999 NOVEMBER 30, 1998 TO NOVEMBER 30, 1997
----------------- ----------------- --------------------
<S> <C> <C> <C>
Revenues:
Lease income, net..................... $114,651 $120,005 $ 4,747
Investment income on collection
account............................ 1,845 2,156 --
-------- -------- --------
Total revenues........................ 116,496 122,161 4,747
-------- -------- --------
Expenses:
Interest expense...................... 63,584 50,533 --
Depreciation expense.................. 47,060 38,876 43
Operating expenses:
Service provider and other fees.... 8,568 9,534 --
Maintenance and other aircraft
related costs.................... 5,216 2,969 --
-------- -------- --------
Total expenses........................ 124,428 101,912 43
-------- -------- --------
Net (loss)/income....................... $ (7,932) $ 20,249 $ 4,704
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 62
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL FISCAL PERIOD FROM
YEAR ENDED YEAR ENDED OCTOBER 30, 1997
NOVEMBER 30, NOVEMBER 30, (DATE OF FORMATION)
1999 1998 TO NOVEMBER 30, 1997
------------ ------------- --------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net (loss)/income............................ $ (7,932) $ 20,249 $ 4,704
Adjustments to reconcile net (loss)/income to
net cash provided by operating activities:
Depreciation expense -- equipment under
operating leases.......................... 47,060 38,876 43
Gain on capital lease........................ -- -- (4,610)
Amortization of underwriting and other
issuance related costs.................... 1,118 837 --
Provision for doubtful accounts.............. 6,361 689 --
Changes in assets and liabilities:
Receivables:
Investment income and other............. (8) (153) --
Lease income, net....................... (1,224) (5,520) (137)
Investment in capital lease............... (20) 4,643 --
Liability for maintenance................. 4,948 13,204 --
Interest payable to Noteholders........... (174) 2,655 --
Deferred rental income.................... (2,033) 7,351 --
Other liabilities......................... (4,489) 1,110 --
---------- -------- --------
Net cash provided by operating activities...... 43,607 83,941 --
---------- -------- --------
Cash flows from investing activities
Purchase of aircraft......................... -- (887,315) (66,370)
---------- -------- --------
Net cash used for investing activities......... -- (887,315) (66,370)
---------- -------- --------
Cash flows from financing activities
Issuance of beneficial interest to Morgan
Stanley Financing Inc..................... -- -- 1
Proceeds from Notes, net of underwriting
costs..................................... -- 1,041,610 --
Proceeds from borrowings from Morgan Stanley
Financing Inc............................. -- 853,490 66,369
Beneficial Interest Distribution............. -- (976,257) --
Repayments of Notes.......................... (43,338) (71,119) --
Other issuance related costs................. -- (9,500) --
---------- -------- --------
Net cash (used for)/provided by financing
activities................................... (43,338) 838,224 66,370
---------- -------- --------
Net increase in cash and cash equivalents...... 269 34,850 --
Cash and cash equivalents at beginning of
period....................................... 34,850 -- --
---------- -------- --------
Cash and cash equivalents at end of period..... $ 35,119 $ 34,850 $ --
========== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE> 63
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN BENEFICIAL INTEREST/(DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED TOTAL
EARNINGS BENEFICIAL
BENEFICIAL DEEMED (ACCUMULATED INTEREST
INTEREST DISTRIBUTION DEFICIT) (DEFICIT)
---------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Issuance of Beneficial Interest.............. $ 1 $ -- $ -- $ 1
Net income................................... -- -- 4,704 4,704
--------- -------- -------- ---------
Balance at November 30, 1997................. 1 -- 4,704 4,705
Net income................................... -- -- 20,249 20,249
Deemed Distribution.......................... -- (15,305) -- (15,305)
Borrowings from Morgan Stanley Financing Inc.
converted into Beneficial Interest......... 919,859 -- -- 919,859
Payment of Beneficial Interest Distribution
to Morgan Stanley Financing Inc............ (919,859) -- (56,398) (976,257)
--------- -------- -------- ---------
Balance at November 30, 1998................. 1 (15,305) (31,445) (46,749)
Net (loss)................................... -- -- (7,932) (7,932)
--------- -------- -------- ---------
Balance at November 30, 1999................. $ 1 $(15,305) $(39,377) $ (54,681)
========= ======== ======== =========
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE> 64
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
Morgan Stanley Aircraft Finance ("MSAF") is a special-purpose statutory
business trust that was formed on October 30, 1997 under the laws of Delaware.
MSAF and its subsidiaries ("MSAF GROUP") were formed to conduct certain limited
activities, including acquiring, financing, re-financing, owning, leasing,
re-leasing, selling, maintaining and modifying commercial aircraft. All of the
beneficial interest of MSAF Group is owned by Morgan Stanley Financing Inc.
("MSF"), a wholly owned subsidiary of Morgan Stanley Dean Witter & Co. ("MSDW").
MSAF Group's obligations, including its financial debt obligations, are not
obligations of, or guaranteed by, MSDW, MSF or any person other than MSAF Group.
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles, which require management to make
estimates and assumptions that affect the financial statements and related
disclosures. Management believes that the estimates utilized in the preparation
of the consolidated financial statements are prudent and reasonable. Actual
results could differ materially from these estimates.
All material intercompany transactions have been eliminated.
Certain reclassifications have been made to prior year amounts to conform
to the current presentation.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments
with a maturity of three months or less.
Revenue Recognition
Revenue from aircraft on operating leases is recognized on a straight-line
basis.
Certain lease contracts may require the lessee to make separate payments
for flight hours flown and revenue sector passenger miles flown. In such
instances, MSAF Group recognizes rental revenues as they are earned in
accordance with the terms of the lease contract.
Aircraft
Aircraft, including engines, are stated at cost less accumulated
depreciation. Cost is comprised of the cash purchase price paid plus any
maintenance liabilities that MSAF Group assumed from the seller at the date of
purchase. Depreciation is calculated on a straight line basis. The estimates of
useful lives and residual values are reviewed periodically. The current
estimates for residual values are generally 10% of cost and useful lives are
generally 25 years from the date of manufacture.
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of " ("SFAS 121"), the recognition of an impairment loss for an
asset held for use is required when the estimate of undiscounted future cash
flows expected to be generated by the asset is less than its carrying amount.
Measurement of impairment loss is to be recognized based on the fair value of
the asset. Fair value reflects the underlying economic value of the aircraft,
including engines, in normal market conditions (where supply and demand are in
reasonable equilibrium) and assumes adequate time for a sale and a willing buyer
and seller. Short-term fluctuations in the market place are disregarded and it
is assumed that there is no necessity either to dispose of a significant number
of aircraft simultaneously or to dispose of aircraft quickly. The fair value of
the assets is based on independent valuations of the aircraft in the fleet and
estimates of discounted future cash flows. SFAS 121 also requires that
long-lived assets to be disposed of be reported at the lower of the carrying
amount
F-7
<PAGE> 65
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
or fair value less estimated disposal costs. At November 30, 1999 and November
30, 1998, no impairment losses had been recognized.
Liability for Maintenance
In most lease contracts the lessee has the obligation for maintenance costs
on airframes and engines. In many lease contracts the lessee makes a full or
partial prepayment to the lessor, calculated at an hourly rate, which is used to
reimburse the lessee for significant maintenance charges, including major
airframe and engine overhauls. Such prepayments are generally non-refundable.
MSAF Group records the cash prepayments made by lessees for maintenance as a
component of the liability for maintenance account which appears on the
Consolidated Balance Sheets. When the lessee incurs maintenance expenditures,
MSAF Group must return a corresponding amount of the prepayment to the lessee.
At this time, MSAF Group will forward cash to the lessee, with a corresponding
decrease to the liability for maintenance account. MSAF Group will only
reimburse the lessee for the cost of maintenance expenditures to the extent that
sufficient prepayments have been made by the lessee. At the time an aircraft is
re-leased to a new lessee, an assessment is made of the expected maintenance
reserve requirements; any excess reserve is then released to lease income.
MSAF Group also estimates the amount of maintenance expenditures for which
it will have primary responsibility. Such expenditures typically are required
when an aircraft must be prepared prior to the commencement of a new lease. MSAF
Group also makes estimates of the amounts that, in certain circumstances
(including lessees defaulting on payment obligations), could result in MSAF
Group incurring maintenance costs which are the lessee's primary responsibility.
When MSAF Group determines that it will be primarily responsible for certain
maintenance expenditures, the amount of such expenditure is charged directly to
earnings and is included as a component of the liability for maintenance account
appearing on the Consolidated Balance Sheets.
Allowance for Doubtful Accounts
Allowances are made for doubtful accounts where it is considered that there
is a significant risk of non-recovery. The assessment of risk of non-recovery is
primarily based on the extent to which amounts outstanding exceed the expected
value of security deposits held (if any), together with an assessment of the
financial strength and condition of a lessee and the economic conditions
existing in the lessee's operating environment. At November 30, 1999, MSAF Group
had recorded allowances for doubtful accounts against lease income receivables
for two lessees totalling $0.4 million. The allowance for doubtful accounts at
November 30, 1998 totalled $0.6 million.
Income Taxes
MSAF Group is a Delaware business trust treated as a branch of MSF for U.S.
Federal, State and local income tax purposes. As such, MSAF Group is not subject
to U.S. Federal, State and local income taxes.
Concentrations of Credit Risk
Credit risk with respect to operating lease receivables is generally
diversified due to the number of lessees comprising MSAF Group's customer base
and the different geographic areas in which they operate. At November 30, 1999
MSAF Group had leased aircraft to 27 lessees in 19 countries. The geographic
concentrations of the MSAF Group's leasing revenues is set forth in Note 6.
Many of MSAF Group's lessees are in a relatively weak financial position
because of the difficult economic conditions in the civil aviation industry as a
whole and because, in general weakly capitalized airlines are more likely to
seek operating leases. In addition, at November 30, 1999, 14 of MSAF Group's
aircraft are being leased to lessees domiciled in certain emerging markets
nations, including those located in
F-8
<PAGE> 66
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Eastern Europe, the Middle East, Latin America and Asia. Emerging market
economies have been affected by severe economic and financial difficulties. The
exposure of MSAF Group's aircraft to particular countries and customers is
managed partly through concentration limits and through obtaining security from
lessees by way of deposits. MSAF Group will continue to manage its exposure to
particular countries, regions and lessees through concentration limits.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") 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.
MSAF Group is in the process of evaluating the impact of adopting SFAS No. 133.
In fiscal 1999, MSAF Group adopted SFAS No. 130, "Reporting Comprehensive
Income", which establishes the standards for the reporting and presentation of
comprehensive income. MSAF Group does not have any items affecting comprehensive
income. Accordingly, MSAF Group's comprehensive (loss) income was equal to its
net (loss) income for all periods presented.
NOTE 3 -- AIRCRAFT
<TABLE>
<CAPTION>
NOVEMBER 30, NOVEMBER 30,
1999 1998
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Stage 3 Aircraft and one engine:
Cost........................................................ $972,030 $972,030
Less Accumulated depreciation............................... (85,979) (38,919)
-------- --------
$886,051 $933,111
======== ========
Aircraft cost includes $38.7 million of maintenance
liabilities that MSAF Group assumed at the date of
purchase.
Fleet Analysis:
On lease for a further period of:
More than five years........................................ 9 8
From one to five years...................................... 20 20
Less than one year.......................................... 3 5
-------- --------
Total aircraft portfolio (including one engine) on lease.... 32 33
======== ========
</TABLE>
At November 30, 1999 there was 1 non-revenue earning aircraft in MSAF
Group's portfolio, which is subject to a non-binding letter of intent for lease.
At November 30, 1998 there were no non-revenue earning aircraft in MSAF Group's
portfolio.
F-9
<PAGE> 67
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- INVESTMENT IN CAPITAL LEASE
One of MSAF Group's aircraft has been leased to a customer under a
sales-type capital lease. The components of MSAF Group's investment in this
lease are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30, NOVEMBER 30,
1999 1998
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Minimum lease payments receivable........................... $28,733 $26,662
Less: Allowance for doubtful accounts....................... -- (136)
------- -------
Net minimum lease payments receivable....................... 28,733 26,526
Less: Unearned income....................................... (10,433) (4,945)
------- -------
Net investment in capital lease............................. $18,300 $21,581
======= =======
</TABLE>
At November 30, 1999, minimum lease payments for each of the five
succeeding fiscal years are $3.7 million.
Unearned income is recognized over the term of the lease using the interest
method.
The provision for doubtful accounts related to this lease of $3.3 million
for the year ended November 30, 1999 is recorded as a reduction of lease income
revenues in the Consolidated Statements of Operations.
The lessee associated with this capital lease has been experiencing severe
financial difficulties and has been adversely affected by economic uncertainty
in Latin America and the devaluation of the Brazilian currency in January 1999.
As a result, in August 1999 MSAF Group and the lessee agreed to modify the terms
of the existing capital lease by increasing the total rental payments to be
received and by extending the lease term. The balances of the net minimum lease
payments receivable and unearned income have been adjusted to reflect the
amended terms of the capital lease.
NOTE 5 -- LEASE INCOME RECEIVABLE
Lease income receivable was as follows:
<TABLE>
<CAPTION>
NOVEMBER 30, NOVEMBER 30,
1999 1998
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Lease income receivable..................................... $2,271 $4,297
Less: Allowance for doubtful accounts....................... (363) (553)
------ ------
Lease income receivable, net................................ $1,908 $3,744
====== ======
</TABLE>
The provision for doubtful accounts of $3.1 million in Fiscal 1999 is
recorded as a reduction of lease income revenues in the Consolidated Statement
of Operations.
Activity in the allowance for doubtful accounts was as follows:
<TABLE>
<CAPTION>
FISCAL 1999 FISCAL 1998
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance, beginning of period................................ $ 553 $ --
Provision for doubtful accounts............................. 3,060 553
Amounts written-off......................................... (3,250) --
------- ------
Balance, end of period...................................... $ 363 $ 553
======= ======
</TABLE>
F-10
<PAGE> 68
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- REVENUES
The distribution of lease revenues by geographic area is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 30, 1997
(DATE OF FORMATION)
FISCAL 1999 FISCAL 1998 TO NOVEMBER 30, 1997
----------- ----------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
North America...................................... $ 14,117 $ 8,743 $ --
Asia............................................... 15,227 13,814 --
Europe............................................. 38,241 51,409 --
Middle East........................................ 14,457 10,950 --
Latin America...................................... 11,860 20,084 4,747
Other.............................................. 20,749 15,005 --
-------- -------- -------
Total.............................................. $114,651 $120,005 $ 4,747
======== ======== =======
</TABLE>
At November 30, 1999, MSAF Group had contracted to receive the following
minimum rentals under operating leases (Dollars in millions):
<TABLE>
<CAPTION>
FISCAL YEAR ENDING NOVEMBER 30,
- -------------------------------
<S> <C>
2000........................................................ $108
2001........................................................ 100
2002........................................................ 91
2003........................................................ 70
2004........................................................ 48
Thereafter.................................................. 60
</TABLE>
NOTE 7 -- LIABILITY FOR MAINTENANCE
Activity in the liability for maintenance account was as follows:
<TABLE>
<CAPTION>
FISCAL 1999 FISCAL 1998
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance, beginning of period................................ $52,489 $ --
Liabilities assumed from International Lease Finance
Corporation............................................... -- 38,735
Collections from lessees.................................... 17,709 15,837
Reimbursements to lessees................................... (11,872) (2,633)
Net accruals and transfers.................................. (889) 550
------- -------
Balance, end of period...................................... $57,437 $52,489
======= =======
</TABLE>
NOTE 8 -- NOTES PAYABLE
During Fiscal 1998, MSAF Group acquired 32 aircraft and one spare engine
having an aggregate cost of $972 million. MSAF Group financed these purchases
primarily through borrowings from MSF and from the net proceeds from MSAF
Group's private placement of securitized notes as discussed below.
On March 3, 1998, MSAF Group completed an offering of $1,050 million of
securitized notes (the "NOTES") on a basis exempt from registration under the
Securities Act of 1933, as amended. Simultaneous with the private placement, the
loan provided by MSF was automatically converted into a beneficial interest held
by MSF. MSAF Group primarily utilized the proceeds from the Notes to pay a
beneficial interest
F-11
<PAGE> 69
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
distribution to MSF and to acquire an additional aircraft. With the exception of
MSAF Group, the Notes are not obligations of, or guaranteed by, MSDW or any of
its subsidiaries, including MSF.
Underwriting and other issuance related costs of $17.9 million which were
incurred in connection with the offering are being amortized over the expected
life of the Notes, which is currently estimated to be 16 years.
The repayment terms of each subclass of Notes are such that certain
principal amounts are expected to be repaid based on certain assumptions (the
"Expected Final Payment Date") or refinanced through the issuance of new Notes,
but in any event are ultimately due for repayment on specified final maturity
dates (the "Final Maturity Date"). The Expected Final Payment Dates, Final
Maturity Dates and interest rates applicable to each subclass of the Notes are
listed below:
<TABLE>
<CAPTION>
INITIAL EXPECTED FINAL FINAL
SUBCLASS OF NOTE PRINCIPAL AMOUNT INTEREST RATE PAYMENT DATE MATURITY DATE
---------------- ---------------------- ------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Subclass A-1............ 400,000 LIBOR + 0.21% March 15, 2000 March 15, 2023
Subclass A-2............ 340,000 LIBOR + 0.35% Sept. 15, 2005 March 15, 2023
Subclass B-1............ 100,000 LIBOR + 0.65% March 15, 2013 March 15, 2023
Subclass C-1............ 100,000 6.90% March 15, 2013 March 15, 2023
Subclass D-1............ 110,000 8.70% March 14, 2014 March 15, 2023
</TABLE>
If the Subclass A-1 Notes are not repaid on or before the Expected Final
Payment Date for such subclass, such subclass of Notes will accrue interest
thereafter at a rate equal to the stated interest rate therefore, plus 0.50% per
annum ("Step-Up Interest").
MSAF Group filed a registration statement with the Securities and Exchange
Commission (the "SEC") with respect to an exchange offer (the "Exchange Offer")
for exchange Notes with terms virtually identical to the Notes which was
declared effective on January 12, 1999. The Exchange Offer was consummated on
January 18, 1999. MSAF Group paid an additional coupon of 0.50% on each of the
subclasses of debt during the period from November 30, 1998 to January 18, 1999,
as required under the terms of the Notes.
The dates on which principal repayments on the Notes will actually occur
will depend on the cash flows generated by the rental income from MSAF Group's
portfolio of aircraft. Amounts received by MSAF Group and available for
distribution are paid in accordance with the priorities specified in the
Indenture relating to the Notes.
