LISTING PARTICULARS
U.S.$328,274,000 2015-1 Pass Through Trust Pass Through Certificates, Series 2015-1A __________________ Bosphorus Pass Through Certificates, Series 2015-1A are being offered under this offering memorandum (the “Class A Certificates” or “Certificates”). A trust (the “Trust”) has been established to issue the Class A Certificates. This offering is being made in connection with the financing of three new Boeing 777-300ER aircraft scheduled to be delivered in March 2015 and April 2015 (each, an “Aircraft”). The proceeds from the sale of the Class A Certificates will initially be held in escrow. The Trust will use the escrowed funds to acquire equipment notes (the “Equipment Notes”) to be issued by Bosphorus 2015 LLC, as issuer (the “Issuer”). Proceeds from the sale of the Equipment Notes will be used by the Issuer to fund the acquisition of the Aircraft each of which the Issuer will lease to Türk Hava Yolları A.O. (“Turkish Airlines”) under a separate finance lease agreement (each, a “Lease” and a “Lease Agreement”). Payments under each Lease will be used to make payments on the related Equipment Notes held in the Trust, which payments will be passed through to the holders of the Class A Certificates. See “Use of Proceeds” in this offering memorandum. Interest on the Equipment Notes will be payable semi-annually on 15 March and 15 September of each year after issuance, commencing on 15 September 2015. Principal payments on the Equipment Notes will be payable semi-annually on 15 March and 15 September of each year, commencing on 15 September 2015. BNP Paribas, acting through its Paris head office, will provide a liquidity facility for the Class A Certificates (the “Liquidity Facility”) in an amount sufficient to make three consecutive semi-annual interest payments on the Class A Certificates. _________________________________________
Investing in the Certificates involves a high degree of risk. See “Risk Factors” beginning on page 18 of this offering memorandum. _________________________________________ Pass Through Certificates Class A .....................................
Face Amount U.S.$328,274,000
Interest Rate 4.20%
Final Expected Distribution Date 15 March 2027
Price to Public(1) 100.0%
_____________ (1) Plus accrued interest, if any, from the date of issuance.
The Initial Purchasers (as defined herein) will purchase all of the Certificates if any are purchased. The Initial Purchasers expect to deliver the Certificates to purchasers through the facilities of The Depository Trust Company (“DTC”) and its direct and indirect participants, including Euroclear Bank S.A./N.V. and Clearstream Banking, société anonyme, against payments on 26 March 2015. _________________________________________ This offering memorandum constitutes the listing particulars (the “Listing Particulars”) in respect of the Certificates. Application has been made to the Irish Stock Exchange plc (the “Irish Stock Exchange”) for the approval of this offering memorandum as Listing Particulars. Application has been made to the Irish Stock Exchange for the Certificates to be admitted to the Official List and trading on the Global Exchange Market, which is the exchange regulated market of the Irish Stock Exchange. The Global Exchange Market is not a regulated market for the purposes of Directive 2004/39/EC. The Certificates have not been and will not be registered under the United States Securities Act of 1933, as amended (the “Securities Act”) or the securities laws of any other jurisdiction. Accordingly, the Certificates are being offered and sold only to “qualified institutional buyers” (“QIBs”) in reliance on Rule 144A under the Securities Act (“Rule 144A”) and to certain non-U.S. persons in transactions outside the United States in reliance on Regulation S under the Securities Act (“Regulations S”). Prospective purchasers that are QIBs are hereby notified that the seller of the Certificates may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. Each purchaser of the Certificates offered hereby in making its purchase will be deemed to have made certain acknowledgements, representations, warranties and agreements with respect to its purchase of the Certificates as described herein. The Certificates are not transferable except in accordance with the restrictions described under “Transfer Restrictions” in this offering memorandum. There are no registration rights associated with the Certificates. ____________________________________________
Citigroup Joint Structuring Agent
Lead Bookrunners
Goldman, Sachs & Co. Joint Structuring Agent _______________________________________________________
Bookrunner
BNP PARIBAS The date of this offering memorandum is 26 March 2015
Deutsche Bank Securities
TABLE OF CONTENTS Notice to Investors .................................................... ii Description of the Deposit Agreement ..................115 Notice to European Economic Area Description of the Escrow Agreement ...................117 Description of the Liquidity Facility .....................118 Investors .................................................................. iv Certain Volcker Rule Considerations ........................v Description of the Intercreditor Agreement ...........124 Enforcement of Judgments ........................................v Description of the Aircraft and the Appraisals ..............................................................131 Available Information.............................................. vi Cautionary Statement Regarding ForwardDescription of the Equipment Notes......................133 Looking Information............................................... vii Description of the Leases and Other Agreements ............................................................138 Industry and Market Data ...................................... viii Defined Terms ....................................................... viii Possible Issuance of Additional Certificates..........147 Presentation of Financial and Other Certain U.S. Federal Income Tax Information .............................................................. ix Considerations .......................................................148 CRA Regulation ........................................................x Certain Delaware Taxes.........................................153 Summary....................................................................1 Certain U.S. ERISA Considerations ......................154 Risk Factors .............................................................18 Plan of Distribution ...............................................156 Use of Proceeds .......................................................43 Transfer Restrictions..............................................161 Capitalization ...........................................................44 Legal Matters .........................................................165 Selected Financial and Operating Independent Auditors ............................................165 Information ..............................................................45 Independent Appraisers .........................................165 Operating and Financial Review .............................50 Listing and General Information ...........................166 Business ...................................................................65 Appendix I - Index of Terms ................. Appendix I-1 Industry Overview ...................................................88 Appendix II - Appraisal Letters ............ Appendix II-1 Directors ..................................................................92 Appendix III - Loan to Value Ratios by Aircraft ................................................Appendix III-1 Management ............................................................96 Related Party Transactions ......................................97 Appendix IV - Index to Financial Statements of Turkish Airlines........................... Appendix IV-F-1 Description of the Certificates .................................98 ____________________ You should rely only on the information contained in this offering memorandum. Neither Turkish Airlines nor any Initial Purchaser (as defined herein) has authorized any person (including any dealer, salesman or broker) to provide you with any information or represent anything about Turkish Airlines or this offering that is not contained in this offering memorandum. If given or made, any such other information or representation should not be relied upon as having been authorized by Turkish Airlines or the Initial Purchasers referred to below. You should assume that the information contained in this offering memorandum is accurate only as of the date hereof or as of the date the information is otherwise stated to be provided and is subject to change, completion or amendment without notice. You are authorized to use this offering memorandum solely for the purpose of considering a purchase of the Certificates described in this offering memorandum. Citigroup Global Markets Inc., Goldman, Sachs & Co., Deutsche Bank Securities Inc. and BNP Paribas Securities Corp. (collectively, the “Initial Purchasers”) make no representation or warranty, express or implied, as to the accuracy or completeness of such information, and nothing contained in this offering memorandum is, or shall be relied upon as, a promise or representation by the Initial Purchasers. You may not reproduce or distribute this offering memorandum, in whole or in part, and you may not disclose any of the contents of this offering memorandum or use any information herein for any purpose other than considering the purchase of the Certificates. You agree to the foregoing by accepting delivery of this offering memorandum. In this offering memorandum, references to (i) “Turkish Airlines” and “THY” refer to Türk Hava Yolları A.O. and its consolidated subsidiaries, unless the context otherwise requires or unless otherwise specified, and (ii) “Issuer” refers to Bosphorus 2015 LLC, a newly formed limited liability company formed and existing under the laws of Delaware that will issue the Equipment Notes and lease the Aircraft to Turkish Airlines. ____________________
In accordance with Article 405 of Regulation (EU) No. 575/2013 and Article 51 of Regulation (EU) No. 231/2013 (which, in each case, does not take into account any corresponding national measures) certain entities may acquire the credit risk of a securitisation if the originator, sponsor or original lender thereof has explicitly disclosed that it will retain, on an on-going basis, a material net economic interest in the securitisation of not less than 5% (the “Risk Retention Requirement”). Turkish Airlines has considered, and obtained legal advice as to, the applicability of the Risk Retention Requirement to this offering and, on balance, is of the view that an investment in the Certificates should not constitute a “securitisation position” due to, among other things, its payment obligations under the Leases. Turkish Airlines does not therefore consider that the Risk Retention Requirement should apply to investments in the Certificates. However, investors should be aware that the regulatory capital treatment of any investment in the Certificates will be determined by the investor’s regulator and the relevant provisions of national law. Although market participants have, in consultations relating to the Risk Retention Requirement, requested guidance on the structures captured by the definitions, no definitive guidance has been forthcoming. Therefore some uncertainty remains as to which structures would be considered to be “securitisations”. Investors in the Certificates are responsible for analyzing their own regulatory position and should not rely on Turkish Airlines’ interpretation set out above. Investors should consult their regulator should they require guidance in relation to the regulatory capital treatment that their regulator would apply to an investment in the Certificates. ____________________
NOTICE TO NEW HAMPSHIRE RESIDENTS NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES ANNOTATED, 1955, AS AMENDED (“RSA 421-B”), WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH. NOTICE TO INVESTORS Turkish Airlines is furnishing this offering memorandum in connection with an offering that is exempt from registration under, or not subject to, the Securities Act, and applicable state securities laws solely to allow a prospective investor to consider purchasing the Certificates. Delivery of this offering memorandum to any other person or any reproduction of this offering memorandum, in whole or in part, without Turkish Airlines’ and the Initial Purchasers’ prior consent, is prohibited. The information contained in this offering memorandum has been provided by Turkish Airlines and other sources identified in this offering memorandum.
