Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F x
Form 40-F o
Indicate
by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): o
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): o
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the
registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant’s “home country”), or under the rules of the home country exchange on which the registrant’s securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant’s security holders, and, if discussing a material event, has already been the subject of a Form 6-K
submission or other Commission filing on EDGAR.
Accounts payable, accrued expenses and other liabilities
11
$
1,046,204
$
1,009,945
Accrued
maintenance liability
12
2,281,224
2,237,494
Lessee deposit liability
762,261
768,677
Debt
13
29,283,522
29,507,587
Deferred
income tax liabilities
14
935,812
804,598
Commitments and contingencies
23
Total
Liabilities
34,309,023
34,328,301
Ordinary
share capital, €0.01 par value, 350,000,000 ordinary shares authorized as of September 30, 2019 and December 31, 2018; 146,847,345 and 151,847,345 ordinary shares issued and 134,742,482 and 142,674,664 ordinary shares outstanding (including 2,229,371 and 2,429,442 shares of unvested restricted stock) as of September 30, 2019 and December 31, 2018, respectively
Supplemental
balance sheet information—amounts related to assets and liabilities of consolidated VIEs for which creditors do not have recourse to our general credit:
Restricted cash
$
73,385
$
87,584
Flight
equipment held for operating leases and held for sale
2,111,934
2,230,634
Other assets
74,667
82,995
Accrued
maintenance liability
$
40,154
$
44,073
Debt
1,420,028
1,497,144
Other
liabilities
79,960
89,598
The accompanying notes are an integral part of these Unaudited Financial Statements.
We are the global leader in aircraft leasing with 1,360 aircraft owned, managed or on order, and total assets of $43.5 billion as of September 30, 2019. Our ordinary shares are listed on the New York Stock Exchange under the ticker symbol AER. Our headquarters is located in Dublin, and we have offices in Shannon, Los Angeles, Singapore, Amsterdam, Shanghai and Abu Dhabi. We also have representative offices at the world’s largest aircraft manufacturers, Boeing in Seattle and Airbus in Toulouse.
The
Condensed Consolidated Financial Statements presented herein include the accounts of AerCap Holdings N.V. and its subsidiaries. AerCap Holdings N.V. was incorporated in the Netherlands as a public limited liability company (“naamloze vennootschap” or “N.V.”) on July 10, 2006.
2. Basis of presentation
General
Our Condensed Consolidated Financial Statements are presented in accordance with U.S. GAAP.
We consolidate all companies in which we have direct and indirect legal or effective control and all VIEs for which we are deemed
the PB under Accounting Standards Codification (“ASC”) 810. All intercompany balances and transactions with consolidated subsidiaries are eliminated. The results of consolidated entities are included from the effective date of control or, in the case of VIEs, from the date that we are or become the PB. The results of subsidiaries sold or otherwise deconsolidated are excluded from the date that we cease to control the subsidiary or, in the case of VIEs, when we cease to be the PB.
Unconsolidated investments where we have significant influence are reported using the equity method of accounting.
Our Condensed Consolidated Financial Statements are stated in U.S. dollars, which is our functional currency.
Our
interim financial statements have been prepared pursuant to the rules of the SEC and U.S. GAAP for interim financial reporting, and reflect all normally recurring adjustments that are necessary to fairly state the results for the interim periods presented. Certain information and footnote disclosures required by U.S. GAAP for complete annual financial statements have been omitted and, therefore, our interim financial statements should be read in conjunction with our Annual Report on Form 20-F for the year ended December 31, 2018, filed with the SEC on March 8, 2019. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of those
for a full fiscal year.
Due to rounding, numbers presented throughout this document may not add up precisely to the totals provided and percentages may not precisely reflect the absolute figures.
Use of estimates
The preparation of Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The use of estimates is or could be a significant factor affecting the reported carrying values of flight equipment, intangibles, investments, trade and notes receivables, deferred income tax assets and accruals and reserves. Actual results
may differ from our estimates under different conditions, sometimes materially.
Reportable segments
We manage our business and analyze and report our results of operations on the basis of one business segment: leasing, financing, sales and management of commercial aircraft and engines.
Notes
to the Unaudited Condensed Consolidated Financial Statements (Continued)
(U.S. Dollars in thousands or as otherwise stated, except share and per share data)
3. Summary of significant accounting policies
Our significant accounting policies are described in our Annual Report on Form 20-F for the year ended December 31, 2018, filed with the SEC on March 8, 2019.
Recent accounting standards adopted during 2019:
Lease accounting
In
February 2016, the FASB issued an accounting standard, ASC 842, Leases, that requires lessees to recognize lease-related assets and liabilities on the balance sheet. In certain circumstances, the lessee is required to remeasure the lease payments. Qualitative and quantitative disclosures, including significant judgments made by management, are required to provide insight into the extent of revenue and expense recognized and expected to be recognized from existing contracts.
We adopted the new standard on its required effective date of January 1, 2019 using the optional transition method provided under Accounting Standards Update 2018-11, Targeted Improvements. Under this optional transition method, we applied the new lease standard at the effective date and will continue to report prior
comparative periods in accordance with ASC 840, Leases. We have elected the package of practical expedients, which permits us to not reassess lease identification, lease classification or initial direct costs. Upon adoption, we recognized operating lease-related assets and liabilities, where we are the lessee, of $58 million. In accordance with ASC 842, commencing with the three months ended March 31, 2019, we classified collections of finance and sales-type leases as part of operating activity cash flows. In periods prior to the adoption of ASC 842, these finance and sales-type leases cash flows are classified as part of investing activity cash flows.
As a lessor, we lease most of our aircraft under operating leases. Under the new lease standard, the accounting for leases as a lessor is similar to the previous standard (refer to
our Annual Report on Form 20-F for the year ended December 31, 2018, filed with the SEC on March 8, 2019).
As a lessee, we lease office space in several locations globally. In accordance with ASC 842, Leases, we determine if an arrangement is a lease at its inception. For leases with terms greater than 12 months, operating lease right-of-use (“ROU”) assets and liabilities are included in other assets (Note 9) and other liabilities (Note 11), respectively, in our Condensed Consolidated Balance Sheets, and finance leases are included in flight equipment held for operating leases (Note 5) and debt
(Note 13).
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our contractual obligation to make lease payments. Operating lease ROU assets and liabilities are recognized at the lease commencement date and are calculated based on the present value of lease payments over the lease term. To determine the present value of lease payments, we use our incremental borrowing rate based on the information available at the lease commencement date.
Our assumed lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Future application of accounting standards:
Allowance
for credit losses
In June 2016, the FASB issued an accounting standard that requires entities to estimate lifetime expected credit losses for most financial assets measured at amortized cost and certain other instruments, including loan and other receivables, net investments in leases and off-balance sheet credit exposures. The standard also requires additional disclosures, including how the entity develops its allowance for credit losses for financial assets measured at amortized cost and disaggregated information on the credit quality of net investments in leases measured at amortized cost by year of the asset’s origination for up to five annual periods. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption will be permitted in any interim or annual period beginning after December
15, 2018. The new standard must be adopted using the modified retrospective transition approach. We will adopt the standard on its required effective date of January 1, 2020. We continue to evaluate the effect the adoption of the standard will have on our Condensed Consolidated Balance Sheets and Condensed Consolidated Income Statements. Based on the analysis performed to date we currently do not expect a significant impact when we adopt this new standard.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(U.S. Dollars in thousands or as otherwise stated, except share and per share data)
4. Restricted cash
Our restricted cash balance was $159.7 million and $211.0 million as of September 30, 2019 and December 31, 2018, respectively, and was primarily related to our ECA financings and Ex-Im financings,
our AerFunding revolving credit facility and other debt. See Note 13—Debt.
Our current operating lease agreements expire over the next 15 years. The contracted minimum future lease payments receivable from lessees for flight equipment on non-cancelable operating leases for our owned aircraft and engines as of September 30,
2019 were as follows:
Estimated residual values of leased flight equipment
583,519
528,916
Less:
Unearned income
(297,155
)
(317,895
)
$
1,038,832
$
1,003,286
As
of September 30, 2019, the cash flows receivable, including the estimated residual values at lease termination, on finance and sales-type leases were as follows:
Cash flows receivable
2019 - remaining
$
39,433
2020
156,885
2021
139,752
2022
208,050
2023
135,136
Thereafter
656,731
Undiscounted
cash flows receivable
$
1,335,987
Less: Unearned income
(297,155
)
$
1,038,832
During the three months ended September 30, 2019 and
2018, we recognized interest income from net investment in finance and sales-type leases of $15.3 million and $16.7 million, respectively, included in basic lease rents. During the nine months ended September 30, 2019 and 2018, we recognized interest income from net investment in finance and sales-type leases of $46.5 million and $49.9 million, respectively, included in basic lease rents.
Lease
premium amounts that are fully amortized are removed from the gross carrying amount and accumulated amortization columns in the tables above.
During the three months ended September 30, 2019 and 2018, we recorded lease premium amortization expense of $2.3 million and $2.6 million, respectively. During the nine months ended September 30, 2019 and 2018, we recorded lease premium amortization expense of $7.5 million
and $8.0 million, respectively.
During
the three months ended September 30, 2019 and 2018, we recorded amortization expense for customer relationships of $5.3 million. During the nine months ended September 30, 2019 and 2018, we recorded amortization expense for customer relationships of $15.9 million.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(U.S. Dollars in thousands or as otherwise stated, except share and per share data)
8. Flight equipment held for sale
Generally, an aircraft is classified as held for sale when the sale is probable, the aircraft is available for sale in its present condition, and the aircraft is expected to be sold within one year. Aircraft are reclassified from flight equipment held for operating leases to flight equipment held for sale at the lower of the aircraft carrying value or fair value, less costs to sell. Depreciation is no longer recognized for aircraft classified
as held for sale.
As of September 30, 2019, 27 aircraft with a total net book value of $801.6 million met the held for sale criteria and were classified as flight equipment held for sale in our Condensed Consolidated Balance Sheet. Aggregate maintenance and security deposit amounts received from the lessees of approximately $185 million will be assumed by the buyers of these aircraft upon consummation of the individual sale transactions.
As of December 31, 2018, seven aircraft with a total net book value of $184.1
million met the held for sale criteria and were classified as flight equipment held for sale in our Consolidated Balance Sheet. During the first quarter of 2019, the sale of six of those aircraft closed and the sale of the remaining aircraft closed during the third quarter of 2019.
We have entered into interest rate derivatives to hedge the current and future interest rate payments on our variable rate debt. These derivative financial instruments can include interest rate swaps, caps, floors, options and forward contracts.
As of September 30, 2019, we had interest rate caps and swaps outstanding, with underlying variable benchmark interest rates ranging from one to six-month U.S. dollar LIBOR.
Some of our agreements with derivative counterparties require a two-way cash collateralization of derivative fair values. As of September 30,
2019 and December 31, 2018, we had cash collateral of $0.6 million and $5.5 million, respectively, from various counterparties and the obligation to return such collateral was recorded in accounts payable, accrued expenses and other liabilities. We had not advanced any cash collateral to counterparties as of September 30, 2019 or December 31, 2018.
The counterparties to our interest rate derivatives are primarily major international financial institutions. We continually monitor our
positions and the credit ratings of the counterparties involved and limit the amount of credit exposure to any one party. We could be exposed to potential losses due to the credit risk of non-performance by these counterparties. We have not experienced any material losses to date.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(U.S.
Dollars in thousands or as otherwise stated, except share and per share data)
10. Derivative financial instruments (Continued)
Our derivative assets are recorded in other assets and our derivative liabilities are recorded in accounts payable, accrued expenses and other liabilities in our Condensed Consolidated Balance Sheets. The following tables present notional amounts and fair values of derivatives outstanding as of September 30, 2019 and December 31, 2018:
Derivative liabilities designated as accounting cash flow hedges:
Interest
rate swaps
$
3,776,000
$
116,304
$
1,375,000
$
29,321
Total
derivative liabilities
$
116,304
$
29,321
(a)
The
notional amount is excluded for swaps which are not yet effective.
We recorded the following in other comprehensive income related to derivative financial instruments for the three and nine months ended September 30, 2019 and 2018:
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(U.S. Dollars in thousands or as otherwise stated, except share and per share data)
10. Derivative financial instruments (Continued)
We expect to reclassify approximately $20 million from AOCI as an increase in interest expense in our Condensed Consolidated Income Statements over the next 12 months. The following table presents the effect of derivatives recorded as reductions to or (increases) in interest expense in our Condensed Consolidated
Income Statements for the three and nine months ended September 30, 2019 and 2018:
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(U.S. Dollars in thousands or as otherwise stated, except share and per share data)
13. Debt
As of September 30, 2019, the principal amount of our outstanding indebtedness totaled $29.3 billion, which excluded fair value adjustments of $112.8 million and debt issuance costs, debt discounts and debt premium of $138.9 million,
and our undrawn lines of credit were approximately $6.9 billion, availability of which is subject to certain conditions, including compliance with certain financial covenants. As of September 30, 2019, we remained in compliance with the financial covenants across our various debt obligations. All of our debt is redeemable by AerCap, unless otherwise stated.
