Item 1
AerCo Limited
Cash Analysis of Financial Condition and Results of Operations
Two Month Period from
July 17, 2000 to September 15, 2000
I Background and General Information
The financial information contained in this report was not prepared in
accordance with generally accepted accounting principles of the United States
or the United Kingdom but was prepared in accordance with the Company's
obligations under the Indenture. This report should be read in conjunction with
the Company's most recent financial information prepared in accordance with
generally accepted accounting principles of the United Kingdom, including a
reconciliation of net loss, shareholders' deficit and aircraft assets to
estimated amounts under generally accepted principles of the United States. For
this you should refer to the Company's Form 20-F which is on file at the
Securities and Exchange Commission.
On July 15, 1998, AerCo Limited ("AerCo" or "the Company"), a Jersey
limited liability company, issued $800 million of notes in four subclasses,
subclass A-1, subclass A-2, subclass B-1 and subclass C-1 (the "1998 notes").
The Company also issued two additional subclasses of notes, the subclass D-1
notes and the subclass E-1 notes which were purchased by AerFi Group plc
("AerFi Group"). The Company used the proceeds from the issuance of the 1998
notes, the subclass D-1 notes and the subclass E-1 notes (i) to acquire the
issued and outstanding capital stock of Aircraft Lease Portfolio Securitization
94-1 Limited, a Jersey limited liability company ("ALPS 94-1") (and thereby to
indirectly acquire ALPS 94-1's portfolio of 25 aircraft and the related
leases), (ii) to finance the repayment of all of ALPS 94-1's existing financial
indebtedness and (iii) to finance the acquisition of 10 aircraft and the
related leases from AerFi Group and its subsidiaries ("AerFi") through the
acquisition of 100% of the capital stock of three wholly owned subsidiaries of
AerFi Group.
On May 14, 1999, AerCo consummated an exchange offer under which the 1998
notes were exchanged for notes which are registered with the Securities and
Exchange Commission. The registration statement filed by AerCo in connection
with the exchange offer went effective on April 15, 1999.
On July 17, 2000, AerCo issued a further $960 million of notes in four
subclasses, subclass A-3, subclass A-4, subclass B-2 and subclass C-2 (the
"2000 notes"). The Company also issued two additional subclasses of notes, the
D-2 notes and E-2 notes which were purchased by AerFi Group. The Company used
the proceeds from the issuance of the 2000 notes, the subclass D-2 notes and
subclass E-2 notes (i) to refinance the subclass A-1 notes, (ii) to refinance
the subclass D-1 notes and (iii) to acquire 30 additional aircraft (the
"additional aircraft") with an appraised value of $724.1 million, and
associated leases through the acquisition of certain aircraft owning
subsidiaries, and one associated conduit leasing company, of AerFi. Certain of
the additional aircraft transferred to AerCo on July 17, 2000. Consequently,
the funds allocable to the remaining undelivered aircraft were deposited into
the aircraft purchase account and are being used to purchase the remaining
additional aircraft as they are ready for delivery. As of October 16, 2000, 20
of the additional aircraft with an appraised value of $467.3 million had been
acquired by AerCo. Although not all of the additional aircraft were acquired by
AerCo on July 17, 2000, the aircraft purchase agreement has been structured to
provide for net payments from AerFi to AerCo designed to put AerCo in
substantially the position it would have been if all 30 additional aircraft had
been acquired by AerCo on July 17, 2000.
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AerCo has undertaken to complete by April 12, 2001 either an exchange
offer for the 2000 notes under an effective registration statement or to
register the resale of the 2000 notes under the Securities Act. If AerCo does
not fulfil these obligations on or prior to April 12, 2001, then an additional
incremental interest amount will accrue on each subclass of the 2000 notes, at
an annual rate of 0.50%, until the exchange offer is consummated or a shelf
registration statement is declared effective. The 1998 notes, the notes issued
as a result of the exchange offer in 1999 and together with the 2000 notes are
collectively referred to below as the "notes".
Applying the declining value assumptions contained in the Offering
Memorandum issued by AerCo on July 12, 2000 to the appraisal dated March 1,
1998 of the aircraft acquired by AerCo on July 15, 1998, adjusting for aircraft
sales, and to the April 30, 2000 appraisal of the additional aircraft, the
total appraised value of AerCo's portfolio was assumed to be $1,552.6 million
at September 15, 2000. The adjusted appraised value of AerCo's portfolio at
September 15, 2000 is $1,522.4 million.
Assuming AerCo takes delivery of all of the additional aircraft, AerCo
will own (directly and indirectly) 63 aircraft, which are on operating leases,
having sold one Fokker 100 aircraft in January 1999 and a second Fokker 100
aircraft in July 1999. AerCo may also acquire further aircraft and any related
existing leases or similar arrangements from various sellers, which may include
AerFi. Additional aircraft may include among other things, aircraft, engines
and entities with an ownership or leasehold interest in aircraft or engines.
AerCo will finance acquisitions of further aircraft with external funds,
including issuing further notes. Any acquisition of further aircraft will be
subject to certain confirmations from the Rating Agencies and compliance with
certain operating covenants of AerCo set out in the Indenture dated as of July
15, 1998, as amended on July 17, 2000, by and between AerCo and Bankers Trust
Company, as trustee of the notes (the "Indenture").
As of September 15, 2000, the 63 aircraft were on lease in 21 countries as
shown on pages 13 and 14 attached.
The discussion and analysis which follows is based on the results of AerCo
Limited and its subsidiaries as a single entity (collectively the "AerCo
Group").