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The Certificates described in this offering memorandum have not been and will not be registered with, recommended by or approved by the United States Securities and Exchange Commission (the “SEC”), or any other federal, state or foreign securities commission or regulatory authority, nor has the SEC or any such state or foreign securities commission or authority passed upon the accuracy or adequacy of this offering memorandum. Any representation to the contrary is a criminal offense. You must comply with all applicable laws and regulations in connection with the distribution of this offering memorandum and the offer or sale of the Certificates. See “Transfer Restrictions”. You are not to construe the contents of this offering memorandum as investment, legal or tax advice. You should consult your own counsel, accountant and other advisors as to legal, tax, business, financial and related aspects of a purchase of the Certificates. Neither Turkish Airlines nor the Initial Purchasers are making any representation to you regarding the legality of an investment in the Certificates by you under applicable laws. In making an investment decision regarding the Certificates offered by this offering memorandum, you must rely on your own examination of Turkish Airlines and the terms of this offering, including, without limitation, the merits and risks involved. This offering is being made on the basis of this offering memorandum. Any decision to purchase Certificates in this offering must be based on the information contained in this offering memorandum. This offering memorandum is being provided (1) to QIBs in reliance on Rule 144A under the Securities Act and (2) to non-U.S. Persons in offshore transactions complying with Rule 903 or Rule 904 of Regulation S under the Securities Act, in each case, for informational use solely in connection with their consideration of the purchase of the Certificates. This offering memorandum and any other material in relation to the Certificates described herein are only being distributed to, and are only directed at, (i) persons who are outside the United Kingdom, (ii) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the “Order”), (iii) high net worth entities and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order and (iv) persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services Markets Act 2000, as amended (“FSMA”)) in connection with the issue or sale of any Certificates may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as “relevant persons”). The Certificates are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire the Certificates will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this offering memorandum or any of its contents. This offering memorandum may not be copied or reproduced in whole or in part, nor may it be distributed or any of its contents be disclosed to anyone other than the prospective investors to whom it is being provided. By accepting delivery, you agree that the use of this information for any purpose other than considering an investment in the Certificates is strictly prohibited. This offering memorandum contains summaries, believed to be accurate, of some of the terms of specific documents, but reference is made to the actual documents, copies of which will be made available upon request, for the complete information contained in those documents, as indicated under “Available Information”. All summaries are qualified in their entirety by this reference. In making your investment decision, you will be deemed to have made certain acknowledgements, representations and agreements as set forth in this offering memorandum under the caption “Transfer Restrictions”. The Certificates are subject to restrictions on transferability and resale and may not be transferred or resold except as permitted under the Securities Act and applicable state and foreign securities laws pursuant to registration or exemption therefrom. See “Transfer Restrictions”. You should be aware that you may be required to bear the financial risks of this investment for an indefinite period of time. Turkish Airlines accepts responsibility for the information contained in this offering memorandum. To the best of Turkish Airlines’ knowledge and belief, having taken all reasonable care to ensure that such is the case, the information contained in this offering memorandum is in accordance with the facts and does not omit anything likely to affect the import of such information. Neither the delivery of this offering memorandum at any time nor any subsequent commitment to enter into any financing shall, under any circumstances, create any implication that there has been no change in the information set iii
forth in this offering memorandum or in Turkish Airlines’ affairs since the date hereof. Turkish Airlines reserves the right to withdraw this offering at any time. This offering is subject to the terms described in this offering memorandum and the pass through trust agreement relating to the Certificates. This offering memorandum does not constitute an offer to sell the Certificates to, or a solicitation of an offer to buy the Certificates from, any person in any jurisdiction where it is unlawful to make such an offer or solicitation. The distribution of this offering memorandum and the offer and sale of the Certificates may be restricted by law in certain jurisdictions. Persons into whose possession this offering memorandum or any of the Certificates come must inform themselves about, and observe, any such restrictions. You must comply with all applicable laws and regulations (including obtaining required consents, approvals and permissions) in any jurisdiction in which you possess or distribute this offering memorandum or in which you purchase, offer or sell the Certificates. Turkish Airlines does not have any responsibility therefor. The Certificates will be available in book-entry form only. Turkish Airlines expects that the Certificates sold pursuant to this offering memorandum will be issued in the form of one or more global certificates, which will be deposited with, or on behalf of, DTC, and registered in its name or in the name of Cede & Co., its nominee. Beneficial interests in the global certificates will be shown on and transfers of the global certificates will be effected only through records maintained by DTC and its participants. After the initial issuance of the global certificates, Certificates in certificated form will be issued in exchange for the global certificates only as set forth in the pass through trust agreement governing the Certificates. In connection with this offering, the Initial Purchasers may engage in transactions that stabilize, maintain or otherwise affect the price of the Certificates at levels that might not otherwise prevail in the open market. This stabilizing, if commenced, may be discontinued at any time. NOTICE TO EUROPEAN ECONOMIC AREA INVESTORS This offering memorandum has been prepared on the basis that all offers of Certificates will be made pursuant to an exemption under the Prospectus Directive, as implemented in Member States of the European Economic Area (“EEA”), from the requirement to produce a prospectus for offers of securities. Accordingly, any person making or intending to make any offer within the EEA of Certificates, which are the subject of the offering contemplated in this offering memorandum, should only do so in circumstances in which no obligation arises for Turkish Airlines or the Initial Purchasers to produce a prospectus for such offer. Neither Turkish Airlines nor the Initial Purchasers has authorized, nor do they authorize, the making of any offer of Certificates through any financial intermediary, other than offers made by the Initial Purchasers, which constitute the final placement of Certificates contemplated in this offering memorandum. In relation to each Member State of the EEA that has implemented the Prospectus Directive (each, a “Relevant Member State”), each Initial Purchaser has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the “Relevant Implementation Date”) it has not made and will not make an offer of Certificates that are the subject of the offering contemplated by this offering memorandum to the public in that Relevant Member State other than: (a)
to any legal entity which is qualified as defined in the Prospectus Directive;
(b)
to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the relevant Initial Purchaser or Initial Purchasers nominated by the Issuer for any such offer; or
(c)
in any other circumstances falling within Article 3(2) of the Prospectus Directive;
provided that no such offer of Certificates shall require Turkish Airlines or any Initial Purchaser to publish a prospectus pursuant to Article 3 of the Prospectus Directive. For the purposes of this provision, the expression an “offer of Certificates to the public” in relation to any Certificates in any Relevant Member State means the communication in any form and by any means of sufficient iv