Institutional secured term loans & secured portfolio loans
262
8,072,199
355,000
7,717,199
3.77
%
2020
- 2030
7,533,028
AerFunding Revolving Credit Facility
16
2,500,000
1,612,997
887,003
4.05
%
2022
919,484
Other
secured debt
42
1,087,460
—
1,087,460
4.15
%
2021
- 2037
1,633,099
Fair value adjustment
NA
NA
(2,458
)
NA
NA
(2,103
)
TOTAL
SECURED
$
12,306,106
$
1,967,997
$
10,335,651
$
10,932,880
Subordinated
ECAPS
Subordinated Notes
1,000,000
—
1,000,000
3.87
%
2065
1,000,000
Junior
Subordinated Notes
500,000
—
500,000
6.50
%
2045
500,000
Subordinated
debt issued by joint ventures
47,521
—
47,521
—
2019
- 2020
48,234
Fair value adjustment
NA
NA
(223
)
NA
NA
(225
)
TOTAL
SUBORDINATED
$
1,547,521
$
—
$
1,547,298
$
1,548,009
Debt
issuance costs, debt discounts and debt premium
NA
NA
(138,869
)
NA
NA
(160,616
)
341
$
36,227,627
$
6,917,997
$
29,283,522
$
29,507,587
(a)
The
weighted average interest rate for our floating rate debt is calculated based on the U.S. dollar LIBOR rate as of the last interest payment date of the respective debt, and excludes the impact of related derivative financial instruments which we hold to hedge our exposure to floating interest rates, as well as any amortization of debt issuance costs, debt discounts and debt premium. The institutional secured term loans and secured portfolio loans also contain base rate alternatives.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(U.S. Dollars in thousands or as otherwise stated, except share and per share data)
13. Debt (Continued)
Additional details of the principal terms of our indebtedness can be found in our Annual Report on Form 20-F for the year ended December 31, 2018, filed with the SEC on March 8, 2019, our quarterly report on Form 6-K for the first quarter
ended March 31, 2019, filed with the SEC on May 1, 2019 and our quarterly report on Form 6-K for the second quarter ended June 30, 2019, filed with the SEC on July 30, 2019. There have been no material changes to our indebtedness since the filing of those reports, except for scheduled repayments and as described below.
AGAT/AICDC Notes
In August 2019, AerCap Trust and AICDC co-issued $750.0 million aggregate principal amount of 2.875% senior notes due 2024. The proceeds from the offering were used for general
corporate purposes.
Junior Subordinated Notes
In October 2019, AerCap Holdings N.V. issued $750.0 million aggregate principal amount of 5.875% fixed-rate reset junior subordinated notes due 2079 (the “Junior Subordinated Notes”). The Junior Subordinated Notes are fully and unconditionally guaranteed on a junior subordinated basis by certain subsidiaries of AerCap Holdings N.V. The proceeds from the Junior Subordinated Notes will be used for general corporate purposes.
Citi Revolving Credit Facility
In October 2019, AerCap completed the amendment and extension of the $4.0 billion Citi Revolving Credit Facility. The maturity date was extended to February 2024.
14.
Income taxes
Our effective tax rate was 13.0% for the three and nine months ended September 30, 2019 and 2018. Our effective tax rate in any period can be impacted by revisions to the estimated full year rate.
15. Leases
We lease office space in several locations globally under operating lease arrangements, and in limited instances may enter into finance leases for flight equipment. Our leases have remaining lease terms of one year to 18 years, and in some cases we have options to extend the lease terms for up
to ten years. Our finance lease arrangements may be terminated prior to their original expiration date at our discretion.
As of September 30, 2019, operating lease ROU assets net of lease incentives included in other assets were $45.3 million, and operating lease liabilities included in accounts payable, accrued expenses and other liabilities were $51.3 million. Finance lease liabilities included in debt were $128.3 million.
As of September 30, 2019, supplemental balance sheet information related to leases was as follows:
In November 2019, our Board of Directors approved a share repurchase program authorizing total repurchases of up to $200 million of AerCap ordinary shares through March 31, 2020. See Note 26—Subsequent events.
During the nine months ended September 30, 2019, we repurchased an aggregate of 8,585,611 of our ordinary shares under our share repurchase programs at an average price, including commissions, of $47.78 per ordinary share.
Between October 1, 2019 and November
6, 2019, we repurchased an aggregate of 522,730 of our ordinary shares under our share repurchase program at an average price, including commissions, of $52.79 per ordinary share.
During the nine months ended September 30, 2019, we cancelled 5,000,000 ordinary shares which were acquired through the share repurchase programs in accordance with authorizations obtained from the Company's shareholders.
In October 2019, we cancelled 5,000,000 ordinary shares which were acquired through the share repurchase programs in accordance with authorizations obtained from the Company's
shareholders.
Our long-lived assets include flight equipment and definite-lived intangible assets. We test long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable.
During the three and nine months ended September 30, 2019, we recognized impairment charges of $31.2 million and $54.0 million, respectively. During the three and nine months ended September 30, 2018, we recognized impairment charges of $12.8 million and $28.9 million,
respectively.
These impairments, for all periods mentioned, related to lease terminations and were fully or partially offset by maintenance revenue recognized when we retained maintenance-related balances or received EOL compensation.
The impairment charges of $54.0 million recognized during the nine months ended September 30, 2019 included $0.8 million relating to one aircraft which met the held for sale criteria and was classified as flight equipment held for sale in our Condensed Consolidated Balance Sheet.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(U.S. Dollars in thousands or as otherwise stated, except share and per share data)
20. Earnings per share
Basic EPS is calculated by dividing net income by the weighted average of our ordinary shares outstanding, which excludes 2,229,371 and 2,133,610 shares of unvested restricted stock as of September 30, 2019 and 2018,
respectively. For the calculation of diluted EPS, the weighted average of our ordinary shares outstanding for basic EPS is adjusted by the effect of dilutive securities, provided under our equity compensation plans. The number of shares excluded from diluted shares outstanding was 32,692 for the three and nine months ended September 30, 2019 and 92,129 for the three and nine months ended September 30, 2018, because the effect of including these shares in the calculation would have been anti-dilutive.
Basic and diluted EPS for the three and nine months ended September 30, 2019
and 2018 were as follows:
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(U.S. Dollars in thousands or as otherwise stated, except share and per share data)
21. Variable interest entities
We use many forms of entities to achieve our leasing and financing business objectives and we have participated to varying degrees in the design and formation of these entities. Our involvement in VIEs varies and includes being a passive investor in the VIE with involvement from other parties, managing and structuring all the VIE’s activities, or being the sole shareholder of the VIE.
During
the nine months ended September 30, 2019, we did not provide any financial support to any of our VIEs that we were not contractually obligated to provide.
Consolidated VIEs
As of September 30, 2019 and December 31, 2018, substantially all assets and liabilities presented in our Condensed Consolidated Balance Sheets were held in consolidated VIEs. The assets of our consolidated VIEs that can only be used to settle obligations of these entities, and the liabilities of these VIEs for which creditors do not have recourse to our general credit, are disclosed in our Condensed Consolidated Balance Sheets under
Supplemental balance sheet information. Further details of debt held by our consolidated VIEs are disclosed in Note 13—Debt.
Wholly-owned ECA and Ex-Im financing vehicles
We have created certain wholly-owned subsidiaries for the purpose of purchasing aircraft and obtaining financing secured by such aircraft. The secured debt is guaranteed by the European ECAs and the Export-Import Bank of the United States. These entities meet the definition of a VIE because they do not have sufficient equity to operate without subordinated financial support from us in the form of intercompany notes. We have determined that we are the PB of these entities because we control
and manage all aspects of these entities, including directing the activities that most significantly affect the entities’ economic performance, we absorb the majority of the risks and rewards of these entities and we guarantee the activities of these entities.
Other secured financings
We have created a number of wholly-owned subsidiaries for the purpose of obtaining secured financings. These entities meet the definition of a VIE because they do not have sufficient equity to operate without subordinated financial support from us in the form of intercompany notes. We have determined that we are the PB of these entities because we control and manage all aspects of these entities, including directing the activities that most significantly affect the entities’ economic performance, we absorb the
majority of the risks and rewards of these entities and we guarantee the activities of these entities.
Wholly-owned leasing entities
We have created wholly-owned subsidiaries for the purpose of facilitating aircraft leases with airlines. These entities meet the definition of a VIE because they do not have sufficient equity to operate without subordinated financial support from us in the form of intercompany notes, which serve as equity. We have determined that we are the PB of these entities because we control and manage all aspects of these entities, including directing the activities that most significantly affect the entities’ economic performance, we absorb the majority of the risks and rewards of these entities and we guarantee the activities of these entities.
Limited
recourse financing structures
We have established entities to obtain secured financings for the purchase of aircraft in which we have variable interests. These entities meet the definition of a VIE because they do not have sufficient equity to operate without subordinated financial support from us in the form of intercompany notes. The loans of these entities are non-recourse to us except under limited circumstances. We have determined that we are the PB of these entities because we control and manage all aspects of these entities, including directing the activities that most significantly affect the entities’ economic performance, and we absorb the majority of the risks and rewards of these entities.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(U.S. Dollars in thousands or as otherwise stated, except share and per share data)
21. Variable interest entities (Continued)
AerCap Partners I
AerCap Partners I Holding Limited (“AerCap Partners I”) is a 50%-50% joint venture owned by us and Deucalion Aviation Funds. We provide lease management, insurance management and aircraft asset management services to AerCap Partners I for a fee. We have determined that we are the PB of the entity because we direct the activities that most significantly affect the economic performance
of the entity and we absorb a significant portion of the risks and rewards of the entity.
As of September 30, 2019, AerCap Partners I had a portfolio consisting of two Boeing 737NG aircraft. As of September 30, 2019, AerCap Partners I had $63.8 million of subordinated debt outstanding, consisting of $31.9 million from us and $31.9 million from our joint venture partner. The senior debt facility was repaid in full in April 2019.
AerCap Partners 767
AerCap Partners 767 Limited
(“AerCap Partners 767”) is a 50%-50% joint venture owned by us and Deucalion Aviation Funds. We provide lease management, insurance management and aircraft asset management services to AerCap Partners 767 for a fee. We have determined that we are the PB of the entity because we direct the activities that most significantly affect the economic performance of the entity and we absorb a significant portion of the risks and rewards of the entity.
As of September 30, 2019, AerCap Partners 767 had a portfolio consisting of two Boeing 767-300ER aircraft. As of September 30, 2019, AerCap Partners 767 had $31.2 million of subordinated debt outstanding,
consisting of $15.6 million from us and $15.6 million from our joint venture partner. The senior debt facility was repaid in full in April 2019.
AerFunding
We hold a 5% equity investment and 100% of the subordinated fixed rate deferrable interest asset-backed notes (“AerFunding Class E-1 Notes”) in AerFunding. We provide lease management, insurance management and aircraft asset management services to AerFunding for a fee. We have determined that we are the PB of the entity because we direct the activities that most significantly affect the economic performance of the entity and we absorb the majority of the risks and rewards of the entity.
As of September 30, 2019,
AerFunding had a portfolio consisting of one Airbus A320 Family aircraft, two Airbus A320neo Family aircraft, two Airbus A350 aircraft, six Boeing 737NG aircraft and five Boeing 787 aircraft. As of September 30, 2019, AerFunding had $887.0 million outstanding under a secured revolving credit facility and $320.0 million of AerFunding Class E-1 Notes outstanding due to us.
The maximum exposure to loss represents the amount that would be absorbed by us in the event that all of our assets held in the VIEs, for which we are not the PB, had no value and outstanding debt guarantees were called upon in full.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(U.S. Dollars in thousands or as otherwise stated, except share and per share data)
21. Variable interest entities (Continued)
AerDragon
AerDragon is a joint venture with 50% owned by China Aviation Supplies Holding Company and the other 50% owned in equal parts by us, affiliates of Crédit Agricole Corporate and Investment Bank, and East Epoch Limited. This joint venture enhances our presence in the Chinese market and our ability to lease our
aircraft and engines throughout the entire Asia/Pacific region. We provide accounting related services to AerDragon.
