The Transport Finance Law Review: Editor's Preface

The Transport Finance Law Review is intended to provide the industry with a guide to transport finance today, in each of the key jurisdictions globally in which aircraft, rolling stock and ships are financed.

The transformation of the asset finance industry triggered by the global financial crisis has been well-documented. Before the crisis, traditional asset finance, in the form of bank debt, had been the mainstay of the transport sector.

Now, regulation introduced with the intention of preventing future crises, such as Basel III and Basel IV, has made long-term lending to the transport sector significantly less attractive. This has, in part, led certain banks to exit the asset finance market altogether, by selling all or part of their loan books to help them to meet their capital requirements.

At the same time, the aviation, rail and cruise industries have required a steady stream of finance to acquire additional assets to help them to meet growing demand from passengers, particularly in developing economies. This, coupled with the desire, and in many cases the requirement, for more environmentally friendly and sustainable transport, the advent of new and disruptive technologies (such as autonomy, blockchain and artificial intelligence) and the introduction of increasingly sophisticated technology (such as high-speed rail and high-specification ships) is leading to increased funding requirements in many areas of the transport sector.

Asset finance in its traditional form is now available from relatively few banks, who in turn are prepared to lend to relatively few names, which are usually leaders in their relevant sectors and have green credentials, which satisfy new environmental standards set out in, for example, the Equator Principles or the Poseidon Principles. Tenors tend to be shorter, and borrowing more expensive. It is clear that debt finance alone is no longer sufficient to meet the needs of the global aviation, rail and shipping industries. Other financiers and investors have recognised this and have identified significant opportunities to secure returns, using innovative new funding structures, and often in collaboration with traditional lenders who have remained in the market.

These developments have meant that legal advisers to the transport finance sector are now required to provide a far broader set of legal skills and market knowledge than has previously been required.

At the time of writing, capital is readily available to much of the aviation industry, which is benefiting from rising demand for air travel and industry forecasts anticipating a doubling of passenger numbers in the next 20 years. The capital markets are also open for business for the aviation industry, and there is a flow of equity investments from both hedge funds and private equity as well as large-scale investments from Asia (and China in particular).

In the rail market, passenger demand is also increasing and significant investment is being made in new and existing rail assets globally. Increased appetite for high-speed rail and light rail transit is encouraging rail market participants to look outside of their traditional markets in search of new opportunities in developing countries, including those forming part of China's Belt & Road Initiative.

Attitudes towards the shipping industry are generally more cautious. The amount of debt finance available to shipping has fallen dramatically, and alternative sources of finance, such as private equity, hedge funds, bond markets and capital markets, have also reduced. This is not surprising to many as shipping gradually emerges from possibly the worst recession it has ever experienced in modern times, impacting across the entire spectrum of the industry. Shipping is still a hugely entrepreneurial business with more than its fair share of dynamic owner principals who are still making sizeable commercial bets as to where the industry is heading and this has led, in a number of sectors, to an over ordering of ships in recent times, which has kept the market depressed.

Today, capital markets, private equity structures and leasing account for a substantial proportion of the transport finance market. A number of private equity players are buying loans from traditional banks at a large discount to see immediate returns. Others have invested directly in shipping in the belief that the cyclical nature of shipping will result in returns in the medium to long term. In the aviation industry, leasing firms, which are frequently supported by private equity players, now account for about 40 per cent of the major aircraft manufacturers' sales. In the case of rail, new investors are being attracted to the industry by the commitments made by governments worldwide to improve existing infrastructure and invest in new, sophisticated rail links.

Against this evolving financing landscape, new environmental regulation and disruptive technology is bringing about further changes. Artificial intelligence, distributed ledger technology such as blockchain, and low carbon technology are creating new funding requirements, as well as bringing new participants into the transport sector, with new ideas for raising finance.

The aviation, rail and shipping industries each have their own unique characteristics and need lawyers with a deep understanding of how each of these complex industries operates. A detailed knowledge of the principles of asset finance is now also required, combined with the ability to advise on new capital markets, leasing and corporate structures. In addition, while the majority of asset financings in the transport sector tend to be governed by English or New York law, an understanding of the principles of local law in the key jurisdictions in which transport assets are registered is also of great importance.

We have sought contributions from jurisdictions that play a leading role in the financing of transport assets. Each chapter provides an overview of the transport finance industry in these jurisdictions, with an analysis of how key lenders have changed over the past five years and how the financing of assets has developed as a result. Contributors have provided an overview of the legislative framework for transport finance and financial regulation affecting lenders to the transport sector. Authors have also been asked to review any significant innovations and notable recent and pending financings and cases, and to provide assessments of how the transport sector is likely to continue to develop in their markets.

I would like to thank the contributors to this volume. Their efforts are deeply appreciated and represent a substantial contribution to the transport law library as the sector continues its transformation.

Each contribution reflects the significance of the transport sector today, and the need for readily available funding for industries that underpin the global economy by transporting people and commodities around the world every day.

Lawyers have had to become increasingly nimble as clients require advice on developing intricate joint-venture agreements and complex capital market products, and increasingly on the opportunities and threats presented by environmental challenges and disruptive change throughout the transport sector. It is an incredibly exciting time to be a lawyer in this field, as our contributors demonstrate in the following chapters.

Harry Theochari
Norton Rose Fulbright
April 2020

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