AerCo Group's cash receipts and disbursements are determined, in part, by
the overall economic condition of the aircraft operating leasing market. This,
in turn, is affected by various cyclical factors including interest rates, the
availability of credit, fuel costs and general and regional economic conditions
affecting airline operations and trading; aircraft manufacturer production
levels; passenger demand; retirement and obsolescence of aircraft models;
manufacturers exiting or entering the market or ceasing to produce aircraft
types; re-introduction into service of aircraft previously in storage;
governmental regulation; air traffic control infrastructure constraints;
capital market risks and general risk of lessee default.
AerCo 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 the aircraft types. 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 AerCo Group, may also impact AerCo Group's ability to compete with
other lessors.
For the purposes of this report, the "Two Month Period", referred to on
page 10 "Comparison of Actual Cash versus Base Case cashflows for the Two Month
Period", comprises information from the monthly cash reports dated August 15,
2000 and September 15, 2000. The financial data in these reports includes cash
receipts from July 12, 2000 (first day of the Collection Period for the August
2000 Report) up to September 11, 2000 (last day of the Collection Period for
the September 2000 Report).
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II Comparison of Actual Cash Flows versus the 2000 Base Case for the Two
Month Period
The July 12, 2000 Offering Memorandum (the "Offering Memorandum") issued
by AerCo contained assumptions in respect of AerCo Group's future cash flows
and expenses (the "2000 Base Case"). For the purpose of this report, "Net Cash
Collections" is defined as Total Cash Collections less Total Cash Expenses,
Movements in the Expense Account, Interest Payments and Swap Payments. A
discussion of the Total Cash Collections, Cash Expenses, Interest Payments and
Principal Payments is given below and should be read in conjunction with the
analysis on page 10.
CASH COLLECTIONS
"Total Cash Collections" include Net Lease Rentals (Contracted Lease
Rentals less Net Stress-Related Costs), Movement in Current Arrears Balance,
Interest Earned, Aircraft Sales and Net Maintenance. In the Two Month Period,
AerCo generated approximately $32.2 million in Total Cash Collections, $2.5
million greater than the 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 on page 10).
[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 Two Month Period, there was no loss of revenue
attributed to Renegotiated Leases.
[3] Rental Resets Including Interest Rate Adjustments for Floating Rate Leases
Rental Resets is a measure of the loss in rental revenue when new lease
rates are lower than those assumed in the Base Case, including lease rate
adjustments for changes in interest rates on floating rate leases. AerCo
currently has 50 fixed rate leases and 13 floating rate leases. There were no
rental resets during the Two Month Period.
[4] Aircraft Sales
Aircraft Sales is a measure of the loss in rental revenue as a result of
aircraft sales. In the Two Month Period, there was no lost revenue attributed
to Aircraft Sales.
[5] Contracted Lease Rentals
Contracted Lease Rentals represents the current contracted lease rental
rollout which equates to the 2000 Base Case Lease Rentals less adjustments for
Renegotiated Leases, Rental Resets and Aircraft Sales. For the Two Month
Period, Contracted Lease Rentals were $30.3 million.
[6] 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 Two Month Period was
$3.3 million versus $5.5 million at the end of the Two Month Period, which is a
negative movement of $2.2 million.
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Analysis of Current Arrears Balances
% of Current Current Movement
Appraised Arrears Arrears In Current
Aircraft Type Country Value* 7/15/00 9/15/00 Arrears
------------- ------- ------ ------- ------- -------
$M $M $M
1 B747-200........ North America 0.5 3.0 3.3 (0.3)
2 A320-200........ Canada 1.9 - 0.3 (0.3)
3 B767-300ER...... Canada 3.7 - 0.4 (0.4)
4 B757-200........ Colombia 2.5 - 1.0 (1.0)
5 B737-400........ Italy 1.7 0.3 0.3 -
6 A320-200........ Italy 1.5 - 0.2 (0.2)
---- --- --- ---
Total..............................13.2 3.3 5.5 2.2
==== === === ===
--------------
* Appraised Value as of April 30, 2000
At July 17, 2000, two lessees were in arrears, owing $3.3 million, against
which, AerCo Group held security deposits of $1.0 million.
As at September 15, 2000, 6 lessees were in arrears, owing $5.4 million,
against which AerCo Group held security deposits of $1.0 million. On February
29, 2000, one of the lessees (Tower Air) filed for Chapter 11 bankruptcy
protection in the U.S. in its attempts to restructure its operations. The
Offering Memorandum contains an assumption that no further lease revenue is
earned on the aircraft leased to Tower Air. See Section IV - "Recent
Developments".
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 Base Case assumed Net Stress-Related Costs equal to 6% of the Base
Case Lease Rentals. For the Two Month Period, Net Stress-Related Costs led to a
cash inflow of $0.3 million compared to $1.2 million outflow assumed in the
Base Case, a positive variance of $1.5 million that is due to the following six
factors described in items [8] to [13] below.
[8] Bad Debts and [10] 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 drawdown of
security deposits held and amounts subsequently recovered from the defaulted
lessee. There were no bad debts or security deposit drawdowns during the Two
Month Period.
[9] Deferred Arrears Balance
Deferred Arrears Balance refers to current arrears that have been
capitalized and restructured into a deferred balance. In the Two Month Period,
AerCo received payments totalling $0.3 million from two lessees in accordance
with schedules agreed with those lessees. One other lessee failed to make
payments on its deferred balance amounting to $0.4 million.