We have determined that AerDragon is a VIE in which we do not have control and are not the PB. We do have significant influence and, accordingly, we account for our investment in AerDragon under the equity method of accounting.
AerLift
AerLift is a joint venture in which we have a 39% interest. We provide asset and lease management, insurance management and cash management services to AerLift for a fee. As of September 30,
2019 and December 31, 2018, we guaranteed debt of $76.4 million and $88.3 million, respectively, for AerLift. Other than the debt for which we act as a guarantor, the debt obligations of AerLift are non-recourse to us.
We have determined that AerLift is a VIE in which we do not have control and are not the PB. We do have significant influence and, accordingly, we account for our investment in AerLift under the equity method of accounting.
ACSAL
In
June 2013, we completed a transaction under which we sold eight Boeing 737NG aircraft to ACSAL, an affiliate of Guggenheim, in exchange for cash, and we made a capital contribution to ACSAL in exchange for 19% of its equity. We provide aircraft asset and lease management services to ACSAL for a fee.
We have determined that ACSAL is a VIE in which we do not have control and are not the PB. We do have significant influence and, accordingly, we account for our investment in ACSAL under the equity method of accounting.
Peregrine
In
December 2017, we invested in Peregrine, a vehicle established by NCB Capital for the purpose of acquiring a portfolio of aircraft from us. We have a 9.5% investment in Peregrine, and provide asset and lease management, insurance management, accounting and cash management services to Peregrine for a fee.
We have determined that Peregrine is a VIE in which we do not have control and are not the PB. We account for our equity investment in Peregrine under the cost method of accounting.
Other variable interest entities
We have variable interests in other entities
in which we have determined we are not the PB because we do not have the power to direct the activities that most significantly affect the entities’ economic performance. Our variable interest in these entities consists of aircraft management servicing fees.
Notes to the Unaudited
Condensed Consolidated Financial Statements (Continued)
(U.S. Dollars in thousands or as otherwise stated, except share and per share data)
22. Related party transactions
AerDragon
We provide accounting related services to AerDragon, for which we received a fee of $0.1 million during the three months ended September 30, 2019 and 2018 and $0.5 million and $0.4 million for the nine months ended September
30, 2019 and 2018, respectively. In addition, we received a dividend of nil and $1.7 million during the nine months ended September 30, 2019 and 2018, respectively.
ACSAL
We provide aircraft asset and lease management services to ACSAL, for which we received a fee of $0.1 million during the three months ended September 30, 2019 and 2018
and $0.4 million for the nine months ended September 30, 2019 and 2018. In addition, we received a dividend of $0.3 million and $0.2 million during the three months ended September 30, 2019 and 2018, respectively, and $0.8 million and $0.9 million during the nine months ended September 30, 2019
and 2018, respectively.
AerLift
We provide a variety of management services to, and guarantee certain debt of, AerLift, for which we received a fee of $0.4 million during the three months ended September 30, 2019 and 2018 and $1.1 million and $1.3 million for the nine months ended September 30, 2019 and 2018,
respectively. In addition, we received a dividend of $0.2 million during the nine months ended September 30, 2019 and 2018.
AerCap Partners I
During the nine months ended September 30, 2019, we sold three aircraft to our joint venture partner in AerCap Partners I.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(U.S. Dollars in thousands or as otherwise stated, except share and per share data)
23. Commitments and contingencies
Aircraft on order
As of September 30, 2019, we had commitments to purchase 320 new aircraft scheduled for delivery through 2024. These commitments are based upon purchase agreements with Boeing, Airbus and Embraer. These agreements
establish the pricing formulas (including adjustments for certain contractual escalation provisions) and various other terms with respect to the purchase of aircraft. Under certain circumstances, we have the right to alter the mix of aircraft types ultimately acquired.
Movements in prepayments on flight equipment during the nine months ended September 30, 2019 and 2018 were as follows:
Prepayments on flight equipment at beginning of period
$
3,024,520
$
2,930,303
Prepayments
during the period
939,613
1,438,851
Interest paid and capitalized during the period
78,552
72,510
Prepayments and capitalized interest
applied to the purchase of flight equipment
(1,111,714
)
(1,125,573
)
Prepayments on flight equipment at end of period
$
2,930,971
$
3,316,091
Asset
value guarantees
We have potential obligations under contracts that guarantee a portion of the residual value of aircraft owned by third parties. These guarantees expire at various dates through 2023 and generally obligate us to pay the shortfall between the fair market value and the guaranteed value of the aircraft and, in certain cases, provide us with an option to purchase the aircraft for the guaranteed value. As of September 30, 2019, two guarantees were outstanding.
We regularly review the underlying values of the aircraft collateral to determine our exposure under these asset value guarantees. We did not record any asset value guarantee loss provisions
during the nine months ended September 30, 2019 or 2018.
As of September 30, 2019 and December 31, 2018, the carrying value of the asset value guarantee liability was nil. As of September 30, 2019, the maximum aggregate potential commitment that we were obligated to pay under these guarantees, without any offset for the projected value of the aircraft or other contractual features that may limit our exposure, was approximately $31.8 million.
Other
guarantees
We guarantee the replacement lease rental cash flows of two sold aircraft, in the event of a default and lease termination by the current lessees, up to agreed maximum amounts for each aircraft. These guarantees expire in 2020. We are obligated to perform under these guarantees in the event of a default and lease termination by the current lessees, and if the contracted net replacement lease rental rates do not equal or exceed the rental amounts in the current lease contracts. As of September 30, 2019 and December 31, 2018, the carrying value of these guarantees was $2.3 million, and was included
in accounts payable, accrued expenses and other liabilities in our Condensed Consolidated Balance Sheets. As of September 30, 2019, the maximum undiscounted aggregate future guarantee payments that we could be obligated to make under these guarantees, without offset for the projected net future re-lease or extension rates, were approximately $10.5 million.
Legal proceedings
General
In the ordinary course of our business, we are a party to various legal actions, which we believe are incidental to the operations of our business. The Company regularly reviews the possible outcome of such legal actions, and accrues for
such legal actions at the time a loss is probable and the amount of the loss can be estimated. In addition, the Company also reviews indemnities and insurance coverage, where applicable. Based on information currently available, we believe the potential outcome of those cases where we are able to estimate reasonably possible losses, and our estimate of the reasonably possible losses exceeding amounts already recognized, on an aggregated basis, is immaterial to our Condensed Consolidated Financial Statements.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(U.S. Dollars in thousands or as otherwise stated, except share and per share data)
23. Commitments and contingencies (Continued)
VASP litigation
We leased 13 aircraft and three spare engines to Viaçăo Aerea de Săo Paulo (“VASP”), a Brazilian airline. In 1992, VASP defaulted on its lease obligations and we commenced litigation against VASP to repossess our equipment. In 1992, we obtained a preliminary injunction for the repossession
and export of 13 aircraft and three spare engines from VASP. We repossessed and exported the aircraft and engines in 1992. VASP appealed this decision. In 1996, the Appellate Court of the State of Săo Paulo (“TJSP”) ruled in favor of VASP on its appeal. We were instructed to return the aircraft and engines to VASP for lease under the terms of the original lease agreements. The Appellate Court also granted VASP the right to seek damages in lieu of the return of the aircraft and engines. Since 1996 we have defended this case in the Brazilian courts through various motions and appeals. On March 1, 2006, the Superior Tribunal of Justice (the “STJ”) dismissed our then-pending appeal and on April 5, 2006, a special panel of the STJ confirmed this decision. On May
15, 2006 we filed an extraordinary appeal with the Federal Supreme Court. In September 2009 the Federal Supreme Court requested an opinion on our appeal from the office of the Attorney General. This opinion was provided in October 2009. The Attorney General recommended that AerCap’s extraordinary appeal be accepted for trial and that the case be subject to a new judgment before the STJ. On April 4, 2018, the Federal Supreme Court declined to accept our extraordinary appeal for trial. We appealed this decision on April 25, 2018.
On February 23, 2006, VASP commenced a procedure to calculate its alleged damages and since then we, VASP and the court have appointed experts to assist the court in calculating damages. Our appointed expert has concluded that no damages were incurred.
The VASP-appointed expert has concluded that substantial damages were incurred, and has claimed that such damages should reflect monetary adjustments and default interest for the passage of time. The court-appointed expert has also concluded that no damages were incurred. Different public prosecutors have issued conflicting opinions. The first public prosecutor had filed an opinion that supports the view of the VASP-appointed expert. In response to that opinion, the court-appointed expert reaffirmed his conclusion. A subsequently-appointed public prosecutor subsequently filed a new opinion that is less supportive of the VASP-appointed expert’s opinion, but the original public prosecutor then issued a third opinion consistent with the first one. On October 30, 2017, the court decided that VASP had suffered no damages. On April 20, 2018, VASP appealed this decision. We believe,
however, and we have been advised, that it is not probable that VASP will ultimately be able to recover damages from us even if VASP prevails on the issue of liability. The outcome of the legal process is, however, uncertain. The ultimate amount of damages, if any, payable to VASP cannot reasonably be estimated at this time. We continue to actively pursue all courses of action that may reasonably be available to us and intend to defend our position vigorously.
In July 2006, we brought a claim for damages against VASP in the English courts, seeking damages incurred by AerCap as a result of VASP’s default under seven leases that were governed by English law. VASP filed applications challenging the jurisdiction of the English court, and sought to adjourn the jurisdictional challenge pending the sale of some of its assets in Brazil. We opposed this application and by an order dated
March 6, 2008, the English court dismissed VASP’s applications.
In September 2008, the bankruptcy court in Brazil ordered the bankruptcy of VASP. VASP appealed this decision. In December 2008, we filed with the English court an application for default judgment, seeking damages plus accrued interest pursuant to seven lease agreements. On March 16, 2009, we obtained a default judgment in which we were awarded approximately $40 million in damages plus accrued interest. We subsequently applied to the STJ for an order ratifying the English judgment, so that it might be submitted in the VASP bankruptcy. The STJ granted AerCap’s application and entered an order ratifying the English judgment. Although VASP appealed that order, it is fully effective
pending a resolution of VASP’s appeal of the order ratifying the English judgment.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(U.S. Dollars in thousands or as otherwise stated, except share and per share data)
23. Commitments
and contingencies (Continued)
In addition to our claim in the English courts, AerCap has also brought actions against VASP in the Irish courts to recover damages incurred as a result of VASP’s default under nine leases governed by Irish law. The Irish courts granted an order for service of process, and although VASP opposed service in Brazil, the STJ ruled that service of process had been properly completed. After some additional delay due to procedural issues related to VASP’s bankruptcy, the Irish action went forward. Upon VASP’s failure to appear, the High Court entered default judgment in favor of AerCap, finding VASP liable for breach of its obligations under the leases. On October 24, 2014, the High Court entered two judgments in favor of AerCap, awarding us aggregate damages in the amount of approximately
$36.9 million. We subsequently applied to the STJ for an order ratifying the Irish judgments, so that they might be submitted in the VASP bankruptcy. The STJ granted AerCap’s application and ratified the Irish judgments.
AerCap has submitted both the Irish and the English judgments in the VASP bankruptcy; the bankruptcy court has required that the claims submitted limit interest on the judgments to that accrued on or before the commencement of VASP’s bankruptcy, which has resulted in claims of approximately $40 million for the English judgments and approximately $24 million for the Irish judgments.
On November 6, 2012, the STJ ruled in favor of VASP on its appeal from the order placing it in bankruptcy.
Acting alone, the reporting justice of the appellate panel ordered the bankruptcy revoked and the matter converted to a judicial reorganization. Several creditors of VASP appealed that ruling to the full panel of the STJ. On December 17, 2012, the Special Court of the STJ reversed the ruling of the reporting justice and upheld the order placing VASP in bankruptcy. The decision was published on February 1, 2013. On February 25, 2013, the lapse of time for appeal (res judicata) was certified.
Transbrasil litigation
In the early 1990s, two AerCap-related companies (the “AerCap Lessors”) leased an aircraft and two engines
to Transbrasil S/A Linhas Areas (“Transbrasil”), a now-defunct Brazilian airline. By 1998, Transbrasil had defaulted on various obligations under its leases with AerCap, along with other leases it had entered into with GECC and certain of its affiliates (collectively with GECC, the “GE Lessors”). GECAS was the servicer for all these leases at the time. Subsequently, Transbrasil issued promissory notes (the “Notes”) to the AerCap lessors and GE Lessors (collectively the “Lessors”) in connection with restructurings of the leases. Transbrasil defaulted on the Notes and GECC brought an enforcement action on behalf of the Lessors in 2001. Concurrently, GECC filed an action for the involuntary bankruptcy of Transbrasil.