Cash paid for interest on the Notes amounted to $58.5 million for the year
ended November 30, 1999, as compared to $48.9 million for the year ended
November 30, 1998. The interest expense for Fiscal 1999 is not comparable to
Fiscal 1998 as the Notes were not issued until March 3, 1998.
The estimated fair value of the Notes was $903 million and $1,001 million
at November 30, 1999 and November 30, 1998, respectively.
NOTE 9 -- 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. 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.
F-12
<PAGE> 70
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the issuance of the Notes, MSAF Group entered into two
credit agreements. Under a Custody and Loan Agreement (the "ILFC Facility")
between International Lease Finance Corporation ("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 $10 million plus the aggregate
amount of cash security deposits held by ILFC. Under a Loan Agreement (the "MSDW
Facility") between MSDW and MSAF Group, MSDW has agreed to extend loans in a
maximum amount of $10 million.
As of November 30, 1999, the aggregate amount available under the ILFC
Facility and the MSDW Facility was approximately $40.4 million.
NOTE 10 -- 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 arises to the extent that MSAF Group's fixed and floating
interest obligations in respect of the Notes do not correlate to the mix of
fixed and floating rental payments for different rental periods. This interest
rate exposure can be managed through the use of interest rate swaps and other
derivative instruments. The Subclass A-1, A-2 and B-1 Notes bear floating rates
of interest and the Subclass C-1 and D-1 Notes bear fixed rates of interest.
MSAF Group is a party to seven interest rate swaps with Morgan Stanley Capital
Services Inc. ("MSCS"), a wholly-owned subsidiary of MSDW. In five of these
swaps, MSAF Group pays a fixed monthly coupon and receives one month LIBOR on a
total notional balance of $900 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. MSAF Group was a party to one additional interest rate
swap with MSCS with a notional balance of $100 million that matured on November
15, 1999. In this swap MSAF Group paid a fixed monthly coupon and received one
month LIBOR.
All eight original swaps were originally entered into by MSCS, with an
internal swaps desk as the counterparty, on November 12, 1997 and February 19,
1998, respectively. On March 3, 1998, eight swaps were assigned to MSAF Group by
MSCS. Although MSAF Group's floating rate liability at March 3, 1998 was $800
million (after the repayment of principal due to an undelivered aircraft), the
net economic effect of assigning all eight swaps to MSAF Group with an aggregate
notional amount of $1.2 billion was to fix the interest rate liability at the
November 12, 1997 interest rate. MSAF Group required this certainty both in
furtherance of its interest rate management policy not to be adversely exposed
to material movements in interest rates from November 12, 1997 (shortly after
MSAF Group entered into the Asset Purchase Agreement) and by fixing the
principal liabilities relating to the transaction, to facilitate the structuring
of the transaction.
On the date that the eight interest rate swaps were assigned from MSCS to
MSAF Group, such swaps had an aggregate fair value of approximately $(15.3)
million. No consideration was paid to or received by MSAF Group in connection
with the assumption of these swap positions. MSAF Group has recorded the
assumption of these interest rate swaps at their fair value by recognizing a
liability within Other liabilities in its Consolidated Balance Sheets, with a
corresponding charge to Deemed Distribution, a component of Beneficial
Interestholder's Deficit.
Three of the swaps assumed from MSCS having an aggregate notional principal
amount of $700 million are accounted for as hedges of its obligations under the
Notes. Under these swap arrangements MSAF Group will pay fixed and receive
floating amounts on a monthly basis. The fair value of the liability assumed
relating to those swaps which are being accounted for as hedges is being
deferred and recognized when the offsetting gain or loss is recognized on the
hedged transaction. This amount and the differential payable or receivable on
F-13
<PAGE> 71
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
such interest rate swap contracts, to the extent such swaps are deemed to be
hedges, is recognized as an adjustment to interest expense. The portion of these
swaps not deemed to be an effective hedge is accounted for on a mark-to-market
basis with changes in fair value reflected in interest expense. Gains and losses
resulting from the termination of such interest rate swap contracts prior to
their stated maturity are deferred and recognized when the offsetting gain or
loss is recognized on the hedged transaction. The fair value of these interest
rate swaps at November 30, 1999 was $5.3 million.
The remaining four swaps assumed by MSAF Group have an aggregate gross
notional principal amount of $400 million. Under these swap arrangements, MSAF
Group will pay/receive fixed and receive/pay floating amounts on a monthly
basis. MSAF Group determined that these swaps do not qualify for hedge
accounting. The fair value of the liability assumed related to these swaps is
accounted for on a mark-to-market basis with changes in fair value reflected in
interest expense. At November 30, 1999, the fair value of these swaps was $(6.5)
million.
The gross notional amounts of these swaps are indicative of MSAF Group's
degree of use of such swaps but do not represent MSAF Group's exposure to credit
or market risk. Credit risk arises from the failure of the counterparty to
perform according to the terms of the swap contract. MSAF Group's exposure to
credit risk at any point in time is represented by the fair value of the swap
contracts reported as assets. MSAF Group does not currently require collateral
to support swap contracts with credit risk. The credit risk of these swap
contracts is monitored by MSAF Group's Trustees.
MSAF Group does not utilize derivative financial instruments for trading
purposes.
NOTE 11 -- RELATED PARTY TRANSACTIONS
Under service agreements with MSAF Group, Cabot Aircraft Services Limited
and Morgan Stanley & Co. Incorporated, both subsidiaries of MSDW, act as
Administrative Agent and Financial Advisor, respectively. During Fiscal 1999,
Cabot Aircraft Services Limited received a fee of $1.6 million for providing
these services, which is calculated as a percentage of the operating lease
rentals received. Morgan Stanley & Co. Incorporated received advisory fees of
$0.05 million in this period.
Prior to the issuance of the Notes, MSAF Group received approximately $920
million of non-interest bearing financing from MSF which was utilized to
purchase 31 of the 32 aircraft and a spare engine in its aircraft portfolio. At
the time of the issuance of the Notes, this loan was automatically converted
into a beneficial interest and a payment of approximately $976 million was made
in the form of a distribution on such beneficial interest, comprised the
following amounts (dollars in millions):
<TABLE>
<S> <C>
Non-interest bearing loans (subsequently converted into
beneficial interest)...................................... $920
Distribution (comprising $21 million in lease rentals
accrued to the date of issuance of the Notes with the
balance representing finance and other charges paid to
MSF)...................................................... 56
----
Total Beneficial Interest Distribution...................... $976
====
</TABLE>
MSAF Group's counterparty to its interest rate swap agreements is MSCS, a
wholly owned subsidiary of MSDW.
MSAF Group's management is comprised of six trustees, including the
Delaware trustee, as MSAF Group has no employees or executive officers. Three of
MSAF Group's six trustees are employees of MSDW. The two remaining trustees and
the Delaware trustee are unaffiliated with MSDW.
F-14
<PAGE> 72
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
MSAF Group did not have any material contractual commitments for capital
expenditures at November 30, 1999.
In accordance with the terms of a servicing agreement (the "Servicing
Agreement"), ILFC (the "Servicer") 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.
The Servicing Agreement expires in 2023, although each party has the right
to terminate the Servicing Agreement under certain circumstances.
NOTE 13 -- QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL 1999
-------------------------------------------
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
FEB. 28, MAY 31, AUG. 31, NOV. 30,
1999 1999 1999 1999
-------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Lease income, net............................... $27,088 $32,045 $27,898 $27,620
Investment income on collection account......... 431 450 463 501
------- ------- ------- -------
Total revenues.................................. 27,519 32,495 28,361 28,121
------- ------- ------- -------
Expenses:
Interest expense................................ 16,349 16,046 15,491 15,698
Depreciation expense............................ 11,765 11,765 11,765 11,765
Operating expenses:
Service provider and other fees.............. 2,047 2,244 2,153 2,124
Maintenance and other aircraft related
costs...................................... 1,072 1,926 2,448 (230)
------- ------- ------- -------
Total expenses.................................. 31,233 31,981 31,857 29,357
------- ------- ------- -------
Net (loss)/income................................. $(3,714) $ 514 $(3,496) $(1,236)
======= ======= ======= =======
</TABLE>
During the fourth quarter ended November 30, 1999, maintenance and other
aircraft related costs included the reversal of certain provisions made in the
previous quarter relating to maintenance costs that were subsequently paid by
the lessee.
F-15
<PAGE> 73
MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FISCAL 1998
-------------------------------------------
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
FEB. 28, MAY 31, AUG. 31, NOV. 30,
1998 1998 1998 1998
-------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Lease income, net............................... $25,117 $32,688 $30,932 $31,268
Investment income on collection account......... -- 961 724 471
------- ------- ------- -------
Total revenues.................................. 25,117 33,649 31,656 31,739
------- ------- ------- -------
Expenses:
Interest expense................................ -- 16,664 17,693 16,176
Depreciation expense............................ 3,823 11,523 11,765 11,765
Operating expenses:
Service provider and other fees.............. 2,837 2,839 1,805 2,053
Maintenance and other aircraft related
costs...................................... 375 1,921 305 368
------- ------- ------- -------
Total expenses.................................. 7,035 32,947 31,568 30,362
------- ------- ------- -------
Net income........................................ $18,082 $ 702 $ 88 $ 1,377
======= ======= ======= =======
</TABLE>
NOTE 14 -- SUBSEQUENT EVENTS
INTENDED SECURITIZATION
On February 14, 2000, MSAF Group filed a Form 8-K in which MSAF Group
reported its intention to commence a securitization of 29 aircraft previously
purchased by affiliates of MSDW. MSAF Group also reported its intention to
refinance its Subclass A-1 notes simultaneously with the securitization. Upon
consummation of the securitization, MSAF Group will acquire the 29 aircraft.
INSPECTIONS OF MD-80S
On February 11, 2000, following an accident involving a MD-83 aircraft, the
United States Federal Aviation Administration ("FAA") issued an Airworthiness
Directive ("AD") covering DC-9 (MD-83), MD-88, MD-90 and B717 aircraft. The AD
required inspection of the stabilization equipment on these aircraft types
within three days. MSAF Group owns one MD-82 and two MD-83 aircraft,
representing 6.01% of the portfolio by appraised value at November 30, 1999.
Under the leases of the affected aircraft, all costs of compliance with the AD
are the obligation of the lessees.
The Servicer has confirmed that it believes that all of MSAF Group's MD-82
and MD-83 aircraft were inspected in accordance with instructions of this AD.
The terms of MSAF Group's leases do not require the lessees to report to MSAF
Group their actions to comply with ADs.
F-16
<PAGE> 74
MORGAN STANLEY AIRCRAFT FINANCE
CASH ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(1)
Twelve Month Period from December 1, 1998 to November 30, 1999
(1)This report was filed with the Securities and Exchange Commission on Form
8-K/A on February 28, 2000. All information contained in it is as of February 1,
2000.
A-1
<PAGE> 75
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
I BACKGROUND AND GENERAL INFORMATION.................... A-3
II COMPARISON OF ACTUAL CASH FLOWS VERSUS THE 1998 BASE
CASE FOR THE TWELVE MONTH PERIOD..................... A-4
III OTHER FINANCIAL DATA.................................. A-9
IV RECENT DEVELOPMENTS.................................... A-9
V APPENDICES............................................. A-16
</TABLE>
A-2
<PAGE> 76
I BACKGROUND AND GENERAL INFORMATION
On March 3, 1998, Morgan Stanley Aircraft Finance ("MSAF"), a Delaware
business trust, issued $1,050 million of Notes in five subclasses -- Subclass
A-1, Subclass A-2, Subclass B-1, Subclass C-1 and Subclass D-1 (the "NOTES").
The Notes were issued in connection with MSAF's agreement to acquire 33 aircraft
plus a spare engine with a total appraised value at September 30, 1997 of
$1,115.5 million from International Lease Finance Corporation ("ILFC").
All but one of the 33 aircraft was acquired by MSAF. The undelivered
aircraft was a B737-400 with an appraised value of $28.8 million. Pursuant to
the indenture relating to the Notes (the "INDENTURE"), MSAF decided not to
substitute this aircraft but to distribute to the Noteholders $27.1 million on
June 15, 1998. $26 million of this amount represents that portion of the
proceeds from the offering of the Notes relating to this aircraft and $1.1
million represents swap breakage costs paid by ILFC. As a result, the overall
size of the aircraft fleet is now 32 aircraft plus a spare engine and the
appraised value of the fleet reduced from $1,115.5 million to $1,086.7 million
at September 30, 1997.
Applying the declining value assumption to the original September 30, 1997
fleet appraisal of $1,086.7 million, the total appraised value was assumed to be
$1,026.7 million at November 15, 1999. The fleet is appraised annually and the
most recent appraisal dated June 30, 1999 valued the portfolio at $978.1
million. See Section III -- "Other Financial Data" below for a discussion on
assumed aircraft values and annual appraisals.
As of February 1, 2000, 28 aircraft plus the engine were on-lease with 25
lessees in 18 countries as shown in Appendix A attached. Four aircraft were
non-revenue earning of which one was subject to a lease commencing in February,
2000 and two had signed Letters of Intent for lease to new lessees. The fourth
aircraft was available for lease.
The discussion and analysis that follows is based on the results of MSAF
and its subsidiaries as a single entity (collectively the "MSAF GROUP").
MSAF Group is a special purpose vehicle, which owns aircraft subject to
operating leases and one financing lease. MSAF Group may also make additional
aircraft acquisitions and aircraft sales. MSAF Group intends to acquire
additional commercial passenger or freight aircraft from various sellers and
will finance the acquisition of such aircraft by issuing additional notes. In
August 1999, MSAF Group announced that it intended to acquire a portfolio of 29
aircraft -- see Section IV -- "Recent Developments" for more information. 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.
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.
For the purposes of this report, the "TWELVE MONTH PERIOD", referred to in
Section II -- "Comparison of Actual Cash Flows versus the Base Case for the
Twelve Month Period", shall comprise information from the monthly cash reports
dated December 15, 1998 through to November 15, 1999. The financial data in
these
A-3
<PAGE> 77
reports includes cash receipts from November 10, 1998 (first day of the
Collection Period for the December 1998 Report) up to November 8, 1999 (last day
of the Collection Period for the November 1999 Report). It also includes
payments made by MSAF Group between November 17, 1998 and up to November 15,
1999 (the Note Payment Date for the November 1999 Report).
II COMPARISON OF ACTUAL CASH FLOWS VERSUS THE 1998 BASE CASE FOR THE TWELVE
MONTH PERIOD
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, Interest Payments
and Swap Payments. A discussion of the annual Cash Collections, Cash Expenses,
Interest Payments 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 less Net Stress-related Costs), Movement in Current Arrears Balance,
Interest Earned and Net Maintenance. In the Twelve Month Period, MSAF Group
generated approximately $119.1 million in Total Cash Collections, $3.4 million
less than the 1998 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 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 the Twelve Month Period, the amount of revenue loss attributed
to Renegotiated Leases was $1.4 million and relates to two renegotiated leases.
The $1.4 million loss in rental revenue is primarily 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.
[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 Base Case. In the Twelve Month Period,
six new leases were entered into with a weighted average decline of 10.4% versus
the rental assumed in the 1998 Base Case resulting in a loss of $2.0 million in
rental revenue. See Section IV -- "Recent Developments" for a discussion of
current re-leasing events.
Analysis of Rental Resets in Twelve Month Period
<TABLE>
<CAPTION>
% CHANGE FROM
1998 BASE % OF APPRAISED
AIRCRAFT TYPE CASE VALUE*
- ------------- ------------- --------------
<S> <C> <C>
1 A310-300................................................ -28.2 2.35
2 A310-300................................................ -28.2 2.38
3 A320-100................................................ -9.2 4.22
4 B737-300................................................ -13.1 2.57
5 A320-200................................................ -15.3 3.09
6 B757-200ER.............................................. 18.5 3.48
WEIGHTED AVERAGE**.......................................... -10.4% 18.09%
</TABLE>
- ---------------
Notes
* Appraisal as of June 30, 1999
** Average weighted by Appraised Value as of June 30, 1999.
A-4
<PAGE> 78
[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 the Twelve Month Period, Contracted
Lease Rentals were $123.4 million, $3.4 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 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 start of the Twelve Month Period was
$3.2 million versus $3.1 million at the end, a positive movement of $0.1
million.
Analysis of Current Arrears Balances
<TABLE>
<CAPTION>
% OF CURRENT CURRENT MOVEMENT
APPRAISED ARREARS ARREARS IN CURRENT
AIRCRAFT TYPE COUNTRY VALUE* 11/15/98 11/15/99 ARREARS
- ------------- ---------------- --------- -------- -------- ----------
$ M $M $M
<S> <C> <C> <C> <C> <C>
1 A310-300.............................. Brazil 2.90 1.0 0.6 0.4
2 A321-100.............................. Turkey** 4.22 1.3 1.3
3 B737-300.............................. Brazil 2.09 0.3 1.0 (0.7)
4 B737-400.............................. Mexico 2.30 0.5 (0.5)
5 A321-100.............................. Turkey 4.22 0.6 (0.6)
6 B757-200.............................. Guyana** 3.48 0.5 0.5
7 B757-200.............................. U.K. 3.36 0.1 0.1
8 A310-300.............................. Oman 2.35 0.1 (0.1)
9 A320-200.............................. Ireland 3.19 0.3 (0.3)
----- --- --- ----
TOTAL..................................... 28.11 3.2 3.1 0.1
----- --- --- ----
</TABLE>
- ---------------
* Appraised Value as of June 30, 1999
** Lessees which subsequently defaulted in Twelve Month Period, Onur Air and
Guyana Airways.
At November 15, 1998, 5 lessees in arrears owed $3.2 million, against
which, MSAF Group held security deposits of $2.7 million. Two of the five
lessees (Onur Air and Guyana Airways) defaulted in 1999 and the aircraft were
repossessed. Arrears amounting to $2.2 million associated with these lessees at
the time of repossession were deemed irrecoverable and re-classified from
Current Arrears to Bad Debts. See the discussion on Bad Debts below.
As at November 15, 1999, six lessees were in arrears, owing $3.1 million,
against which MSAF Group held security deposits of $2.9 million. Since November
15, 1999 one of the 6 lessees (TAESA) has defaulted and the aircraft has been
repossessed. See Section IV -- "Recent Developments" for a discussion of lessee
defaults.
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. For the Twelve Month Period, net stress-related costs
amounted to $8.8 million (7.0% of Contracted Lease Rentals) compared to $5.7
million assumed in the 1998 Base Case, a variance of $3.1 million that is due to
the following six factors described in items [6] to [11] below.
A-5
<PAGE> 79
[6] BAD DEBTS AND [8] SECURITY DEPOSITS DRAWN DOWN
Bad Debts are 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.
