Back-to-Back Aircraft Transactions: Sensible Strategy or Horrendous Heap?
5 min read
Author: Ann Bugeja
The present economic recession, the restrictive credit market and the unfavourable press have all had a significant impact on the business aviation industry. Whilst any aircraft transaction requires exceptional attention to detail, a good dose of fear and a properly constructed backup plan, in a “back-to-back” arrangement, the probability of things not turning out as planned, increases significantly. Typically, in such deals, contrary to a standard seller and purchaser transaction, the aircraft is transferred to the end-purchaser through a middleman who serves as both the interim purchaser and the interim seller.
Consequently, a back-to-back transaction, in its simplest form, involves an aviation intermediary purchasing an aircraft from the primary vendor and selling it right away to the end purchaser. Intermediaries sign a distinct sales contract with the purchaser after concluding a purchase contract with the vendor. The specifics of each party’s agreement with the intermediary are often kept private.
Indubitably, these deals are rather challenging with funding constraints, confidentiality concerns, contractual restrictions, and legal and tax barriers making up only a few of the most common predicaments which interested parties face on a daily basis. Nevertheless, the back-to-back arrangement frequently makes an impossible transaction doable. In some limited circumstances such as the framework of a corporate mandate, trade-in, or aircraft holdings, the application of a back-to-back transaction may indeed be justified.
An aircraft vendor could merely desire to sell an aircraft for a certain amount and be happy to allow the intermediary to retain any premium it might be able to achieve from selling the aircraft for more than the seller’s desired price. In the event of a repossessed aircraft, the bank would have a target price in mind and may not be too concerned with getting the best deal.
Similarly, a purchaser would have the mandate and power to buy an aircraft with the complete transactional cost authorised, but not necessarily the power to compensate an intermediary or consultant. The intermediary is then free to find an eligible aircraft and collect the equivalent of a commission by negotiating a reduced purchase price from a vendor. In this scenario, both purchaser and the intermediary agree that the purchaser will acquire an aircraft of a specified kind for a fixed price. If the transaction is a success, the objectives of the seller and the purchaser are achieved.
In addition, although non-American purchasers of aircraft could have a cultural aversion to settling a broker’s fee, they would have no trouble paying a greater purchase price if the broker’s fee was included in the aircraft’s cost. In a comparable manner, a purchaser would prefer to refer to the full transaction price as the cost of the aircraft rather than reporting or accounting for a commission individually. This may take place vis-a-vis back-to-back transactions.
It is also possible to maintain the privacy of the aircraft purchaser with a back-to-back transaction, at least in the first phases of the transaction. A vendor may at some stage prior to closure require knowledge of the identity of the purchaser to ensure compliance with any export restrictions or anti-money laundering regulations.
The sale or purchase of a business jet is an intricate process that includes commercial, specialized, contractual, compliance, taxation, and/or customs attributes and necessitates the involvement and coordination of numerous parties with distinct interests such as the vendor, the purchaser, the escrow agent, the intermediary, the operator and the financial institution.
Since neither the vendor nor the purchaser has the required expertise to effectively execute the sale or purchase of a business jet, in most transactions, both parties choose to enlist the support of a competent intermediary with a strong network who can help the vendor locate the right purchaser or assist the purchaser in finding the right aircraft to match their business model. Intermediaries play a crucial function within such deals, and therefore, it is crucial that an experienced and reputable intermediary is selected.
On the other hand, interested parties ought to be aware of a tactic which has increased in popularity over the past years, i.e. for the intermediary to put up a covert “back-to-back” transaction to obtain unauthorised commission. In such unethical cases, the intermediary never puts up any money but uses the end-purchaser’s money to acquire the aircraft, to then immediately transfer title to the same end-purchaser (with the intermediary then pocketing the difference which may be significant). Furthermore, aside from the additional higher costs incurred by the buyer, such transactions may create title concerns, especially if the deal goes belly up.
Here are some of our suggestions:
- Both the purchaser and the vendor must insist on having the transaction correctly recorded by a knowledgeable aviation expert. There are concerns with export certifications of airworthiness, export and embargo limitations, and export approval processes that must be observed in international transactions.
- As the purchaser, you should request an exhaustive examination and records assessment from an inspection facility versed about the model of the aircraft and its issues. Companies experiencing financial hardship may cut corners with upkeep and retention, leaving ‘pencil whipped’ data as a prospect.
- To avoid last-minute liens being put on aircraft shortly before closing by suppliers who learn of an anticipated sale, a title search should be performed both during the ‘letter of intent’ phase and just prior to closing.
- It is crucial to verify that the legal adviser is exclusively serving your interests and that the relationship is captured in a formal agreement.
A trend promoting integrity, openness, honesty, responsibility, and ethical conduct in aircraft buy/sell agreements, especially back-to-backs, appears to be developing across corporate policies, industry recommendations, and governmental regulations.