Transbrasil brought a lawsuit against the Lessors in February 2001 (the “Transbrasil Lawsuit”), claiming that the Notes had in fact been paid at the time GECC brought the enforcement
action. In 2007, the trial judge ruled in favor of Transbrasil. That decision was appealed. In April 2010, the appellate court published a judgment (the “2010 Judgment”) rejecting the Lessors’ appeal, ordering them to pay Transbrasil statutory penalties equal to double the face amount of the Notes (plus interest and monetary adjustments) as well as damages for any losses incurred as a result of the attempts to collect on the Notes. The 2010 Judgment provided that the amount of such losses would be calculated in separate proceedings in the trial court (the “Indemnity Claim”). In June 2010, the AerCap Lessors and GE Lessors separately filed special appeals before the STJ in Brazil. These special appeals were subsequently admitted for hearing.
In July 2011, Transbrasil brought three actions for provisional enforcement of the 2010 Judgment (the “Provisional Enforcement
Actions”): one to enforce the award of statutory penalties; a second to recover attorneys’ fees related to that award, and a third to enforce the Indemnity Claim. Transbrasil submitted its alleged calculation of statutory penalties, which, according to Transbrasil, amounted to approximately $210 million in the aggregate against all defendants, including interest and monetary adjustments. AerCap and its co-defendants opposed provisional enforcement of the 2010 judgment, arguing, among other things, that Transbrasil’s calculations were greatly exaggerated.
Transbrasil also initiated proceedings to determine the amount of its alleged Indemnity Claim. The court appointed an expert to determine the measure of damages and the defendants appointed an assistant expert. We believe we have strong arguments to convince the expert and the court
that Transbrasil suffered no damage as a result of the defendants’ attempts to collect on the Notes.
In February 2012, AerCap brought a civil complaint against GECAS and GECC in the State of New York (the “New York Action”), alleging, among other things, that GECAS and GECC had violated certain duties to AerCap in connection with their attempts to enforce the Notes and their defense of Transbrasil’s lawsuit. In November 2012, AerCap, GECAS, and the GE Lessors entered into a settlement agreement resolving all of the claims raised in the New York Action. The terms of the settlement agreement are confidential.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(U.S. Dollars in thousands or as otherwise stated, except share and per share data)
23. Commitments and contingencies (Continued)
In October 2013, the STJ granted the special appeals filed by GECAS and its related parties, effectively reversing the 2010 Judgment in most respects as to all of the Lessors.
In February 2014, Transbrasil appealed the STJ’s ruling of October 2013 to another panel of the STJ. The appellate panel rejected Transbrasil’s appeal in November 2016, preserving the October 2013 order. All appeals in respect of the
Transbrasil Lawsuit have now concluded.
In light of the STJ’s ruling of October 2013, the trial court has ordered the dismissal of two of Transbrasil’s Provisional Enforcement Actions—those seeking statutory penalties and attorneys’ fees. The TJSP has since affirmed the dismissals of those actions and Transbrasil has appealed that order. Transbrasil’s Provisional Enforcement Action with respect to the Indemnity Claim remains pending.
Yemen Airways-Yemenia litigation
ILFC is named in a lawsuit in connection with the 2009 crash of an Airbus A310-300 aircraft owned by ILFC and on lease to Yemen Airways-Yemenia, a Yemeni carrier (“Hassanati Action”). The Hassanati plaintiffs are families of deceased occupants of the flight
and seek unspecified damages for wrongful death, costs, and fees. The Hassanati Action commenced in January 2011 and was pending in the United States District Court for the Central District of California. On February 18, 2014, the district court granted summary judgment in ILFC’s favor and dismissed all of the Hassanati plaintiffs’ remaining claims. The Hassanati plaintiffs appealed. On March 22, 2016, the appellate court rejected the appeal. On April 22, 2016, the Hassanati plaintiffs refiled their action at the trial court. The trial court granted ILFC’s motion to dismiss the Hassanati plaintiffs’ second complaint on November 22, 2016, and entered judgment in favor of ILFC. The Hassanati plaintiffs appealed and the appellate court rejected their appeal on September
17, 2018.
On August 29, 2014, a new group of plaintiffs filed a lawsuit against ILFC in the United States District Court for the Central District of California (the “Abdallah Action”). The Abdallah Action claims unspecified damages from ILFC on the same theory as does the Hassanati Action. On June 30, 2017, the parties to the Abdallah action executed a Master Settlement Agreement setting forth terms on which Yemenia’s insurance carrier proposes to settle the case with each claimant family. Upon the claimant families’ execution of individual release and discharge agreements and upon ILFC’s and Yemenia’s confirmation of a sufficient number of participating claimants, the claims by such participating claimants against ILFC and Yemenia in the Abdallah Action will be dismissed in exchange for payment from Yemenia’s insurance
carrier. We believe that ILFC has substantial defenses on the merits and is adequately covered by available liability insurance in respect of both the Hassanati Action and the Abdallah Action.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(U.S.
Dollars in thousands or as otherwise stated, except share and per share data)
24. Fair value measurements
The Company determines fair value based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy as described below. Where limited or no observable market data exists, fair value measurements for assets and liabilities are primarily based on management’s own estimates and are calculated based upon the economic and competitive environment, the characteristics of the asset or liability
and other such factors. Therefore, the results may not be realized in actual sale or immediate settlement of the asset or liability.
The degree of judgment used in measuring the fair value of a financial and non-financial asset or liability generally correlates with the level of pricing observability. We classify our fair value measurements based on the observability and significance of the inputs used in making the measurement, as provided below:
Level 1 — Quoted prices available in active markets for identical assets or liabilities as of the reported date.
Level 2 — Observable market data. Inputs include quoted prices for similar assets, liabilities (risk adjusted) and market-corroborated inputs, such as market comparables, interest rates, yield curves and other items that allow value to be determined.
Level
3 — Unobservable inputs from our own assumptions about market risk developed based on the best information available, subject to cost benefit analysis. Inputs may include our own data.
Fair value measurements are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.
Assets and liabilities measured at fair value on a recurring basis
As of September 30, 2019 and December 31, 2018, our derivative portfolio consisted of interest rate swaps and caps. The fair value of derivatives is based on dealer quotes for identical instruments. We have also considered the credit rating and risk of the counterparty
of the derivative contract based on quantitative and qualitative factors. As such, the valuation of these instruments was classified as Level 2.
The following tables present our financial assets and liabilities that we measured at fair value on a recurring basis by level within the fair value hierarchy as of September 30, 2019 and December 31, 2018:
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(U.S. Dollars in thousands or as otherwise stated, except share and per share data)
24. Fair value measurements (Continued)
Assets and liabilities measured at fair value on a non-recurring basis
We measure the fair value of certain definite-lived intangible assets and our flight equipment on a non-recurring basis, when U.S. GAAP requires the application of fair value, including when events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. Additional details of recoverability assessments
performed on certain definite-lived intangible assets and our flight equipment are described in our Annual Report on Form 20-F for the year ended December 31, 2018, filed with the SEC on March 8, 2019.
Management develops the assumptions used in the fair value measurements. Therefore, the fair value measurements of definite-lived intangible assets and flight equipment are classified as Level 3 valuations.
Definite-lived intangible assets
We use the income approach to measure the fair value of definite-lived intangible assets, which is based on the present value of estimated future cash flows to be generated from the asset.
Flight
equipment
Inputs to non-recurring fair value measurements categorized as Level 3
We use the income approach to measure the fair value of flight equipment, which is based on the present value of estimated future cash flows. Key inputs to the income statement approach include the discount rate, current contractual lease cash flows, projected future non-contractual lease or sale cash flows, extended to the end of the aircraft’s estimated holding period in its highest and best use, and a contractual or estimated disposition value.
The current contractual lease cash flows are based on the in-force lease rates. The projected future non-contractual lease cash flows are estimated based on the aircraft type, age, and the airframe and engine configuration of the aircraft. The projected non-contractual lease cash flows are applied
to follow-on lease terms, which are estimated based on the age of the aircraft at the time of re-lease and are assumed through the estimated holding period of the aircraft. The estimated holding period is the period over which future cash flows are assumed to be generated. Shorter holding periods can result when a potential sale or future part-out of an individual aircraft has been contracted for, or is likely. In instances of a potential sale or part-out, the holding period is based on the estimated sale or part-out date. The disposition value is generally estimated based on aircraft type. In situations where the aircraft will be disposed of, the disposition value assumed is based on an estimated part-out value or the contracted sale price.
The estimated future cash flows, as described above, are then discounted to present value. The discount rate used is based on the aircraft type and incorporates assumptions market participants
would use regarding the likely debt and equity financing components, and the required returns of those financing components.
Sensitivity to changes in unobservable inputs
When estimating the fair value measurement of flight equipment, we consider the effect of a change in a particular assumption independently of changes in any other assumptions. In practice, simultaneous changes in assumptions may not always have a linear effect on inputs.
The significant unobservable inputs utilized in the fair value measurement of flight equipment are the discount rate, the remaining estimated holding period and the non-contractual cash flows. The discount rate is affected by movements in the aircraft funding markets, including fluctuations in required rates of return in debt and equity, and loan to value ratios. The remaining estimated holding period
and non-contractual cash flows represent management’s estimate of the remaining service period of an aircraft and the estimated non-contractual cash flows over the remaining life of the aircraft. An increase in the discount rate would decrease the fair value measurement of the aircraft, while an increase in the remaining estimated holding period or the estimated non-contractual cash flows would increase the fair value measurement of the aircraft.
Notes
to the Unaudited Condensed Consolidated Financial Statements (Continued)
(U.S. Dollars in thousands or as otherwise stated, except share and per share data)
24. Fair value measurements (Continued)
Fair value disclosures of financial instruments
The fair value of restricted cash and cash and cash equivalents approximates their carrying value because of their short-term nature (Level 1). The fair value of our long-term unsecured debt is estimated using quoted market prices for similar or identical instruments, depending on the frequency and volume of activity in the market. The fair value of our long-term secured debt is estimated using a discounted cash flow analysis based on current market interest rates and spreads for debt with similar characteristics (Level 2). Derivatives
are recognized in our Condensed Consolidated Balance Sheets at their fair value. The fair value of derivatives is based on dealer quotes for identical instruments. We have also considered the credit rating and risk of the counterparties of the derivative contracts based on quantitative and qualitative factors (Level 2).
All of our financial instruments are measured at amortized cost, other than derivatives which are measured at fair value on a recurring basis. The carrying amounts and fair values of our most significant financial instruments as of September 30, 2019 and December 31, 2018 were as follows:
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(U.S. Dollars in thousands or as otherwise stated, except share and per share
data)
25. Supplemental guarantor financial information
The following supplemental financial information is presented to comply with Rule 3-10 of Regulation S-X.
AGAT/AICDC Notes
From time to time since the completion of the ILFC acquisition, AerCap Trust and AICDC have co-issued additional senior unsecured notes (the “AGAT/AICDC Notes”). The proceeds from these offerings have been used for general corporate purposes.
The following table provides a summary of the outstanding AGAT/AICDC Notes as of September 30, 2019:
Maturities
of AGAT/AICDC Notes
2019 - remaining
$
—
2020
1,500,000
2021
2,600,000
2022
2,100,000
2023
1,200,000
Thereafter
5,100,000
$
12,500,000
The
AGAT/AICDC Notes are jointly and severally and fully and unconditionally guaranteed by AerCap Holdings N.V. (the “Parent Guarantor”) and by AerCap Ireland Limited, AerCap Aviation Solutions B.V., ILFC and AerCap U.S. Global Aviation LLC (together, the “Subsidiary Guarantors”).
The following condensed consolidating financial information presents the Condensed Consolidating Balance Sheets as of September 30, 2019 and December 31, 2018, the Condensed Consolidating Income Statements and the Condensed Consolidating Statements of Comprehensive Income for the three and nine months ended September 30, 2019 and 2018,
and the Condensed Consolidating Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 of (i) the Parent Guarantor; (ii) AerCap Trust; (iii) AICDC; (iv) the Subsidiary Guarantors on a combined basis; (v) the non-guarantor subsidiaries on a combined basis; (vi) elimination entries necessary to consolidate the Parent Guarantor with AerCap Trust and AICDC, the Subsidiary Guarantors and the non-guarantor subsidiaries; and (vii) the Company on a consolidated basis. Investments in consolidated subsidiaries
are presented under the equity method of accounting. A portion of our cash and cash equivalents is held by subsidiaries and access to such cash by us for group purposes is limited.