Analysis of Bad Debts for the Twelve Month Period
<TABLE>
<CAPTION>
BAD SECURITY
BAD DEBTS DEBTS DEPOSITS
AIRCRAFT TYPE LESSEE COUNTRY RENTAL RECOVERED DRAWN TOTAL
- ------------- ------ ------- --------- --------- -------- -----
$M $M $M $M
<S> <C> <C> <C> <C> <C> <C>
1 B757-200................ Transaero Russia 0.2* 0.2
2 B757-200................ Guyana Airways Guyana (1.3) 1.3 0.7 0.7
3 A321-100................ Onur Air Turkey (1.6) 1.0 0.7 0.1
4 B747-300................ VARIG Brazil (4.0) 0.4 1.1 (2.5)
TOTAL....................... (6.9) 2.9 2.5 (1.5)
</TABLE>
- ---------------
* $0.2 million was recovered from Transaero against amounts written off in the
previous period.
In the Twelve Month Period, $6.9 million was written off in respect of
lease rentals due from three former lessees, Guyana Airways, Onur Air, and
VARIG, against which MSAF Group drew down security deposits totalling $2.5
million. In the Twelve Month Period, $2.9 million was recovered and applied to
rental due from four former lessees, Transaero, Guyana Airways, Onur Air and
VARIG.
[7] CAPITALIZED ARREARS
Capitalized arrears refer to current arrears that have been capitalized and
restructured into a note payable. As a result, arrears balances previously shown
as Current Arrears are re-categorized as capitalized arrears. In August 1999,
the current arrears of Passaredo, a Brazilian carrier, equal to $3.5 million
were capitalized (with interest of $0.2 million) into a note payable and added
to the lessee's Conditional Sale Agreement loan balance. The term of the loan
balance was also extended.
[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
<TABLE>
<CAPTION>
AIRCRAFT TYPE OLD LESSEE NEW LESSEE LOST RENTALS # DAYS*
- ------------- ---------- ---------- ------------ -------
$M
<S> <C> <C> <C> <C>
1 B757-200ER.................... Transaero Flying Colours 1.0 10
2 B757-200ER.................... Guyana National Airlines 1.0 75
3 A321-100...................... Onur Air Air Alfa None 17
4 B747-300...................... VARIG AOG 3.2 137**
TOTAL............................. 5.2
</TABLE>
- ---------------
Notes
* # Days is measured from date of lease termination to commencement date of new
lease
** # Days is measured from date of lease termination to November 30, 1999. A
Letter of Intent has been signed for this aircraft. It is scheduled to be
delivered to a new lessee in February, 2000.
The impact of AOG downtime amounted to $5.2 million. This was in respect of
three former lessees; Transaero, Guyana Airways and VARIG. Although the
ex-Transaero aircraft was off-lease for only 10 days, the new lessee paid a
reduced rental until April 1999 while the aircraft underwent modification work
and this loss of rental revenue is reflected in the AOG cost. No AOG costs were
incurred when the ex-Onur Air
A-6
<PAGE> 80
aircraft was re-leased to Air Alfa as the downtime was less that 1 month. The
ex-Guyana aircraft was AOG for 75 days prior to its re-lease to National
Airlines. The ex-VARIG aircraft was AOG and non-revenue earning since July 1999,
but is scheduled to be delivered to its new lessee in February, 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
the Twelve Month Period, other leasing income amounted to $2.5 million. This
consists of one payment for $0.9 million received in respect of a rental support
agreement for a lessee credit and several miscellaneous amounts of less than
$0.5 million.
[11] REPOSSESSION COSTS
Repossession costs cover legal and aircraft technical costs incurred as a
result of repossessing an aircraft. In the Twelve Month Period, repossession
costs amounted to $1.1 million, of which $1.0 million related to the
repossession of a B757-200ER from Guyana Airways in April 1999. An additional
$0.1 million in costs were incurred relating to legal, inspection and
consultancy fees in respect of the repossessions from Onur Air and from VARIG.
[13] NET LEASE RENTALS is Contracted Lease Rentals less any movement in
Current Arrears Balance and Net Stress-related Costs. In the Twelve Month
Period, net lease rentals amounted to $114.7 million, $6.4 million less than
assumed in the 1998 Base Case. The variance was attributable to the combined
effect of the six factors outlined in items [2] and [3] and in items [6] to [11]
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 consists 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 3 months. In the Twelve
Month Period, interest earned amounted to $1.8 million, $0.4 million more than
assumed in the 1998 Base Case. The difference is due to a combination of two
offsetting factors. The 1998 Base Case made no assumption as to the interest
earned on the intra-month cash balances in the Collection Account and Expense
Account and the average actual reinvestment rate for the Twelve Month Period was
4.99% as compared to 5.75% assumed in the 1998 Base Case.
[15] NET MAINTENANCE
Net maintenance refers to maintenance reserve revenue received less any
maintenance reimbursements paid to lessees. In the Twelve Month Period, actual
maintenance reserve revenue received amounted to $17.8 million from 20 lessees
and maintenance expenditure amounted to $15.2 million, generating positive net
maintenance revenue of $2.6 million. The 1998 Base Case makes no assumptions for
net maintenance as it assumes that, over time, maintenance revenue will equal
maintenance expenditure. However, it is unlikely that in any particular Note
Payment Period, maintenance revenue will exactly equal maintenance expenses.
CASH EXPENSES
"Total Cash Expenses" include Aircraft Operating Expenses and Selling,
General and Administrative ("SG&A") Expenses. In the Twelve Month Period, total
cash expenses were $8.6 million, $5.4 million lower than the Base Case, which
assumed total cash expenses of $14.0 million. The difference is due to a
combination of factors discussed below.
Aircraft Operating Expenses includes all operational costs related to the
leasing of an aircraft including costs of insurance, re-leasing and other
overhead costs. In the Twelve Month Period, Aircraft Operating
A-7
<PAGE> 81
Expenses amounted to $0.6 million compared to $4.4 million per the 1998 Base
Case, which assumes these costs to be 3.5% of the 1998 Base Case Lease Rentals.
[17] INSURANCE
Insurance costs amounted to $0.4 million relating to the annual insurance
premium for contingent coverage for the portfolio.
[18] 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 the Twelve Month Period
these costs amounted to $0.2 million.
SG&A Expenses relate to fees paid to the Aircraft Servicer and to other
service providers.
[20] 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 the
Twelve Month Period, the total Aircraft Servicer fee paid was $5.7 million, $0.7
million lower than assumed in the 1998 Base Case, reflecting lower actual
rentals achieved relative to Contracted Lease Rentals.
Aircraft Servicer Fees consist of:
<TABLE>
<CAPTION>
$M
----
<S> <C>
Base Fee.................................................... 2.9
Rent Collected Fee.......................................... 1.1
Rent Contracted Fee......................................... 1.2
Incentive Fee 1997/98....................................... 0.5
----
TOTAL SERVICER FEE.......................................... 5.7
====
</TABLE>
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 1% of all rentals received. The
Incentive fee is 10% of all cash flow received above a targeted amount set at
the beginning of each financial year. The Incentive fee for the year ended
November 30, 1998, but paid in December 1998 was $0.5 million. No incentive fee
was paid to ILFC in December 1999 for the Twelve Month Period due to the lower
than expected revenues received.
[22] OTHER FEES
Other Fees relate to fees and expenses paid to other Service providers
including the Administrative Agent, Financial Advisor, legal advisors,
accountants and Independent Trustees. In the Twelve Month Period, Other Fees
amounted to $2.3 million as compared to an assumed expense of $3.2 million in
the 1998 Base Case, a positive variance of $0.9 million. The variance is due to
lower than expected Administrative Agent fees and a reduction in the level of
accrued expenses. The Administrative Agent fee is equal to 1.5% of rentals
collected and was lower than assumed in the 1998 Base Case, reflecting lower
actual rentals achieved relative to Contracted Lease Rentals.
[27] INTEREST PAYMENTS AND [28] SWAP PAYMENTS
In the Twelve Month Period, interest payments to Noteholders amounted to
$58.5 million. This is $4.7 million lower than the 1998 Base Case, which assumed
interest costs for the Twelve Month Period to be $63.2 million. The variance
reflects the faster than expected amortization of the A-2 Note, coupled with a
lower than expected level of average interest rates. The 1998 Base Case assumed
LIBOR to be 5.75% whereas the average monthly LIBOR rate was 5.6%. The reduced
interest costs were offset by an increase in swap payments. MSAF paid $8.7
million in swap costs, $4.9 million more than assumed in the 1998 Base Case.
A-8
<PAGE> 82
[29] EXCEPTIONAL ITEM
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 the Twelve Month Period.
[31] PRINCIPAL PAYMENTS
In the Twelve Month Period, total principal payments to Noteholders
amounted to $43.3 million, $1.8 million more than assumed in the 1998 Base Case,
reflecting the application of the positive Net Cash Collections variance of $1.8
million.
III OTHER FINANCIAL DATA
An analysis of the cash performance from the deal inception date, March 3,
1998, to November 15, 1999 is shown in Appendix C.
CASH
Cash held at November 15, 1999 was $29.0 million. This includes $25.0
million that represents the cash portion of the Liquidity Reserve Amount. This
is a source of liquidity for, among other things, maintenance obligations,
security deposit return obligations, and cash operating expenses and contingent
liabilities. The remainder of $4.0 million represents accrued expenses held in
the Expense Account in respect of future maintenance obligations ($3.8 million),
repossession expenses ($0.1 million) and other service provider fees ($0.1
million).
In addition to the $29.0 million cash balance held at November 15, 1999,
the Liquidity Reserve Amount also contained credit and liquidity facilities
provided by Morgan Stanley Dean Witter & Co. ("MSDW") and ILFC aggregating to
$40.0 million. Neither of these facilities were drawn upon in the Twelve Month
Period.
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 most recent annual appraisal
was as of June 30, 1999 and the next appraisal is due to be delivered to the
Trustee no later than October 31, 2000. Details of the most recent appraisal,
dated June 30, 1999, are shown in Appendix A.
The actual appraised value of the fleet at June 30, 1999 was $978.1 million
as compared to an Assumed Portfolio value at June 30, 1999 of $1,032.0 million,
a difference of $53.9 million or 5.2%. Where the appraisals indicate a Base
Value decline in excess of the 5.0% assumed under the terms of the Notes, excess
cash flow is redirected to the extent required to the Class A Notes via the
Class A Scheduled Principal Payment Amount. As the actual balance outstanding of
the Class A Notes was lower than the Class A Scheduled Principal balance from
July 15, 1999 to November 15, 1999, there was no requirement to redirect cash
flow to the Class A Notes.
A-D NOTE BALANCE
As of November 15, 1999, the aggregate amount of Class A-D Notes
outstanding was $935.5 million, approximately $12.6 million lower than assumed
in the 1998 Base Case due to higher than assumed principal repayments with
respect to the Class A-2 Notes.
IV RECENT DEVELOPMENTS
ACQUISITION OF ADDITIONAL AIRCRAFT
MSAF Group advises that it intends to acquire a portfolio of 29 commercial
aircraft from certain subsidiaries of MSDW. MSDW acquired two Fokker-50 aircraft
from an affiliate of GE Capital Corporation
A-9
<PAGE> 83
on March 19, 1999 and 27 aircraft from ILFC on August 6, 1999. MSAF Group
intends to finance this acquisition by issuing additional notes.
LEASING ACTIVITY IN 1999
In the Twelve Month Period, 7 aircraft came off lease, of which 4 were
scheduled terminations and 3 were repossession events. Six of the seven aircraft
were placed on lease during the Twelve Month Period and the remaining aircraft,
a B747-300, was AOG at November 30, 1999. A Letter of Intent ("LOI") has been
signed for this AOG aircraft and it is scheduled to be delivered to the new
lessee in February 2000.
Re-Leasing Summary
<TABLE>
<CAPTION>
# AIRCRAFT
ASSETS
----------
<S> <C>
Fleet size.................................................. 33
Scheduled terminations...................................... 4
Plus repossession events.................................... 3
---
Equals total remarketing task in 1999....................... 7
Less Aircraft placed on lease............................... (6)
---
Equals Aircraft on Ground (AOG) at November 30, 1999........ 1
Of which LOI signed......................................... (1)
---
Aircraft available for lease at November 30, 1999........... 0
</TABLE>
Summary of Scheduled Re-leasing Events
<TABLE>
<CAPTION>
AIRCRAFT TYPE MSN PRIOR LESSEE NEW LESSEE
- ------------- --- ------------ ----------
<S> <C> <C> <C>
1 A310-300............................. 409 Flightlease Oman Air
2 A310-300............................. 410 Flightlease Oman Air
3 A320-200............................. 279 Monarch Canadian
4 B737-300............................. 25161 TAP Air Malta
</TABLE>
Summary of Unscheduled Re-leasing Events
<TABLE>
<CAPTION>
AIRCRAFT TYPE MSN PRIOR LESSEE NEW LESSEE
- ------------- --- ------------ ----------
<S> <C> <C> <C>
1 B757-200ER........................... 24260 Guyana National Airlines
2 A321-100............................. 597 Onur Air Air Alfa
3 B747-300............................. 24106 VARIG LOI
</TABLE>
AOG
At November 30, 1999 one B747-300 aircraft formerly leased to VARIG was AOG
undergoing maintenance work prior to re-leasing to a new lessee in February
2000. Since November 30, 1999, three aircraft have become available for lease
and are AOG as of February 1, 2000. Two of the aircraft , scheduled
terminations, are A310-300s, previously on lease with Oman Air. These aircraft
are currently undergoing airframe and engine overhauls in advance of their
delivery to a new lessee in April 2000. The third aircraft, a B737-400, was
repossessed from TAESA in December 1999.
At February 1, 2000, two aircraft, representing 4.27% of the Appraised
Value at June 30, 1999, are scheduled for re-marketing before November 30, 2000.
One aircraft, a B767-200, is subject to a Letter of Intent. The other aircraft,
a B737-400, is available for lease as of February 1, 2000 (since this date, a
signed Letter of Intent has been received).
A-10
<PAGE> 84
AOG Analysis February 1, 2000
<TABLE>
<CAPTION>
EXPECTED
AIRCRAFT TYPE OLD LESSEE STATUS RE-LEASE DATE
- ------------- ---------- ------ -------------
<S> <C> <C> <C>
1 B747-300............. VARIG Subject to Lease February 2000
2 A310-300............. Oman Air LOI signed April 2000
3 A310-300............. Oman Air LOI signed April 2000
4 B737-400............. TAESA Available for lease None
</TABLE>
FIVE YEAR RE-MARKETING TASK BY NUMBER OF AIRCRAFT AS OF FEBRUARY 1, 2000.
<TABLE>
<CAPTION>
NOV 30, NOV 30, NOV 30, NOV 30, NOV 30,
YEAR ENDING 2000 2001 2002 2003 2004
- ----------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Narrowbody
A320......................................... 2
A321......................................... 1
B737......................................... 1 4 1 3 1
B757
MD82......................................... 1
MD83......................................... 1
F70.......................................... 0 3
--- --- --- --- ---
Subtotal..................................... 1 5 1 6 5
--- --- --- --- ---
Widebody
A300.........................................
A310......................................... 2
B747......................................... 1
B767......................................... 1 1
--- --- --- --- ---
Subtotal..................................... 1 0 0 4 0
--- --- --- --- ---
Engine....................................... 1
--- --- --- --- ---
Total........................................ 2 5 2 10 5
=== === === === ===
</TABLE>
FIVE YEAR RE-MARKETING TASK AS OF FEBRUARY 1, 2000 BY APPRAISED VALUE.*
<TABLE>
<CAPTION>
NOV 30, NOV 30, NOV 30, NOV 30, NOV 30,
YEAR ENDING 2000 2001 2002 2003 2004
- ----------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Narrowbody
A320...................................... 6.30%
A321...................................... 4.22%
B737...................................... 2.30% 9.55% 2.63% 6.90% 2.57%
B757......................................
MD82/MD83................................. 1.99% 1.87%
F70....................................... 4.45%
------ ------ ------ ------ ------
Subtotal.................................. 2.30% 11.54% 2.63% 17.42% 8.89%
------ ------ ------ ------ ------
Widebody
A300......................................
A310...................................... 4.73%
B747...................................... 5.56%
B767...................................... 3.16% 5.60%
------ ------ ------ ------ ------
Subtotal.................................. 3.16% 0% 0% 15.89% 0%
------ ------ ------ ------ ------
Engine.................................... 0.55%
------ ------ ------ ------ ------
Total..................................... 5.46% 11.54% 3.18% 33.31% 8.89%
====== ====== ====== ====== ======
</TABLE>
- ---------------
* Appraised Value as at June 30, 1999
A-11
<PAGE> 85
The average remaining term to lease expiration date, weighted by appraised
value at June 30, 1999 is 41 months at February 1, 2000.
LESSEE DIFFICULTIES
CURRENT ARREARS
As of February 1, 2000, five lessees were in arrears. The five aircraft on
lease to these lessees represented 15.5% of the portfolio by appraised value at
June 30, 1999. The total amount of rental payments and maintenance reserves that
was in arrears with respect to these five lessees was $3.9 million. MSAF Group
holds security deposits of $2.2 million against these arrears. This amount
represents 3.6% of annual contracted lease rental payments. The weighted average
number of days past due of such arrears was 64 days.
BAD DEBTS
In addition to the current arrears of $3.9 million, $6.7 million of rental
and maintenance payments (before set-off of security deposits of $2.9 million)
was owed to MSAF Group from four of its former lessees as of February 1, 2000.
One Brazilian lessee owed $4.4 million of this amount. . Three of the four
aircraft have been re-leased to other carriers and the fourth aircraft is
off-lease, undergoing maintenance work prior to re-marketing to a new lessee.
Analysis of Bad Debts Balance as of February 1, 2000
<TABLE>
<CAPTION>
SECURITY
FORMER BAD DEBTS BAD DEBTS DEPOSITS
REPOSSESSION DATE AIRCRAFT TYPE LESSEE COUNTRY TOTAL RECOVERED DRAWN TOTAL
- ----------------- ------------- ------ ------- --------- --------- -------- -----
$M $M $M $M
<S> <C> <C> <C> <C> <C> <C> <C>
1 October 1998.......... B757-200 Transaero Russia (1.0) 0.2* 0.6 (0.2)
2 March 1999............ A321-100 Onur Air Turkey (2.1) 1.2 0.7 (0.2)
3 July 1999............. B747-300 VARIG Brazil (4.8) 0.4 1.1 (3.3)
4 December 1999......... B737-400 TAESA Mexico (0.6) 0.5 (0.1)
---- ---- ---- ----
TOTAL..................... (8.5) 1.8 2.9 (3.8)
==== ==== ==== ====
</TABLE>
- ---------------
* $0.2 million was recovered from Transaero against amounts written off in the
previous period.
