Thai Airways–Business Rehabilitation—Aircraft Financing via Special Purpose Vehicles

Thai Airways–Business Rehabilitation—Aircraft Financing via Special Purpose Vehicles

With the first court trial slated for August 17 looming, the public remain bewildered by the names of principal creditors of Thai Airways International Plc that were revealed. They expected to see familiar names of well-known aircraft manufacturers based in the U.S. or Europe. Instead, all they came across was a list of creditors bearing strange names, some in the Thai language, of aircraft lessor corporations incorporated in offshore tax havens such as the Cayman Islands, an autonomous British overseas territory in the Caribbean Sea.

These offshore lessors are generally known as special purpose vehicles (SPVs), established only for the specified purpose of financing and purchasing a commercial aircraft to lease to the lessee airline.

Offshore SPVs have been serving as an international aircraft financing tool for decades based on two chief factors: for the ultimate investor to avoid financial liability toward lending banks and for the jurisdiction’s favorable tax treatment.

Non-Recourse Borrowing

How is an SPV used? An investor would become a shareholder of the SPV by investing roughly 20% of the cost of the aircraft as share capital. If a large passenger plane costs US$320 million, the investment risk that the investor would take is $64 million.

The remaining 80% portion of the aircraft cost would be borrowed by the SPV from a syndicate of international banks in a non-recourse financing which exposes the lenders to the financial risk of the transaction, in this case up to the maximum of $256 million.

The facility is without recourse to the investor-shareholder as the lending banks would have no claims nor recourse whatsoever against the investor, who has no liability to amortize the $256 million loan, although naturally the bank is entitled to seek remedy from the borrowing SPV for the full amount of the credit.

The right of the banks is limited to the financed plane as the single asset of the SPV borrower encompassing the 20% share capital initially invested by the shareholder. The remedy available to the bank stops there and does not extend to reach the shareholder.

SPV Buys Plane from Manufacturer to Lease to Thai Airways

Once the SPV has raised the 20% equity finance from the investor-shareholder and the 80% balance from the without-recourse debt financing, it can now use the $320 million proceeds to buy a passenger airplane from the world-famous multinational aircraft manufacturer.

This is a one-off final purchase and sale with the ownership of the plane held by the SPV upon transfer.

The SPV then leases the plane to Thai Airways, the lessee, in a financial lease contract that grants the lessee an option to purchase at the end of the lease term, at an option price equal to a predetermined residual value of the plane. The option price is to provide the SPV lessor with a significant profit and return on investment to be passed on in the form of a dividend to the shareholder.

The SPV, as the lessor, receives a stream of rent from the lease throughout the term and distributes it to the lending banks.

Hopefully, the rent is payable at a spread over the debt service or loan interest the SPV lessor pays to the bank, so much so that the spread gives the lessor another item of profitable return on investment.

Tax-Free Jurisdiction

For the international aircraft financing to work and produce the optimum yield for the parties involved, an offshore tax haven is selected by the investor-shareholder as the place of incorporation of the SPV.

The Cayman Islands, for instance, does not impose any corporate income tax on an SPV’s profits derived from financial rent, the spread over loan interest.

Dividends payable to the shareholder are also not subject to withholding tax, corporate income tax or personal income tax in that jurisdiction.

Likewise, loan interest and financing fees paid by the SPV borrower to the banks are free from withholding tax.

There is also no personal income tax on the payroll of the SPV executives based in the jurisdiction, nor are there any sales taxes or value added tax of any kind.

To compensate for the lack of tax revenue, these tax havens draw their income from tourism and fees on financial transactions and corporate transactions and registrations as well as import duties on most goods. (To be continued.)

Wirot Poonsuwan is Senior Counsel and Head of Special Projects at Bangkok law firm Blumenthal Richter & Sumet and can be contacted at

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