In accordance with Rule 3-10 of Regulation S-X, separate financial statements and other disclosures with respect to AerCap Trust, AICDC and the Subsidiary Guarantors have not been provided, as AerCap Trust, AICDC and the Subsidiary Guarantors are 100%-owned by the Parent Guarantor, all guarantees of the AGAT/AICDC Notes are joint and several and full and unconditional and the Parent Guarantor’s financial statements have been filed for the periods specified by Rules 3-01 and 3-02 of Regulation S-X.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(U.S. Dollars in thousands or as otherwise stated, except share and per share data)
25. Supplemental guarantor financial information (Continued)
Junior Subordinated Notes
In October 2019, AerCap Holdings N.V. issued $750.0 million aggregate principal amount of 5.875% fixed-rate reset junior subordinated notes due 2079. The Junior Subordinated Notes are jointly and severally and fully and unconditionally guaranteed by AerCap Trust, AICDC, AerCap Ireland Limited, AerCap Aviation Solutions B.V., ILFC and AerCap U.S. Global Aviation LLC
(together, the “Junior Subordinated Guarantors”).
Condensed consolidating financial information for each of AerCap Trust and AICDC are presented below on a stand-alone basis (before elimination of intercompany transactions and balances). The non-guarantor financial information set forth below accurately represents the condensed consolidating financial information with respect to the subsidiaries of AerCap Holdings N.V. that do not guarantee the Junior Subordinated Notes.
In accordance with Rule 3-10 of Regulation S-X, separate financial statements and other disclosures with respect to the Junior Subordinated Guarantors have not been provided, as the Junior Subordinated Guarantors are 100%-owned by AerCap Holdings N.V., all guarantees of the Junior Subordinated Notes are joint and several
and full and unconditional and AerCap Holdings N.V.’s financial statements have been filed for the periods specified by Rules 3-01 and 3-02 of Regulation S-X.
Recent accounting standards adopted during 2019:
Lease accounting
In February 2016, the FASB issued an accounting standard, ASC 842, Leases, that requires lessees to recognize lease-related assets and liabilities on the balance sheet. We adopted the new standard on its required effective date of January 1, 2019 (refer to “Part I. Financial Information—Item 1. Financial Statements (Unaudited)—Note 3—Summary of significant accounting policies”). We periodically
enter into intercompany lease agreements whereby a 100%-owned AerCap legal entity is both a lessor and a lessee of the aircraft asset. As a lessee of the aircraft, the entity is subject to the ASC 842 requirements. Although these leases are eliminated upon consolidation, they are presented discretely within the supplemental guarantor Condensed Consolidating Balance Sheets. As of September 30, 2019, operating lease ROU assets and liabilities are included in other assets and other liabilities, respectively, in our Condensed Consolidating Balance Sheets. Operating lease-related assets and liabilities in AerCap Trust, AICDC, the Subsidiary Guarantors and the non-guarantor subsidiaries totaled $1.6 billion as of September 30,
2019.
Guarantors
consist of AerCap U.S. Global Aviation LLC, AerCap Aviation Solutions B.V., AerCap Ireland Ltd. and ILFC. AerCap Global Aviation Trust and AerCap Ireland Capital Designated Activity Company, which are presented separately as co-issuers of the AGAT/AICDC Notes, are guarantors of the Junior Subordinated Notes.
Guarantors
consist of AerCap U.S. Global Aviation LLC, AerCap Aviation Solutions B.V., AerCap Ireland Ltd. and ILFC. AerCap Global Aviation Trust and AerCap Ireland Capital Designated Activity Company, which are presented separately as co-issuers of the AGAT/AICDC Notes, are guarantors of the Junior Subordinated Notes.
Net
income attributable to non-controlling interest
—
—
—
(2
)
—
—
(2
)
Net
income (loss) attributable to AerCap Holdings N.V.
$
270
$
157
$
101
$
288
$
(48
)
$
(498
)
$
270
(a)
Guarantors
consist of AerCap U.S. Global Aviation LLC, AerCap Aviation Solutions B.V., AerCap Ireland Ltd. and ILFC. AerCap Global Aviation Trust and AerCap Ireland Capital Designated Activity Company, which are presented separately as co-issuers of the AGAT/AICDC Notes, are guarantors of the Junior Subordinated Notes.
Net
income attributable to non-controlling interest
—
—
—
—
(1
)
—
(1
)
Net
income (loss) attributable to AerCap Holdings N.V.
$
263
$
220
$
183
$
208
$
(112
)
$
(499
)
$
263
(a)
Guarantors
consist of AerCap U.S. Global Aviation LLC, AerCap Aviation Solutions B.V., AerCap Ireland Ltd. and ILFC. AerCap Global Aviation Trust and AerCap Ireland Capital Designated Activity Company, which are presented separately as co-issuers of the AGAT/AICDC Notes, are guarantors of the Junior Subordinated Notes.
Net
income attributable to non-controlling interest
—
—
—
(16
)
(1
)
—
(17
)
Net
income (loss) attributable to AerCap Holdings N.V.
$
836
$
596
$
463
$
874
$
(199
)
$
(1,734
)
$
836
(a)
Guarantors
consist of AerCap U.S. Global Aviation LLC, AerCap Aviation Solutions B.V., AerCap Ireland Ltd. and ILFC. AerCap Global Aviation Trust and AerCap Ireland Capital Designated Activity Company, which are presented separately as co-issuers of the AGAT/AICDC Notes, are guarantors of the Junior Subordinated Notes.
Net
income attributable to non-controlling interest
—
—
—
—
(1
)
—
(1
)
Net
income (loss) attributable to AerCap Holdings N.V.
$
783
$
676
$
572
$
774
$
(369
)
$
(1,653
)
$
783
(a)
Guarantors
consist of AerCap U.S. Global Aviation LLC, AerCap Aviation Solutions B.V., AerCap Ireland Ltd. and ILFC. AerCap Global Aviation Trust and AerCap Ireland Capital Designated Activity Company, which are presented separately as co-issuers of the AGAT/AICDC Notes, are guarantors of the Junior Subordinated Notes.
AerCap Ireland Capital Designated Activity Company (a)
Guarantors (a)
Non- Guarantors
Eliminations
Total
(U.S.
Dollars in millions)
Net income (loss)
$
270
$
157
$
101
$
290
$
(48
)
$
(498
)
$
272
Other
comprehensive loss:
Net
change in fair value of derivatives, net of tax
—
—
—
(11
)
(1
)
—
(12
)
Total
other comprehensive loss
—
—
—
(11
)
(1
)
—
(12
)
Comprehensive
income (loss)
270
157
101
279
(49
)
(498
)
260
Comprehensive
income attributable to non-controlling interest
—
—
—
(2
)
—
—
(2
)
Total
comprehensive income (loss) attributable to AerCap Holdings N.V.
$
270
$
157
$
101
$
277
$
(49
)
$
(498
)
$
258
(a)
Guarantors
consist of AerCap U.S. Global Aviation LLC, AerCap Aviation Solutions B.V., AerCap Ireland Ltd. and ILFC. AerCap Global Aviation Trust and AerCap Ireland Capital Designated Activity Company, which are presented separately as co-issuers of the AGAT/AICDC Notes, are guarantors of the Junior Subordinated Notes.
Condensed
Consolidating Statement of Comprehensive Income
AerCap
Ireland Capital Designated Activity Company (a)
Guarantors (a)
Non- Guarantors
Eliminations
Total
(U.S. Dollars in millions)
Net income (loss)
$
263
$
220
$
183
$
208
$
(111
)
$
(499
)
$
264
Other
comprehensive income:
Net
change in fair value of derivatives, net of tax
—
—
—
10
—
—
10
Total
other comprehensive income
—
—
—
10
—
—
10
Comprehensive
income (loss)
263
220
183
218
(111
)
(499
)
274
Comprehensive
income attributable to non-controlling interest
—
—
—
—
(1
)
—
(1
)
Total
comprehensive income (loss) attributable to AerCap Holdings N.V.
$
263
$
220
$
183
$
218
$
(112
)
$
(499
)
$
273
(a)
Guarantors
consist of AerCap U.S. Global Aviation LLC, AerCap Aviation Solutions B.V., AerCap Ireland Ltd. and ILFC. AerCap Global Aviation Trust and AerCap Ireland Capital Designated Activity Company, which are presented separately as co-issuers of the AGAT/AICDC Notes, are guarantors of the Junior Subordinated Notes.
AerCap Ireland Capital Designated Activity Company (a)
Guarantors (a)
Non- Guarantors
Eliminations
Total
(U.S.
Dollars in millions)
Net income (loss)
$
836
$
596
$
463
$
890
$
(198
)
$
(1,734
)
$
853
Other
comprehensive loss:
Net
change in fair value of derivatives, net of tax
—
—
—
(100
)
(6
)
—
(106
)
Total
other comprehensive loss
—
—
—
(100
)
(6
)
—
(106
)
Comprehensive
income (loss)
836
596
463
790
(204
)
(1,734
)
747
Comprehensive
income attributable to non-controlling interest
—
—
—
(16
)
(1
)
—
(17
)
Total
comprehensive income (loss) attributable to AerCap Holdings N.V.
$
836
$
596
$
463
$
774
$
(205
)
$
(1,734
)
$
730
(a)
Guarantors
consist of AerCap U.S. Global Aviation LLC, AerCap Aviation Solutions B.V., AerCap Ireland Ltd. and ILFC. AerCap Global Aviation Trust and AerCap Ireland Capital Designated Activity Company, which are presented separately as co-issuers of the AGAT/AICDC Notes, are guarantors of the Junior Subordinated Notes.
Condensed
Consolidating Statement of Comprehensive Income
AerCap
Ireland Capital Designated Activity Company (a)
Guarantors (a)
Non- Guarantors
Eliminations
Total
(U.S. Dollars in millions)
Net income (loss)
$
783
$
676
$
572
$
774
$
(368
)
$
(1,653
)
$
784
Other
comprehensive income:
Net
change in fair value of derivatives, net of tax
—
—
—
35
3
—
38
Total
other comprehensive income
—
—
—
35
3
—
38
Comprehensive
income (loss)
783
676
572
809
(365
)
(1,653
)
822
Comprehensive
income attributable to non-controlling interest
—
—
—
—
(1
)
—
(1
)
Total
comprehensive income (loss) attributable to AerCap Holdings N.V.
$
783
$
676
$
572
$
809
$
(366
)
$
(1,653
)
$
821
(a)
Guarantors
consist of AerCap U.S. Global Aviation LLC, AerCap Aviation Solutions B.V., AerCap Ireland Ltd. and ILFC. AerCap Global Aviation Trust and AerCap Ireland Capital Designated Activity Company, which are presented separately as co-issuers of the AGAT/AICDC Notes, are guarantors of the Junior Subordinated Notes.
Amortization
of debt issuance costs, debt discount, debt premium and lease premium
—
14
4
—
43
—
61
Amortization
of fair value adjustments on debt
—
(62
)
—
—
—
—
(62
)
Maintenance
rights write-off
—
93
—
10
72
—
175
Maintenance
liability release to income
—
(46
)
—
(20
)
(77
)
—
(143
)
Net
gain on sale of assets
—
(54
)
—
(8
)
(78
)
—
(140
)
Deferred
income taxes
—
49
(20
)
43
60
—
132
Collections
of finance and sales-type leases
—
31
—
18
24
—
73
Other
25
7
—
41
61
—
134
Cash
flow from operating activities before changes in working capital
26
734
(149
)
494
1,292
—
2,397
Working
capital
400
(239
)
(541
)
(380
)
701
—
(59
)
Net
cash provided by (used in) operating activities
426
495
(690
)
114
1,993
—
2,338
Purchase
of flight equipment
—
(610
)
—
(326
)
(1,461
)
—
(2,397
)
Proceeds
from sale or disposal of assets
—
415
—
149
608
—
1,172
Prepayments
on flight equipment
—
(350
)
—
(1
)
(664
)
—
(1,015
)
Net
cash used in investing activities
—
(545
)
—
(178
)
(1,517
)
—
(2,240
)
Issuance
of debt
—
2,857
698
4
1,780
—
5,339
Repayment
of debt
—
(3,101
)
—
(8
)
(2,414
)
—
(5,523
)
Debt
issuance costs paid, net of debt premium received
—
(3
)
(2
)
—
(14
)
—
(19
)
Maintenance
payments received
—
165
—
86
313
—
564
Maintenance
payments returned
—
(71
)
—
(28
)
(150
)
—
(249
)
Security
deposits received
—
97
—
47
56
—
200
Security
deposits returned
—
(68
)
—
(27
)
(100
)
—
(195
)
Dividend
paid to non-controlling interest holders
—
—
—
—
(5
)
—
(5
)
Repurchase
of shares and tax withholdings on share-based compensation
(426
)
—
—
—
—
—
(426
)
Net
cash (used in) provided by financing activities
(426
)
(124
)
696
74
(534
)
—
(314
)
Net
(decrease) increase in cash, cash equivalents and restricted cash
—
(174
)
6
10
(58
)
—
(216
)
Effect
of exchange rate changes
—
—
—
(2
)
—
—
(2
)
Cash,
cash equivalents and restricted cash at beginning of period
3
318
6
738
350
—
1,415
Cash,
cash equivalents and restricted cash at end of period
$
3
$
144
$
12
$
746
$
292
$
—
$
1,197
(a)
Guarantors
consist of AerCap U.S. Global Aviation LLC, AerCap Aviation Solutions B.V., AerCap Ireland Ltd. and ILFC. AerCap Global Aviation Trust and AerCap Ireland Capital Designated Activity Company, which are presented separately as co-issuers of the AGAT/AICDC Notes, are guarantors of the Junior Subordinated Notes.