information on the terms of the offer and the Certificates to be offered so as to enable an investor to decide to purchase or subscribe the Certificates, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State and the expression “Prospectus Directive” means Directive 2003/71/EC (and amendments thereto, including the 2010 Prospectus Directive Amending Directive, to the extent implemented in the Relevant Member State) and includes any relevant implementing measure in the Relevant Member State and the expression “2010 Prospectus Directive Amending Directive” means Directive 2010/73/EU. CERTAIN VOLCKER RULE CONSIDERATIONS The Issuer is not now, and immediately following the issuance of the Certificates pursuant to the Trust Agreement will not be, a “covered fund” for purposes of regulations adopted under Section 13 of the Bank Holding Company Act of 1956, as amended, commonly known as the “Volcker Rule”. In reaching this conclusion, although other statutory or regulatory exemptions under the United States Investment Company Act of 1940, as amended (the “Investment Company Act”), may be available, the Issuer is relying on the exemption from registration set forth in Section 3(c)(5) under the Investment Company Act. ENFORCEMENT OF JUDGMENTS Turkish Airlines is a public joint stock company organized under the laws of the Republic of Turkey (“Turkey”). All or substantially all of the directors and officers of Turkish Airlines named herein reside inside Turkey and all or a significant portion of the assets of such persons may be, and substantially all of the assets of Turkish Airlines are, located in Turkey. As a result, it may not be possible for investors to effect service of process upon such persons or entities outside Turkey or to enforce against them in the courts of jurisdictions other than Turkey any judgments obtained in such courts that are predicated upon the laws of such other jurisdictions. In order to enforce such judgments in Turkey, investors should initiate enforcement lawsuits before the competent Turkish courts. In accordance with Articles 50-59 of Turkey’s International Private and Procedure Law (Law No. 5718), the courts of Turkey will not enforce any judgment obtained in a court established in a country other than Turkey unless: (a) there is in effect a treaty between such country and Turkey providing for reciprocal enforcement of court judgments; (b) there is de facto enforcement in such country of judgments rendered by Turkish courts; or (c) there is a provision in the laws of such country that provides for the enforcement of judgments of Turkish courts. There is no treaty between Turkey and the United States or Turkey and the United Kingdom providing for reciprocal enforcement of judgments. There is no de facto reciprocity between Turkey and the United States. Turkish courts have rendered at least one judgment in the past confirming de facto reciprocity between Turkey and the United Kingdom. However, since de facto reciprocity is decided by the relevant court on a case-by-case basis, there is uncertainty as to the enforceability of court judgments obtained in the United States or the United Kingdom by Turkish courts in the future. Moreover, there is uncertainty as to the ability of an investor to bring an original action in Turkey based on the U.S. federal or any other non-Turkish securities laws. In addition, the courts of Turkey will not enforce any judgment obtained in a court established in a country other than Turkey if: (a) the defendant was not duly summoned or represented, or if the defendant’s fundamental procedural rights were not observed; (b) the judgment has been issued in absentia in infringement of the applicable laws of such jurisdiction; (c) the judgment in question was rendered with respect to a matter within the exclusive jurisdiction of the courts of Turkey;
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(d) the judgment is incompatible with a judgment of a court in Turkey between the same parties and relating to the same issues or, as the case may be, with an earlier foreign judgment on the same issue and enforceable in Turkey; (e) the judgment is not of a civil nature; (f) the judgment is clearly against public policy rules of Turkey; (g) the judgment is not final and binding with no further recourse for appeal under the laws of the country where the judgment has been rendered; or (h) the judgment was rendered by a foreign court that has deemed itself competent even though it has no actual relationship with the parties or the subject matter at hand. AVAILABLE INFORMATION Each purchaser of the Certificates from the Initial Purchasers will be furnished with a copy of this offering memorandum and any related amendments or supplements to this offering memorandum. Each person receiving this offering memorandum acknowledges that (i) such person has been afforded an opportunity to request from Turkish Airlines and the Issuer, and has received, all additional information considered to be necessary to verify the accuracy and completeness of the information herein; (ii) such person has not relied on the Initial Purchasers or any person affiliated with the Initial Purchasers in connection with its investigation of the accuracy of such information or its investment decision; and (iii) except as provided in clauses (i) and (ii) above, no person has been authorized to give any information or to make any representation concerning the Certificates other than those contained herein, and, if given or made, such other information or representation should not be relied upon as having been authorized by Turkish Airlines or the Initial Purchasers. None of Turkish Airlines, the Issuer or the Trust is currently subject to the periodic reporting and other information requirements of the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”). For so long as any of the Certificates are restricted securities within the meaning of Rule 144(a)(3) under the Securities Act and Turkish Airlines is neither subject to Section 13 or 15(d) of the Exchange Act nor exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act, each will, upon the request of any such person, furnish to any holder of Certificates, or to any prospective purchaser designated by any such registered holder, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. Turkish Airlines has applied to list the Certificates on the Irish Stock Exchange. For so long as the Certificates are listed on the Irish Stock Exchange for trading on the Global Exchange Market thereof and the rules of that exchange so require, copies of such information and its organizational documents will be available for review during the normal business hours on any business day at the specified office of the listing agent. See “Listing and General Information”. This offering memorandum contains summaries of certain agreements that Turkish Airlines, the Issuer and other parties have entered into or will enter into in connection with this offering. The descriptions contained in this offering memorandum of these agreements are only summaries, do not purport to be complete and are subject to, or qualified in their entirety by reference to, these definitive agreements. Copies of the definitive agreements will be made available in accordance with the terms of the Certificates without charge to you by making a written request to Turkish Airlines at the following address: Türk Hava Yolları A.O. Turkish Airlines General Management Building Atatürk Hava Limanı Yeşilköy 34149 Istanbul, Turkey +90 212 463 6363
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION Certain statements contained in this offering memorandum are forward-looking within the meaning of the U.S. federal securities laws and certain applicable jurisdictions. Forward-looking statements relate to analyzes and other information that are based on forecasts or future results and estimates of amounts not yet determinable. These statements may involve, but are not limited to, comments relating to preliminary results, guidance, strategies, expectations, financial results, operations or future actions. Forward-looking statements are identified by the use of terms and phrases such as “preliminary”, “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “predict”, “project”, “will”, “would” and similar terms and phrases, or the negative thereof, including references to assumptions. Forward-looking statements, by their nature, are based on assumptions, including those described herein, and are subject to important risks and uncertainties. Actual results may differ materially from results indicated in forwardlooking statements due to a number of factors, including without limitation:
declines in the demand for air transport services, including declines due to global or regional economic downturns;
Turkish Airlines’ leverage and ability to meet its debt and other obligations (including obligations under aircraft operating and finance leases), including the costs and availability of financing and its ability to maintain adequate liquidity;
the impact of competition on Turkish Airlines’ results of operations;
constraints on Turkish Airlines’ ability to successfully implement its growth strategy including capacity limits at airports in Istanbul;
the ability of other air carriers with whom Turkish Airlines has alliances or partnerships to provide the services contemplated by the respective arrangements with such carriers;
general economic conditions (including interest rates, foreign currency exchange rates, investment or credit market conditions, crude oil prices, costs of aircraft fuel and energy refining capacity in relevant markets); and
adverse changes in regulatory and legislative provisions (including excessive taxation) and adverse judicial developments or airline industry directives (including security directives associated with air transport).
The forward-looking statements contained in this offering memorandum represent Turkish Airlines’ expectations as of the date of this offering memorandum (unless any other date is expressly referenced in this offering memorandum in relation to such information) and are subject to change after such date. Although Turkish Airlines has attempted to identify important factors that could cause actual results to differ materially from those identified in the forwardlooking statements, there may be other factors that could cause actual results not to be as anticipated, estimated or intended. Although Turkish Airlines believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee its future results, level of activity, performance or achievements. Because actual results could differ materially from Turkish Airlines’ intentions, plans, expectations, assumptions and beliefs about the future, you are urged not to rely on forward-looking statements in this offering memorandum and to view all forwardlooking statements made in this offering memorandum with caution. Turkish Airlines disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required under applicable securities regulations.