REGIONAL ANALYSIS OF CURRENT ARREARS
The categorization of countries into geographical regions, Developed
Markets, Emerging Markets and Other is determined using Morgan Stanley Capital
International, Inc. ("MSCI") designations. A regional analysis of current
arrears as of February 1, 2000 is shown below.
Analysis of Lessee Total Arrears by Region
<TABLE>
<CAPTION>
# # # CURRENT SECURITY
REGION COUNTRIES AIRCRAFT LESSEES ARREARS DEPOSIT
------ --------- -------- ------- ------- --------
$M
<S> <C> <C> <C> <C> <C> <C>
Developed Europe..................................... 1 1 1 0.6 0.6
North America.............................. 1 1 1 0.2 0.3
Emerging Europe and Middle East..................... 1 1 1 1.3 0.7
Asia....................................... 0 0 0 0.0 0.0
Latin America.............................. 1 2 2 1.8 0.7
Other Other...................................... 0 0 0 0.0 0.0
--- --- --- --- ---
TOTAL ARREARS.............................. 4 5 5 3.9 2.2
=== === === === ===
</TABLE>
A-12
<PAGE> 86
LATIN AMERICA (EMERGING)
MSAF Group currently leases 9.3% of the portfolio in Latin America (4.3% in
Mexico and 5.0% in Brazil) by appraised value at June 30, 1999. In 1998, Brazil
experienced significant downturns in its economy and financial markets,
following a dramatic decrease in the value of its currency. Since the beginning
of 1998, when MSAF had five aircraft placed with five lessees, there have been
two negotiated repossessions (one in Brazil and one in Mexico) with two other
lessees restructuring their arrears (both in Brazil). Two of the five current
lessees in arrears are based in Latin America.
In March 1999, MSAF reached an agreement with VASP to defer $0.5 million of
arrears owed at that time. Repayment of the arrears plus interest was scheduled
to begin in August 1999 and end in January 2000. On February 10, 2000, VASP made
a payment of $1.3 million to MSAF Group in full settlement of their deferred and
current arrears up to January 31, 2000. This aircraft is a B737-300 and
represented 2.1% of the portfolio by appraised value at June 30, 1999.
In August 1999, MSAF agreed to restructure the arrears of the second
Brazilian lessee, Passaredo. The total rental payments, maintenance reserves and
default interest owed amounted to $3.7 million. The restructured amounts were
capitalized as a note payable and added to the lessee's Conditional Sale
Agreement loan balance, with an extension to the term of the loan. At February
1, 2000, $0.3 million of current arrears under the new agreement, which
represents approximately 35 days of rental, were due and unpaid. In conjunction
with this restructuring, the obligations under this lease were transferred to a
new Brazilian entity, B.R.A Transportes Aereos, which replaced Passaredo as
lessee. This aircraft is an A310-300 and represented 2.9% of the portfolio by
appraised value at June 30, 1999.
A former Brazilian lessee, VARIG, negotiated an early termination of its
lease of a B747-300 aircraft in July 1999. The lease was scheduled to expire in
April 2003. The total amount of rental payments and maintenance reserves due
under this lease to July 1999, 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 $1.0 million on a pro-rata basis between October 2005
and October 2007, the scheduled final payment date under the note. The first
payment of $0.4 million under this agreement was due and paid in October 1999.
Maintenance work including repairs to the engines is almost completed and the
aircraft is scheduled to be delivered to the new lessee in February, 2000. The
current market for widebody aircraft in general is weak due to an over supply of
capacity caused by the Asian crisis -- see section "Market for B747-300s" below.
This aircraft represents approximately 5.6% of the portfolio by appraised value
at June 30, 1999.
A former Mexican lessee, TAESA, defaulted on its obligations under its
lease of a B737-400 aircraft and the aircraft was repossessed in December 1999.
The lease was scheduled to expire in May 2000. The total amount of rental
payments and maintenance reserves due under the lease at the date of
repossession was $0.6 million. This amount was partially offset by a security
deposit of $0.5 million. The aircraft is currently undergoing maintenance work
prior to re-leasing to a new lessee. This aircraft represents approximately 2.3%
of the portfolio by appraised value at June 30, 1999.
EUROPE
MSAF Group currently leases 31.5% of the portfolio by appraised value at
June 30, 1999 in the Europe region. One of the five current lessees in arrears
is based in Europe. At February 1, 2000, the total rental and maintenance
arrears owed by this lessee was $0.6 million, against which MSAF Group holds a
security deposit of $0.6 million. However, the Servicer has indicated that the
lessee is currently in financial difficulty and may be unable to meet its future
rental or maintenance obligations. This aircraft, an A320-200, represented 3.2%
of the portfolio by appraised value at June 30, 1999.
A-13
<PAGE> 87
EUROPE AND MIDDLE EAST (EMERGING)
MSAF Group currently leases 8.7% of the portfolio by appraised value at
June 30, 1999 in the Europe and Middle East (Emerging) region. One of the five
lessees in arrears is based in the Europe and Middle East (Emerging) region. In
addition, in the last twelve months, one aircraft was repossessed from a lessee
based in the Europe and Middle East (Emerging) region. At February 1, 2000, Air
Alfa had rental and maintenance arrears of $1.3 million, against which MSAF
Group holds a security deposit of $0.7 million. The obligations of Air Alfa
under the lease are guaranteed by its parent company, Kombassan Holdings, and
the Servicer has instituted legal steps in Turkey to draw down upon the
guarantee. This aircraft, an A321-100, represented 4.2% of the portfolio by
appraised value at June 30, 1999.
A former Turkish lessee, Onur Air, defaulted on its obligations under its
lease and the aircraft was repossessed in April 1999. The lease was scheduled to
expire in May 2000. The total amount of rental payments and maintenance reserves
due under the lease at the date of repossession was $2.1 million, against which
we retained a security deposit of $0.7 million. The former lessee repaid $1.2
million. The aircraft was re-leased to another Turkish carrier, Air Alfa.
ASIA (EMERGING)
MSAF Group currently leases 13.1% of the portfolio by appraised value at
June 30, 1999 in the Asia (Emerging) Region. As of February 1, 2000, none of
these lessees were in arrears.
NORTH AMERICA (DEVELOPED)
MSAF Group currently leases 13.3% of the portfolio by appraised value at
June 30, 1999 in the North America (Developed) region. One of the five lessees
in arrears is based in North America. On February 2, 2000, Canadian Airlines
announced a debt restructuring and moratorium plan. The plan will result in a
suspension of payments of about $135 million to lenders and aircraft lessors,
including MSAF. The amounts will be repaid on a basis to be negotiated.
According to a statement by the lessee, the payment schedule is expected to
resume in late April 2000, following approval of the plan by all interested
parties. The lessee's rental payment for the month of February was due and
unpaid on February 1, 2000. MSAF Group holds a security deposit of $0.3 million
for this aircraft, an A320-200 and represented 3.1% of the portfolio by
appraised value at June 30, 1999.
OTHER
MSAF Group currently leases 11.5% of the portfolio by appraised value at
June 30, 1999 in the "Other" region. As of February 1, 2000, none of these
lessees were in arrears. In the last twelve months, one aircraft was repossessed
from an airline in the "Other" region.
On April 2, 1999 a lease with Guyana Airways was terminated by agreement
with rental arrears of $1.3 million. Guyana made a payment of $3.0 million to
MSAF in settlement of its arrears and maintenance obligations. As at February 1,
2000, the total costs for maintenance and redelivery are $5.6 million in excess
of the settlement amount received. The aircraft was re-leased to National
Airlines, a U.S. carrier, in June 1999. The aircraft, a B757-200ER, represented
3.5% of the portfolio by appraised value at June 30, 1999.
MARKET FOR B747-300S
The re-leasing market for the B747-300 aircraft has recently been severely
hit by over-capacity in the widebody market in general and for this aircraft
type in particular. According to Airclaims, there are currently 79 B747-300
aircraft in the world fleet, of which 20 are currently available for lease. MSAF
owns one B747-300 at June 30, 1999 representing 5.6% of the portfolio by
appraised value at June 30, 1999. This aircraft was repossessed from its
previous lessee, VARIG, a Brazilian airline, in July 1999. The aircraft has been
re-leased for three years commencing February 2000 to Air Atlanta Icelandic, a
contract carrier based in Iceland and specializing in wet-leases. The new lease
rate for this aircraft is approximately 20% of the previous rental reflecting
the significant fall in demand for this aircraft type and the current over
supply. The reduced
A-14
<PAGE> 88
rent is somewhat offset by a settlement that was reached with VARIG for
terminating its lease early. Future lease rentals for this aircraft will in part
depend on the state of the Asian economies, where demand for these aircraft and
other widebodies has been strongest in the past.
INSPECTIONS OF MD-80S
On February 11, 2000, following an accident involving a MD-83 aircraft, the
FAA issued an AD covering DC-9 (MD-83), MD-88, MD-90 and B717 aircraft. The AD
required inspection of the stabilization equipment on these aircraft types
within 3 days. We own one MD-82 and two MD-83 aircraft, representing 5.98% of
the portfolio by appraised value at June 30, 1999. Under the leases of the
affected aircraft, all costs of compliance with the AD are the obligation of the
lessees.
A-15
<PAGE> 89
APPENDIX A
MORGAN STANLEY AIRCRAFT FINANCE
PORTFOLIO DETAILS
All amounts in thousands of US dollars unless otherwise stated
FIGURES AS OF FEBRUARY 1, 2000
<TABLE>
<CAPTION>
COUNTRY OF AIRCRAFT ENGINE
REGION (1) CURRENT LESSEE CURRENT LESSEE TYPE CONFIGURATION
---------- ----------------------- ------------------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
1 Europe France Air Liberte MD-83 JT8D-219
2 (Developed) France l'Aeropostale B737-300 CFM 56-3C1
3 Greece Olympic Airways B737-400 CFM 56-3C1
4 Netherlands KLM engine CF6-80C2B6F
5 Netherlands Transavia B737-300 CFM 56-3C1
6 Ireland TransAer A320-200 V2500-A1
7 Norway Braathens B737-500 CFM 56-3B1
8 UK Britannia Airways B767-200ER CF6-80A
9 UK Flying Colours (5) A320-200 V2500-A1
10 UK Air 2000 B767-300ER CF6-80C2B6F
11 UK Flying Colours B757-200ER RB211-535-E4-37
Sub-total
12 North America USA Alaska Airlines B737-400 CFM 56-3C1
13 (Developed) USA TWA MD-83 JT8D-219
14 USA TWA MD-82 JT8D-217C
15 USA National Airlines B757-200ER RB211-535-E4
16 Canada Canadian Airlines A320-200 V2500-A1
Sub-total
17 Europe Hungary Malev F-70 TAY MK620-15
18 and Middle East Hungary Malev F-70 TAY MK620-15
19 (Emerging) Hungary Malev F-70 TAY MK620-15
20 Turkey Air Alfa A321-100 V2530-A5
Sub-total
21 Asia Korea Asiana B767-300 CF6-80C2B6F
22 (Emerging) Taiwan China Airlines A300-600R PW 4158
23 China China Hainan B737-300 CFM 56-3C1
Sub-total
Latin America
24 (Emerging) Brazil B.R.A. Transportes Aereos A310-300 JT9D-7R4E1
25 Brazil VASP B737-300 CFM 56-3B2
26 Mexico Aero Mexico B757-200ER PW 2037
Sub-total
27 Other Fiji Air Pacific B767-300ER CF6-80C2B4
28 Iceland IcelandAir B737-300 CFM 56-3B2
29 Malta Air Malta B737-300 CFM 56-3B2
Sub-total
AOG
30 Other Iceland (6) Air Atlanta Icelandic B747-300B CF6-80C2
31 Pacific (Developed) Singapore (6) Regionair A310-300 JT9D-7R4E1
32 Pacific (Developed) Singapore (6) Regionair A310-300 JT9D-7R4E1
33 Available for lease (7) Available for lease B737-400 CFM 56-3B2
Total....................................................................................................
<CAPTION>
30-JUN-99
SERIAL DATE OF ADJUSTED BASE % OF % OF
NUMBER MANUFACTURE VALUE (2) TOTAL REGION
------ ----------- ------------- ------ ------
<S> <C> <C> <C> <C> <C>
49822 Dec-88 19,454 2.0%
23788 May-87 19,330 2.0%
25371 Jan-92 25,729 2.6%
704279 Jun-95 5,425 0.5%
27635 May-95 28,072 2.9%
414 May-93 31,182 3.2%
25165 Apr-93 19,849 2.0%
23807 Aug-87 30,952 3.2%
393 Feb-93 30,426 3.1%
26256 Apr-93 64,912 6.6%
24367 Feb-89 32,859 3.4%
Sub-total 31.5%
25104 May-93 27,099 2.8%
49824 Mar-89 20,726 2.1%
49825 Mar-89 18,290 1.9%
24260 Dec-88 34,083 3.4%
279 Feb-92 30,175 3.1%
Sub-total 13.3%
11564 Dec-95 13,991 1.5%
11565 Feb-96 14,603 1.5%
11569 Mar-96 14,969 1.5%
597 May-96 41,248 4.2% 8.7%
Sub-total
24798 Oct-90 54,775 5.6%
555 Mar-90 47,140 4.8%
26295 Dec-93 25,741 2.7%
Sub-total 13.1%
437 Nov-86 28,322 2.9%
24299 Nov-88 20,454 2.1%
26272 Mar-94 42,545 4.3%
Sub-total 9.3%
26260 Sep-94 67,167 6.9%
23811 Oct-87 20,299 2.1%
25161 Feb-92 25,123 2.5%
Sub-total 11.5%
24106 Apr-88 54,382 5.6%
409 Nov-85 23,009 2.3%
410 Nov-85 23,276 2.4%
24234 Oct-88 22,508 2.3% 12.6%
------- ------ ------
Total............... 978,116 100.0% 100.0%
978,116 100.0% 100.0%
======= ====== ======
</TABLE>
- ---------------
(1) Regions are defined according to MSCI designations.
(2) Adjusted Base Value is the Base Value of each aircraft as per the June
30, 1999 Appraisal
(3) Total Number of Lessees = 25
(4) Total Number of Countries = 18
(5) Previously Caledonian Airways, now merged with Flying Colours.
(6) Currently AOG but subject to a Letter of Intent
(7) Subject to a Letter of Intent since February 1, 2000.
A-16
<PAGE> 90
APPENDIX B
MORGAN STANLEY AIRCRAFT FINANCE
COMPARISON OF ACTUAL CASH FLOWS VERSUS
THE BASE CASE FOR THE TWELVE MONTH PERIOD
All amounts in US dollars millions unless otherwise stated
<TABLE>
<CAPTION>
1998 % OF 1998 BASE CASE LEASE RENTALS
----------------------------- -----------------------------------
ACTUAL BASE CASE VARIANCE ACTUAL* BASE CASE** VARIANCE
------ --------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CASH COLLECTIONS
[1] Lease Rentals....................... 126.8 126.8 -- 100.0% 100.0% 0.0%
[2] -Renegotiated Leases................ (1.4) -- (1.4) -1.1% -1.1%
[3] -Rental Resets...................... (2.0) -- (2.0) -1.6% -1.6%
------ ------ ----- ----- ------ -----
[4] (LOGO)[1]....[3] CONTRACTED LEASE RENTALS............ 123.4 126.8 (3.4) 97.3% 100.0% -2.7%
[5] Movement in Current Arrears 0.1 -- 0.1 0.1% 0.1%
Balance.............................
less Net Stress-related Costs
[6] -Bad debts.......................... (4.0) -- -3.2%
[7] -Capitalised arrears................ (3.5) -2.8%
[8] -Security deposits drawn down....... 2.5 -- 2.0%
[9] -AOG................................ (5.2) -- -4.1%
[10] -Other Leasing Income............... 2.5 -- 2.0%
[11] -Repossession....................... (1.1) -0.9%
------ ------ ----- ----- ------ -----
[12](LOGO)[6]....[11] sub-total........................... (8.8) (5.7) (3.1) -7.0% -4.5% -2.5%
[13] [4]+[5]+[12] NET LEASE RENTALS................... 114.7 121.1 (6.4) 90.4% 95.5% -5.1%
[14] Interest Earned..................... 1.8 1.4 0.4 1.4% 1.1% 0.3%
[15] Net Maintenance..................... 2.6 -- 2.6 2.1% 0.0% 2.1%
------ ------ ----- ----- ------ -----
[16](LOGO)[13]...[15] TOTAL CASH COLLECTIONS.............. 119.1 122.5 (3.4) 93.9% 96.6% -2.7%
====== ====== ===== ===== ====== =====
CASH EXPENSES
Aircraft Operating Expenses
[17] -Insurance.......................... (0.4) -- -0.3%
[18] -Re-leasing and other overheads..... (0.2) -0.2%
------ ------ ----- ----- ------ -----
[19] [17]+[18] subtotal............................ (0.6) (4.4) 3.8 -0.5% -3.5% 3.0%
SG&A Expenses
[20] Aircraft Servicer Fees
-Base Fee........................... (2.9) -2.3%
-Rent Collected Fee................. (1.1) -0.9%
-Rent Contracted Fee................ (1.2) -0.9%
-Incentive Fee...................... (0.5) -0.4%
------ ------ ----- ----- ------ -----
[21] [20] sub-total........................... (5.7) (6.4) 0.7 -4.5% -5.1% 0.6%
[22] Other Fees.......................... (2.3) (3.2) 0.9 -1.8% -2.6% 0.8%
------ ------ ----- ----- ------ -----
[23] [21]+[22] subtotal............................ (8.0) (9.6) 1.6 -6.3% -7.7% 1.4%
------ ------ ----- ----- ------ -----
[24] [19]+[23] TOTAL CASH EXPENSES................. (8.6) (14.0) 5.4 -6.8% -11.2% 4.4%
====== ====== ===== ===== ====== =====
NET CASH COLLECTIONS
[25] [16] Total Cash Collections.............. 119.1 122.5 (3.4) 93.9% 96.6% -2.7%
[26] [24] Total Cash Expenses................. (8.6) (14.0) 5.4 -6.8% -11.2% 4.4%
[27] Interest Payments................... (58.5) (63.2) 4.7 -46.1% -49.8% 3.7%
[28] Swap Payments....................... (8.7) (3.8) (4.9) -6.8% -3.0% -3.8%
[29] Exceptional Item.................... -- -- --
[30](LOGO)[25]...[29] TOTAL............................... 43.3 41.5 1.8 34.2% 32.6% 1.6%
====== ====== ===== ===== ====== =====
[31] PRINCIPAL PAYMENTS
subclass A1......................... -- --
subclass A2......................... 39.5 37.7 1.8 31.2% 29.6% 1.6%
subclass B1......................... 3.8 3.8 0.0 3.0% 3.0% 0.0%
subclass C1......................... 0.0 0.0 0.00 0.0% 0.0% 0.0%
subclass D1......................... -- 0.0% 0.0% 0.0%
------ ------ ----- ----- ------ -----
TOTAL............................... 43.3 41.5 1.8 34.2% 32.6% 1.6%
====== ====== ===== ===== ====== =====
DEBT BALANCES
as at November 15, 1999
subclass A1......................... 400.0 400.0
subclass A2......................... 234.5 247.1
subclass B1......................... 91.0 91.0
subclass C1......................... 100.0 100.0
subclass D1......................... 110.0 110.0
------ ------
935.5 948.1
====== ======
</TABLE>
A-17
<PAGE> 91
APPENDIX C
MORGAN STANLEY AIRCRAFT FINANCE
PERFORMANCE TO DATE VERSUS
1998 BASE CASE
MAR 3, 1998 -- NOV 15, 1999
All amounts in US dollars millions unless otherwise stated
<TABLE>
<CAPTION>
1998 % OF 1998 BASE CASE LEASE RENTALS
----------------------------- -----------------------------------
ACTUAL BASE CASE VARIANCE ACTUAL* BASE CASE** VARIANCE
------ --------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CASH COLLECTIONS
[1] Lease Rentals....................... 220.9 220.9 -- 100.0% 100.0% 0.0%
[2] -Renegotiated Leases................ (1.4) -- (1.4) -0.6% 0.0% -0.6%
[3] -Rental Resets...................... (2.0) -- (2.0) -0.9% 0.0% -0.9%
------ ------ ----- ----- ------ -----
[4] (LOGO)[1]....[3] CONTRACTED LEASE RENTALS............ 217.5 220.9 (3.4) 98.5% 100.0% -1.5%
[5] Movement in Current Arrears (3.1) -- (3.1) -1.4% -1.4%
Balance.............................