Amortization
of debt issuance costs, debt discount, debt premium and lease premium
—
14
4
2
40
—
60
Amortization
of fair value adjustments on debt
—
(115
)
—
—
(1
)
—
(116
)
Maintenance
rights write-off
—
104
—
8
123
—
235
Maintenance
liability release to income
—
(48
)
—
(31
)
(98
)
—
(177
)
Net
gain on sale of assets
—
(44
)
—
(13
)
(104
)
—
(161
)
Deferred
income taxes
(2
)
63
(15
)
30
42
—
118
Other
43
8
—
20
17
—
88
Cash
flow from operating activities before changes in working capital
27
859
(115
)
319
1,024
—
2,114
Working
capital
553
(891
)
68
(80
)
298
—
(52
)
Net
cash provided by (used in) operating activities
580
(32
)
(47
)
239
1,322
—
2,062
Purchase
of flight equipment
—
(672
)
—
(806
)
(722
)
—
(2,200
)
Proceeds
from sale or disposal of assets
—
651
—
120
567
—
1,338
Prepayments
on flight equipment
—
(462
)
—
—
(1,044
)
—
(1,506
)
Collections
of finance and sales-type leases
—
36
—
18
20
—
74
Other
—
—
—
—
(21
)
—
(21
)
Net
cash used in investing activities
—
(447
)
—
(668
)
(1,200
)
—
(2,315
)
Issuance
of debt
—
2,409
50
—
1,611
—
4,070
Repayment
of debt
—
(2,025
)
—
(17
)
(1,940
)
—
(3,982
)
Debt
issuance costs paid, net of debt premium received
—
(21
)
—
(1
)
(31
)
—
(53
)
Maintenance
payments received
—
189
—
65
314
—
568
Maintenance
payments returned
—
(126
)
—
(14
)
(224
)
—
(364
)
Security
deposits received
—
43
—
41
57
—
141
Security
deposits returned
—
(58
)
—
(31
)
(56
)
—
(145
)
Dividend
paid to non-controlling interest holders
—
—
—
—
(3
)
—
(3
)
Repurchase
of shares and tax withholdings on share-based compensation
(597
)
—
—
—
—
—
(597
)
Net
cash (used in) provided by financing activities
(597
)
411
50
43
(272
)
—
(365
)
Net
(decrease) increase in cash, cash equivalents and restricted cash
(17
)
(68
)
3
(386
)
(150
)
—
(618
)
Effect
of exchange rate changes
—
—
—
3
—
—
3
Cash,
cash equivalents and restricted cash at beginning of period
21
222
14
1,237
530
—
—
2,024
Cash,
cash equivalents and restricted cash at end of period
$
4
$
154
$
17
$
854
$
380
$
—
$
1,409
(a)
Guarantors
consist of AerCap U.S. Global Aviation LLC, AerCap Aviation Solutions B.V., AerCap Ireland Ltd. and ILFC. AerCap Global Aviation Trust and AerCap Ireland Capital Designated Activity Company, which are presented separately as co-issuers of the AGAT/AICDC Notes, are guarantors of the Junior Subordinated Notes.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(U.S. Dollars in thousands or as otherwise stated, except share and per share data)
26. Subsequent events
Junior Subordinated Notes
In October 2019, AerCap Holdings N.V. issued $750.0 million aggregate principal amount of 5.875% fixed-rate reset junior subordinated notes due 2079. The Junior Subordinated Notes are fully and unconditionally guaranteed on a junior subordinated basis by certain subsidiaries of AerCap Holdings N.V. The proceeds will be used for general
corporate purposes.
Share repurchase program
In November 2019, our Board of Directors approved a share repurchase program authorizing total repurchases of up to$200 million of AerCap ordinary shares through March 31, 2020. Repurchases under the program may be made through open market purchases or privately negotiated transactions in accordance with applicable U.S. federal securities laws. The timing of repurchases and the exact number of common shares to be purchased will be determined by the Company's management, in its discretion, and will depend upon market conditions and other factors. The program will be funded using the Company's cash on hand and cash generated
from operations. The program may be suspended or discontinued at any time.
50
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read this discussion in conjunction with our unaudited Condensed Consolidated Financial Statements and the related notes included in this Interim Report. Our financial statements are presented in accordance with U.S. GAAP,
and are presented in U.S. dollars. Due to rounding, numbers presented throughout this document may not add up precisely to the totals provided and percentages may not precisely reflect the absolute figures.
Special note about forward looking statements
This report includes “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We have based these forward looking statements largely on our current beliefs and projections about future events and financial trends affecting our business. Many important factors, in addition to those discussed in this report, could cause our actual results to differ substantially from those anticipated in our forward looking statements, including, among other things:
•
the
availability of capital to us and to our customers and changes in interest rates;
•
the ability of our lessees and potential lessees to make operating lease payments to us;
•
our ability to successfully negotiate aircraft purchases, sales and leases, to collect outstanding amounts due and to repossess aircraft under defaulted leases, and to control costs and expenses;
•
changes
in the overall demand for commercial aircraft leasing and aircraft management services;
•
the effects of terrorist attacks on the aviation industry and on our operations;
•
the economic condition of the global airline and cargo industry and economic and political conditions;
•
development of increased
government regulation, including regulation of trade and the imposition of import and export controls, tariffs and other trade barriers;
•
competitive pressures within the industry;
•
the negotiation of aircraft management services contracts;
•
regulatory
changes affecting commercial aircraft operators, aircraft maintenance, engine standards, accounting standards and taxes; and
•
the risks set forth or referred to in “Part II. Other Information—Item 1A. Risk Factors” included below.
The words “believe,”“may,”“will,”“aim,”“estimate,”“continue,”“anticipate,”“intend,”“expect” and similar words are intended to identify forward looking statements. Forward looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities,
the effects of future regulation and the effects of competition. Forward looking statements speak only as of the date they were made and we undertake no obligation to update publicly or to revise any forward looking statements because of new information, future events or other factors. In light of the risks and uncertainties described above, the forward looking events and circumstances described in this report might not occur and are not guarantees of future performance.
Aircraft portfolio
We are the global leader in aircraft leasing. We focus on acquiring in-demand aircraft at attractive prices, funding them efficiently, hedging interest rate risk prudently and using our platform to deploy these assets with the objective of delivering superior risk-adjusted returns. We believe that by applying our expertise, we will be able to identify and execute on a broad range of market opportunities
that we expect will generate attractive returns for our shareholders. We are an independent aircraft lessor, and, as such, we are not affiliated with any airframe or engine manufacturer. This independence provides us with purchasing flexibility to acquire aircraft or engine models regardless of the manufacturer.
51
As of September 30, 2019, we owned 946 aircraft and we managed 94
aircraft. As of September 30, 2019, we also had 320 new aircraft on order. As of September 30, 2019, the weighted average age of our 946 owned aircraft fleet, weighted by net book value, was 6.2 years, and as of September 30, 2018, the weighted average age of our 952 owned aircraft fleet, weighted by net book value, was 6.6 years. We operate our business on a global basis. As of September 30, 2019, 937 of our 946
owned aircraft were on lease to 156 customers in 68 countries and nine aircraft were off-lease. As of November 6, 2019, four of the off-lease aircraft were re-leased or under commitments for re-lease, four aircraft were designated for sale or part-out, and one aircraft was sold.
The following table presents our aircraft portfolio by type of aircraft as of September 30, 2019:
Aircraft
type
Number of owned aircraft
Percentage of total net book value
Number of managed aircraft
Number of on order aircraft
Total owned, managed and on order aircraft
Airbus
A320 Family
294
15
%
39
—
333
Airbus
A320neo Family
124
17
%
—
151
275
Airbus
A330
65
7
%
11
—
76
Airbus
A350
26
10
%
—
3
29
Boeing
737NG
245
17
%
37
—
282
Boeing
737 MAX
5
1
%
—
95
100
Boeing
767
29
—
—
—
29
Boeing
777-200ER
17
1
%
4
—
21
Boeing
777-300/300ER
23
4
%
2
—
25
Boeing
787
87
28
%
1
26
114
Embraer
E190/195-E2
5
—
—
45
50
Other
26
—
—
—
26
Total
946
100
%
94
320
1,360
On
March 13, 2019, the Federal Aviation Administration issued an order to suspend operations of all Boeing 737 MAX aircraft in the U.S. and by U.S. aircraft operators following two recent fatal accidents involving Boeing 737 MAX aircraft. Non-U.S. civil aviation authorities have also issued directives to similar effect. Boeing has suspended deliveries of the Boeing 737 MAX until clearance is granted by the appropriate regulatory authorities. Prior to the grounding, we had delivered five Boeing 737 MAX aircraft that are currently on lease to an airline customer, and we currently have 95 Boeing 737 MAX aircraft on order. It is uncertain when and under what conditions the Boeing 737 MAX will return to service and when Boeing will resume making deliveries of these aircraft. As a result, we have incurred delays and expect to incur future delays on our scheduled Boeing 737 MAX deliveries.
During
the nine months ended September 30, 2019, we had the following activity related to flight equipment:
Held for operating leases
Net investment in finance and sales-type leases
Held
for sale
Total owned aircraft
Number of owned aircraft at beginning of period
884
71
7
962
Aircraft
purchases
44
—
—
44
Aircraft reclassified to held for sale
(63
)
—
63
—
Aircraft
sold or designated for part-out
(16
)
(1
)
(43
)
(60
)
Aircraft reclassified to net investment in finance and sales-type leases
(9
)
9
—
—
Number
of owned aircraft at end of period
840
79
27
946
Critical accounting policies
There
have been no significant changes to our critical accounting policies from those disclosed in our Annual Report on Form 20-F for the year ended December 31, 2018, filed with the SEC on March 8, 2019, except for the additions and updates as described in “Part I. Financial Information—Item 1. Financial Statements (Unaudited)—Note 3—Summary of significant accounting policies.”
Income before income taxes and income of investments
accounted for under the equity method
326,501
300,655
Provision for income taxes
(42,445
)
(39,089
)
Equity in net earnings of investments accounted
for under the equity method
(12,065
)
2,711
Net income
$
271,991
$
264,277
Net
income attributable to non-controlling interest
(1,701
)
(926
)
Net income attributable to AerCap Holdings N.V.
$
270,290
$
263,351
Diluted
earnings per share
$
2.01
$
1.79
Basic lease rents. Basic lease rents increased by $28.1 million, or 3%, to $1,066.6 million during the three months ended September 30,
2019 from $1,038.5 million during the three months ended September 30, 2018. The increase in basic lease rents was attributable to:
•
the acquisition of 93 aircraft between July 1, 2018 and September 30, 2019 with an aggregate net book value of $6.9 billion on their respective acquisition dates, resulting in an increase in basic lease rents of $134.1 million,
partially
offset by
•
the sale of 100 aircraft between July 1, 2018 and September 30, 2019 with an aggregate net book value of $1.8 billion on their sale dates, resulting in a decrease in basic lease rents of $62.9 million; and
•
a decrease in basic lease rents of $43.1 million primarily due to re-leases and extensions at lower rates. The accounting for the extensions requires the remaining rental payments
to be recorded on a straight-line basis over the remaining term of the original lease plus the extension period.
53
Maintenance rents and other receipts. Maintenance rents and other receipts decreased by $21.3 million, or 23%, to $72.6
million during the three months ended September 30, 2019 from $93.9 million during the three months ended September 30, 2018. The decrease in maintenance rents and other receipts was attributable to:
•
a decrease of $15.1 million in maintenance revenue and other receipts from early lease terminations; and
•
a
decrease of $6.2 million in maintenance revenue and other receipts, primarily due to lower recurring revenue due to one-time adjustments related to lease extensions, partially offset by higher revenue recognized upon lease expirations, at which time we recognize any retained maintenance-related balances as revenue.
