PIA all set to buy 8 Boeings
LAHORE Pakistan International Airlines (PIA) has fulfilled all the legal, technical and operational formalities in their purchase of eight new Boeing 777s.
According to an official release issued on Saturday, PIA entered into a purchase agreement with Boeing to purchase the new 777s. After a detailed presentation of PIA’s business strategy for 2003-2011 to US Exim Bank, the bank agreed to guarantee the PIA financing on soft terms.
The bank mandated that a special purpose vehicle (SPV) was formed in a tax efficient jurisdiction (Bermuda, Cayman Islands, Delaware or another jurisdiction acceptable to US Exim Bank), the beneficial interests in which shall be indirectly held for general charitable purposes. The SPV should act as the obliger/borrower under US Exim Bank — supported financing and as owner and lessor for the Boeing 777s and the related spare engines. US Exim Bank also required the selection of a guaranteed lender to raise the funds..
In accordance with the requirement of US Exim Bank, Citi Bank was selected as the guaranteed lender through a transparent bidding process.
A special purpose vehicle company, Taxila Limited, was incorporated in Cayman Islands. The shares of Taxila Limited are held by a trustee (Maples Finance Limited) on trust for a charitable trust (Taxila Limited Trust). As part of the financing structure, the purchase agreement between Boeing and the PIA was assigned by the PIA to Taxila Limited pursuant to the purchase agreement assignment dated December 15, 2003. The purchase agreement assignment specifically stated that the purchase agreement would be re-assigned by Taxila Limited to the PIA upon the release of the “Lien of the Security Documents”. In other words, once US Exim Bank guaranteed facility was repaid by the PIA, the deeds for the airplanes would revert back to PIA.
The above-mentioned structure is a standard/typical finance lease arrangement, which is commonly employed, inter alia, by many airlines to finance the acquisition of aircraft. Notwithstanding the legal ownership of the aircraft by Taxila Limited, all the rewards and obligations of the aircraft are carried by the PIA. Taxila Limited has entered into a 12-year lease agreement with PIA.
Under the lease agreement, PIA is required to pay rent in an amount at all times equal to the corresponding quarterly payment required to be made by Taxila Limited under US Exim Bank guaranteed financing. It is cardinal legal principle that in evaluating a transaction, it is the substance and not just the form that should be adhered to.
The special purpose vehicle set up in the form of Taxila Limited is in effect and in substance a financing arrangement put in place to comply with the terms of US Exim Bank. The transaction structure, as reflected in the documents for the financing of these aircraft, clearly establishes the financing nature of the transaction whereby the concepts of flow through and limited recourse are clearly established. In other words, in a finance lease the SPV (Taxila Limited in PIA’s case) is only a conduit and the actual payment obligations are of the PIA and all recourse under this financing arrangement is to the PIA as the principal obligator.
The master lease agreement entered into between Taxila Limited as the lessor and the PIAC as the lesse also reflects the finance lease structure of the transaction. The agreement clearly established that at the end of the term of the lease or prepayment by the PIAC or the earlier termination of the lease agreement, the title to the aircraft would automatically transfer to PIA.
In view of the above provisions, it is clear that Taxila Limited is a SPV set-up as part of the finance lease structure employed by the PIAC for acquiring the 777s and the documentation signed for above clearly reflect the position of Taxila Limited as SPV and this company is in fact merely a financing arrangement. From the accounting standpoint also in substance the transaction is a finance lease and the beneficial ownership and all the risks and rewards of the aircraft are to the account of the PIA, the three 777s are reflected in PIA’s balance sheet as “assets” and depreciation being claimed for tax purpose as normal. staff report