less Net Stress related Costs
[6] -Bad debts.......................... (6.2) -- -2.8%
[7] -Capitalised arrears................ (3.5) -1.6%
[8] -Security deposits drawn down....... 4.0 -- 1.8%
[9] -AOG................................ (5.6) -- -2.6%
[10] -Other Leasing Income............... 3.6 -- 1.6%
[11] -Repossession....................... (2.2) -1.0%
------ ------ ----- ----- ------ -----
[12](LOGO)[6]....[11] sub-total........................... (9.9) (9.9) -- -4.5% -4.5% 0.0%
[13] [4]+[5]+[12] NET LEASE RENTALS................... 204.5 211.0 (6.5) 92.6% 95.5% -2.9%
------------------------------------ ------ ------ ----- ----- ------ -----
[14] Interest Earned..................... 3.8 2.4 1.4 1.7% 1.1% 0.6%
[15] Net Maintenance..................... 9.7 -- 9.7 4.4% 0.0% 4.4%
------ ------ ----- ----- ------ -----
[16](LOGO)[13]...[15] TOTAL CASH COLLECTIONS.............. 218.0 213.4 4.6 98.7% 96.6% 2.1%
====== ====== ===== ===== ====== =====
CASH EXPENSES
Aircraft Operating Expenses
[17] -Insurance.......................... (1.6) (7.7) 6.1 -0.7% -3.5% 2.8%
[18] -Re-leasing and other overheads
[19] [17]+[18] subtotal............................ (1.6) (7.7) 6.1 -0.7% -3.5% 2.8%
SG&A Expenses
[20] Aircraft Servicer Fees
-Base Fee........................... (3.6)
-Rent Collected Fee................. (2.0)
-Rent Contracted Fee................ (2.2)
-Incentive Fee...................... (0.5)
------ ------ ----- ----- ------ -----
[21] [20] sub-total........................... (8.3) (9.7) 1.4 -3.7% -4.4% 0.7%
[22] Other Fees.......................... (4.7) (5.5) 0.8 -2.1% -2.5% 0.4%
------ ------ ----- ----- ------ -----
[23] [21]+[22] subtotal............................ (13.0) (15.2) 2.2 -5.8% -6.9% 1.1%
[24] [19]+[23] TOTAL CASH EXPENSES................. (14.6) (22.9) 8.3 6.5% -10.4% 3.9%
====== ====== ===== ===== ====== =====
NET CASH COLLECTIONS
[25] [16] Total Cash Collections.............. 218.0 213.4 4.6 98.7% 96.6% 2.1%
[26] [24] Total Cash Expenses................. (14.6) (22.9) 8.3 -6.6% -10.4% 3.8%
[27] Interest Payments................... (104.1) (109.5) 5.4 -47.1% -49.6% 2.5%
[28] Swap Payments....................... (11.9) (6.2) (5.7) -5.4% -2.8% -2.6%
[29] Exceptional Item.................... 27.1 27.1 -- 12.3% 12.3% 0.0%
------ ------ ----- ----- ------ -----
[30](LOGO)[25]...[29] TOTAL............................... 114.5 101.9 12.6 51.9% 46.1% 5.8%
====== ====== ===== ===== ====== =====
[31] PRINCIPAL PAYMENTS
subclass A1......................... -- --
subclass A2......................... 105.5 92.9 12.6 47.8% 42.0% 5.8%
subclass B1......................... 9.0 9.0 (0.0) 4.1% 4.1% 0.0%
subclass C1......................... 0.0 0.0 0.0 0.0% 0.0% 0.0%
subclass D1......................... -- --
------ ------ ----- ----- ------ -----
TOTAL............................... 114.5 101.9 12.6 51.9% 46.1% 5.8%
====== ====== ===== ===== ====== =====
DEBT BALANCES
as at November 15, 1999
subclass A1......................... 400.0 400.0
subclass A2......................... 234.5 247.1
subclass B1......................... 91.0 91.0
subclass C1......................... 100.0 100.0
subclass D1......................... 110.0 110.0
------ ------
935.5 948.1
====== ======
</TABLE>
A-18
<PAGE> 92
APPENDIX C
MORGAN STANLEY AIRCRAFT FINANCE
PERFORMANCE TO DATE VERSUS
1998 BASE CASE
MAR 3, 1998 -- NOV 15, 1999
All amounts in US dollars millions unless otherwise stated
<TABLE>
<CAPTION>
1998
COVERAGE RATIOS CLOSING ACTUAL BASE CASE
--------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Cash Collections............................ 114.5 101.9
Add Back Interest and Swap Payments............. 116.1 115.7
Add Back Permitted Accruals..................... 1.6 --
a Net Cash Collections (excl. interest and swap 232.1 217.6
pymts)..........................................
b Swaps........................................... 11.9 6.2
c Class A Interest................................ 66.2 71.0
d Class A Minimum................................. 15.2 22.2
e Class B Interest................................ 9.9 10.5
f Class B Minimum................................. 9.0 9.0
g Class C Interest................................ 11.8 11.7
h Class C Minimum................................. 0.0 0.0
i Class D Interest................................ 16.3 16.3
j Class D Minimum................................. -- --
k Class A Scheduled............................... -- --
l Class B Scheduled............................... -- --
m Class C Scheduled............................... 0.0 0.0
n Class D Scheduled............................... -- --
o Permitted Aircraft Modifications................ 1.6 --
p Class A Supplemental............................ 90.2 70.7
----------- -------------
Total........................................... 232.1 217.6
----------- -------------
[1] Interest Coverage Ratio
Class A......................................... 2.97 2.82 = a / (b+c)
Class B......................................... 2.25 1.98 = a / (b+c+d+e)
Class C......................................... 1.87 1.67 = a / (b+c+d+e+f+g)
Class D......................................... 1.65 1.48 = a / (b+c+d+e+f+g+h+i)
[2] Debt Coverage Ratio
Class A......................................... 1.65 1.48 = a / (b+c+d+e+f+g+h+i+ j+k)
Class B......................................... 1.65 1.48 = a / (b+c+d+e+f+g+h+i+j+k+l)
Class C......................................... 1.65 1.48 = a / (b+c+d+e+f+g+h+i+j+k+l+m)
Class D......................................... 1.65 1.48 = a / (b+c+d+e+f+g+h+i+j+k+l+m+n)
Loan-to-Value Ratios (in US dollars)
[3] Assumed Portfolio Value... 1,115,510,000 1,015,877,091
[4] Adjusted Portfolio --
Value.....................
Liquidity Reserve Amount
Of which
-- Cash................... 25,000,000 25,000,000 25,000,000
-- Accrued Expenses....... 4,045,764
-- Letters of Credit 40,000,000 40,428,351 40,428,351
held....................
------------- ----------- -------------
Subtotal.................. 65,000,000 69,474,115 65,428,351
Less Lessee Security (20,000,000) (20,428,351) (20,428,351)
Deposits..................
Subtotal.................. 45,000,000 49,045,764 45,000,000
[5] Total Asset Value......... 1,160,510,000 49,045,764 1,060,877,091
Note Balances as at November 15, 1999
Class A................... 740,000,000 63.8% 634,532,775 62.7% 647,100,914 61.0%
Class B................... 100,000,000 72.4% 91,022,587 71.7% 91,022,587 69.6%
Class C................... 100,000,000 81.0% 99,986,794 81.6% 99,986,794 79.0%
Class D................... 110,000,000 90.5% 110,000,000 92.5% 110,000,000 89.4%
------------- ----------- -------------
Total..................... 1,050,000,000 935,542,156 948,110,295
============= =========== =============
</TABLE>
- ---------------
* 1998 Base Case Cash Collections and Cash Expenses have been adjusted for
non-delivery of an aircraft.
A-19
<PAGE> 93
[1] Interest Coverage Ratio is equal to Net Cash Collections (excl. interest and
swap payments) expressed as a ratio of the 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 (excl. 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 Initial 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] Adjusted Portfolio Value represents the Base Value of each aircraft in the
Portfolio as determined by the most recent Appraisal multiplied by the
Depreciation Factor at Calculation date divided by the Depreciation Factor
at Closing date.
The lower of the Assumed Portfolio Value or 105% of the Adjusted Portfolio
Value is used to calculate the principal repayment amounts to Noteholders.
[5] Total Asset Value is equal to Total Assumed Portfolio Value plus Liquidity
Reserve Amount minus Lessee Security Deposits.
A-20
<PAGE> 94
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF DOCUMENT NUMBERED PAGE
- ------- ----------------------- -------------
<C> <S> <C>
3.1 Certificate of Trust of MSAF*
3.2 Third Amended and Restated Trust Agreement of MSAF dated as
of March 3, 1998*
4.1 Indenture dated as of March 3, 1998 by and among MSAF and
Bankers Trust Company, as Trustee with respect to the Notes*
4.2 Form of Global Note (included in Exhibit 4.1)
4.3 Registration Rights Agreement dated March 3, 1998 by and
between MSAF and Morgan Stanley & Co. International Limited*
10.1 Administrative Agency Agreement dated as of March 3, 1998
among MSAF, Cabot Aircraft Services Limited, as
Administrative Agent, Bankers Trust Company, as Security
Trustee and each subsidiary of MSAF*
10.2 Cash Management Agreement dated as of March 3, 1998 among
MSAF, Bankers Trust Company, as Security Trustee and as Cash
Manager and each subsidiary of MSAF*
10.3 Financial Advisory Agreement dated as of March 3, 1998
between MSAF and Morgan Stanley & Co. Incorporated, as
Financial Adviser*
10.4 Custody and Loan Agreement dated as of March 3, 1998 among
MSAF, International Lease Finance Corporation and each
subsidiary of MSAF*
10.5 Loan Agreement dated as of March 3, 1998 between MSAF and
Morgan Stanley, Dean Witter, Discover & Co.*
10.6 Security Trust Agreement dated as of March 3, 1998 among
MSAF, Bankers Trust Company, as Security Trustee, as Cash
Manager and as Trustee, Cabot Aircraft Services Limited, as
Administrative Agent and each subsidiary of MSAF*
10.7 Reference Agency Agreement dated as of March 3, 1998 among
MSAF, Bankers Trust Company, as Reference Agent and as
Trustee and Cabot Aircraft Services Limited, as
Administrative Agent*
10.8 Servicing Agreement dated as of November 10, 1997 among
MSAF, International Lease Finance Corporation, Cabot
Aircraft Services Limited, as Administrative Agent and each
subsidiary of MSAF*
10.9 Asset Purchase Agreement dated as of November 10, 1997
between MSAF and International Lease Finance Corporation*
21.1 Subsidiaries of MSAF*
23.1 Consent of Aircraft Information Services, Inc.**
23.2 Consent of BK Associates, Inc.**
23.3 Consent of Airclaims Limited**
23.4 Consent of Aircraft Value Analysis Company**
23.5 Consent of Morten Beyer and Agnew**
27.1 Financial Data Schedule**
99.1 Appraisal of Aircraft Information Services, Inc. relating to
the Aircraft**
99.2 Appraisal of BK Associates, Inc. relating to the Aircraft**
99.3 Appraisal of Airclaims Limited relating to the Aircraft**
</TABLE>
<PAGE> 95
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF DOCUMENT NUMBERED PAGE
- ------- ----------------------- -------------
<C> <S> <C>
99.4 Appraisal of Aircraft Value Analysis Company relating to the
Aircraft**
99.5 Appraisal of Morten Beyer and Agnew relating to the
Aircraft**
</TABLE>
- ---------------
* Incorporated by reference to the Registration Statement on Form S-4 (File No.
333-56575), previously filed with the Securities and Exchange Commission
** Filed herewith
<PAGE> 1
Exhibit 23.1
Aircraft Information Services, Inc.
Morgan Stanley Aircraft Finance
C/o Wilmington Trust Company
1100 North Market Street
Rodney Square North
Wilmington, DE 19890
USA
Date: February 25, 2000
CONSENT
Dear Sirs,
We refer to our report addressed to Morgan Stanley Aircraft Finance
dated 30 November 1999 containing our appraisal of a portfolio of 32 aircraft
and one engine (the "Appraisal") and to the filing of a Report on Form 10-K with
the Securities and Exchange Commission. We hereby consent to the references to
our firm in the Form 10-K and to the inclusion in the Form 10-K of the Appraisal
Values.
Yours faithfully,
Aircraft Information Services, Inc.
/s/ John D. McNicol
By: John D. McNicol
Title: Vice President
Date: 25 February 2000
<PAGE> 1
BK Associates, Inc.
Morgan Stanley Aircraft Finance
C/o Wilmington Trust Company
1100 North Market Street
Rodney Square North
Wilmington, DE 19890
USA
Date: February 25, 2000
Dear Sirs,
We refer to our report addressed to Morgan Stanley Aircraft Finance
dated November 30, 1999 containing our appraisal of a portfolio of 32 aircraft
and one engine (the "Appraisal") and to the filing of a Report on Form 10-K with
the Securities and Exchange Commission. We hereby consent to the references to
our firm in the Form 10-K and to the inclusion in the Form 10-K of the Appraisal
Values.
Yours faithfully,
BK Associates, Inc.
/s/ R. Britton
By: R.L.Britton
Title: Vice President
ISTAT Certified Appraiser
Date: February 25, 2000
<PAGE> 1
Airclaims Limited
Morgan Stanley Aircraft Finance
C/o Wilmington Trust Company
1100 North Market Street
Rodney Square North
Wilmington, DE 19890
USA
Date: February 28, 2000
CONSENT
Dear Sirs,
We refer to our report addressed to Morgan Stanley Aircraft Finance
dated November 30, 1999 containing our appraisal of a portfolio of 32 aircraft
and one engine (the "Appraisal") and to the filing of a Report on Form 10-K with
the Securities and Exchange Commission. We hereby consent to the references to
our firm in the Form 10-K and to the inclusion in the Form 10-K of the Appraisal
Values.
Yours faithfully,
/s/ Chris Seymour
By: Chris Seymour
Title: Senior Analyst
Date: February 28, 2000
<PAGE> 1
The Aircraft Value Analysis Company
Morgan Stanley Aircraft Finance
C/o Wilmington Trust Company
1100 North Market Street
Rodney Square North
Wilmington, DE 19890
USA
Date: February 28, 2000
CONSENT
Dear Sirs,
We refer to our report addressed to Morgan Stanley Aircraft Finance
dated 30th November 1999 containing our appraisal of a portfolio of 32 aircraft
and one engine (the "Appraisal") and to the filing of a Report on Form 10-K with
the Securities and Exchange Commission. We hereby consent to the references to
our firm in the Form 10-K and to the inclusion in the Form 10-K of the Appraisal
Values.
Yours faithfully,
The Aircraft Value Analysis Company
/s/ P. Leighton
By: P. Leighton
Title: Managing Director
Date: 28th February 2000
<PAGE> 1
Morten Beyer & Agnew
Morgan Stanley Aircraft Finance
C/o Wilmington Trust Company
1100 North Market Street
Rodney Square North
Wilmington, DE 19890
USA
Date: February 25, 2000
CONSENT
Dear Sirs,
We refer to our report addressed to Morgan Stanley Aircraft Finance
dated November 30, 1999 containing our appraisal of a portfolio of 32 aircraft
and one engine (the "Appraisal") and to the filing of a Report on Form 10-K with
the Securities and Exchange Commission. We hereby consent to the references to
our firm in the Form 10-K and to the inclusion in the Form 10-K of the Appraisal
Values.
Yours faithfully,
Morten Beyer & Agnew
/s/ Teoman Ozdener
By: Teoman Ozdener
Title: Vice President Technical
Date: February 25, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated statement of operations for the fiscal year ended November 30, 1999
and the consolidated balance sheets as of November 30, 1999, and is qualified in
this entirety by reference to such consolidated financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1999
<PERIOD-END> NOV-30-1999
<CASH> 35,119
<SECURITIES> 0
<RECEIVABLES> 2,271
<ALLOWANCES> (363)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 972,030
<DEPRECIATION> (85,979)
<TOTAL-ASSETS> 957,474
<CURRENT-LIABILITIES> 0
<BONDS> 935,543
0
0
<COMMON> 1
<OTHER-SE> (54,682)
<TOTAL-LIABILITY-AND-EQUITY> 957,474
<SALES> 114,651
<TOTAL-REVENUES> 116,496
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (60,844)
<LOSS-PROVISION> (6,361)
<INTEREST-EXPENSE> (63,584)
<INCOME-PRETAX> (7,932)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,932)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,932)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
Exhibit 99.1
27 January 2000
Morgan Stanley Aircraft Finance ("MSAF")
c/o Wilmington Trust Company
1100 North Market Street
Rodney Square North
Subject: AISI Report No.: A0S016BVO
Sight Unseen Half Life and Adjusted Base Value Appraisal
Thirty Two Aircraft and One Spare Engine
Dear Mr. Irving:
In response to your request, Aircraft Information Services, Inc. (AISI) is
pleased to offer Morgan Stanley Aircraft Finance ("MSAF") our opinion of the
sight unseen half life and adjusted base value as of 30 November 1999 of thirty
two aircraft and one spare engine as defined and listed in Table I of this
report.