Net gain on sale of assets. Net gain on sale of assets increased by $20.5 million, or 103%, to $40.5 million during the three months ended September 30, 2019 from $20.0 million during the three months ended September
30, 2018. The increase was primarily due to the volume and composition of asset sales. During the three months ended September 30, 2019, we sold 19 aircraft for $561.3 million and during the three months ended September 30, 2018 we sold 13 aircraft for $187.5 million.
Depreciation and amortization. Depreciation and amortization increased by $2.6 million, or 0.6%, to $415.3 million during the three months ended September
30, 2019 from $412.7 million during the three months ended September 30, 2018. The increase was primarily due to aircraft purchases, partially offset by aircraft sales.
Asset impairment. We recognized aggregate impairment charges of $31.2 million during the three months ended September 30, 2019, compared to $12.8 million during the three months ended September 30, 2018. These impairments, which related to lease
terminations, were partially offset by lease revenue recognized when we retained maintenance-related balances or received EOL compensation.
Interest expense. Interest expense increased by $20.2 million, or 7%, to $312.3 million during the three months ended September 30, 2019 from $292.1 million during the three months ended September 30, 2018. The increase in interest expense was primarily attributable to:
•
an
$8.3 million increase in interest expense attributable to an increase in mark-to-market losses on interest rate caps. For the three months ended September 30, 2019, we recognized a loss of $3.4 million related to mark-to-market movements on interest rate caps, compared to a gain of $4.9 million recognized during the three months ended September 30, 2018;
•
an increase in the average cost of debt to 4.2% for the three months ended September 30, 2019, compared to
4.1% for the three months ended September 30, 2018. The average cost of debt excludes the effect of mark-to-market movements on interest rate caps. The increase in the average cost of debt was primarily due to the reduction in debt assumed as part of the ILFC Transaction, which had lower reported interest expense as a result of the application of the acquisition method of accounting to the debt. The increase in the average cost of debt resulted in a $6.8 million increase in interest expense; and
•
a $0.5 billion increase in the average outstanding debt balance to $29.4 billion for the three months ended September
30, 2019 from $28.9 billion for the three months ended September 30, 2018, resulting in a $5.1 million increase in interest expense.
Leasing expenses. Leasing expenses decreased by $40.7 million, or 48%, to $44.1 million during the three months ended September 30, 2019 from $84.8 million during the three months ended September 30, 2018. The decrease
was primarily due to $19.6 million of lower maintenance rights asset amortization, $14.3 million of lower expenses primarily related to airline defaults and restructuring and $6.8 million of lower aircraft transition costs, lessor maintenance contributions and other leasing expenses.
Provision for income taxes. Provision for income taxes increased by $3.4 million, or 9%, to $42.4 million during the three months ended September 30, 2019 from $39.1 million during the three months ended September 30, 2018.
The effective tax rate for the full year 2019 is expected to be 13.0%, compared to the effective tax rate of 12.5% for the full year 2018. The effective tax rate is impacted by the source and amount of earnings among our different tax jurisdictions. The effective tax rate was 13.0% for the three months ended September 30, 2019 and 2018. The effective tax rate in any period can be impacted by revisions to the estimated full year rate.
Diluted earnings per share. Diluted earnings per share increased by $0.22, or 12%, to $2.01
during the three months ended September 30, 2019 from $1.79 during the three months ended September 30, 2018. The increase was driven by the same factors affecting net income and the repurchase of 14.7 million shares from July 2018 through September 2019.
Income before income taxes and income of investments
accounted for under the equity method
990,011
891,755
Provision for income taxes
(128,701
)
(115,932
)
Equity in net earnings of investments
accounted for under the equity method
(8,028
)
8,520
Net income
$
853,282
$
784,343
Net
income attributable to non-controlling interest
(17,346
)
(1,353
)
Net income attributable to AerCap Holdings N.V.
$
835,936
$
782,990
Diluted
earnings per share
$
6.10
$
5.21
Basic lease rents. Basic lease rents increased by $124.4 million, or 4%, to $3,218.9 million during the nine months ended September 30,
2019 from $3,094.5 million during the nine months ended September 30, 2018. The increase in basic lease rents was attributable to:
•
the acquisition of 120 aircraft between January 1, 2018 and September 30, 2019 with an aggregate net book value of $9.3 billion on their respective acquisition dates, resulting in an increase in basic lease rents of $420.3 million,
partially
offset by
•
the sale of 151 aircraft between January 1, 2018 and September 30, 2019 with an aggregate net book value of $3.0 billion on their sale dates, resulting in a decrease in basic lease rents of $218.0 million; and
•
a decrease in basic lease rents of $77.9 million primarily due to re-leases and extensions at lower rates. The accounting for the extensions requires the remaining rental
payments to be recorded on a straight-line basis over the remaining term of the original lease plus the extension period.
55
Maintenance rents and other receipts. Maintenance rents and other receipts decreased by $20.7 million, or 7%, to $268.5
million during the nine months ended September 30, 2019 from $289.2 million during the nine months ended September 30, 2018. The decrease in maintenance rents and other receipts was attributable to:
•
a decrease of $12.2 million in maintenance revenue and other receipts from early lease terminations; and
•
a
decrease of $8.5 million in maintenance revenue and other receipts, primarily due to lower recurring revenue due to one-time adjustments related to lease extensions, partially offset by higher revenue recognized upon lease expirations, at which time we recognize any retained maintenance-related balances as revenue.
Net gain on sale of assets. Net gain on sale of assets decreased by $20.3 million, or 13%, to $140.2 million during the nine months ended September 30, 2019 from $160.5 million during the nine months ended September
30, 2018. The decrease was primarily due to the volume and composition of asset sales. During the nine months ended September 30, 2019, we sold 60 aircraft for $1,403.7 million and during the nine months ended September 30, 2018 we sold 64 aircraft for $1,682.0 million.
Other income. Other income increased by $16.7 million, or 46%, to $52.7 million during the nine months ended September 30, 2019
from $36.0 million during the nine months ended September 30, 2018. During the nine months ended September 30, 2019, we recognized higher other income primarily related to net insurance proceeds and higher interest income.
Depreciation and amortization. Depreciation and amortization increased by $7.1 million, or 1%, to $1,260.3 million during the nine months ended September 30, 2019 from $1,253.2
million during the nine months ended September 30, 2018. The increase was primarily due to aircraft purchases, partially offset by aircraft sales.
Asset impairment. We recognized aggregate impairment charges of $54.0 million during the nine months ended September 30, 2019, compared to $28.9 million during the nine months ended September 30, 2018. These impairments, which related to sales transactions and lease terminations, were partially offset by lease revenue
recognized when we retained maintenance-related balances or received EOL compensation.
Interest expense. Interest expense increased by $127.5 million, or 15%, to $978.9 million during the nine months ended September 30, 2019 from $851.4 million during the nine months ended September 30, 2018. The increase in interest expense was primarily attributable to:
•
a
$55.1 million increase in interest expense attributable to an increase in mark-to-market losses on interest rate caps. For the nine months ended September 30, 2019, we recognized a loss of $29.1 million related to mark-to-market movements on interest rate caps, compared to a gain of $26.0 million recognized during the nine months ended September 30, 2018;
•
a $1.2 billion increase in the average outstanding debt balance to $29.9 billion for the nine months ended September 30, 2019
from $28.7 billion for the nine months ended September 30, 2018, resulting in a $37.0 million increase in interest expense; and
•
an increase in the average cost of debt to 4.2% for the nine months ended September 30, 2019, compared to 4.1% for the nine months ended September 30, 2018. The average cost of debt excludes the effect of mark-to-market movements on interest rate caps. The increase in the average cost of debt was primarily due to the reduction in debt
assumed as part of the ILFC Transaction, which had lower reported interest expense as a result of the application of the acquisition method of accounting to the debt. The increase in the average cost of debt resulted in a $35.4 million increase in interest expense.
Leasing expenses. Leasing expenses decreased by $119.5 million, or 37%, to $201.0 million during the nine months ended September 30, 2019 from $320.6 million during the nine months ended September 30, 2018. The decrease was primarily due to $70.8 million
of lower maintenance rights asset amortization and $62.1 million of lower expenses primarily related to airline defaults and restructuring, partially offset by $13.4 million of higher aircraft transition costs, lessor maintenance contributions and other leasing expenses.
56
Selling, general and administrative expenses. Selling, general and administrative expenses decreased by $38.3 million, or 16%, to
$196.1 million during the nine months ended September 30, 2019 from $234.5 million during the nine months ended September 30, 2018. The decrease was primarily due to lower compensation-related expenses.
Provision for income taxes. Provision for income taxes increased by $12.8 million, or 11%, to $128.7 million during the nine months ended September 30, 2019
from $115.9 million during the nine months ended September 30, 2018. The effective tax rate for the full year 2019 is expected to be 13.0%, compared to the effective tax rate of 12.5% for the full year 2018. The effective tax rate is impacted by the source and amount of earnings among our different tax jurisdictions. The effective tax rate was 13.0% for the nine months ended September 30, 2019 and 2018. The effective tax rate in any period can be impacted by revisions to the estimated full year rate.
Diluted
earnings per share. Diluted earnings per share increased by $0.89, or 17%, to $6.10 during the nine months ended September 30, 2019 from $5.21 during the nine months ended September 30, 2018. The increase was driven by the same factors affecting net income and the repurchase of 22.5 million shares from January 2018 through September 2019.
57
Liquidity
and capital resources
The following table presents our consolidated cash flows for the nine months ended September 30, 2019 and 2018:
Cash flows provided by operating activities. During the nine months ended September 30, 2019, our cash provided by operating activities of $2,337.4 million was the result of net income of $853.3 million, non-cash and other adjustments to net income of $1,470.3 million
and collections of finance and sales-type leases of $72.8 million (which was included in cash flows used in investing activities during the nine months ended September 30, 2018), partially offset by the net change in operating assets and liabilities of $59.0 million. During the nine months ended September 30, 2018, our cash provided by operating activities of $2,061.9 million was the result of net income of $784.3 million, non-cash and other adjustments to net income of $1,329.7 million, partially offset by the net change in operating assets and liabilities
of $52.1 million.
Cash flows used in investing activities. During the nine months ended September 30, 2019, our cash used in investing activities of $2,240.2 million primarily consisted of cash used for the purchase of aircraft and other assets of $3,412.1 million, partially offset by cash provided by asset sales proceeds of $1,171.9 million. During the nine months ended September 30, 2018, our cash used in investing activities of $2,314.9 million primarily consisted of cash used for the
purchase of aircraft and other fixed assets of $3,727.3 million, partially offset by cash provided by asset sales proceeds of $1,338.8 million and collections of finance and sale-type leases of $73.6 million.
Cash flows used in financing activities. During the nine months ended September 30, 2019, our cash used in financing activities of $313.7 million primarily consisted of cash used for debt repayments and debt issuance costs, net of new financing proceeds and debt premium of $202.5 million, cash used for the repurchase of shares and payments of tax withholdings on share-based
compensation of $425.6 million and cash used for the payment of dividends to our non-controlling interest holders of $4.8 million, partially offset by cash provided by net receipts of maintenance and security deposits of $319.2 million. During the nine months ended September 30, 2018, our cash used in financing activities of $365.4 million primarily consisted of cash used for the repurchase of shares and payments of tax withholdings on share-based compensation of $597.0 million and cash used for the payment of dividends to our non-controlling interest holders of $2.7 million, partially offset by cash provided
by net receipts of maintenance and security deposits of $199.5 million and cash provided by new financing proceeds, net of debt repayments and debt issuance costs of $34.8 million.
We have significant capital requirements, including making pre-delivery payments and paying the balance of the purchase price for aircraft on delivery. As of September 30, 2019, we had 320 new aircraft on order, including 151 Airbus A320neo Family aircraft, 95 Boeing 737 MAX aircraft, 45 Embraer E-Jets E2 aircraft, 26 Boeing 787 aircraft,
and three Airbus A350 aircraft. As a result, we will need to raise additional funds to satisfy these requirements, which we expect to do through a combination of accessing committed debt facilities and securing additional financing, if needed, from capital markets transactions or other sources of capital. If other sources of capital are not available to us, we may need to raise additional funds through selling aircraft or other aircraft investments, including participations in our joint ventures.
As of September 30, 2019, our existing sources of liquidity of $12.2 billion, including estimated operating cash flows of $3.1 billion, were sufficient to operate our business and cover at least 2.0x of
our debt maturities and contracted capital requirements for the next 12 months. Our sources of liquidity for the next 12 months include undrawn lines of credit, unrestricted cash, estimated operating cash flows, cash flows from contracted asset sales and other sources of funding.