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INDUSTRY AND MARKET DATA Market data and certain industry forecasts used throughout this offering memorandum were obtained from internal surveys, market research, publicly available information and industry publications. Industry publications generally state that the information contained therein has been obtained from sources believed to be reliable at the relevant time, but that the accuracy and completeness of such information is not guaranteed. Similarly, internal surveys, market research and other publicly available information, while believed to be reliable, have not been independently verified, and neither Turkish Airlines nor any Initial Purchaser makes any representation as to the completeness or accuracy of such information. Any estimates and forecasts involve risks and uncertainties and are subject to change based on various factors, including those discussed under “Cautionary Statement Regarding Forward-Looking Information” and “Risk Factors”. Turkish Airlines has accurately reproduced the market and industry data, and as far as Turkish Airlines is aware and able to ascertain from internal surveys, market research, publicly available information and industry publications, no facts have been omitted which would render the reproduced information inaccurate or misleading. DEFINED TERMS An index of terms defined throughout this offering memorandum is set forth in Appendix I – Index of Terms. Certain other capitalized terms used in this offering memorandum and not defined have the following meanings: Adjusted aircraft rent expense means all operational lease expenses for the period (including heavy maintenance portion of operating lease aircraft) and adjusted wet lease expenses, which are normalized for rent and heavy maintenance portion (55.0% of wet lease expenses). Adjusted net debt means finance leases plus capitalized rent net of cash and cash equivalents, time deposits with a maturity of more than three months, current pre-delivery payment receivables for aircraft and restricted cash. In order to capitalize rent, adjusted aircraft rent expenses are multiplied by seven. Available seat kilometers (“ASK”) means the number of seats available for sale multiplied by the distance flown. Available ton kilometers (“ATK”) means the number of tons of capacity available for the carriage of revenue load (passenger and cargo) multiplied by the distance flown. CAGR means compound annual growth rate. Cargo revenue per CTK means cargo revenue divided by CTK. Cargo ton kilometers (“CTK”) means the number of revenue tons of cargo (freight and mail) carried multiplied by the distance flown. CASK or Cost per ASK means the operating costs of Turkish Airlines over ASK. EBITDA means the sum of (a) income from investment incentives and Turkish Airlines’ share of profits in income from subsidiaries (Turkish Airlines’ share of profits in unconsolidated investments) all of which are below adjusted operating profit, and (b) adjusted operating profit adjusted to add back depreciation and amortization. EBITDAR means the sum of (a) income from investment incentives and Turkish Airlines’ share of profits in income from subsidiaries (Turkish Airlines’ share of profits in unconsolidated investments) all of which are below adjusted operating profit, and (b) adjusted operating profit adjusted to add back depreciation and amortization and aircraft rent. GDP means the gross domestic product of Turkey. Overall load factor means RTK expressed as a percentage of ATK. Passenger load factor means RPK expressed as a percentage of ASK.
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Punctuality means the industry’s standard, measured as the percentage of flights departing within 15 minutes of schedule. Revenue passenger kilometers (“RPK”) means the number of revenue passengers carried multiplied by the distance flown. Revenue ton kilometers (“RTK”) means the revenue load in tons multiplied by the distance flown. Yield means passenger revenue per RPK. PRESENTATION OF FINANCIAL AND OTHER INFORMATION The consolidated financial information included in this offering memorandum has been derived from Turkish Airlines’ audited consolidated financial statements as of and for the financial years ended 31 December 2014, 2013 and 2012 (the “Financial Statements”) prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by International Accounting Standards Board (“IASB”) and presented in U.S. Dollars. IFRS differs from generally accepted accounting principles in the United States (“U.S. GAAP”). See “—Certain Differences Between IFRS and U.S. GAAP”. Turkish Airlines’ financial year ends on 31 December and references in this offering memorandum to any specific year are to the 12-month period ended on 31 December of such year, unless otherwise indicated or the context otherwise requires. Certain numerical figures set out in this offering memorandum, including financial data presented in millions or thousands, have been subject to rounding adjustments and, as a result, the totals of the data in this offering memorandum may vary slightly from the actual arithmetic totals of such information. Turkish Airlines’ consolidated balance sheet as at 31 December 2012 and the related consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flow for the years ended 31 December 2012, included in this offering memorandum, have been audited by DRT Bağımsız Denetim ve SMMM A.Ş. (“Deloitte”). Turkish Airlines’ consolidated balance sheet as at 31 December 2014 and 31 December 2013 and the related consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flow for the years ended 31 December 2014 and 31 December 2013, included in this offering memorandum, have been audited by KPMG Akis Bağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik A.Ş. (“KPMG”). In 2013, in accordance with the requirement for the mandatory rotation of auditors every seven years under Turkish regulations, Turkish Airlines changed its auditors to KPMG. Statutory Financial Statements Turkish Airlines maintains its books of account and prepares its statutory financial statements in Turkish Lira in accordance with the requirements of the Turkish Commercial Codes and Turkish tax legislation and the Uniform Chart of Accounts issued by the Ministry of Finance of Turkey. However, Turkish Airlines’ functional currency is the U.S. Dollar. Furthermore, the Financial Statements have been prepared using a U.S. Dollar presentation currency. However, Turkish Airlines is under no obligation to prepare future financial statements using a U.S. Dollar presentation and may decide not to prepare U.S. Dollar financial statements in the future. Certain Differences Between IFRS and U.S. GAAP This offering memorandum includes the Financial Statements and other financial information prepared and presented in accordance with IFRS and the discussion and analysis of Turkish Airlines’ financial condition and results of operations is based on such Financial Statements and other financial information. IFRS and U.S. GAAP differ materially from each other. This offering memorandum does not include any reconciliation of the Financial Statements and other financial data to U.S. GAAP. Moreover, this offering memorandum does not include any narrative description of the differences between IFRS and U.S. GAAP and no attempt has been made to identify or quantify the differences between IFRS and U.S. GAAP that might be applicable to Turkish Airlines or its Financial Statements or other financial information. It is possible that reconciliation or other qualitative or quantitative analysis would identify material differences between the Financial Statements included herein and other financial ix
information prepared under IFRS and U.S. GAAP. You should consult your own accounting advisers for an understanding of the differences between IFRS and U.S. GAAP and how those differences might affect the Financial Statements and other financial information in this offering memorandum. Non-IFRS Financial Measures This offering memorandum also includes certain references to non-IFRS financial measures such as EBITDAR and adjusted net debt. Turkish Airlines uses these non-IFRS financial measures to evaluate its financial performance. This information is not prepared in accordance with IFRS and should be viewed as supplemental to measures computed in accordance with IFRS. There are limitations to the use of these non-IFRS financial measures including the fact that there is no uniform definition of, for example, EBITDAR. Investors are cautioned not to place undue reliance on this information and should note that such measures, as calculated by Turkish Airlines, may differ materially from similarly titled financial measures reported by other companies, including Turkish Airlines’ competitors. These non-IFRS measures should not be considered in isolation or construed as a substitute for IFRS measures. For a reconciliation of these non-IFRS measures to their respective most directly comparable IFRS measures, see “Operating and Financial Review”. Certain Conventions Certain figures and percentages included in this offering memorandum have been subject to rounding adjustments. Accordingly, figures shown in the same category presented in different tables may vary slightly and figures shown as totals in certain tables may not be an arithmetic aggregation of the figures which precede them. All references in this offering memorandum to “Turkish Lira” refer to Turkish lira, the legal currency of Turkey and all references to “U.S.$” and “U.S. Dollars” refer to U.S. Dollars, the legal currency of the United States of America. CRA REGULATION In general, European regulated investors are restricted from using a rating for regulatory purposes if such rating is not issued by a credit rating agency established in the European Community and registered under Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies (the “CRA Regulation”) unless the rating is provided by a credit rating agency operating in the European Community before 7 June 2010 which has submitted an application for registration in accordance with the CRA Regulation and such registration is not refused. Neither Moody’s Investors Service, Inc. (“Moody’s”) nor Standard & Poor’s Rating Services, a Standard & Poor’s Financial Services LLC business (“S&P” and together with Moody’s, the “Rating Agencies”) is a credit rating agency established and operating in the European Community prior to 7 June 2010.