[11] Aircraft on Ground ("AOG")
AOG is defined as the Base Case lease rental lost when an aircraft is
off-lease and non-revenue earning. AerCo has not experienced any off lease
aircraft during the Two Month Period.
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[12] 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.
There were no cashflows from Other Leasing Income during the Two Month Period.
[13] Repossession Costs
Repossession Costs cover legal and aircraft technical costs incurred as a
result of repossessing an aircraft. In the Two Month Period, AerCo has
experienced no Repossession Costs.
[15] Net Lease Rentals
Net Lease Rentals is Contracted Lease Rentals less any movement in Current
Arrears Balance and Net Stress-Related Costs. In the Two Month Period, Net
Lease Rentals amounted to $29.0 million, $0.2 million less than assumed in the
Base Case. The variance was attributable to the combined effect of the factors
outlined in items [2], [3] and [4] and in items [6] to [13] above.
[16] 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 $65 million plus the security deposit
amount, in addition to 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 month. In the Two Month Period, interest earned amounted
to $0.7 million, $0.1 million more than assumed in the Base Case.
[17] Aircraft Sales
There were no aircraft sales during the Two Month Period.
[18] Net Maintenance
Net Maintenance refers to maintenance reserve revenue received less any
maintenance reimbursements paid to lessees. In the Two Month Period, actual
maintenance reserve revenue received amounted to $3.2 million and maintenance
expenditure amounted to $0.7 million, generating positive net maintenance
revenue of $2.5 million. The 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 Two Month Period, Total
Cash Expenses were $3.0 million compared with an assumed amount of $2.1
million. A number of offsetting factors discussed below have given rise to this
variance of $0.9 million.
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 Two Month
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Period, Aircraft Operating Expenses amounted to $0.1 million compared to $0.6
million included in the Base Case, which assumed these costs to be 2% of the
Base Case Lease Rentals.
[21] 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 Two Month Period
these costs amounted to $0.1 million.
SG&A Expenses relate to fees paid to the Aircraft Servicer and to other
service providers.
[23] Aircraft Servicer Fees
The Aircraft Servicer Fees are defined as amounts paid to the Aircraft
Servicer. AerFi replaced Babcock & Brown as Servicer on July 17, 2000. Babcock
& Brown received $1.8 million in the Two Month Period which was due to them in
accordance with the terms of their Servicing Agreement. In the Two Month
Period, the total Aircraft Servicer's fees paid were $0.4 million, which is in
line with the assumed amount in the Base Case.
Aircraft Servicer Fees consist of:
$mm
---
Retainer Fee...................................................... 0.2
Rent Collected Fee................................................ 0.2
Previous Servicer Fees............................................ 1.8
---
Total Servicer Fee................................................ 2.2
===
The Retainer Fee is a fixed amount per month per aircraft and changes only
as aircraft are acquired or sold.
[25] Other Servicer Fees
Other Servicer Fees relate to fees and expenses paid to other service
providers including the Administrative Agent, financial advisors, legal
advisors, accountants and the directors. In the Two Month Period, Other
Servicer Fees amounted to $0.5 million, $0.3 million less than the assumed fees
of $0.8 million in the Base Case.
[31] Interest Payments and [32] Swap Payments
In the Two Month Period, interest payments to Noteholders amounted to
$18.2 million. This is $0.2 million lower than the Base Case, which assumed
Interest Payments for the Two Month Period to be $18.4 million.
[34] Principal Payments
In the Two Month Period, total principal payments to Noteholders amounted
to $14.3 million, $4.6 million more than assumed in the Base Case, reflecting
the application of the positive Net Cash Collections variance of $4.6 million.
III Other Financial Data
Weakly capitalized airlines are more likely than well capitalized airlines
to seek operating leases. Therefore, many of the lessees are in a relative weak
financial position and several of them have faced and continue to face severe
economic difficulties.
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As of September 11, 2000, amounts outstanding for more than 30 days for
rental payments due under the leases equalled $4.1 million for two lessees who
had a total of two aircraft on lease representing 3.1% of AerCo's portfolio by
appraised value at April 30, 2000. The outstanding amounts are net of agreed
deferrals or other restructuring and default interest.
As of September 11, 2000, Tower Air, a North American lessee, representing
0.5% of the portfolio by appraised value at April 30, 2000, owed $3.6 million
in rent, $3.3 million of which was in arrears for more than 30 days. Tower Air
has filed for Chapter 11 bankruptcy protection. (See "North American
Concentration" below).
PAL, an Asian lessee of two B737-300 aircraft representing 2.6% of the
portfolio by appraised value at April 30, 2000 was adversely affected by the
Asian economic crisis such that it sought bankruptcy protection in 1998. As
part of PAL's rehabilitation plan, the Aircraft Servicer has agreed with PAL to
a schedule covering the payment of arrearages over the period to December 31,
2003 and the extension of leases. At September 11, 2000, these arrearages
amounted to $2.0 million. All amounts have been paid in accordance with the
scheduled terms as of September 11, 2000.
As of September 11, 2000, a Colombian lessee representing 2.5% of the
portfolio by appraised value at April 30, 2000, owed $1.0 million in rent, $0.5
million of which was in arrears for more than 30 days. In addition, the lessee
has a deferred amount of $0.7 million that was previously restructured. The
Servicer has agreed not to exercise its remedies in respect of events of
default currently existing under the lease in order to permit the Colombian
lessee to have a stable business environment in which to develop, negotiate and
commence implementing a long-term business plan. During this period, AerCo will
receive approximately 61% of amounts due under the lease in cash, with the
remainder provided by way of secured and unsecured notes issued by the
Colombian lessee which have a maturity date of January 31, 2001. The Colombian
lessee's other aircraft lessors and major creditors have agreed similar
forbearance agreements. There can be no guarantee that the Colombian lessee
will be successful in preparing a realistic long-term business plan by January
2001. In that event, AerCo will need to consider all of its alternatives,
including, potentially, seeking the return of the aircraft.