1. METHODOLOGY AND DEFINITIONS
The standard terms of reference for commercial aircraft or engine value are
"half-life base market value" and "half-life current market value" of an
"average" aircraft or engine. Base value is a theoretical value that assumes a
balanced market while current market value is the value in the real market; both
assume a hypothetical average aircraft or engine condition. AISI value
definitions are consistent with the current definitions of the International
Society of Transport Aircraft Trading (ISTAT), those of 01 January 1994. AISI is
a member of that organization and employs an ISTAT Certified and Senior
Certified Aircraft Appraiser.
AISI defines a "base value" as that of a transaction between equally willing and
informed buyer and seller, neither under compulsion to buy or sell, for a single
unit cash transaction with no hidden value or liability, and with supply and
demand of the sale item roughly in balance. Base values are typically given for
aircraft or engines in "new" condition, "average half-life" condition, or in a
specifically described condition unique to a single aircraft or engine at a
specific time. An "average" aircraft or engine is an operable airworthy aircraft
or engine in average physical condition and with average accumulated flight
hours and cycles, with clear title and, for aircraft, a standard unrestricted
certificate of airworthiness and registered in an authority which does not
represent a penalty to aircraft value or liquidity; with no damage
<PAGE> 2
27 January 2000
AISI File No. A0S01BVO
Page 2
history and with inventory configuration and level of modification which is
normal for the title and, for aircraft, a standard unrestricted certificate of
airworthiness and registered in an authority which does not represent a penalty
to aircraft value or liquidity; with no damage history and with inventory
configuration and level of modification which is normal for the aircraft or
engine's intended use and age. AISI assumes average condition unless otherwise
specified in this report. "Half-life" condition assumes that every component or
maintenance service which has a prescribed interval that determines its service
life, overhaul interval or interval between maintenance services, is at a
condition which is one-half of the total interval. AISI defines engine "zero
time since overhaul" condition to be that of an engine fresh from an engine
heavy maintenance shop visit which overhauled all engine modules or all engine
compressor and combustor/turbine stages as appropriate, with all life-limited
components at half-life. It should be noted that AISI and ISTAT value
definitions apply to a transaction involving a single aircraft or engine, and
that transactions involving more than one aircraft or engine are often executed
at considerable and highly variable discounts to a single aircraft or engine
price, for a variety of reasons relating to an individual buyer or seller.
AISI defines a "current market value", which is synonymous with the older term
"fair market value" as that value which reflects the real market conditions,
whether at, above or below the base value conditions. Assumption of a single
unit sale and definitions of aircraft or engine condition, buyer/seller
qualifications and type of transaction remain unchanged from that of base value.
Current market value takes into consideration the status of the economy in which
the aircraft or engine is used, the status of supply and demand for the
particular aircraft or engine type, the value of recent transactions and the
opinions of informed buyers and sellers. Current market value assumes that there
is no short term time constraint to buy or sell.
AISI encourages the use of base values to consider historical trends, to
establish a consistent baseline for long term value comparisons and future value
considerations, or to consider how actual market values vary from theoretical
base values. Base values are less volatile than current market values and tend
to diminish regularly with time. Base values are normally inappropriate to
determine near term values. AISI encourages the use of current market values to
consider the probable near term value of an aircraft or engine.
AISI determines an "adjusted market value" by determining the value of known
deviations from half-life condition, which may be better or worse than half-life
condition, and to account for better or worse than average physical condition,
and the inclusion of additional equipment, or absence of standard equipment.
No physical inspection of the Aircraft or Engine or their essential records was
made by AISI for the purposes of this report, nor has any attempt been made to
verify information provided to us, which is assumed to be correct and applicable
to the Aircraft.
<PAGE> 3
27 January 2000
AISI File No. A0S01BVO
Page 3
Given the relatively thin used engine market and the relatively broad range of
values for transactions for an engine type, the meaning of 'base value' for used
engines is open to broad interpretation. Normally base value is derived from
historical normalized current market values with manufacturer's list price as a
start point, while current market value is deduced directly from recent
transactions. For used engines there are seldom sufficient historical
transactions to permit the same derivation of engine base values as is possible
for aircraft base values. In our opinion the used engine market is currently a
relatively hard market, and base value will be close to current market values
for most engine types. AISI's definitions of engines are as follows:
Bare Engine
AISI defines a BARE ENGINE as an engine without accessories, but complete with
all engine related air, hydraulic and electrical lines which are not directly
part of accessories.
Engine Accessories
AISI defines a BASIC QEC (quick engine change set of equipment) as being
composed of two subsets of equipment according to original sources of
procurement.
o EBU (engine build up) items which include all accessories, connecting
lines, engine mounts, tubes and ducting. When procured from sources other
than the airframe manufacturers, these items are referred to as baseline
QEC items.
o BFE (buyer furnished equipment) items which include the starter, valves,
IDG and hydraulic pump.
Note the above subset definitions are valid for new engines and QEC kits; once
the engine and QEC are used, the distinctions between EBU and BFE becomes
irrelevant and are referred to collectively as basic QEC.
Engine with QEC
The engine with basic QEC is often referred to as the "demountable engine" by
manufacturers and as a "high neutral QEC" by airlines. The engine plus basic QEC
does not include engine inlet cowl, centerbody, nozzle, or plug. There will be
some variation in basic QEC inventory from engine type to type, and from
position to position.
AISI defines an engine with FULL QEC as a basic QEC engine plus inlet cowl,
centerbody, nozzle, and plug. Manufacturers often refer to this configuration as
a "fully demountable engine". There will be some variation in full QEC inventory
from engine type to type, and from position to position. None of the above
descriptions include the thrust reverser, which is valued separately.
<PAGE> 4
27 January 2000
AISI File No. A0S01BVO
Page 4
2. VALUATION
Our opinion of the adjusted base market value of the Aircraft is derived from
information and specifications supplied to AISI by Morgan Stanley. Adjustments
are calculated in accordance with standard AISI methods. Adjustments are
calculated only where there is sufficient information to do so, or where
reasonable assumptions can be made.
With regard to airframe maintenance, if no time between check/overhaul (TBO) or
time since check/overhaul (TSO) information was provided, and if the total
hours/cycles of the airframe do not exceed the TBO limits then the total
hours/cycles of the airframe were assumed to be the TSO. This is typical of
newer aircraft. If no information was provided and if the TSO could not be
calculated, then half life was assumed.
With regard to the engines, due to the amount of information provided, all
engines are considered to be in half life condition.
All hours and cycle information provided for airframe, C Check, D Check, gear
and engines have been projected from the dates of the Aircraft Specification
sheet supplied to 30 November 1999 based on a daily utilization factor
calculated for each aircraft.
It is our considered opinion that the half life and adjusted base values of the
Aircraft as of 30 November 1999 are as follows in Table I subject to the
assumptions, definitions, and disclaimers herein.
<PAGE> 5
27 January 2000
AISI File No. A0S01BVO
Page 5
TABLE I - HALF LIFE AND ADJUSTED BASE VALUES AS OF 30 NOVEMBER 1999
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Half Life Adjusted
Base Value Base Value
30 Nov 1999 30 Nov 1999
No Type MSN DOM Engine MTOW US Dollars US Dollars
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 A300-600R 555 Mar-90 PW4158 375,900 $50,550,000 $50,860,000
- ----------------------------------------------------------------------------------------------------------------
2 A310-300 409 Nov-85 JT9D-7R4E1 330,690 $22,030,000 $21,300,000
- ----------------------------------------------------------------------------------------------------------------
3 A310-300 410 Nov-85 JT9D-7R4E1 337,304 $22,370,000 $21,820,000
- ----------------------------------------------------------------------------------------------------------------
4 A310-322 437 Feb-87 JT9D-7R4E1 337,304 $27,260,000 $27,820,000
- ----------------------------------------------------------------------------------------------------------------
5 A320-200 279 Feb-92 CFM56-5A3 169,756 $28,980,000 $28,640,000
- ----------------------------------------------------------------------------------------------------------------
6 A320-200 393 Feb-93 V2500-A1 166,447 $28,900,000 $29,090,000
- ----------------------------------------------------------------------------------------------------------------
7 A320-200 414 Mar-93 V2500-A1 166,447 $28,900,000 $29,130,000
- ----------------------------------------------------------------------------------------------------------------
8 A321-100 597 May-96 V2530-A5 182,982 $42,220,000 $41,930,000
- ----------------------------------------------------------------------------------------------------------------
9 B737-300 25161 Feb-92 CFM56-3B2 138,500 $24,470,000 $25,010,000
- ----------------------------------------------------------------------------------------------------------------
10 B737-300 26295 Dec-93 CFM56-3C1 135,000 $25,840,000 $25,560,000
- ----------------------------------------------------------------------------------------------------------------
11 B737-300QC 23788 May-87 CFM56-3C1 139,500 $21,980,000 $21,780,000
- ----------------------------------------------------------------------------------------------------------------
12 B737-353F 23811 Sep-87 CFM56-3B2 138,500 $21,530,000 $21,560,000
- ----------------------------------------------------------------------------------------------------------------
13 B737-3K2 27635 May-95 CFM56-3C1 138,500 $29,180,000 $28,540,000
- ----------------------------------------------------------------------------------------------------------------
14 B737-3Q8 24299 Nov-88 CFM56-3B2 137,000 $20,690,000 $20,570,000
- ----------------------------------------------------------------------------------------------------------------
15 B737-4Q8 24234 Oct-88 CFM56-3B2 143,500 $22,400,000 $22,780,000
- ----------------------------------------------------------------------------------------------------------------
16 B737-4Q8 25371 Jan-92 CFM56-3C1 150,000 $27,010,000 $26,430,000
- ----------------------------------------------------------------------------------------------------------------
17 B737-4Q8 25104 May-93 CFM56-3C1 143,500 $27,850,000 $27,350,000
- ----------------------------------------------------------------------------------------------------------------
18 B737-500 25165 Apr-93 CFM56-3B1 121,254 $20,410,000 $19,980,000
- ----------------------------------------------------------------------------------------------------------------
19 B747-300 24106 Apr-88 CF6-80C2B1 833,000 $49,000,000 $48,480,000
- ----------------------------------------------------------------------------------------------------------------
20 B757-200ER 24260 Dec-88 RB211-535E4 250,000 $35,030,000 $35,580,000
- ----------------------------------------------------------------------------------------------------------------
21 B757-200ER 24367 Feb-89 RB211-535E4 250,000 $36,600,000 $36,050,000
- ----------------------------------------------------------------------------------------------------------------
22 B757-200ER 26272 Mar-94 PW2037 230,000 $44,850,000 $44,160,000
- ----------------------------------------------------------------------------------------------------------------
23 B767-200ER 23807 Aug-87 CF6-80A2 345,000 $35,000,000 $35,160,000
- ----------------------------------------------------------------------------------------------------------------
24 B767-300ER 24798 Oct-90 CF6-80C2B6F 380,000 $56,670,000 $56,670,000
- ----------------------------------------------------------------------------------------------------------------
25 B767-300ER 26256 Apr-93 CF6-80C2B6F 407,000 $68,060,000 $67,990,000
- ----------------------------------------------------------------------------------------------------------------
26 B767-300ER 26260 Sep-94 CF6-80C2B6F 380,000 $69,330,000 $68,760,000
- ----------------------------------------------------------------------------------------------------------------
27 Fokker 70 11564 Dec-95 TAY MK620-15 80,997 $13,430,000 $13,410,000
- ----------------------------------------------------------------------------------------------------------------
28 Fokker 70 11565 Feb-96 TAY MK620-15 80,997 $14,930,000 $14,910,000
- ----------------------------------------------------------------------------------------------------------------
29 Fokker 70 11569 Mar-96 TAY MK620-15 80,997 $14,930,000 $14,910,000
- ----------------------------------------------------------------------------------------------------------------
30 MD-82 49825 Mar-89 JT8D-219 149,500 $20,350,000 $20,750,000
- ----------------------------------------------------------------------------------------------------------------
31 MD-83 49822 Dec-88 JT8D-219 160,000 $20,680,000 $20,080,000
- ----------------------------------------------------------------------------------------------------------------
32 MD-83 49824 Mar-89 JT8D-219 160,000 $21,550,000 $21,660,000
- ----------------------------------------------------------------------------------------------------------------
33 Spare Engine 704279 Jan-95 CF6-80C2B6F Basic QEC $5,710,000 $5,710,000
- ----------------------------------------------------------------------------------------------------------------
Totals: $998,690,000 $994,430,000
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 6
27 January 2000
AISI File No. A0S01BVO
Page 6
Unless otherwise agreed by Aircraft Information Services, Inc. (AISI) in
writing, this report shall be for the sole use of the client/addressee. This
report is offered as a fair and unbiased assessment of the subject aircraft.
AISI has no past, present, or anticipated future interest in the subject
aircraft. The conclusions and opinions expressed in this report are based on
published information, information provided by others, reasonable
interpretations and calculations thereof and are given in good faith. Such
conclusions and opinions are judgments that reflect conditions and values which
are current at the time of this report. The values and conditions reported upon
are subject to any subsequent change. AISI shall not be liable to any party for
damages arising out of reliance or alleged reliance on this report, or for any
parties action or failure to act as a result of reliance or alleged reliance on
this report.
THIS DATA HAS BEEN ELECTRONICALLY COPIED AND / OR TRANSMITTED. AISI HAS NO
SUBSEQUENT CONTROL OF THIS DATA AND CAN NOT ASSURE THAT IT HAS REMAINED AS
ORIGINALLY RELEASED BY AISI. BY USE OF THIS DATA THE USER AGREES TO ABSOLVE AISI
FROM ANY LIABILITY FOR THE USE OF OR RELIANCE ON THIS DATA, HOWSOEVER SUCH
LIABILITY MAY ARISE. QUALIFIED RECIPIENTS MAY CONTACT AISI TO DETERMINE THE
ACCURACY OR COMPLETENESS OF THIS DATA BY COMPARISON TO THE AISI MASTER COPY.
Sincerely,
AIRCRAFT INFORMATION SERVICES, INC.
John D. McNicol
Vice President
Appraisals and Forecasts
<PAGE> 1
February 25, 2000
Morgan Stanley Aircraft Finance
c/o Wilmington Trust Company
1100 North Market Street, Rodney Square No.
Wilmington, DE 19890
In response to your request, BK Associates, Inc. is pleased to provide our
opinion of Base Values as of November 30, 1999 for 32 commercial jet transport
aircraft and one commercial jet transport engine which comprise part of the MSAF
Portfolio (Portfolio). The Portfolio aircraft are further identified by type,
manufacture, serial number and year of manufacture on the attached Figure 1.
Based upon our knowledge of these various aircraft types, our knowledge of the
capabilities and uses to which they have been put in various parts of the world,
our knowledge of the marketing of used aircraft, and our knowledge of aircraft
in general, it is our opinion that the Base Values of each aircraft are as shown
in the attached Figure 1.
According to the International Society of Transport Aircraft Trading's (ISTAT)
definition of Base Value, to which BK Associates subscribes, the base value is
the Appraiser's opinion of the underlying economic value of an aircraft in an
open, unrestricted, stable market environment with a reasonable balance of
supply and demand, and assumes full consideration of its "highest and best use".
An aircraft's base value is founded in the historical trend of values and in the
projection of future value trends and presumes an arm's length, cash transaction
between willing, able and knowledgeable parties, acting prudently, with an
absence of duress and with a reasonable period of time available for marketing.
As the definition suggests, Base Value is determined from historic and future
value trends and is not influenced by current market conditions. It is often
determined as a function of the original cost of the aircraft, technical
characteristics of competing aircraft, and development of new models. BK
Associates has determined from analysis of historic data, a relationship between
aircraft age and its value as a percentage of original value for the average
aircraft.
February 25, 2000
We provided the Base Value with an assumed half-time between scheduled major
maintenance events for the airframe and engines (Half-Time Base Value) as well
as the Base Value inclusive of appropriate financial adjustments based on our
interpretation of the current maintenance summary status of each aircraft
provided by Morgan Stanley (Adjusted Base Value). Base Values of each aircraft
are as shown in the attached table.
It should be understood that BK Associates has not inspected the Aircraft nor
the maintenance records for this appraisal, but has relied upon the information
you have provided and our own database. The assumptions have been made that the
Aircraft, are in average or better condition; all Airworthiness Directives have
been complied with; accident damage has not been incurred that would affect
market values; and maintenance has been accomplished in accordance with an
Airworthiness Authority approved maintenance program and accepted industry
standards. Deviations from these assumptions can change our opinion
significantly regarding the Aircraft values.
BK Associates, Inc. has no present or contemplated future interest in the
Aircraft, nor any interest that would preclude our making a fair and unbiased
estimate. This appraisal represents the opinion of BK Associates, Inc. and
reflects our best judgment based on the information available to us at the time
of preparation and the time and budget constraints imposed by the client. It is
not given as a recommendation, or as an inducement, for any financial
transaction and further, BK Associates, Inc. assumes no responsibility or legal
liability for any action taken or not taken by the addressee, or any other
party, with regard to the appraised equipment. By accepting this appraisal, the
addressee agrees that BK Associates, Inc. shall bear no such responsibility or
legal liability. This appraisal is prepared for the use of the addressee and
shall not be provided to other parties without the express consent of the
addressee.
Sincerely yours,
BK ASSOCIATES, INC.