As of September 30, 2019, our cash balance was $1.2 billion, including unrestricted cash of $1.0 billion, and we had approximately $6.9 billion of undrawn lines of credit available under our revolving credit and term loan facilities. As of September 30, 2019, our total available liquidity, including undrawn lines of credit,
unrestricted cash, cash flows from contracted asset sales and other sources of funding, was $9.1 billion and, including estimated operating cash flows for the next 12 months, our total sources of liquidity were $12.2 billion. As of September 30, 2019, the principal amount of our outstanding indebtedness, which excludes fair value adjustments of $112.8 million and debt issuance costs, debt discounts and debt premium of $138.9 million, totaled $29.3 billion and consisted of senior unsecured, subordinated and senior secured notes, export credit facilities, commercial bank debt, revolving credit debt, securitization
debt and capital lease structures.
58
In order to satisfy our contractual purchase obligations, we expect to source new debt finance through access to the capital markets, including the unsecured and secured bond markets, the commercial bank market, export credit and the asset-backed securities market.
In the longer term, we expect to fund the growth of our business, including acquiring aircraft, through internally generated cash flows, the incurrence of new debt, the refinancing of existing debt and other capital raising
initiatives.
During the nine months ended September 30, 2019, our average cost of debt, excluding the effect of mark-to-market movements on our interest rate caps, was 4.2%. As of September 30, 2019, our adjusted debt to equity ratio was 2.75 to 1. Please refer to “Part I. Financial Information—Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP measures” for reconciliations of adjusted debt and adjusted equity to the most closely related U.S. GAAP measures as of September 30, 2019 and December 31, 2018.
Contractual
obligations
Our contractual obligations consist of principal and interest payments on debt (excluding fair value adjustments, debt issuance costs, debt discounts and debt premium), executed purchase agreements to purchase aircraft and rent payments pursuant to our office and facility leases. We intend to fund our contractual obligations through unrestricted cash, lines-of-credit and other borrowings, operating cash flows and cash flows from asset sales. We believe that our sources of liquidity will be sufficient to meet our contractual obligations.
The following table provides details regarding our contractual obligations and their payment dates as of September 30, 2019:
2019
- remaining
2020
2021
2022
2023
Thereafter
Total
(U.S.
Dollars in millions)
Unsecured debt facilities
$
—
$
2,650.0
$
3,550.0
$
4,254.0
$
1,870.0
$
5,100.0
$
17,424.0
Secured
debt facilities
224.2
1,247.4
965.8
2,749.3
1,803.5
3,347.9
10,338.1
Subordinated
debt facilities
—
—
—
—
—
1,547.5
1,547.5
Estimated
interest payments (a)
314.4
1,247.6
1,005.3
789.9
501.4
3,045.3
6,903.9
Purchase
obligations (b)
1,507.1
4,081.1
4,736.9
3,180.6
1,777.1
213.4
15,496.2
Operating
leases (c)
2.4
8.7
8.2
8.2
8.3
33.1
68.9
Total
$
2,048.1
$
9,234.8
$
10,266.2
$
10,982.0
$
5,960.3
$
13,287.2
$
51,778.6
(a)
Estimated
interest payments for floating rate debt are based on rates as of September 30, 2019. Estimated interest payments include the estimated impact of our interest rate swap agreements.
(b)
Includes commitments to purchase 317 aircraft and three purchase and leaseback transactions. The timing of payments is based on our estimates of expected delivery dates.
(c)
Represents contractual payments on our office and facility leases.
Off-balance
sheet arrangements
We have interests in variable interest entities, some of which are not consolidated into our Condensed Consolidated Financial Statements. Please refer to “Part I. Financial Information—Item 1. Financial Statements (Unaudited)—Note 21—Variable interest entities” for a detailed description of these interests and our other off-balance sheet arrangements.
The following are definitions of our non-GAAP measures and a reconciliation of such measures to the most closely related U.S. GAAP measures for the nine months ended September 30, 2019.
Net interest margin, annualized net spread and annualized net spread less depreciation and amortization
Net interest margin is calculated as the difference between basic lease rents and interest expense, excluding the impact of the mark-to-market of interest rate caps.
Annualized net spread is net interest margin expressed as a percentage of average lease assets. Annualized net spread less depreciation and amortization is net interest margin less depreciation and amortization, including maintenance rights expense, expressed as a percentage of average lease assets. We believe these measures may further assist investors in their understanding of the changes and trends related to the earnings of our leasing activities. These measures reflect the impact from changes in the number of aircraft leased, lease rates and utilization rates, as well as the impact from changes in the amount of debt and interest rates.
60
The
following is a reconciliation of basic lease rents to net interest margin, annualized net spread and annualized net spread less depreciation and amortization for the nine months ended September 30, 2019 and 2018:
Nine Months Ended September 30,
Percentage Difference
2019
2018
(U.S.
Dollars in millions)
Basic lease rents
$
3,218.9
$
3,094.5
4
%
Interest
expense
978.9
851.4
15
%
Adjusted for:
Mark-to-market
of interest rate caps
(29.1
)
26.0
NA
Interest expense excluding mark-to-market of interest rate caps
949.8
877.4
8
%
Net
interest margin
$
2,269.1
$
2,217.1
2
%
Depreciation and amortization, including maintenance rights expense
(1,311.7
)
(1,375.3
)
(5
)%
Net
interest margin less depreciation and amortization
$
957.4
$
841.8
14
%
Average
lease assets
$
37,524
$
35,037
7
%
Annualized
net spread
8.1
%
8.4
%
Annualized net spread less depreciation and amortization
3.4
%
3.2
%
Lease
assets
Lease assets include flight equipment held for operating leases, flight equipment held for sale, net investment in finance and sales-type leases and maintenance rights assets.
Adjusted debt to equity ratio
This measure is the ratio obtained by dividing adjusted debt by adjusted equity. Adjusted debt means consolidated total debt less cash and cash equivalents, and less a 50% equity credit with respect to certain long-term subordinated debt. Adjusted equity means total equity, plus the 50% equity credit relating to the long-term subordinated debt. Adjusted debt and adjusted equity are adjusted by the 50% equity credit to reflect the equity nature of those financing arrangements and to provide information that is consistent with definitions under certain of our debt covenants. We believe this measure may further assist investors in
their understanding of our capital structure and leverage.
The following is a reconciliation of debt to adjusted debt and equity to adjusted equity as of September 30, 2019:
(U.S. Dollars in millions, except debt/equity ratio)
Debt
$
29,284
Adjusted
for:
Cash and cash equivalents
(1,037
)
50% credit for long-term subordinated debt
(750
)
Adjusted debt
$
27,497
Equity
$
9,240
Adjusted
for:
50% credit for long-term subordinated debt
750
Adjusted equity
$
9,990
Adjusted debt/equity ratio
2.75 to 1
61
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Our primary market risk exposure is interest rate risk associated with short- and long-term borrowings bearing variable interest rates and lease payments under leases tied to floating interest rates. To manage this interest rate exposure, from time to time, we enter into interest rate swap and cap agreements. We are also exposed to foreign currency risk, which can adversely affect our operating profits. To manage this risk, from time to time, we may enter into forward exchange contracts.
The following discussion should be read in conjunction with “Part I. Financial Information—Item 1. Financial Statements (Unaudited)—Note 10—Derivative financial instruments,”
“Part I. Financial Information—Item 1. Financial Statements (Unaudited)—Note 13—Debt” and our audited Consolidated Financial Statements included in our Annual Report on Form 20-F for the year ended December 31, 2018, filed with the SEC on March 8, 2019, which provide further information on our debt and derivative financial instruments.
Interest rate risk
Interest rate risk is the exposure to changes in the level of interest rates and the spread between different interest rates. Interest rate risk is highly sensitive to many factors, including government monetary
policies, global economic factors and other factors beyond our control.
We enter into leases with rents that are based on fixed and variable interest rates, and we fund our operations primarily with a mixture of fixed and floating rate debt. Interest rate exposure arises when there is a mismatch between terms of the associated debt and interest earning assets, primarily between floating rate debt and fixed rate leases. We manage this exposure primarily through the use of interest rate caps, interest rate swaps and interest rate floors using a cash flow-based risk management model. This model takes the expected cash flows generated by our assets and liabilities and then calculates by how much the value of these cash flows will change for a given movement in interest rates.
The following tables present the average notional amounts and weighted average interest rates which are contracted
for the specified year for our derivative financial instruments that are sensitive to changes in interest rates, including our interest rate caps and swaps, as of September 30, 2019. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Under our interest rate caps, we will receive the excess, if any, of LIBOR, reset monthly or quarterly on an actual/360 adjusted basis, over the strike rate of the relevant cap. For our interest rate swaps, pay rates are based on the fixed rate which we are contracted to pay to our swap counterparty.
2019
- remaining
2020
2021
2022
2023
Thereafter
Fair value
(U.S.
Dollars in millions)
Interest rate caps
Average
notional amounts
$
2,662.1
$
2,611.5
$
2,140.7
$
1,636.2
$
1,029.6
$
216.7
$
7.5
Weighted
average strike rate
2.5
%
2.5
%
2.5
%
2.5
%
2.6
%
1.6
%
2019
- remaining
2020
2021
2022
2023
Thereafter
Fair value
(U.S.
Dollars in millions)
Interest rate swaps
Average
notional amounts
$
4,265.9
$
3,945.4
$
3,406.0
$
2,453.1
$
694.3
$
—
$
(114.3
)
Weighted
average pay rate
2.4
%
2.4
%
2.6
%
2.8
%
3.0
%
—
The
variable benchmark interest rates associated with these instruments ranged from one- to six-month U.S. dollar LIBOR.
Our Board of Directors is responsible for reviewing our overall interest rate management policies. Our counterparty risk is monitored on an ongoing basis, but is mitigated by the fact that the majority of our interest rate derivative counterparties are required to collateralize in the event of their downgrade by the rating agencies below a certain level.
62
Foreign currency risk and foreign operations
Our
functional currency is U.S. dollars. Foreign exchange risk arises from our and our lessees’ operations in multiple jurisdictions. All of our aircraft purchase agreements are negotiated in U.S. dollars, we receive substantially all of our revenue in U.S. dollars and we pay our expenses primarily in U.S. dollars. We currently have a limited number of leases denominated in foreign currencies, maintain part of our cash in foreign currencies, pay taxes in foreign currencies, and incur some of our expenses in foreign currencies, primarily the Euro. A decrease in the value of the U.S. dollar in relation to foreign currencies increases both our lease revenue received from foreign currency denominated leases and our expenses paid in foreign currencies. An increase in the value of the U.S. dollar in relation to foreign currencies decreases both our lease revenue received from foreign currency denominated leases and our expenses paid in foreign currencies. Because we currently
receive most of our revenues in U.S. dollars and pay most of our expenses in U.S. dollars, a change in foreign exchange rates would not have a material impact on our results of operations or cash flows. We do not have any restrictions or repatriation issues associated with our foreign cash accounts.
Inflation
Inflation generally affects our lease revenue and costs, including selling, general and administrative expenses and other expenses. We do not believe that our financial results have been, or will be in the near future, materially and adversely affected by inflation.
63
PART
II OTHER INFORMATION
Item 1. Legal Proceedings
Please refer to “Part I. Financial Information—Item 1. Financial Statements (Unaudited)—Note 23—Commitments and contingencies” in this report.
Item 1A. Risk Factors
There have been no material changes to the disclosure related to the risk factors as described in our Annual Report on Form 20-F for the year ended December 31, 2018, filed with the SEC on March 8,
2019.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents repurchases of our ordinary shares made by us during the nine months ended September 30, 2019:
Number
of ordinary shares purchased
Average price paid per ordinary share
Total number of ordinary shares purchased as part of our publicly announced program
Maximum dollar value of ordinary shares that may yet be purchased under the program (U.S. Dollars in millions) (a)
January 2019
2,044,932
$
44.02
2,044,932
$
42.6
February
2019
529,252
46.90
529,252
217.8
March 2019
513,720
43.43
513,720
195.5
April
2019
970,788
48.64
970,788
148.3
May 2019
1,607,513
48.35
1,607,513
70.6
June
2019
908,609
48.69
908,609
226.3
July 2019
750,158
50.97
750,158
188.1
August
2019
1,157,464
52.00
1,157,464
127.9
September 2019
103,175
53.15
103,175
122.4
8,585,611
$
47.78
8,585,611
$
122.4
(a)
For
further detail on our share repurchase programs, please refer to Note 16—Equity.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
None.
64
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