AerCo expects to respond to the needs of lessees in financial difficulty
by restructuring the applicable leases or agreeing to rent deferrals. The
restructurings will typically involve the rescheduling of rental payments for a
specified period. In addition, certain restructurings may involve the voluntary
early termination of a lease, the replacement of aircraft with less expensive
aircraft and the arrangement of sub-leases from the lessee to another aircraft
operator. In certain cases, it may be necessary to repossess aircraft from
defaulting lessees and re-lease the aircraft to other lessees. The early
termination of leases may lead AerCo to incur swap breakage costs under its
agreements with swap providers which could be substantial.
Certain lessees have experienced periodic difficulties in meeting their
maintenance obligations under the leases. Such difficulties are caused by the
failure of the lessee to have in place a well established maintenance program,
adverse climate and other environmental conditions in the locations where the
aircraft are operated or financial and labor difficulties experienced by the
relevant lessee.
IV Recent Developments
Asia Pacific Concentration. At September 11, 2000, 17.6% of the aircraft
by appraised value at April 30, 2000 were leased by operators in "emerging"
markets in the Asia Pacific region, including China, the Philippines, South
Korea, Taiwan and India. One lessee, Asiana, leased 4.7% of the aircraft by
appraised value at April 30, 2000.
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Trading conditions in Asia's civil aviation industry have been adversely
affected by the severe economic and financial difficulties recently in the
region. The economies of the region have experienced acute difficulties
including many business failures, significant depreciation of local currencies
against the dollar, downgrading of sovereign and corporate credit ratings and
internationally organized financial stability measures. One Asian lessee, PAL,
which leases 2.6% of the aircraft by appraised value at April 30, 2000 has been
adversely affected by the Asian economic crisis such that it sought bankruptcy
protection in 1998. As part of its rehabilitation plan, certain of PAL's
outstanding lease obligations were re-scheduled in 1999. Several other airlines
in the region scheduled their aircraft purchase obligations, eliminated certain
routes and reduced employees. 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.
Latin American Concentration. At September 11, 2000, 18.3% of the aircraft
by appraised value at April 30, 2000 were leased by operators in "emerging
markets" in Latin America, principally Brazil, Chile and Colombia. The
financial prospects for lessees in Latin America depend amongst other things 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 America.
Most significantly, in 1999, Brazil experienced significant downturns in
its economy and financial markets, with large decreases in financial asset
prices and dramatic decreases in the value of its currency. One of the lessees,
TAM, representing 4.2% of the aircraft by appraised value at April 30, 2000,
operates five of the aircraft in Brazil. Continued weakness in the value of the
Brazilian real, as well as any further general deterioration in the Brazilian
economy, means that this lessee may be unable to generate sufficient revenues
in Brazilian currency to pay the U.S. dollar-denominated rental payments under
the leases. More importantly, financial and economic problems in Brazil could
spread throughout Latin America and other "emerging" economies, having a
similar effect on many of AerCo Group's other lessees.
Colombia has recently suffered as a result of the deterioration in the
value of the Colombian Peso and the resulting negative impact on the Colombian
economy. AerCo leases one aircraft to a Colombian lessee, representing 2.5% of
the portfolio by appraised value at April 30, 2000. Continued weakness in the
value of the Colombian Peso, as well as general deterioration in the Colombian
economy, will mean that this lessee may be unable to generate sufficient
revenues in the Colombian currency to pay the U.S. dollar denominated rental
repayments under the lease. As of September 11, 2000, this Colombian lessee
owed $1.9 million, $1.3 million of which was in arrears for more than 30 days.
The Servicer has agreed not to exercise its remedies in respect of events of
default currently existing under the lease in order to permit the Colombian
lessee to have a stable business environment in which to develop, negotiate and
commence implementing a long-term business plan. During this period, AerCo will
receive approximately 61% of amounts due under the lease in cash with the
remainder provided by way of secured and unsecured notes issued by the
Colombian lessee which have a maturity date of January 31, 2001. The Colombian
lessee's other aircraft lessors and major creditors have agreed similar
forbearance arrangements. There can be no guarantee that the Colombian lessee
will be successful in preparing a realistic long-term business plan by January
2001. In that event, AerCo will need to consider all of its alternatives
including, potentially, seeking the return of the aircraft.
European Concentration. At September 11, 2000, 53.7% of the aircraft by
appraised value at April 30, 2000 were leased by operators based in Europe. Of
this amount, lessees of 42.8% of the aircraft were based in "developed"
European markets, principally the United Kingdom and Spain. Lessees of the
remaining 10.9% of the aircraft were based in "emerging"
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European markets, principally Turkey. As of September 11, 2000, 20.9% of the
aircraft by appraised value at April 30, 2000 were leased to lessees in the
United Kingdom.
The commercial aviation industry in Europe is very sensitive to general
economic conditions. Since air travel is largely discretionary, the industry
tends to suffer severe financial difficulties during slow economic periods. As
a result, the financial prospects for European lessees will depend on the level
of economic activity in Europe and in the specific countries where they
operate. A recession or other worsening of economic conditions in any European
country may adversely affect the European lessees' ability to meet their
financial and other obligations. Most European currencies in which European
airlines primarily receive their revenue have fallen in value in the last
number of months when measured against the United States dollar, adversely
affecting the ability of those airlines to meet dollar denominated lease
rental, fuel and other operating costs. Competitive pressures from continuing
deregulation of the airline industry by the EU may also adversely affect
European lessees' operations and their ability to meet their obligations under
the leases.