x
SUMMARY The following summary highlights selected information included elsewhere in this offering memorandum to help you better understand Turkish Airlines and the Certificates. This summary does not contain all of the information that you should consider before investing in the Certificates. Before investing in the Certificates, you should read this entire offering memorandum carefully, including the Financial Statements and the notes thereto, and the section of this offering memorandum entitled “Risk Factors”. Turkish Airlines Turkish Airlines, Turkey’s flag carrier airline, offers air transportation and related services in Turkey and across the globe. Turkish Airlines was founded in 1933 and grew steadily over the next eight decades. The airline’s route network expanded from three destinations in 1933 to 112 at the end of 2000. The airline flew its first international route in 1947, expanded into Europe in the 1960s and 1970s and further expanded into the Far East and North America in the late 1980s. Since 2000, Turkish Airlines has continued to add destinations to its flight network, including 33 destinations in the Middle East and 43 destinations in Africa by 31 December 2014, and has increased flight frequency on its existing routes. In 2008, Turkish Airlines joined Star Alliance Services GmbH (the “Star Alliance”). Originally a 100.0% state owned airline, in 1990 Turkish Airlines began the process of privatization; the most recent iteration of which occurred in 2006. As of 31 December 2014, Turkish Airlines was 50.88% publicly owned. During the year ended 31 December 2014, Turkish Airlines carried 54.7 million passengers across the world and generated total sales revenue of U.S.$11.07 million, EBITDAR of U.S.$2.044 million and adjusted operating profit of U.S.$638 million. Turkish Airlines’ total number of employees was 25,117 as of 31 December 2014. Turkish Airlines’ principal place of business is Istanbul Atatürk Airport (“Atatürk Airport”) from which it has created and currently maintains a well-balanced and extensive route network both directly and through alliances and codeshare arrangements. In addition, Turkish Airlines has a significant presence at Istanbul Sabiha Gökçen International Airport (“Sabiha Gökçen Airport”). As of 31 December 2014, Turkish Airlines flew to more than 260 destinations worldwide and was able to reach 115 additional destinations through its Star Alliance partners. Turkish Airlines operated regularly scheduled flights to 43 cities in Turkey, 102 cities in Europe and the Commonwealth of Independent States (“CIS”), 33 cities in the Middle East, 43 cities in Africa, 31 cities in the Far East and 10 cities in the Americas as of 31 December 2014. With service to 108 countries as of 31 December 2014, Turkish Airlines is the largest airline in the world by number of countries served. Turkish Airlines generated 97.8% of its revenue from its air transport operations during the year ended 31 December 2014, which consist of domestic and international passenger and cargo operations. Scheduled passenger revenues are derived from passengers transported on flights operated by Turkish Airlines and AnadoluJet, which is a wholly-owned sub-brand of Turkish Airlines that operates as a low cost carrier. Cargo revenues are derived from cargo transported by Turkish Cargo, a sub-brand of Turkish Airlines. Other revenues consist primarily of maintenance service revenues which are derived from the operations of THY Technic (“Turkish Technic”) and Türk Hava Yolları Havacilik Bakim Onarim Merkezi – Turkish Airlines Aviation Maintenance, Repair and Overhaul Centre (“Turkish HABOM”), both 100.0% owned subsidiaries of Turkish Airlines whose financial results are fully consolidated with Turkish Airlines. Turkish Airlines has been awarded “Best Airline in Europe” and the “Best Airline in Southern Europe” for the last four consecutive years as part of the Skytrax World Airline Awards and was named “Airline of the Year” at the 2013 Centre for Asia Pacific Aviation Awards for Excellence, an award presented to the air carrier that has made the greatest impact on the development of the airline industry, established itself as a leader and is a benchmark to follow.
1
Turkish Airlines’ Fleet Turkish Airlines’ fleet was comprised of 263 aircraft in operation as at 28 February 2015, a breakdown of which is provided in the table below: On-Balance Sheet fixed assets CONTINUING AIRLINE OPERATIONS(1) Wide Body A330-200 .............................. A330-300 .............................. A340-300 .............................. 5 B777-300ER ......................... 5 Total...................................... Narrow Body B737-900ER ......................... B737-800 .............................. 25 B737-800WL ........................ B737-700 .............................. B737-700WL ........................ A320-200 .............................. A321-200 .............................. A319-100 .............................. E190...................................... A321 NEO ............................ A320 NEO ............................ B737-8MAX......................... B737-9MAX......................... 25 Total...................................... Cargo A310-300 .............................. 2 A330-200 .............................. Wet Lease ............................. 2 Total...................................... TOTAL CONTINUING 32 OPERATIONS ......................
On-Balance Sheet finance leases
Off-Balance Sheet operating leases
5 18
11
16 39 11 33
12 39 6
101
11
16 18 5 16 55
10 20 3 6 21 4 8 1
11 68 20 3 6 33 43 14 1
Future deliveries
Options
12 16 28
0
4 20
25
72
20 10 30
0 30
73
199
55 10 186
2 2 86
2 5 2 9 263
0 214
5 5 145
Total 28 February 2015
___________________ 1.
Includes jets operated by AnadoluJet. Does not include aircraft operated by SunExpress, an unconsolidated venture 50.0% of which is owned by Turkish Airlines and 40.0% of which is owned by Lufthansa.
2
Turkish Airlines’ Competitive Strengths Turkish Airlines’ key competitive strengths lie in its central location between Europe and Asia, strong flight network, low unit cost, focus on customer satisfaction, high brand awareness and commitment to balanced, planned and rapid growth.
Turkish Airlines operates from a natural aviation hub. Turkish Airlines has a natural advantage due to the prime location of its hub at Atatürk Airport in Istanbul, with close connectivity to Europe, the Middle East, Central Asia and North Africa—constituting more than 40.0% of all worldwide international air traffic and covering more than 55 national capitals—with its narrow body fleet, as well as competitive coverage of the Americas and the Far East with its wide body aircraft such as the Boeing 777-300ER. Turkish Airlines’ wide body fleet has grown by 175.0% since 31 December 2009 and Turkish Airlines expects that the addition of the three Boeing 777-300ER aircraft financed with the proceeds of this offering will complement the airline’s current structure by increasing utilization, load factor, premium revenue, network connectivity and cargo transport capabilities. Narrow body aircraft have a lower breakeven load factor to cover their direct operational costs, which creates the opportunity for profit generation on flights to cities with low passenger potential. Being able to reach all of these destinations with narrow body aircraft allows Turkish Airlines to penetrate many smaller underserved cities and serve them with greater frequency, differentiating its product from that of its main competitors. Turkish Airlines offers one of the highest numbers of origin and destination (“O&D”) pair options for its passengers in the airline industry. In addition, a route traveling through Istanbul when connecting Europe to Asia, the Middle East or Central Asia will generally have a lower detour factor than competing flights that connect in other locations in Europe or the Middle East.
Turkish Airlines takes advantage of Turkey’s and Istanbul’s economic and demographic potential. Turkey is a growing country with a population, as of 31 December 2014, of 77.7 million people and Istanbul, specifically, is a city with a young, growing population, as of 31 December 2014, of 14.3 million people. Turkey, and particularly Istanbul, is fast becoming one of the most visited destinations in the world and Turkish Airlines believes it will continue to grow as a tourist destination, given its strategic central location between Europe and Asia. In 2014, Istanbul ranked as the third largest air travel city in Europe (see “Industry Overview” for more information). This growth creates a continuous increase in direct passenger potential for Turkish Airlines and provides leverage for its operations by reducing its dependence on transfer passengers, which is a highly competitive area for passenger transportation. In 2014, 56.0% of Turkish Airlines’ international passengers flew directly into or out of Turkey, while the remaining 44.0% were international to international transfers.
Turkish Airlines is an industry leader with a strong flight network. As of 31 December 2014, Turkish Airlines offered flights to 108 countries (including Turkey)—more countries than any other airline. In addition, throughout the course of 2013 and 2014, Turkish Airlines positioned itself as the largest air carrier in the world by number of international destinations served from a single hub, with 219 international destinations served from its Istanbul hub as of 28 February 2015. Turkish Airlines continuously adds destinations to its flight network, with 18 new destinations added in 2014, including Rotterdam, Astrakhan, Boston, Montreal, Bordeaux and Münster. Turkish Airlines expects that the addition of the three new Boeing 777-300ER wide body aircraft will expand the airline’s reach and permit it to add additional international destinations to its network.
Turkish Airlines’ low unit cost is a major competitive advantage. Turkish Airlines has a lower cost base than most of its full service competitors. During the year ended 31 December 2014, its total unit cost base was U.S.$7.73 per ASK. The primary driver of this low cost structure is the geographic location of Istanbul, Turkish Airlines’ main hub, which enables Turkish Airlines to operate at optimum stage lengths and with high utilization rates using lower cost narrow body aircraft. During the year ended 31 December 2014, approximately 27.0% of Turkish Airlines’ total costs were fixed costs, permitting greater production with the same assets and lower unit costs. Turkish Airlines’ relatively young average fleet age of 7.3 years also contributes to the airline’s operational efficiency. In order to preserve its competitive advantage through a low cost base, Turkish Airlines has implemented efficient fuel consumption policies, employee efficiency strategies, cost cutting strategies and financial risk management strategies. Aircraft fuel costs stemming from fluctuations in oil prices are controlled through the use of strategic financial instruments and, in order to reduce sales costs, Turkish Airlines has implemented strategies designed to increase sales via direct sales channels. Turkish Airlines plans to continue investing in new generation technologies to decrease costs, increase efficiency and enhance its customers’ product experience. 3
Turkish Airlines’ management is focused on customer satisfaction. Customer satisfaction is integral to Turkish Airlines’ business model. The airline’s commitment to maintaining a high level of customer satisfaction is evident in every service that it provides, from Turkish Airlines’ “Lounge Istanbul” at Atatürk Airport—which was nominated to the list of the world’s top ten premium airport lounges and was awarded “Best Business Class Lounge Dining” by Skytrax in 2014—to Turkish Airlines’ award winning catering service—which was named “Best Business Class Catering” by Skytrax in 2014 for the second year in a row. On all of its aircraft delivered in and after 2008, Turkish Airlines delivers a comprehensive inflight entertainment system where every seat is provided with its own screen and, on its long haul flights, Turkish Airlines provides live inflight television, dubbed “Live TV”, and wireless internet services. Turkish Airlines also provides comfortable seating with 30 to 31 inch seat pitches on its economy class and between 45 and 78 inch seat pitches on its business class narrow body and wide body aircraft, respectively. Turkish Airlines is committed to creating, providing and maintaining a product that customers are satisfied with and can trust.
