JAPAN Trends and Developments Contributed by: Taro Omoto, Yusuke Nakajima and Makoto Sakai, Mori Hamada & Matsumoto
Mori Hamada & Matsumoto Marunouchi Park Building 2-6-1 Marunouchi Chiyoda-ku Tokyo, 100-8222 Japan
Tel: +81 362 128 330 Fax: +81 362 128 230
Email: info@morihamada.com Web: www.morihamada.com/en
Unique Features of Japanese Aviation Finance and Leases Lessors One of the unique characteristics of Japanese avia - tion lessors is that many are small to medium-sized business enterprises engaging in various businesses (or their subsidiary special purpose companies, or SPCs) rather than large specialised leasing compa - nies. These business enterprises purchase and lease aircraft typically for tax purposes, among others; for example, lessors can utilise the depreciation cost to partially offset the profits they earn from their main business. Adding aviation leasing to the list of busi - nesses they engage in may enable lessor companies to enjoy preferable tax status. These lessors often obtain debt financing to partially finance the purchase of aircraft. Against this backdrop, some small to medium-sized business enterprises have a need for securitised prod - ucts to decrease the size of their investment lots. In this regard, TK and NK structures, which are unique Japanese leasing structures, are widely utilised. • TK stands for tokumei kumiai , where several inves- tors (which are business enterprises) make equity contributions to a business operator pursuant to a tokumei kumiai agreement (legally speaking, not equity but a kind of debt). The business opera - tors are typically wholly owned subsidiary SPCs of Japanese leasing companies. They utilise the funds contributed by investors, together with limited recourse loans from lenders, to purchase and lease aircraft.
• NK stands for nin-i kumiai , where several inves- tors (which are business enterprises) and a general partner (which is typically a wholly owned subsidi - ary SPC of a Japanese leasing company) form a partnership pursuant to a nin-i kumiai agreement. The partnership utilises the funds contributed by the investors, together with limited recourse loans from lenders, to purchase and lease the aircraft. An NK structure is used particularly for leases to US airlines, for example, because of the US–Japan tax treaty. A TK/NK fund is usually formed for a particular aircraft; funds with a portfolio of multiple aircraft are not com - mon in Japan. Investors in TK/NK funds can enjoy tax benefits since they can recognise depreciation costs and reduce taxable income to a certain extent, although recognition is significantly restricted by tax laws, compared to investors who directly own the air - craft. Usually, more than half of the purchase price is funded by a limited recourse loan, so TK/NK investors can enjoy the leverage effect. From a regulatory point of view, TK interests and NK interests are treated as securities for the purpose of Japanese securities regulation. More precisely, Jap - anese securities regulation classifies securities into two types (type 1 and type 2). TK interests and NK interests are type 2 securities, which are less liquid securities. Being treated as securities, sales of TK interests and NK interests are regulated under the Financial Instru - ments and Exchange Act. Generally speaking, the
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