R. L. Britton
Vice President
RLB/kf ISTAT Certified Appraiser
Attachment
<PAGE> 2
FIGURE I
MORGAN STANLEY
MSAF PORTFOLIO - BASE VALUES
NOVEMBER 30,1999
<TABLE>
<CAPTION>
HALF TIME MTC ADJ'D
AIRCRAFT SERIAL MFG. BASE VALUE BASE VALUE
TYPE NUMBER YEAR ( MIL $ ) ( MIL $ )
---- ------ ---- --------- ---------
<S> <C> <C> <C> <C> <C>
1 A300-600R 555 1990 46.35 46.87
2 A310-300 409 1985 26.70 27.02
3 A310-300 410 1985 26.70 27.40
4 A310-300 437 1987 31.70 33.26
5 A320-200 279 1992 29.60 31.24
6 A320-200 393 1993 29.90 31.19
7 A320-200 414 1993 29.90 30.96
8 A321-100 597 1996 46.00 45.16
9 B737-300 24299 1988 18.70 18.79
10 B737-300 25161 1992 24.50 25.51
11 B737-300 26295 1993 26.25 26.02
12 B737-300 27635 1995 29.15 28.73
13 B737-300F 23811 1987 18.65 19.00
14 B737-300QC 23788 1987 18.25 18.10
15 B737-400 24234 1988 19.15 20.19
16 B737-400 25104 1993 27.00 26.53
17 B737-400 25371 1992 25.55 24.17
18 B737-500 25165 1993 18.85 17.55
19 B747-300B 24106 1988 60.40 59.94
20 B757-200ER 24260 1988 31.85 33.02
21 B757-200ER 24367 1989 33.90 31.34
22 B757-200ER 26272 1994 44.20 42.93
23 B767-200ER 23807 1987 31.65 31.08
24 B767-300ER 24798 1990 53.25 53.67
25 B767-300ER 26256 1993 63.15 61.96
26 B767-300ER 26260 1994 66.50 64.75
27 F70 11564 1995 14.10 14.10
28 F70 11565 1996 15.20 15.20
29 F70 11569 1996 15.20 15.20
30 MD82 49825 1989 18.35 17.32
31 MD83 49822 1988 19.25 18.82
32 MD83 49824 1989 20.50 21.36
SPARE ENGINE 704279 1995 5.70 6.28
TOTALS 986.10 984.69
</TABLE>
<PAGE> 1
Our Ref: 99384U/MSH/kw
Morgan Stanley Aircraft Finance 28th February 2000
C/o Wilmington Trust Company
1100 North Market Street
Rodney Square North
Wilmington
Delaware 19890
USA
Dear Sirs,
MARKET & BASE VALUATION OF THE
MSAF PORTFOLIO AS AT 30 NOVEMBER 1999
In accordance with instructions received by facsimile, letter and e-mail from
your goodselves, we are pleased to be able to provide our Base Value opinion for
a total of 32 aircraft built by Airbus, Boeing and McDonnell Douglas, and one
spare engine as identified in the attached portfolio listing (ref:
99384/1199/BV/MSH).
Airclaims' valuation of the aircraft takes into account the data supplied by
MSAF and by ILFC between June and December 1999 regarding the subject aircraft,
their specification and maintenance status. We have additionally referred to the
data held in the Airclaims CASE Aviation database to supplement the information
required for the valuation process. We have assumed that, unless otherwise
indicated, each of the aircraft is a typical example of its type, model and age,
and is generally in good condition, with all airworthiness directives (ADs) and
significant service bulletins (SBs) complied with.
No physical inspection of the subject aircraft was undertaken by Airclaims in
conjunction with this assignment, however a physical inspection of portions of
the fleet from within the overall portfolio was performed during July and August
1999.
AIRCRAFT SPECIFICATIONS
The general specification details of the aircraft appear in the attached table.
Please note that Airclaims valuations take into account the `Build Date' of the
aircraft, which is taken to be the date of roll-out, first flight, or first
delivery, whichever is the earlier.
<PAGE> 2
VALUATIONS
As requested, we have provided our value opinions under the scenarios of BASE
VALUES. Airclaims believes it to be very important that value definitions are
understood by all parties and that such values are always considered in
conjunction with their definitions.
BASE VALUE
The International Society of Transport Aircraft Trading (ISTAT) defines 'Base
Value' as follows:
BASE VALUE is the appraiser's opinion of the underlying economic value of an
aircraft in an open, unrestricted, stable market environment with a reasonable
balance of supply and demand, and assumes full consideration of its "highest and
best use". An aircraft's Base Value is founded in the historical trend of values
and in the projection of value trends and presumes an arm's-length, cash
transaction between willing, able and knowledgeable parties, acting prudently,
with an absence of duress and with a reasonable period of time available for
marketing.
The Base Value as at 30/11/1999 is an interpolation based on our 1999 Base Value
opinion (correct to 30th June 1999) and our Base Value opinion correct to 30th
June 2000.
The values have also been provided to a) reflect the Theoretical `Half-Life'
value which assumes that all major rotables are midway in airframe hours /
cycles or calendar time between their last overhaul and the next scheduled
overhaul, and also b) to reflect adjustments made for the actual maintenance
status of the airframe, engines, APU and undercarriage.
The Base `Half-Life' Values are therefore recorded in the attached table. We
have additionally provided the `Adjusted Base Value' which reflects the
aircraft's overall position in its maintenance cycle. A third column separates
the actual adjustment made for maintenance status.
Whilst the values are given as single figures, it must be borne in mind that the
determination of such values involves a multiplicity of variables, and that some
variation in perceived value must be expected. In this case we consider that a
tolerance of +/- 4% may reasonably apply to the calculated values.
- --------------------------------------------------------------------------------
Morgan Stanley Aircraft Finance
Page 2
<PAGE> 3
Please note that valuations given by Airclaims are valid only as at the date of
issue, subsequent to that date there may be alterations in the world aviation
market, or in the status and physical condition of the subject aircraft, its
engines or other general factors that may affect Airclaims' valuation.
Yours faithfully,
MARK SHERIDAN
Senior Analyst
- --------------------------------------------------------------------------------
Morgan Stanley Aircraft Finance
Page 3
<PAGE> 4
MSAF PORTFOLIO - BASE VALUATION AS AT 30 NOV 99
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
TYPE VAR. MSN REG'N DOM REMARKS ENGINES MTOW TOTAL
(ILFC DATA) TYPE & VARIANT (LB) SEATS
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
A300 600R 555 N8888P MAR-90 PW4000 4158 375,880 265
A310 300 409 A4O-OA NOV-85 PW JT9D 7R4E1 330,690 175
A310 300 410 A4O-OB NOV-85 PW JT9D 7R4E1 337,300 175
A310 300 437 PP-PSD FEB-87 BUILD DATE 11/86 PW JT9D 7R4E1 337,300 256
(CASE)
A320 200 279 C-FLSF FEB-92 BUILD DATE 12/91 CFM56 5A3 169,754 180
(CASE)
A320 200 393 G-CVYD FEB-93 BUILD DATE 12/92 IAE A1 166,447 180
(CASE) V2500
A320 200 414 EI-TLR MAR-93 BUILD DATE 02/93 IAE A1 166,447 168
(CASE) V2500
A321 100 597 TC-ONI MAY-96 BUILD DATE 04/96 IAE A5 183,000 220
(CASE) V2530
B737 300 25161 CS-TIK FEB-92 BUILD DATE 01/92 CFM56 3B2 138,500 144
(CASE) (22K)
B737 300 27635 PH-TSZ MAY-95 BUILD DATE 04/95 CFM56 3C1 138,500 149
(CASE) (22K)
B737 300 24299 PP-SFM NOV-88 BUILD DATE 07/88 CFM56 3B2 137,000 132
(CASE) (22K)
B737 300 26295 B-2937 DEC-93 BUILD DATE 11/93 CFM56 3C1 135,000 148
(CASE) (20K)
B737 300F 23811 TF-FIE SEP-87 BUILD DATE 08/87 CFM56 3B2 138,500 FRT
(CASE) (22K)
B737 300QC 23788 F-GIXH MAY-87 CFM56 3C1 139,500 126
(22K)
B737 400 24234 N242GD OCT-88 BUILD DATE 09/88 CFM56 3B2 143,500 159
(CASE) (22K)
B737 400 25104 N771AS MAY-93 BUILD DATE 04/93 CFM56 3C1 143,500 140
(CASE) (23.5K)
B737 400 25371 SX-BKK JAN-92 BUILD DATE 12/91 CFM56 3C1 150,000 159
(CASE) (23.5K)
B737 500 25165 LN-TUX APR-93 BUILD DATE 03/93 CFM56 3B1 121,500 117
(CASE) (18.5K)
B747 300 24106 PP-VOA APR-88 BUILD DATE 03/88 GE CF6 80C2B1 833,000 395
(CASE)
B757 200 24367 G-FCLG FEB-89 BUILD DATE 12/88 RR 535E4-37 250,000 179
(CASE) RB211
B757 200 24260 N757GA DEC-88 BUILD DATE 11/88 RR 535E4 250,000 175
(CASE) RB211
B757 200 26272 N805AM MAR-94 BUILD DATE 12/93 PW2000 2037 230,000 180
(CASE)
B767 200 23807 VH-RMO AUG-87 BUILD DATE 07/87 GE CF6 80A2 345,000 290
(CASE)
B767 300 24798 HL7264 OCT-90 BUILD DATE 08/90 GE CF6 80C2B6F 345,000 249
(CASE)
B767 300ER 26256 G-OOAN APR-93 BUILD DATE 02/93 GE CF6 80C2B6F 407,000 327
(CASE)
B767 300ER 26260 DQ-FJC SEP-94 BUILD DATE 08/94 GE CF6 80C2B6F 380,000 263
(CASE)
ENGINE 704279 - 1995 GE CF6 80C2B6F(QEC - -
F-70 11564 HA-LMA DEC-95 RR 15 81,000 75
TAY620
F-70 11565 HA-LMB FEB-96 RR 15 81,000 75
TAY620
F-70 11569 HA-LMC MAR-96 RR 15 81,000 75
TAY620
MD-80 82 49825 N940AS MAR-89 BUILD DATE 02/89 PW JT8D 219 149,500 142
(CASE)
MD-80 83 49822 F-GHEB DEC-88 BUILD DATE 10/88 PW JT8D 219 160,000 159
(CASE)
MD-80 83 49824 N9420D MAR-89 BUILD DATE 11/88 PW JT8D 219 160,000 142
(CASE)
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
TYPE TOTAL TOTAL AS AT... LESSEE/ LESSEE 01-NOV-99 01-NOV-99 MAINT
HRS CYC OPERATOR COUNTRY BV (HL) ADJBV ADJ.@
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
A300 21,661 7,012 11-JUL-99 CHINA AIRLINES TAIWAN $43.50M $43.82M $0.32
A310 42,426 15,631 30-JUN-99 OMAN AIR OMAN $19.26M $18.67M -$0.60
A310 43,240 15,478 30-JUN-99 OMAN AIR OMAN $19.62M $18.74M -$0.89
A310 47,618 10,159 30-JUN-99 PASSAREDO BRAZIL $20.79M $21.32M $0.53
A320 28,258 10,786 30-JUN-99 CANADIAN AIRLINES CANADA $28.79M $28.87M $0.08
A320 15,798 6,401 30-JUN-99 CALEDONIAN UK $29.93M $29.93M $0.00
A320 13,366 7,146 30-JUN-99 TRANSAER COLOGNE IRELAND $30.26M $30.34M $0.08
A321 9,580 3,672 30-JUN-99 ONUR AIR TURKEY $36.58M $36.09M -$0.50
B737 21,427 12,446 31-MAY-99 AIR MALTA MALTA $22.64M $22.67M $0.03
B737 15,576 5,781 31-MAY-99 TRANSAVIA HOLLAND $26.00M $25.56M -$0.44
B737 29,989 16,709 30-JUN-99 VASP BRAZIL $19.28M $20.00M $0.72
B737 14,464 9,933 30-MAR-99 CHINA HAINAN PR CHINA $23.45M $22.60M -$0.85
B737 28,906 15,414 26-JUN-99 ICELANDAIR ICELAND $19.53M $19.38M -$0.15
B737 27,231 17,022 31-MAY-99 AEROPOSTALE FRANCE $19.59M $19.41M -$0.18
B737 28,777 12,306 31-MAY-99 BLUE PANORAMA /TAESA ITALY $20.77M $21.62M $0.85
B737 21,537 12,801 25-JUN-99 ALASKA USA $25.60M $25.51M -$0.09
B737 19,404 9,723 31-MAY-99 OLYMPIC GREECE $25.06M $24.69M -$0.38
B737 15,060 14,288 31-MAY-99 BRAATHENS SVERIGE SWEDEN $20.77M $20.56M -$0.21
B747 50,289 9,437 31-MAY-99 AOG (EX-VARIG) BRAZIL $47.11M $46.63M -$0.48
B757 36,391 9,782 07-APR-99 FLYING COLOURS UK $29.43M $28.94M -$0.49
B757 35,206 8,654 30-JUN-99 NATIONAL AIRLINES USA $29.63M $30.42M $0.79
B757 17,658 7,346 30-JUN-99 AEROMEXICO MEXICO $33.75M $33.00M -$0.75
B767 41,386 18,347 31-MAY-99 ANSETT AIRLINES AUSTRALIA $28.62M $28.84M $0.22
B767 25,208 15,625 28-JUN-99 ASIANA S KOREA $48.38M $49.10M $0.72
B767 34,093 4,948 31-MAY-99 AIR 2000 UK $58.51M $59.89M $1.38
B767 20,197 4,134 20-JUN-99 AIR PACIFIC FIJI $59.97M $60.05M $0.07
ENGINE 15,443 4,357 20-JUL-99 KLM HOLLAND $ 5.50M $5.95M $0.45
F-70 7,577 5,008 31-MAY-99 MALEV HUNGARY $12.16M $11.88M -$0.28
F-70 7,488 5,215 31-MAY-99 MALEV HUNGARY $11.32M $11.09M -$0.23
F-70 7,472 5,182 31-MAY-99 MALEV HUNGARY $11.62M $11.36M -$0.26
MD-80 31,536 19,364 24-JUN-99 TWA USA $15.96M $15.32M -$0.64
MD-80 22,460 13,892 31-MAY-99 AIR LIBERTE FRANCE $16.66M $16.90M $0.24
MD-80 27,633 19,555 30-JUN-99 TWA USA $16.61M $17.38M $0.76
- -----------------------------------------------------------------------------------------------------------
BV (HL) = BASE VALUE (HALF LIFE CONDITION) $876.67M $876.52M -$0.16M
--------------------------------
ADJBV = ADJUSTED BASE VALUE (ADJUSTED FOR MAINTENANCE CONDITION)
</TABLE>
<PAGE> 1
Morgan Stanley Aircraft Finance
Portfolio of 33 Aircraft
A Desktop Appraisal
February 2000
Prepared by The Aircraft Value Analysis Company
1
<PAGE> 2
The Aircraft Value Analysis Company has been requested by Morgan Stanley
Aircraft Finance to calculate the current market values of 32 aircraft and one
engine.
1. VALUATION ASSUMPTIONS
Specifications were provided for each of the 32 aircraft and single engine. Two
current values as of November 1999 are provided. The first assumes that the
aircraft are in the equivalent of half life condition. The second adjusted
current market value takes into account the hours and cycles of the aircraft and
the maintenance status where known. The quoted values are in millions of US
dollars.
2. DISCLAIMER & CONFIDENTIALITY
The figures quoted above are based on the econometric model constructed by The
Aircraft Value Analysis Company for the sole purpose of assessing the current
and future value of aircraft and major assemblies. Unless otherwise stated, it
is assumed that the aircraft is a single unit and is available for sale on a
willing seller, willing buyer basis. The information contained in this appraisal
has been prepared for the sole use of Morgan Stanley Aircraft Finance and is not
to be released to a third party without MSAFs prior consent. While every effort
has been made to ensure the accuracy of the data and figures contained in this
appraisal, The Aircraft Value Analysis Company bears no responsibility or
liability for any inaccuracies.
P.Leighton - Managing Director
2nd February 2000
2
<PAGE> 3
MORGAN STANLEY AIRCRAFT FINANCE
PREPARED BY THE AIRCRAFT VALUE ANALYSIS COMPANY - NOVEMBER 1999
<TABLE>
<CAPTION>
MARKET VALUES AS OF NOVEMBER 30TH 1999 1/2 LIFE ADJUSTED
NO. TYPE ENGINE SERIAL NO DOM CURRENT VALUE CURRENT VALUE
<C> <C> <C> <C> <C> <C> <C>
1 A300-600R PW4158 555 Mar-90 39.1 39.05
2 A310-300 JT9D-7R4E1 409 Nov-85 16 15.2
3 A310-300 JT9D-7R4E1 410 Nov-85 16.3 15.55
4 A310-300 JT9D-7R4E1 437 Jan-87 22.3 21.8
5 A320-200 CFM56-5A3 279 Feb-92 28.8 29.5
6 A320-200 V2500-A1 393 Feb-93 29.4 30.17
7 A320-200 V2500-A1 414 May-93 29.5 30.45
8 A321-100 V2530-A5 597 May-96 39.9 39.6
9 B737-300 CFM56-3B2 24299 Nov-88 19.7 20.4
10 B737-300 CFM56-3B2 25161 Feb-92 23.5 24.9
11 B737-300 CFM56-3C1 26295 Dec-93 25.4 25.3
12 B737-300 CFM56-3C1 27635 May-95 27.2 26.2
13 B737-300F CFM56-3B2 23811 Sep-87 19.2 20.1
14 B737-300QC CFM56-3B2 23788 May-87 18.6 18.45
15 B737-400 CFM56-3C1 24234 Oct-88 20.3 21.6
16 B737-400 CFM56-3C1 25104 May-93 26.3 25.8
17 B737-400 CFM56-3C1 25371 Jan-92 25.4 25.45
18 B737-500 CFM56-3C1 25165 Apr-93 19.9 18.6
19 B747-300 CF6-80C2 24106 Apr-88 40 39.87
20 B757-200ER RB211-535E4 24260 Dec-88 30.5 32
21 B757-200ER RB211-535 24367 Feb-89 31.1 30.3
22 B757-200ER PW2037 26272 Mar-94 39 38.75
23 B767-200ER CF6-80A 23807 Aug-87 25.5 25.65
24 B767-300ER CF6-80C2B6 24798 Oct-90 46 48.7
25 B767-300ER CF6-80C2B6 26256 Apr-93 61.7 62.3
26 B767-300ER CF6-80C2B6 26260 Sep-94 65.8 66.4
27 CF6-80C2B6F - 704279 Jul-95 3.15 4.85
28 F70 TAY 620-15 11564 Dec-95 13 13.45
29 F70 TAY 620-15 11565 Feb-96 13.3 13.65
30 F70 TAY 620-15 11569 Mar-96 14.4 14.65
31 MD82 JT8D-219 49825 Mar-89 16.5 16.5
32 MD83 JT8D-219 49822 Dec-88 17.5 18.4
33 MD83 JT8D-219 49824 Mar-89 17.7 18.1
881.95 891.69
</TABLE>
3
<PAGE> 1
I. INTRODUCTION AND EXECUTIVE SUMMARY
MORTEN BEYER & AGNEW, (MBA) has been retained by Morgan Stanley & Co.
International Limited to determine the Adjusted Base Values of 32 aircraft and
one engine as of November 30, 1999. The aircraft and the engine and their Base
Values are identified in Section II of this report.