At September 11, 2000, 7.7% of the aircraft by appraised value at April
30, 2000 were on lease to Turkish lessees. Turkey was hit by a series of severe
earthquakes in 1999 and damage caused by the earthquakes and the consequent
fall off in tourist traffic has adversely affected the ability of these
airlines to operate and meet their financial obligations under the leases. In
addition, the fall in value of the Deutsche Mark, the principal currency in
which Turkish airlines receive their revenues, against the U.S. dollar, may
affect the ability of these airlines to pay US dollar denominated costs
including lease rentals.
The recent sharp increase in jet fuel prices, together with the weakness of the
Euro against the U.S. dollar has led to significant increases in operating
costs for many airlines based in the Euro-zone. This may adversely impact the
ability of such airlines to perform their lease obligations to AerCo Group in
the future.
North American Concentration. At September 11, 2000, 18.3% of the aircraft by
appraised value at April 30, 2000 were leased by operators in North America. As
in Europe, the commercial aviation industry in North America is highly
sensitive to general economic conditions. Since airline travel is largely
discretionary, the industry has suffered severe financial difficulties during
economic downturns. Over the last several years, nearly half of the major North
American passenger airlines have filed for Chapter 11 bankruptcy protection and
several major U.S. airlines have ceased operations.
Tower Air, the lessee of one Boeing 747-200 aircraft, which represents 0.5% of
the aircraft by appraised value at April 30, 2000, has filed for Chapter 11
bankruptcy protection. AerCo has petitioned the relevant U.S. bankruptcy court
to terminate the lease. When this aircraft is returned to AerCo, AerCo does not
believe that it has any immediate placement opportunities for lease of this
aircraft. The opportunities for lease or sale of this aircraft type are
currently extremely limited. In addition, the technical costs required to
ensure that it is in a suitable condition for re-leasing will be significant.
Accordingly, AerCo is examining all possibilities in respect of this aircraft,
including a worst case scenario which would involve realizing the scrap value.
As a consequence, this aircraft has been appraised by reference to its scrap
value.
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Comparison of Actual Cash Flows Versus Base Case Cash Flows for
the Two Month Period
<TABLE>
Actual Base Case Variance Actual Base Case Variance
------ --------- -------- ------ --------- --------
(All amounts in US dollars % of 2000 Lease Rentals
unless otherwise stated) under the Base Case
<S> <C> <C> <C> <C> <C> <C>
CASH COLLECTIONS
[1] Lease Rentals 30.88 30.27 0.61 101.0% 100.0% 1.0%
[2] - Renegotiated Leases 0.00 0.00 0.00 0.0% 0.0% 0.0%
[3] - Rental Resets 0.00 0.00 0.00 0.00% 0.0% 0.0%
[4] - Aircraft Sales 0.00 0.00 0.00 0.0% 0.0% 0.0%
----- ----- ---- ----- ----- ---
[5] Sum [1]...[5] Contracted Lease Rentals 30.88 30.27 0.61 101.0% 100.0% 1.0%
[6] Movement in Current Arrears (2.20) 0.00 (2.20) (6.3%) 0.0% (6.3%)
Balance
[7] less Net Stress Related Costs
[8] - Bad Debts 0.00 (0.31) 0.31 0.0% (1.0%) 1.0%
[9] - Deferred Arrears Balance 0.30 0.69 (0.39) 1.0% 2.3% (1.3%)
[10] - Security Deposits drawn down 0.00 0.00 0.00 0.0% 0.0% 0.0%
[11] - AOG 0.00 (1.30) 1.30 0.0% (4.3%) 4.3%
[12] - Other Leasing Income 0.00 0.00 0.00 0.0% 0.0% 0.0%
[13] - Repossession 0.00 (0.25) 0.25 0.0% (0.8%) 0.8%
----- ----- ---- ----- ------ ----
[14] Sum [8]...[13] Sub-total 0.30 (1.17) 1.47 1.0% (3.9%) 4.9%
[15] [5] + [6] + [14] Net Lease Rental 28.96 29.10 (0.15) 95.6% 96.1% (0.5%)
[16] Interest Earned 0.71 0.61 0.10 2.3% 2.0% 0.3%
[17] Aircraft Sales 0.00 0.00 0.00 0.0% 0.0% 0.0%
[18] Net Maintenance 2.53 0.00 2.53 8.3% 0.0% 8.3%
----- ----- ---- ----- ----- ----
[19] Sum [15]...[18] Total Cash Collections 32.19 29.71 2.48 105.3% 98.1% 7.1%
===== ===== ==== ===== ===== ====
CASH EXPENSES
Aircraft Operating Expenses
[20] - Insurance 0.00 0.00 0.00 0.0% 0.0% 0.0%
