Author: Alex Izinyon II, Partner, Alex Izinyon & Co

In Nigeria, as in other common law jurisdictions, the choice of aviation finance structures will depend on factors such as: 

• the type of aircraft; 
• the intended use;  
• the owner/operator;  
• the financier or lessor; and  
• the tax benefits that may be derived from the chosen structure.  

The most common structures are secured direct lending, operating leases and finance leases. For larger orders of commercial aircraft, export credit agencies are often used to guarantee loans. 

Secured lending: This is most commonly used for the purchase of business jets and smaller numbers of large commercial aircraft by operators or owners. It may be obtained through local banks, which may lend through a syndicate of banks for larger transactions. The financier may specify the equity required from the borrower/lessee/operator and fund the remaining amount for a secured interest in the aircraft. The benefit for the lender is that in the event of non-payment, the financier may repossess the aircraft.  

One benefit of this structure for owners is that they may deduct depreciation costs on their financial accounts yearly. However, other structures may afford better interest rates and greater flexibility. 

Operating leases: These provide more flexible financing structures for owners/operators. One example is the inclusion of Nigeria as a voluntary participant in the pilot phase of the International Civil Aviation Organization Carbon Offsetting and Reduction Scheme for International Aviation, which will commence in 2021. Operators under operating leases may have the flexibility to change their fleet to introduce aircraft that comply with the new environmental requirements. Therefore, operating leases – structured as either dry leases or wet leases – are very common in Nigeria.  

Dry leases are longer-term structures of three years or more. The advantage for the lessee is the flexibility to test out the aircraft for the specified period without committing to purchase it. However, the advantages and disadvantages will depend on the classification and recognition of the lease from a legal and tax point of view. With the introduction of International Financial Reporting Standard (IFRS) 16 on leases, which took effect on 1 January 2019, the global requirements on the reporting of leases for tax purposes have changed for most airlines/owners/operators. In Nigeria, Federal Inland Revenue Service (FIRS) Information Circular 2010/01, which served as a guideline on the tax implications of leases, classified leases as either operating leases or finance leases. Under an operating lease, the lessee cannot recognise the aircraft as its own asset. No new laws or circulars have been issued by the federal government or the FIRS with regard to the implementation of IFRS 16, which has changed this position for lessees. Lease rentals may still be recognised as expenses for lessees until guidelines are issued on the reporting of the ‘right of use’, rather than expenses.  

The advantage for the lessor is that the lessor retains ownership of the aircraft and receives rental income from the lessee over the contract period. The disadvantages for lessors depend largely on: 

• the type of aircraft;   
• the age of the aircraft;  
• the aircraft’s residual value; and   
• the condition of the aircraft on redelivery.  

These factors will largely depend on the lessee selected by the lessor after conducting due diligence. They will affect the redelivery condition of the aircraft and/or repossession in the event of default.  

Wet leases, on the other hand, are for shorter periods that may be as brief as three months. This structure is common where the lessee does not possess an air operating certificate (AOC) or requires the aircraft only for a short period, and in some cases for contract operations such as Hajj. A wet lease offers the lessee the benefits of the aircraft, crew, maintenance and insurance. While this gives the lessor peace of mind that the aircraft will remains under the control of its crew, the costs of operating within the region might be more expensive for the lessee. 

Finance lease: Finance leases in Nigeria are similar to those in other common law jurisdictions. They are longer-term structures whereby the lessee bears the obligations of ownership of the aircraft. They may be executed through a combination of operating leases with an option of purchase at the end of the period; or through a hire purchase, whereby the buyer pays some equity and the seller amortises the rest of the payments and interest over a period of time. Either way, the structure is geared towards the transfer of ownership of the aircraft from the financier/lessor to the borrower/lessee upon completion of the loan amount. In some finance lease structures, a special purpose vehicle may be used in a taxbeneficial jurisdiction with which Nigeria has entered into a double tax treaty, to benefit both the lessor and the lessee. Finance leases have not been affected by IFRS 16. Finance leases are also highly advantageous to the lessee, because it is allowed by law to claim capital allowances on the leased aircraft, while at the same time deducting interest payments as expenses. 

Considerations for financing structures in Nigeria.  

Operators should consider both their financial capabilities and the political, economic, social, technological, environmental and legal factors that may affect operations in the region in the coming years. These include, most importantly, potential regulatory changes in the aviation sector, as well as economic and monetary policies. These considerations should inform the choice of financial structure, which should be tailored to: 

• the aircraft type;  
• the age of the aircraft; 
• the chosen tax structure; and  
• the operator’s capacity to keep up with contractual and financial obligations.  

Providers of aircraft finance in Nigeria.  

The most common providers are commercial banks and leasing companies. Although no direct restrictions are applicable, exchange controls – regulated by the Central Bank of Nigeria – apply with regard to the repatriation of payments made in currencies other than Nigerian naira.