Turkey has ratified the Cape Town Convention on International Interests in Mobile Equipment and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment on March 29 2011, with effect from July 4 2011.
The convention and protocol intend to promote certainty and transparency in cross-border aviation financings by eliminating the uncertainties and problems that the creditors face under the laws of various jurisdictions, particularly with respect to the default or insolvency of the borrowers.
Creditors also often find it difficult to locate aircraft when they need to enforce their rights on the aircraft as collateral, as the aircraft are flying in and out of countries on a daily basis. Needless to say, these factors create additional costs to the aircraft financing transactions, let alone being cumbersome and time consuming.
In an effort to reduce these risks, the convention and protocol introduce an internationally recognized collateral system to be used in international aviation financings that enables security interest to be created over the aircraft, and related equipment, upon registration with an electronic global aeronautical register in order to guarantee the priority of their claims against other parties.
In this manner, the creditors of the aircraft and related equipment financings will have more protection against any default and insolvency risks as the existence and effectiveness of their collateral will be assured by the registry system.
Hence, while on the one side the creditors will have an effective collateral system, the airlines will, on the other side, have the benefit of low financing costs that is proving to be the case for a number of member countries which have ratified the convention and the protocol thus far.
This is especially important for developing economies such as Turkey that pay relatively higher interest rates on their financings.
Despite its obvious advantages, the ratification of the convention and the protocol may not have an instant impact in the Turkish aviation market as the convention and protocol do not apply retro-respectively. In other words, the existing financing agreements would have to be amended in order to benefit from the registry system.
Coupled with the financial turmoil in the global loan markets, it may take a while to see aviation financings gaining momentum in Turkey.
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