[21] - Re-leasing and other (0.09) (0.62) 0.53 (0.3%) (2.0%) 1.7%
----- ----- ---- ----- ----- ----
[22] [20] + [21] Sub-total (0.09) (0.62) 0.53 (0.3%) (2.0%) 1.7%
SG&A Expenses
[23] Aircraft Servicer Fees
- Retainer Fee (0.23) (0.26) 0.03 (0.8%) (0.9%) 0.1%
- Rent Collected Fee (0.26) (0.31) 0.06 (0.8%) (1.0%) 0.2%
- Previous Servicer (1.87) 0.00 (1.87) (6.2%) 0.0% (6.2%)
- Sales Fee 0.00 0.00 0.00 0.0% 0.0% 0.0%
----- ----- ---- ----- ----- ----
[24] [23] Sub-total (2.36) (0.58) (1.78) (7.8%) (1.9%) (5.9%)
[25] Other Servicer Fees (0.52) (0.89) 0.37 (1.7%) (2.9%) 1.2%
----- ----- ---- ----- ----- ----
[26] [24] + [25] Sub-total (2.87) (1.47) (1.41) (9.5%) (4.8%) (4.6%)
===== ===== ==== ===== ===== ====
[27] [26] + [22] Total Cash Expenses (2.97) (2.08) (0.88) (9.8%) (6.9%) (2.9%)
===== ===== ==== ===== ===== ====
NET CASH COLLECTIONS
[28] [19] Total Cash Collections 32.19 29.71 2.48 106.3% 98.1% 8.2%
[29] [26] Total Cash Expenses (2.97) (2.08) (0.88) (9.8%) (6.9%) (2.9%)
[30] Movement in Expense Account 2.75 0.00 2.75 9.1% 0.0% 9.1%
[31] Interest Payments (18.21) (18.49) 0.27 (60.2%) (61.1%) 0.9%
[32] Swap Payments 0.50 0.49 0.01 1.6% 1.6% 0.0%
----- ----- ---- ----- ----- ----
[33] Sum [28]....[32] TOTAL 14.27 9.63 4.64 47.1% 31.8% 15.3%
===== ===== ==== ===== ===== ====
[34] PRINCIPAL PAYMENTS
Subclass A1 14.18 9.56 4.62 46.8% 31.6% 15.3%
Subclass B 0.00 0.00 0.00 0.0% 0.0% 0.0%
Subclass C 0.08 0.07 0.02 0.3% 0.2% 0.1%
Subclass D 0.00 0.00 0.00 0.0% 0.0% 0.0%
----- ----- ----- ----- ----- -----
Total 14.27 9.63 4.64 47.1% 31.8% 15.3%
===== ===== ===== ===== ===== =====
</TABLE>
10
<PAGE>
<TABLE>
Coverage Ratios Adjusted
Closing Actual Base Case
<S> <C> <C> <C>
Net Cash Collections 14.3 9.6
Add Back Interest and Swap Payments 17.7 18.0
Add Back Permitted Accruals
a Net Cash Collections (excl. interest and swap 32.0 27.6
payments)
b Swaps 0.8 0.5
c Class A Interest 11.7 11.9
d Class A Minimum - -
e Class B Interest 1.9 2.0
f Class B Minimum - -
g Class C Interest 2.3 2.3
h Class C Minimum - -
i Class D Interest 1.4 1.4
j Class D Minimum - -
k Class A Scheduled - -
l Class B Scheduled - -
m Class C Scheduled 0.1 0.1
n Class D Scheduled - -
o Permitted Aircraft Modifications - -
p Step-up Interest - -
q Class A Supplemental 14.2 9.6
r Class E Primary Interest 0.9 0.9
--- ---
Total 32.0 27.6
---- ----
(i) Interest Coverage Ratio
Class A 2.85 2.42 = a/(b+c)
Class B 2.43 2.06 = a/(b+c+d+e)
Class C 2.07 1.76 = a/(b+c+d+e+f+g)
Class D 1.90 1.61 = a/(b+c+d+e+f+g+h+i)
(ii) Debt Coverage Ratio
Class A 1.90 1.61 = a/(b+c+d+e+f+g+h+I+j+k)
Class B 1.90 1.61 = a/(b+c+d+e+f+g+h+I+j+k+l)
Class C 1.89 1.61 = a/(b+c+d+e+f+g+h+I+j+k+l+m)
Class D 1.89 1.61 = a/(b+c+d+e+f+g+h+I+j+k+l+m+n)
Loan to Value Ratios (in US Dollars)
<S> <C> <C> <C>
(iii) Assumed Portfolio Value 1,566,730,000 1,522,650,000
(iv) Adjusted Portfolio Value 1,522,415,496
Liquidity Reserve Amount
Of which - Cash 87,400,000 81,208,000 87,400,000
- Accrued Expenses 7,818,460
------------- ------------- -------------
Subtotal 87,400,000 89,026,460 87,400,000
Less Lessee Security Deposits 22,400,000 16,208,000 22,400,000
Subtotal 65,000,000 72,818,460 65,000,000
(v) Total Asset Value 1,631,730,000 1,595,233,956 1,587,650,000
Note Balances as at September 15, 2000
Class A 998,386,457 984,203,597 988,823,457
Class B 154,787,636 154,787,636 154,787,636
Class C 164,156,262 164,074,190 164,091,262
Class D 100,000,000 100,000,000 100,000,000
------------- ------------- -------------
1,417,330,355 1,403,065,423 1,407,702,355
</TABLE>
(i) Interest Coverage Ratio is equal to Net Cash Collections (excluding
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.
(ii) 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 Note 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.
(iii) 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 July 15, 1998 or
July 17, 2000.
(iv) 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
on July 15, 1998 or July 17, 2000.
(v) Total Asset Value is equal to Total Assumed Portfolio Value plus Liquidity
Reserve Amount minus Lessee Security Deposits.