Turkish Airlines benefits from high brand awareness. In 2013 and 2014, awareness of the Turkish Airlines brand increased due to its extensive flight network and quality service. With the newly adopted slogan “Widen Your World”, the airline actively encourages passengers to take advantage of Istanbul as a bridge between two continents by introducing potential and existing customers to the airline’s extensive route network. In order to increase brand awareness and brand value, during this period, Turkish Airlines conducted social media campaigns for flights, granted several sponsorships and used celebrity advertising effectively. As a consequence of these activities, Turkish Airlines believes it gained strength against traditional airline brands and has become a preferred airline globally.
Turkish Airlines’ growth is balanced, planned and rapid. Underpinning each of Turkish Airlines’ strengths described above is a balanced, planned and rapid growth strategy. Turkish Airlines demonstrated a stable and sustainable growth over the last decade—the airline has posted a profit every year since 2006 and was one of the few full service airlines to remain profitable throughout the recent financial crisis. Turkish Airlines continues to strive daily to maintain its position among the top of the airline industry in network strength and expansion, operational efficiency, customer satisfaction and brand awareness and each effort is carefully and strategically reviewed and planned by management.
Turkish Airlines’ Business Strategy Ensuring the safety of its flight operations is Turkish Airlines’ single most important business goal, and it intends to continue to strengthen its deeply ingrained safety culture. Keeping this commitment to safety at the forefront, Turkish Airlines’ key strategies for developing its standing as a global airline include:
Expanding, diversifying and deepening its flight network, including through the addition of wide body aircraft to its fleet. In order to increase its global market share, Turkish Airlines plans to expand its long haul coverage through the addition of new destinations and increased frequency on current long haul routes as well as through the addition of new wide body aircraft to its fleet, including the new three Boeing 777-300ER aircraft financed with the proceeds of this offering. Turkish Airlines is also increasing the frequency of flights on its short and medium haul routes in order to create and maintain a mature, efficient network. As of 31 December 2014, Turkish Airlines flew to approximately 69.0% of its destinations at least daily and it aims to increase this level to 95.0% within five years’ time. This strategy of expanding, diversifying and deepening its flight network is intended to increase Turkish Airlines’ international and domestic connectivity and solidify Istanbul as one of the largest aviation hubs in the world.
Taking advantage of modern aircraft capabilities and creating a competitive fleet that balances demand and capacity. Turkish Airlines’ order book, which included 28 firm orders for wide body aircraft and 186 firm orders and 30 options for narrow body aircraft as of 28 February 2015, will provide improved operating economics and passenger experience. Turkish Airlines intends to take full advantage of the capabilities of each type of aircraft on its order book by assigning them to routes in its network based on specific characteristics including seat capacity and flight range capability. For example, new generation narrow body aircraft will be used to increase the frequency of flights to smaller markets within short and medium range of Istanbul, such as flights to Africa, Europe and Central Asia. The addition of the Boeing 777 wide body aircraft will allow Turkish Airlines to expand its network to include additional North American, South American and Asian routes and, together with the Airbus 330, 4
will be used to increase flight frequency on certain strategically important routes in the Americas and the Far East. The use of these modern aircraft will allow Turkish Airlines to capture profit opportunities in underserved markets and improve returns on existing medium and long haul routes as a result of the improved economics of newer aircraft. Turkish Airlines’ new modern aircraft and competitive fleet structure will also provide additional efficiency on mature routes, a more enhanced flying experience and additional capacity on dense routes that are subject to capacity restrictions.
Increasing its revenue generation by using wide body aircraft to access new markets and expand its global network. Turkish Airlines’ total sales revenue has grown 18.9% annually (CAGR) during the last ten years and has become significantly more diversified as Turkish Airlines has expanded and diversified its network globally. Turkish Airlines expects its unit revenue to increase with the delivery of wide body aircraft orders, as they are configured to hold a larger number of the higher revenue generating premium passengers and increased cargo capacity when compared to narrow body jets.
Becoming a five-star airline through investments in superior service and premium products. Turkish Airlines is currently the only European carrier that has earned four stars from Skytrax under its airline rating system in all categories—including seat comfort, inflight entertainment and service efficiency. By 2014, Turkish Airlines had been chosen as the “Best Airline in Europe” and the “Best Airline in Southern Europe” four years in a row as part of the Skytrax World Airline Awards. Additionally, Turkish Airlines was awarded the “Best Business Class Onboard Catering” and “Best Business Class Lounge Dining” at the Skytrax World Airline Awards in 2014. Aiming to become a five star airline, Turkish Airlines has invested heavily in its products and services through the introduction of an award winning catering concept, commercially important person (“CIP”) lounges, premium cabin offerings, inflight entertainment systems, enhanced cabin comfort and specialized cabin attendant and customer service training for its personnel. In recent years, these superior products and services, combined with the numerous prestigious awards from prominent bodies of the airline industry, have resulted in increased brand awareness for Turkish Airlines and, Turkish Airlines believes, an increased appreciation of the airline that will pave the way for Turkish Airlines to become the first five-star airline in Europe.
Becoming a global aviation group with the growth of its subsidiary service provider companies. Turkish Airlines currently has many subsidiaries that provide services to the airline industry such as aircraft maintenance, handling, catering and aviation fuels. With the opening of Istanbul’s new airport (the first phase is expected to be completed by the end of 2017) which is set to be one of the largest airports in the world, Istanbul’s importance as an aviation hub should increase. Turkish Airlines believes that its subsidiary service provider companies will grow due to Turkish Airlines’ growth and by serving other airlines in Turkey and abroad. Together with its subsidiaries, Turkish Airlines envisions itself as a global aviation group.
For additional information on Turkish Airlines, see “Selected Financial and Operating Information”, “Operating and Financial Review” and “Business” in this offering memorandum. The Issuer The Issuer, Bosphorus 2015 LLC, is a newly formed Delaware limited liability company. The Issuer was formed on 10 March 2015 in connection with this offering and will be the owner and lessor of each Aircraft and the issuer of the Equipment Notes in respect of each Aircraft. The registered office of the Issuer is located at 1100 North Market Square, Wilmington, Delaware 19890-1605, United States of America, telephone (302) 636-6000. The Issuer’s sole member is a charitable trust established by Wilmington Trust Company, which acts as trustee of the charitable trust. The Trustee’s telephone number is (302) 636-6000.
5
Summary of Terms of Certificates Aggregate Face Amount .............................................. Interest Rate ................................................................. Initial Loan to Aircraft Value (cumulative)(1) .............. Highest Loan to Aircraft Value (cumulative)(2) ........... Expected Principal Distribution Window (in years) .... Initial Average Life (in years from Issuance Date) ..... Regular Distribution Dates .......................................... Final Expected Distribution Date ................................ Final Maturity Date ..................................................... Minimum Denomination ............................................. Liquidity Facility Coverage .........................................
Class A Certificates U.S.$328,274,000 4.20% 64.5% 64.5% 0.5 to 12.0 7.3 15 March and 15 September 15 March 2027 15 September 2028 U.S.$2,000 or integral multiples of U.S.$1,000 in excess thereof Three consecutive semi-annual interest payments
___________________ (1)
These percentages are determined as of 15 September 2015, the first Regular Distribution Date (as defined herein) after all Aircraft are expected to have been financed pursuant to this offering. In calculating these percentages, Turkish Airlines has assumed that the financings of all Aircraft hereunder and delivery of such aircraft are completed prior to 30 June 2015, that the maximum principal amount of Equipment Notes is issued and that the aggregate appraised value of such Aircraft is U.S.$505,036,667 as of such date. The appraised value is only an estimate and reflects certain assumptions. See “Description of the Aircraft and the Appraisals—The Appraisals”.