In performing this valuation, MBA did not inspect the aircraft, and the engine
or their historical maintenance documentation, and relied solely on information
provided to us by Morgan Stanley Aircraft Finance. Based on the information set
forth further in this report, it is our opinion that the Adjusted Base Value of
the 32 aircraft and one engine in this portfolio is $ 1,004,886,000 as noted in
Section III.
MBA uses the definition of certain terms, such as Current Market Value and Base
Value, as promulgated by the Appraisal Program of International Society of
Transport Aircraft Trading (ISTAT). ISTAT is a non-profit association of
management personnel from banks, leasing companies, airlines, manufacturers,
brokers, and others who have a vested interest in the commercial aviation
industry and who have established a technical and ethical certification program
for expert appraisers.
ISTAT defines Current Market Value (CMV) as the appraiser's opinion of the most
likely trading price that may be generated for an aircraft under market
conditions that are perceived to exist at the time in question. Current Market
Value assumes that the aircraft is valued for its highest, best use; that the
parties to the hypothetical sale transaction are willing, able, prudent and
knowledgeable and under no unusual pressure for a prompt sale. It also assumes
the transaction would be negotiated in an open and unrestricted market on an
arm's-length basis, for cash or equivalent consideration, and given an adequate
amount of time for effective exposure to prospective buyers.
The ISTAT definition of Base Value (BV) has, essentially, the same elements of
Market Value except that the market circumstances are assumed to be in a
reasonable state of equilibrium. Thus, Base Value pertains to an idealized
aircraft and market combination, but will not necessarily reflect the actual
Current Market Value of the aircraft in question. BV is founded in the
historical trend of values and is generally used to analyze historical values or
to project future values.
<PAGE> 2
II. BASE AND ADJUSTED VALUES OF AIRCRAFT & ENGINE
<TABLE>
<CAPTION>
ADJUSTED
AIRCRAFT TYPE ENGINE TYPE S/N MFG. DATE BASE VALUE BASE VALUE
<S> <C> <C> <C> <C> <C>
1 A300-600R PW 4158 A0555 Mar-90 $49,390,000 $48,210,000
2 A310-300 JT9D-7R4E1 A0409 Nov-85 30,520,000 29,499,000
3 A310-300 JT9D-7R4E1 A0410 Nov-85 30,520,000 30,501,000
4 A310-300 JT9D-7R4E1 A0437 Nov-86 33,090,000 33,419,000
5 A320-200 CFM56-5A3 D0279 Feb-92 31,110,000 31,652,000
6 A320-200 V2500-A1 D0393 Feb-93 32,610,000 33,098,000
7 A320-200 V2500-A1 D0414 May-93 32,740,000 33,363,000
8 A321-100 V2530-A5 G0597 May-96 38,610,000 37,567,000
9 B737-300 CFM-56-3B2 25161 Feb-92 22,200,000 23,784,000
10 B737-300 CFM56-3C1 27635 May-95 27,610,000 27,137,000
11 B737-300 CFM56-3B2 24299 Nov-88 17,850,000 19,140,000
12 B737-300 CFM56-3C1 26295 Dec-93 25,270,000 25,546,000
13 B737-300F CFM56-3B2 23811 Oct-87 19,520,000 19,936,000
14 B737-300QC CFM56-3B2 23788 May-87 19,080,000 19,782,000
15 B737-400 CFM56-3C 24234 Oct-88 21,590,000 22,435,000
16 B737-400 CFM56-3C 25104 May-93 27,490,000 27,541,000
17 B737-400 CFM56-3C 25371 Jan-92 25,620,000 25,300,000
18 B737-500 CFM56-3B1 25165 Apr-93 21,450,000 20,762,000
19 B747-300 CF6-80C2 24106 Apr-88 50,480,000 51,991,000
20 B757-200ER RB211-535E4 24367 Feb-89 34,380,000 33,392,000
21 B757-200ER RB211-535E4 24260 Dec-88 34,090,000 35,424,000
22 B757-200ER PW2037 26272 Mar-94 44,570,000 42,618,000
23 B767-200ER CF6-80A 23807 Aug-87 32,050,000 28,539,000
24 B767-300ER CF6-80C2B2F 24798 Oct-90 57,770,000 57,665,000
25 B767-300ER CF6-80C2B6F 26256 Apr-93 66,540,000 67,204,000
26 B767-300ER CF6-80C2B6F 26260 Sep-94 70,520,000 68,534,000
27 F.70 TAY MK620-15 11564 Dec-95 14,450,000 14,331,000
28 F.70 TAY MK620-15 11565 Feb-96 14,550,000 14,430,000
29 F.70 TAY MK620-15 11569 Mar-96 14,600,000 14,478,000
30 MD-82 JT8D-219 49825 Mar-89 19,270,000 19,528,000
31 MD-83 JT8D-219 49822 Dec-88 21,440,000 21,431,000
32 MD-83 JT8D-219 49824 Mar-89 21,690,000 22,143,000
33 CF6-80C2B6F CF6-80C2B6F 704279 Jul-95 4,750,000 4,506,000
----------------- ------------------
$1,007,420,000 $1,004,886,000
</TABLE>
2
<PAGE> 3
III. VALUATION
In developing the Adjusted Base Values, MBA did not inspect the aircraft and the
engine or their historical maintenance documentation, but relied on partial
information supplied by the Client. Therefore, we used certain assumptions that
are generally accepted industry practice to calculate the value of aircraft when
more detailed information is not available. The principal assumptions are as
follows:
1. The aircraft is in good overall condition.
2. The overhaul status of the airframe, engines, landing gear and other
major components are the equivalent of mid-time/mid-life unless
otherwise specified.
3. The historical maintenance documentation has been maintained to
acceptable international standards.
4. The specifications of the aircraft are those most common for an
aircraft of its type and vintage.
5. The aircraft is in a standard airline configuration.
6. The aircraft is current as to all Airworthiness Directives and Service
Bulletins.
7. Its modification status is comparable to that most common for an
aircraft of its type and vintage.
8. Its utilization is comparable to industry averages.
9. There is no history of accident or incident damage.
10. No accounting is made for lease obligations or terms of ownership.
Maintenance Adjustments for the airframe is presented in Section IV of this
report. Section V presents the adjustments related to the Engines and the
Landing Gears. Since there were no information related to the Engine Life
Limited Parts (LLPs) and the Landing Gears, they were all assumed to be
half-life and no positive or negative adjustments were made. Depending on the
Maximum Take Off Weight (MTOW) of each aircraft, adjustments are calculated
based on the difference from the aircraft Base MGTOW at 59 dollars per pound.
3
<PAGE> 4
IV. SUMMARY OF VALUE ADJUSTMENTS
<TABLE>
<CAPTION>
MAINTENANCE MGTOW ADJUSTED
AIRCRAFT TYPE S/N BASE VALUE ADJUSTMENTS ADJUSTMENTS BASE VALUE
<S> <C> <C> <C> <C> <C>
1 A300-600R A0555 $49,390,000 ($1,180,000) $0 $48,210,000
2 A310-300 A0409 30,520,000 ($1,021,000) 0 29,499,000
3 A310-300 A0410 30,520,000 ($373,000) 354,000 30,501,000
4 A310-300 A0437 33,090,000 ($25,000) 354,000 33,419,000
5 A320-200 D0279 31,110,000 $108,000 434,000 31,652,000
6 A320-200 D0393 32,610,000 $228,000 260,000 33,098,000
7 A320-200 D0414 32,740,000 $363,000 260,000 33,363,000
8 A321-100 G0597 38,610,000 ($1,043,000) 0 37,567,000
9 B737-300 25161 22,200,000 $758,000 826,000 23,784,000
10 B737-300 27635 27,610,000 ($1,299,000) 826,000 27,137,000
11 B737-300 24299 17,850,000 $552,000 738,000 19,140,000
12 B737-300 26295 25,270,000 ($344,000) 620,000 25,546,000
13 B737-300F 23811 19,520,000 ($410,000) 826,000 19,936,000
14 B737-300QC 23788 19,080,000 ($183,000) 885,000 19,782,000
15 B737-400 24234 21,590,000 $550,000 295,000 22,435,000
16 B737-400 25104 27,490,000 ($244,000) 295,000 27,541,000
17 B737-400 25371 25,620,000 ($999,000) 679,000 25,300,000
18 B737-500 25165 21,450,000 ($1,028,000) 340,000 20,762,000
19 B747-300 24106 50,480,000 ($436,000) 1,947,000 51,991,000
20 B757-200ER 24367 34,380,000 ($1,578,000) 590,000 33,392,000
21 B757-200ER 24260 34,090,000 $744,000 590,000 35,424,000
22 B757-200ER 26272 44,570,000 ($1,362,000) (590,000) 42,618,000
23 B767-200ER 23807 32,050,000 ($1,033,000) (2,478,000) 28,539,000
24 B767-300ER 24798 57,770,000 ($105,000) 0 57,665,000
25 B767-300ER 26256 66,540,000 ($516,000) 1,180,000 67,204,000
26 B767-300ER 26260 70,520,000 ($1,573,000) (413,000) 68,534,000
27 F.70 11564 14,450,000 ($119,000) 0 14,331,000
28 F.70 11565 14,550,000 ($120,000) 0 14,430,000
29 F.70 11569 14,600,000 ($122,000) 0 14,478,000
30 MD-82 49825 19,270,000 $110,000 148,000 19,528,000
31 MD-83 49822 21,440,000 ($9,000) 0 21,431,000
32 MD-83 49824 21,690,000 $453,000 0 22,143,000
33 CF6-80C2B6F 704279 4,750,000 ($244,000) N/A 4,506,000
---------------- ------------------
$1,007,420,000 $1,004,886,000
</TABLE>
4
<PAGE> 5
V. AIRFRAME MAINTENANCE CONDITION ADJUSTMENTS
<TABLE>
<CAPTION>
HEAVY MAINTENANCE INTERMEDIATE MAINTENANCE TOTAL AIRFRAME MAINT.
AIRCRAFT TYPE S/N POTENTIAL ACTUAL POTENTIAL ACTUAL POTENTIAL ACTUAL
<S> <C> <C> <C> <C> <C> <C> <C>
1 A300-600R A0555 $50,000 $250,000 $270,000 $900,000 $320,000 $1,150,000
2 A310-300 A0409 ($166,667) $300,000 ($1,041,667) $1,250,000 ($1,208,333) $1,550,000
3 A310-300 A0410 66,667 300,000 (972,222) 1,250,000 (905,556) 1,550,000
4 A310-300 A0437 133,333 300,000 1,041,667 1,250,000 1,175,000 1,550,000
5 A320-200 D0279 40,000 200,000 (116,667) 500,000 (76,667) 700,000
6 A320-200 D0393 40,000 200,000 150,000 500,000 190,000 700,000
7 A320-200 D0414 173,333 200,000 200,000 500,000 373,333 700,000
8 A321-100 G0597 (93,333) 200,000 (200,000) 500,000 (293,333) 700,000
9 B737-300 25161 10,000 150,000 423,536 500,000 433,536 650,000
10 B737-300 27635 (125,000) 150,000 (374,387) 500,000 (499,387) 650,000
11 B737-300 24299 (41,461) 150,000 3,220 500,000 (38,241) 650,000
12 B737-300 26295 (146,928) 150,000 (196,573) 500,000 (343,501) 650,000
13 B737-300F 23811 (17,268) 150,000 132,792 500,000 115,524 650,000
14 B737-300QC 23788 0 150,000 (183,333) 500,000 (183,333) 650,000
15 B737-400 24234 (131,250) 175,000 425,000 600,000 293,750 775,000
16 B737-400 25104 58,333 175,000 (440,000) 600,000 (381,667) 775,000
17 B737-400 25371 74,178 175,000 (418,808) 600,000 (344,630) 775,000
18 B737-500 25165 116,667 150,000 (343,750) 500,000 (227,083) 650,000
19 B747-300 24106 70,000 350,000 (506,250) 1,800,000 (436,250) 2,150,000
20 B757-200ER 24367 (30,556) 275,000 (447,222) 700,000 (477,778) 975,000
21 B757-200ER 24260 122,222 275,000 602,778 700,000 725,000 975,000
22 B757-200ER 26272 213,889 275,000 (661,111) 700,000 (447,222) 975,000
23 B767-200ER 23807 (133,333) 200,000 300,000 900,000 166,667 1,100,000
24 B767-300ER 24798 155,556 200,000 (525,000) 900,000 (369,444) 1,100,000
25 B767-300ER 26256 (66,667) 200,000 0 900,000 (66,667) 1,100,000
26 B767-300ER 26260 200,000 200,000 (572,727) 900,000 (372,727) 1,100,000
27 F.70 11564 (7,676) 125,000 (110,951) 250,000 (118,627) 375,000
28 F.70 11565 (10,489) 125,000 (108,993) 250,000 (119,481) 375,000
29 F.70 11569 (12,871) 125,000 (109,372) 250,000 (122,243) 375,000
30 MD-82 49825 25,000 150,000 385,662 600,000 410,662 750,000
31 MD-83 49822 35,465 150,000 (333,330) 600,000 (297,865) 750,000
32 MD-83 49824 ($108,677) $150,000 $162,512 $600,000 $53,835 $750,000
</TABLE>
5
<PAGE> 6
VI. Engine & Landing Gear Maintenance Condition Adjustments
Section V presents the adjustments related to the Engines and the Landing Gears.
Since there were no information related to the Engine Life Limited Parts (LLPs)
and the Landing Gears, they were all assumed to be half-life and no positive or
negative adjustments were made.
<TABLE>
<CAPTION>
ENGINE SHOP VISIT ENGINE LLP LANDING GEAR T - O - T - A - L - S
AIRCRAFT TYPE S/N POTENTIAL ACTUAL POTENTIALACTUAL POTENTIAL ACTUAL POTENTIAL ACTUAL
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 A300-600R A0555 $1,500,000 ($1,500,000) $1,200,000 $0 $200,000 $0 $2,900,000 ($1,500,000)
2 A310-300 A0409 $1,200,000 $187,192 $1,000,000 0 $200,000 0 $2,400,000 $187,192
3 A310-300 A0410 $1,200,000 $459,338 $1,000,000 0 $200,000 0 $2,400,000 $459,338
4 A310-300 A0437 $1,200,000 ($1,200,000) $1,000,000 0 $200,000 0 $2,400,000 ($1,200,000)
5 A320-200 D0279 $750,000 $184,649 $1,250,000 0 $135,000 0 $2,135,000 $184,649
6 A320-200 D0393 $750,000 $37,924 $1,250,000 0 $135,000 0 $2,135,000 $37,924
7 A320-200 D0414 $750,000 ($10,146) $1,250,000 0 $135,000 0 $2,135,000 ($10,146)
8 A321-100 G0597 $750,000 ($750,000) $1,250,000 0 $135,000 0 $2,135,000 ($750,000)
9 B737-300 25161 $800,000 $324,614 $1,000,000 0 $120,000 0 $1,920,000 $324,614
10 B737-300 27635 $800,000 ($800,000) $1,000,000 0 $120,000 0 $1,920,000 ($800,000)
11 B737-300 24299 $800,000 $590,470 $1,000,000 0 $120,000 0 $1,920,000 $590,470
12 B737-300 26295 $800,000 $0 $1,000,000 0 $120,000 0 $1,920,000 $0
13 B737-300F 23811 $800,000 ($525,793) $1,000,000 0 $120,000 0 $1,920,000 ($525,793)
14 B737-300QC 23788 $800,000 $0 $1,000,000 0 $120,000 0 $1,920,000 $0
15 B737-400 24234 $800,000 $256,109 $1,000,000 0 $135,000 0 $1,935,000 $256,109
16 B737-400 25104 $800,000 $138,032 $1,000,000 0 $135,000 0 $1,935,000 $138,032
17 B737-400 25371 $800,000 ($653,824) $1,000,000 0 $135,000 0 $1,935,000 ($653,824)
18 B737-500 25165 $800,000 ($800,000) $1,000,000 0 $120,000 0 $1,920,000 ($800,000)
19 B747-300 24106 $2,500,000 $0 $2,500,000 0 $325,000 0 $5,325,000 $0
20 B757-200ER 24367 $1,100,000 ($1,100,000) $1,400,000 0 $175,000 0 $2,675,000 ($1,100,000)
21 B757-200ER 24260 $1,100,000 $18,572 $1,400,000 0 $175,000 0 $2,675,000 $18,572
22 B757-200ER 26272 $1,100,000 ($915,009) $1,400,000 0 $175,000 0 $2,675,000 ($915,009)
23 B767-200ER 23807 $1,200,000 ($1,200,000) $1,200,000 0 $200,000 0 $2,600,000 ($1,200,000)
24 B767-300ER 24798 $1,200,000 $264,724 $1,200,000 0 $200,000 0 $2,600,000 $264,724
25 B767-300ER 26256 $1,200,000 ($449,020) $1,200,000 0 $200,000 0 $2,600,000 ($449,020)
26 B767-300ER 26260 $1,200,000 ($1,200,000) $1,200,000 0 $200,000 0 $2,600,000 ($1,200,000)
27 F.70 11564 $400,000 $0 $400,000 0 $95,000 0 $895,000 $0
28 F.70 11565 $400,000 $0 $400,000 0 $95,000 0 $895,000 $0
29 F.70 11569 $400,000 $0 $400,000 0 $95,000 0 $895,000 $0
30 MD-82 49825 $650,000 ($300,256) $725,000 0 $113,000 0 $1,488,000 ($300,256)
31 MD-83 49822 $650,000 $288,927 $725,000 0 $113,000 0 $1,488,000 $288,927
32 MD-83 49824 $650,000 $399,025 $725,000 $0 $113,000 $0 $1,488,000 $399,025
</TABLE>
6
<PAGE> 7
VII. INTRODUCTION AND EXECUTIVE SUMMARY
This report has been prepared for the exclusive use of Morgan Stanley & Co
International Limited and shall not be provided to other parties by MBA without
the express written consent of Morgan Stanley & Co International Limited.
MBA certifies that this report has been independently prepared and that it fully
and accurately reflects MBA's opinion as to the Current Market Value. MBA
further certifies that it does not have, and does not expect to have, any
financial or other interest in the subject or similar aircraft and engine.
This report represents the opinion of MBA as to the Current Market Value of the
subject aircraft and engine and is intended to be advisory only in nature.
Therefore, MBA assumes no responsibility or legal liability for any actions
taken, or not taken, by Morgan Stanley & Co. International Limited or any other
party with regard to the subject aircraft. By accepting this report, all parties
agree that MBA shall bear no such responsibility or legal liability.
PREPARED BY:
/s/ Stephen P. Rehrmann
STEPHEN P. REHRMANN
VICE PRESIDENT
REVIEWED BY:
/s/ Robert F. Agnew
FEBRUARY 25, 2000 ROBERT F. AGNEW
PRESIDENT
7