11
<PAGE>
<TABLE>
Note Report Line Name Description
---- ---------------- -----------
<S> <C> <C>
CASH COLLECTIONS
[1] Lease Rentals......................... Assumptions as per the June 1998 Prospectus
[2] - Renegotiated Leases Change in contracted rental cash flow caused by a
renegotiated lease
[3] - Rental Resets....................... Re-leasing events where new lease rate deviated from the
Base Case
[4] - Aircraft Sales Revenue foregone as a result of aircraft sales
[5] Sum [1]...[4] Contracted Lease Rentals.............. Current Contracted Lease Rentals due as at the latest
Calculation Date
[6] Movement in Current Arrears Balance... Current contracted lease rentals not received as at the
latest Calculation Date, excluding Bad Debts
[7] Less Net Stress related Costs
[8] - Bad debts........................... Arrears owed by former lessees and deemed irrecoverable
[9] - Deferred Arrears Balances........... Current arrears that have been capitalised and
restructured as a Note Payable
[10] - Security deposits drawn down........ Security deposits received following a lessee default
[11] - AOG................................. Loss of rental due to an aircraft being off-lease and
non-revenue earning
[12] - Other Leasing Income................ Includes lease termination payments, rental guarantees
and late payments charges
[13] - Repossession........................ Legal and technical costs incurred in repossessing aircraft.
[14] Sum [8]...[13] Sub-total
[15] [5]+[6]+[14] Net Lease Rentals..................... Contracted Lease Rentals less Movement in Current
Arrears Balance and Net Stress related costs
[16] Interest Earned....................... Interest earned on monthly cash balances
[17] Aircraft Sales Gross cash receipts from aircraft sales.
[18] Net Maintenance....................... Maintenance Revenue Reserve received less and
reimbursements to lessees
[19] Sum [15]...[18] Total Cash Collections................ Net Lease Rentals + Interest Earned + Net Maintenance
CASH EXPENSES
Aircraft Operating Expenses........... All operational costs related to the leasing of aircraft.
[20] - Insurance........................... Premium for contingent insurance policies
[21] - Releasing and other................. Costs associated with transferring an aircraft from one
lessee to another
[22] [23]+[24] Sub-total
SG&A Expenses
[23] Aircraft Servicer Fees................ Monthly and annual fees paid to Aircraft Servicer
- Retainer Fee........................ Fixed amount per month per aircraft
- Rent Collected...................... 1.25% of rental received for the month
- Previous Servicer Fee............... Fee paid to previous Servicer for performance in
accordance with the Servicing Agreement
- Sales Fee........................... Fee paid to Servicer on sale of an aircraft
[24] [23] Sub-total
[25] Other Servicer Fees................... Administrative Agent, trustee and professional fees paid
to other service providers
[26] [24]+[25] Sub-total
[27] [22]+[26] Total Cash Expenses................... Aircraft Operating Expenses + SG&A Expenses
NET CASH COLLECTIONS
[28] [19] Total Cash Collections................ Line 16 above
[29] [26] Total Cash Expenses................... Line 24 above
[30] Movement in Expense Account .......... Relates to reduction in accrued expense amounts
[31] Interest Payments..................... Interest paid on all outstanding debt
[32] Swap payments ........................ Net swap payments (paid)/received
[34] Principal payments ................... Principal payments on debt
</TABLE>
12
<PAGE>
<TABLE>
AerCo Portfolio Analysis (1)
% of
% of Aircraft
Appraised Aircraft by
Date of Value at by Appraised
Aircraft Engine Serial Manufacture/ April 30, Appraised Value in
No. Region Country Lessee Type Configuration Number Conversion 2000 Value Region
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Asia (Emerging) China China Xinjiang B757-200 RB211-535E4 26153 Aug-92 39,507 2.6%
2. China China Southern B737-300 CFM56-3C1 26068 Jun-92 23,833 1.5%
3. China China Southern B737-300 CFM56-3C1 25604 Jan-93 23,033 1.5%
4. China Xiamen Airlines B737-500 CFM56-3C1 27153 Aug-93 20,460 1.3%
5. China Xiamen Airlines B737-500 CFM56-3C1 27155 Mar-93 19,943 1.3%
6. India Indian Airlines A300B4-200 CF6-50C2 240 May-83 10,973 0.7%
7. Philippines PAL B737-300 CFM56-3B1 24465 Aug-89 19,667 1.3%
8. Philippines PAL B737-300 CFM56-3B1 24677 Mar-90 20,647 1.3%