(2)
See “—Loan to Aircraft Value Ratios”.
6
Equipment Notes, the Leases and the Aircraft The proceeds of this offering will be used by the Trust to purchase Equipment Notes from the Issuer with respect to the Aircraft. The Issuer will use the proceeds from the sale of the Equipment Notes to finance the acquisition of the relevant Aircraft. The aggregate Lease payments with respect to each Aircraft will be sufficient to permit the Issuer to make principal and interest payments on the relevant Equipment Notes, which will be passed through to the Certificateholders. The Aircraft to be financed pursuant to this offering will consist of three new Boeing 777-300ER aircraft currently scheduled for delivery in March 2015 and April 2015. Turkish Airlines will assign its right to take title to the Aircraft to the Issuer, and the Issuer will purchase the Aircraft from The Boeing Company (“Boeing”). See “Description of the Aircraft and the Appraisals—The Appraisals” for a description of the Aircraft that are expected to be financed with the proceeds of this offering. The Issuer may purchase the Aircraft being delivered in March 2015 (the “Initial Aircraft”) on the Issuance Date. If the Initial Aircraft is purchased on such date, then the Trust will use a portion of the proceeds from the sale of the Certificates to acquire Equipment Notes from the Issuer with respect to such Aircraft. The Issuer will use the monies received from the sale of the Equipment Notes to purchase the Initial Aircraft. The remainder of the proceeds from this offering will initially be held in escrow (if the Initial Aircraft is not financed with the proceeds of the offering at closing, all of the proceeds will initially be held in escrow). As Aircraft are delivered, the proceeds will be released from escrow to permit the Issuer to purchase Equipment Notes. Set forth below is certain information about the Equipment Notes expected to be held in the Trust and the Aircraft expected to secure the Equipment Notes:
Aircraft Type(1) Boeing 777-300ER Boeing 777-300ER Boeing 777-300ER
Registration Number TC-JJV TC-JJY TC-JJZ
Manufacturer’s Serial Number 44119 44120 44122
Delivery Month March 2015 March 2015 April 2015
Principal Amount of Equipment Notes (U.S. Dollars) 109,341,000 109,341,000 109,592,000
Appraised Value(2) (U.S. Dollars) 168,216,667 168,216,667 168,603,333
Latest Equipment Note Maturity Date 15 March 2027 15 March 2027 15 March 2027
___________________ (1)
The indicated registration number, manufacturer’s serial number and delivery month for each Aircraft reflect Turkish Airlines’ current expectations, although these may differ for the actual aircraft financed with the proceeds of the offering. The deadline for purposes of financing an Aircraft pursuant to this offering is 30 June 2015. The financing of each Aircraft with a portion of the proceeds of this offering will be effected at delivery of such Aircraft to the Issuer by Boeing. The actual delivery date for any Aircraft may be subject to delay or acceleration. See “Description of the Aircraft and the Appraisals—Timing of Financing the Aircraft”. Turkish Airlines’ has certain rights to substitute other aircraft if the scheduled delivery date of any Aircraft is delayed for more than 30 days after the month scheduled for delivery. See “Description of the Aircraft and the Appraisals—Substitute Aircraft”.
(2)
The appraised value of each Aircraft set forth above is the lesser of the average and median values of such Aircraft as appraised by three independent appraisal and consulting firms: Aircraft Information Services, Inc., BK Associates, Inc. and Morten Beyer & Agnew, Inc. These appraisals indicate appraised base value, projected as of the scheduled delivery month of the applicable Aircraft. These appraisals are based upon varying assumptions and methodologies. An appraisal is only an estimate of value and should not be relied upon as a measure of realizable value. See “Risk Factors—Risk Factors Relating to the Certificates and the Offering— The Appraisals are only estimates of Aircraft value”.
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Loan to Aircraft Value Ratios The following table sets forth loan to Aircraft value ratios (“LTVs”) for the Class A Certificates as of 15 September 2015, the first Regular Distribution Date after all Aircraft are expected to have been financed pursuant to this offering, and each Regular Distribution Date thereafter. The LTVs for the Class A Certificates for the period prior to 15 September 2015 are not meaningful, because during such period all of the Equipment Notes expected to be acquired by the Trust and all of the Aircraft expected to be financed thereby will not be included in the calculation. The table should not be considered a forecast or prediction of expected or likely LTVs but simply a mathematical calculation based on one set of assumptions. See “Risk Factors—Risk Factors Relating to the Certificates and the Offering—The Appraisals are only estimates of Aircraft value”.
Regular Distribution Date 15 September 2015 15 March 2016 15 September 2016 15 March 2017 15 September 2017 15 March 2018 15 September 2018 15 March 2019 15 September 2019 15 March 2020 15 September 2020 15 March 2021 15 September 2021 15 March 2022 15 September 2022 15 March 2023 15 September 2023 15 March 2024 15 September 2024 15 March 2025 15 September 2025 15 March 2026 15 September 2026 15 March 2027
Assumed Aggregate Aircraft Value(1) (U.S. Dollars)
Outstanding Balance of the Class A Certificates(2) (U.S. Dollars)
497,461,117 489,885,567 482,310,017 474,734,467 467,158,917 459,583,367 452,007,817 444,432,267 436,856,717 429,281,167 421,705,617 414,130,067 406,554,517 398,978,967 391,403,417 383,827,867 376,252,317 368,676,767 361,101,217 353,525,667 345,950,117 338,374,567 330,799,017 323,223,467
320,779,429 309,075,379 297,232,836 285,945,648 274,551,321 262,891,935 253,891,935 244,891,935 235,891,935 226,891,935 217,891,935 208,891,935 199,891,935 190,891,935 181,891,935 163,891,935 145,891,935 127,891,935 109,891,935 88,891,935 67,891,935 46,891,935 25,891,935 0
LTV of the Class A Certificates(3) (%) 64.5 63.1 61.6 60.2 58.8 57.2 56.2 55.1 54.0 52.9 51.7 50.4 49.2 47.8 46.5 42.7 38.8 34.7 30.4 25.1 19.6 13.9 7.8 0.0
___________________ (1)
Turkish Airlines has assumed that all Aircraft will be financed under this offering prior to 30 June 2015, and that the appraised value of each Aircraft, determined as described under “—Equipment Notes and the Aircraft”, declines from that of the initial appraised value of such Aircraft by approximately 3.0% per year for the first 15 years after the year of delivery of such Aircraft, in each case prior to the final expected Regular Distribution Date. Other rates or methods of depreciation may result in materially different LTVs. Turkish Airlines cannot assure you that the depreciation rate and method used for purposes of the table will occur or predict the actual future value of any Aircraft. See “Risk Factors—Risk Factors Relating to the Certificates and the Offering— The Appraisals are only estimates of Aircraft value”.
(2)
In calculating the outstanding balances of the Class A Certificates, Turkish Airlines has assumed that the Trust will acquire the Equipment Notes in respect of each Aircraft. Outstanding balances as of each Regular Distribution Date are shown after giving effect to distributions expected to be made on such distribution date.
(3)
The LTVs for the Class A Certificates were obtained for each Regular Distribution Date by dividing (i) the expected outstanding balance of the Class A Certificates after giving effect to the distributions expected to be made on such distribution date, by (ii) the assumed value of all of the Aircraft on such date based on the assumptions described above. The outstanding balances and LTVs of the Class A Certificates will change if the Trust does not acquire Equipment Notes with respect to all the Aircraft.
8
Cash Flow Structure The following is a diagram of the structure of the offering of the Certificates and certain cash flows. Lease Payments (1)
Bosphorus 2015 LLC
Turkish Airlines Finance Lease
Security Trustee Lien
Equipment Note Payments (2)
Proceeds
Loan Trustee
Series A Equipment Notes
Equipment Note Payments on all Aircraft
Subordination Agent
Advances and Reimbursements (if any)
Liquidity Provider (3)
Principal, Premium (if any) and Interest Distributions Interest Payments on Deposits
Depositary (4)
Class A Trustee
Escrow Agent
Class A Certificateholders
___________________ (1)
Each Aircraft will be subject to a separate Lease pursuant to which the Issuer will lease the Aircraft to Turkish Airlines. Rent payments by Turkish Airlines under each Lease will be sufficient to pay in full when due all amounts of principal and interest required to be paid by the Issuer in respect of the Equipment Notes for each Aircraft.
