The Case For Technology Solutions In Aviation Finance Transactions: Will They Take Flight?
Legal News & Analysis - Asia Pacific - Shipping Maritime & Aviation
20 January 2021
Structuring and documenting aviation finance and leasing transactions typically generates a high volume of paperwork, intense email traffic and the accompanying hours of time spent by clients and advisors producing and reviewing documentation and conditions precedent. Given the nature of work often involves large scale transactions, asset finance practices would appear to be the ideal candidates for the progressive adoption and implementation of AI (artificial intelligence) software, digital collaboration tools and automated transaction management platforms.
While the industry has embraced certain technological advancements, from the electronic filing system which is the International Registry to the recent launch of the Global Aircraft Trading System (GATS), an online platform for the buying and selling of aircraft and engines on lease, other realities of aviation transactions rely on manual data entry and processes. This article seeks to outline the aspects of aviation transactions which could most benefit from widespread adoption of technological solutions and the key obstacles to achieving this goal.
Transaction management and collaboration
Currently, most law firms produce documentation and CP checklists manually (a task commonly assigned to a junior lawyer or paralegal) based on the conditions agreed in the relevant facility agreement or lease agreement at the outset of a transaction. As the key document for managing all paperwork, this usually takes the form of a tabulated Microsoft Word document using the law firm’s template, and sets out the list of transaction documents and conditions precedent items, the party responsible for procuring such document or item, and critically, the status (whether pending or complete). In respect of a transaction document, this would include whether the signatures of each relevant party has been received or if any party’s signature remains outstanding. The method through which documents and conditions precedent are exchanged is primarily through email, and in order to provide clients with an up-to-date snapshot of the transaction, the documentation/CP checklist is required to be manually updated by drafting counsel.
The status quo of transaction management has precipitated the development of software such as Legatics and Litera Transact, which have the capacity to create documentation/CP checklists by extracting this information from the underlying contract, reduce email traffic by permitting parties to upload conditions precedent to a dedicated deal space on the online platform for collaborative review, automate the signature process by producing signature packets for each signing party which can be integrated with DocuSign, and prepare deal bibles promptly following closing. It also enables clients to view a snapshot of the overall transaction progress “live” rather than waiting for a daily update from their legal counsel.
While these solutions have been available for a couple of years now and make the occasional appearance in pitches and business development materials, they have not yet become widely used by aviation legal practices or commonly requested by aviation clients. Part of the reticence can be attributed to the upfront initial time investment required to integrate the software with the law firm’s document management system (e.g. SharePoint or iManage) and for lawyers (and clients!) to familiarise themselves with a new way of working. In addition, because these solutions are collaborative platforms requiring each stakeholder (including opposing counsel and clients) to be able to use the software effectively in order to achieve maximum efficiency, there will be an inertia effect unless a particular party pushes for change. While the impetus to innovate largely rests with law firms, it is also important for clients to be aware that such technological solutions are available and can be requested for any suitable deal.
Due diligence and documentation review
Portfolio transactions often involve a large scale review of loan agreements and aircraft lease agreements, and usually under tight timeframes. The traditional approach by law firms would be to distribute the workload amongst a ready pool of lawyers to manually review each agreement for key clauses important to the transaction. A report summarising these findings and highlighting any red flags would then be provided to the client. While this approach works, the use of machine learning technology (such as Kira) to extract and analyse contractual provisions can provide valuable time and cost savings on the initial review. AI and machine learning software has been used for a number of years now, particularly in the litigation context for the purposes of discovery and in M&A due diligence, but can equally be applied to aviation transactions. Given the bespoke nature of aviation deals, upfront investment time would be required to “train” the software to recognise key aviation financing and leasing concepts (such as “hell or high water provisions” and aircraft redelivery provisions), but the advantage of machine learning software is that it builds on the contractual provisions previously categorised.
This software solution could also be requested by clients who wish to undertake a comparative review of their contracts or term sheets to check for consistency or compliance with internal legal and risk requirements, or to identify provisions affected by the replacement of interest rate benchmarks with alternative risk-free rates in 2021.
Although the AWG (Aviation Working Group) has produced a template novation agreement and the GATS model introduces a non-negotiable set of standard forms for the trading of aircraft, the industry still has some way to go before a standardised set of transaction documents becomes frequently used across the board for the various types of aircraft financing and leasing structures. Notwithstanding this, there are opportunities to apply document automation tools (e.g. Contract Express) to simplify and streamline high volume legal processes both for law firms and clients.
Most law firms have well-developed in-house precedent facility agreements and security agreements and the traditional approach would be for a lawyer to manually update the precedent to conform with the relevant transaction requirements outlined in the term sheet or letter of intent. By automating the fields and options to be populated, contract production processes can be made more efficient and consistent. The same approach could be taken by clients with letters of intent (which are often prepared by commercial parties in advance of the appointment of legal counsel), non-disclosure agreements or even lease agreements produced by the transaction teams within aircraft leasing companies. While this does not eliminate the need for manual input altogether, as provisions will remain subject to negotiation with the counterparty and may subsequently need to be revised, embracing such technology can save time and enable a large number of documents to be produced simultaneously.
Following the movement towards online communication and collaboration platforms accelerated by Covid-19, and the pressures faced by businesses to minimise cost and maximise efficiency, it is an opportune time for aviation industry stakeholders to consider the range of technological solutions available and how they can be customised for purpose.
For further information, please contact:
Samuel Kolehmainen, Partner, Herbert Smith Freehills