9. South Korea Asiana B737-400 CFM56-3C1 25764 Jun-92 24,633 1.6%
10. South Korea Asiana B737-400 CFM56-3C1 25765 Jul-92 25,013 1.6%
11. South Korea Asiana B737-500 CFM56-3C1 25768 May-95 22,433 1.5%
12. Taiwan FEAT MD83 JT8D-219 49952 Dec-91 20,860 1.4%
Sub-total 17.6%
13. Europe (Developed)Italy Air Europe A320-200 CFM5-5A1 85 Feb-86 24,850 1.6%
14. Italy Blue Panorama B737-400 CFM56-3C1 24901 May-90 24,597 1.6%
15. Italy Blue Panorama B737-400 CFM56-3C1 27074 Apr-92 26,867 1.7%
16. Ireland Virgin Express Ireland B737-300 CFM56-3B2 25041 Mar-91 23,237 1.5%
17. Spain Spanair B767-300ER PW4060 24999 Feb-91 56,767 3.7%
18. Spain Spanair MD83 JT8D-219 49627 Apr-89 18,897 1.2%
19. Spain Spanair MD83 JT8D-219 49790 Oct-89 19,230 1.2%
20. Spain Spanair MD-82 JT8D-217C 49570 Feb-88 17,180 1.1%
21. UK Air 2000 B757-200 RB211-535E4 26158 Feb-93 40,820 2.6%
22. UK Airtours A320-200 CFM56-5A3 299 Apr-92 28,783 1.9%
23. UK Airtours A320-200 V2500-A1 362 Nov-92 28,593 1.9%
24. UK British Midland B737-400 CFM56-3C1 23868 Oct-88 20,717 1.3%
25. UK British Midland A320-200 V2527-A5 934 Jan-99 40,420 2.6%
26. UK British Midland A321-200 V2533-A5 1207 Apr-00 52,103 3.4%
27. UK Monarch A320-200 CFM56-5A3 391 Feb-93 29,897 1.9%
28. UK British Airways B737-500 CFM56-3C1 25789 Feb-92 20,513 1.3%
29. UK JMC Airlines A320-200 V2500-A1 354 Oct-92 29,980 1.9%
30. UK JMC Airlines A320-200 V2500-A1 411 Mar-93 30,617 2.0%
31. Belgium Virgin Express B737-400 CFM56-3C1 24270 May-89 22,547 1.5%
32. Belgium Virgin Express B737-400 CFM56-3C1 24271 Jun-89 22,987 1.5%
33. Finland Finnair MD-82 JT8D-219 49905 Oct-90 18,817 1.2%
34. Finland Finnair MD-82 JT8D-219 53245 Apr-92 21,103 1.4%
35. France Aeropostale B737-300QC CFM56-3B2 24021 Nov-88 21,637 1.4%
36. Norway Braathens SAFE B737-500 CFM56-3C1 24651 Apr-90 18,810 1.2%
Sub-total 42.8%
37. Europe (Emerging) Hungary Malev B737-300 CFM56-3C1 24909 Apr-91 22,527 1.5%
<PAGE>
AerCo Portfolio Analysis (1)
% of
% of Aircraft
Appraised Aircraft by
Date of Value at by Appraised
Aircraft Engine Serial Manufacture/ April 30, Appraised Value in
No. Region Country Lessee Type Configuration Number Conversion 2000 Value Region
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
38. Poland LOT B737-400 CFM56-3C1 25594 May-92 26,623 1.7%
39. Turkey Pegasus B737-400 CFM56-3C1 23979 Jan-89 21,587 1.4%
40. Turkey Pegasus B737-400 CFM56-3C1 24685 May-90 24,497 1.6%
41. Turkey Sun Express B737-300 CFM56-3C1 24908 Mar-91 23,120 1.5%
42. Turkey THY B737-400 CFM56-3C1 24904 Feb-91 24,923 1.6%
43. Turkey THY B737-400 CFM56-3C1 26066 Jun-92 25,200 1.6%
Sub-total 10.9%
44. Latin America Brazil TAM Fokker 100 TAY650-15 11341 Aug-91 13,217 0.9%
45. (Emerging) Brazil TAM Fokker 100 TAY650-15 11350 Apr-92 13,177 0.9%
46. Brazil TAM Fokker 100 TAY650-15 11351 Sep-91 13,107 0.9%
47. Brazil TAM Fokker 100 TAY650-15 11320 Sep-91 12,783 0.8%
48. Brazil TAM Fokker 100 TAY650-15 11322 Jun-91 12,673 0.8%
49. Brazil Nordeste B737-500 CFM56-3C1 26067 Jun-92 20,917 1.4%
50. Brazil Varig B737-300 CFM56-3C1 24834 Jun-90 22,013 1.4%
51. Chile AILL (2) DC8-71F CFM56-2C1 46040 Mar-91 14,210 0.9%
52. Columbia Avianca B757-200 RB211-535E4 26152 Aug-92 38,283 2.5%
Sub-total 10.4%
53. North America Canada Air Canada A320-200 CFM56-5A1 403 Dec-93 29,653 1.9%
54. (Devoloped) Canada Air Canada B767-300ER PW4060 24947 Mar-91 57,270 3.7%
55. USA BAX Global DC8-71F CFM56-2C1 46064 Mar-92 14,033 0.9%
56. USA Delta B737-300 CFM56-3B1 23345 Jul-85 14,530 0.9%
57. USA Frontier B737-300 CFM56-3C1 24856 Aug-90 21,987 1.4%
58. USA Frontier B737-300 CFM56-3B2 26440 Mar-92 23,483 1.5%
59. USA Frontier B737-300 CFM56-3B2 26442 May-92 23,063 1.5%
60. USA Reno Air (3) MD-82 JT8D-219 49931 Aug-90 18,953 1.2%
61. USA Reno Air (3) MD-82 JT8D-219 49932 Sep-90 19,340 1.3%
62. USA TWA B757-200 PW2037 28486 May-99 51,320 3.3%
63. USA Tower Air (4) B747-200 JT9D-7Q 22496 Oct-91 8,407 0.5%
Sub-total 18.3%
--------------------------
Total 1,541,867 100.0% 100.0%
==========================
</TABLE>
1. Assumes all of the additional aircraft have been acquired by AerCo. As of
October 25, 2000, 20 of the 30 additional aircraft had been acquired by
AerCo
2. Aircraft International Leasing Limited is an indirect 100% subsidiary of
Lan Chile
3. Reno Air is a 100% subsidiary of American Airlines
4. Tower Air has filed for Chapter 11 bankruptcy protection. AerCo has
petitioned the relevant U.S. bankruptcy court to terminate the lease to
Tower Air