(2)
The Equipment Notes with respect to each Aircraft will be issued under a separate indenture (each, an “Indenture”).
(3)
The Liquidity Facility will be sufficient to allow the Trustee to make up to three consecutive semi-annual interest payments, except that the Liquidity Facility will not cover interest on the Deposits (as defined herein).
(4)
Except as described under “—Equipment Notes, the Leases and the Aircraft” and “—Use of Proceeds”, the proceeds of the sale of the Class A Certificates will initially be held in escrow and deposited with the Depositary, pending financing of each Aircraft with such proceeds. The Depositary will hold such funds as interest-bearing Deposits. The Trust will withdraw funds from the Deposits to purchase Equipment Notes from time to time as each Aircraft is financed. The scheduled payments of interest on the Equipment Notes and on the Deposits, taken together, will be sufficient to pay accrued interest on the outstanding Certificates. If any funds remain as Deposits at the Delivery Period Termination Date (as defined herein), such funds will be withdrawn by the Escrow Agent and distributed to the holders of the Class A Certificates, together with accrued and unpaid interest thereon. No interest will accrue with respect to the Deposits after they have been fully withdrawn.
9
The Offering Certificates Offered ............................................
Bosphorus Class A Pass Through Certificates, Series 20151A. The Class A Certificates will represent a fractional undivided interest in the Trust.
Use of Proceeds ..................................................
The proceeds from the sale of the Certificates will initially be held in escrow and deposited with the Depositary, pending financing of each Aircraft under this offering, to the extent not used in connection with the acquisition by the Issuer of the Initial Aircraft on the Issuance Date as described in “— Equipment Notes, the Leases and the Aircraft” and “Use of Proceeds”. The Trust will withdraw funds from the Deposits to acquire Equipment Notes as these Aircraft are financed. The proceeds from the Equipment Notes will be used by the Issuer to finance the acquisition of the relevant Aircraft. See “Use of Proceeds”.
Legal owner and lessor of Aircraft .....................
The Issuer
Lessee .................................................................
Turkish Airlines
Subordination Agent, Trustee, Paying Agent and Loan Trustee .........................
Wilmington Trust Company
Escrow Agent .....................................................
Wilmington Trust, National Association
Depositary...........................................................
BNP Paribas, acting through its New York branch
Liquidity Provider...............................................
BNP Paribas, acting through its Paris head office
Trust Property .....................................................
The property of the Trust will include:
Equipment Notes acquired by the Trust.
All monies receivable under the Liquidity Facility.
Funds from time to time deposited with the Trustee in accounts, including payments made by the Issuer on the Equipment Notes held in the Trust.
Regular Distribution Dates .................................
15 March and 15 September 2015.
September,
commencing on
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Record Dates ......................................................
The 15th day of the calendar month preceding the related Distribution Date.
Distributions .......................................................
The Trustee will distribute all payments of principal, premium (if any) and interest received on the Equipment Notes held in the Trust to the holders of the Class A Certificates, subject to the subordination provisions applicable to the Certificates. Scheduled payments of principal and interest made on the Equipment Notes will be distributed on the applicable Regular Distribution Dates.
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Payments of principal, premium (if any) and interest made on the Equipment Notes resulting from any early redemption of such Equipment Notes will be distributed on a Special Distribution Date after not less than 15 days’ notice from the Trustee to the Certificateholders. Subordination .....................................................
Distributions on the Certificates will be made in the following order:
First, to the holders of the Class A Certificates to pay interest on the Class A Certificates.
Second, if an additional junior class of certificates (“Additional Certificates”) is issued after the Issuance Date, to the holders of Additional Certificates to pay interest on the Preferred Additional Certificate Pool Balance.
Third, to the holders of the Class A Certificates to pay distributions in respect of the Pool Balance of the Class A Certificates.
Fourth, if Additional Certificates are issued, to the holders of the Additional Certificates to pay interest on the Pool Balance of the Additional Certificates not previously distributed under clause Second above.
Fifth, if Additional Certificates are issued, to the holders of the Additional Certificates to pay distributions in respect of the Pool Balance of the Additional Certificates.
Certain distributions to the Liquidity Provider will be made prior to distributions on the Certificates. See “Description of the Intercreditor Agreement—Priority of Distributions”. Control of Loan Trustee .....................................
The holders of at least a majority of the outstanding principal amount of Equipment Notes issued under each Indenture will be entitled to direct a loan trustee (each, a “Loan Trustee”) under such Indenture in taking action as long as no Indenture Event of Default (as defined in the Indentures) is continuing thereunder. The holders of at least a majority of the outstanding principal amount of the Equipment Notes issued under all Indentures will be entitled to direct the Subordination Agent as pledgee (the “Pledgee”) under a membership interest pledge agreement (the “Membership Interest Pledge” or “Membership Interest Pledge Agreement”) in taking action so long as no Indenture Event of Default is continuing. If an Indenture Event of Default is continuing under any Indenture, subject to certain conditions, the Controlling Party (as defined herein) will direct (i) the Loan Trustee under such Indenture (including in exercising remedies, such as accelerating the related Equipment Notes or causing the Issuer to foreclose the lien on the Aircraft securing such Equipment Notes) and (ii) the Pledgee under the Membership Interest Pledge (including in exercising remedies, such as foreclosing the lien on the collateral thereunder). The “Controlling Party” will be:
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The Class A Trustee.
If Additional Certificates have been issued, upon payment of final distributions to the holders of Class A Certificates, the trustee for the Additional Certificates.
Under certain circumstances, and notwithstanding the foregoing, the Liquidity Provider.
In exercising remedies during the nine months after the earlier of (a) the acceleration of the Equipment Notes issued pursuant to any Indenture or (b) the occurrence of an insolvency proceeding where Turkish Airlines is a debtor, (i) the Equipment Notes and the Aircraft subject to the lien securing such Indenture may not be sold for less than certain specified minimums, (ii) the amount and payment dates of rentals by Turkish Airlines under the Leases may not be adjusted if the discounted present value of such rentals, after giving effect to any such adjustment, would fall below a certain specified minimum and (iii) the collateral subject to the Membership Interest Pledge may not be sold for less than a specified minimum. Right to Purchase Other Classes of Certificates ........................................
If Turkish Airlines becomes subject to an insolvency proceeding, and at the time there is a Lease Event of Default relating to non-payment of amounts due, or breach of its undertakings, the holders of Additional Certificates, if issued (other than Turkish Airlines, the Issuer or any of their respective affiliates) will have the right to purchase all, but not less than all, of the Class A Certificates. The purchase price of the Class A Certificates will be the outstanding balance of the Class A Certificates plus accrued and unpaid interest and other amounts due to the Certificateholders.
Liquidity Facility ................................................
Under the Liquidity Facility, the Liquidity Provider will, if necessary, make advances in an aggregate amount sufficient to pay interest on the Certificates on up to three consecutive semi-annual Regular Distribution Dates at the interest rate for the Certificates. Drawings under the Liquidity Facility cannot be used to pay any amount in respect of the Certificates other than interest and will not cover interest payable on amounts held in escrow as Deposits with the Depositary. Only the holders of the Class A Certificates will be entitled to receive and retain the proceeds of drawings under the Liquidity Facility. Upon each drawing under the Liquidity Facility to pay interest on the Class A Certificates, the Subordination Agent will be obliged to reimburse the Liquidity Provider for the amount of such drawing together with interest on that drawing. Such reimbursement obligation and all interest, fees and other amounts owing to the Liquidity Provider under the Liquidity Facility and certain other agreements will rank senior to the Class A Certificates and the Additional Certificates, if issued, in right of payment. There will be no liquidity facility for the trust related to Additional Certificates in the event that Additional 12
Certificates are issued. Escrowed Funds..................................................
Funds in escrow for the Certificateholders will be held by the Depositary as deposits (the “Deposits”). The Trustee may withdraw these funds from time to time to purchase Equipment Notes prior to the deadline established for purposes of this offering. On the first Regular Distribution Date, the Depositary will pay interest accrued on the Deposits at a rate per annum equal to the interest rate applicable to the Class A Certificates. The Deposits and interest paid thereon will not be subject to the subordination provisions applicable to the Class A Certificates. The Deposits cannot be used to pay any other amount in respect of the Class A Certificates.
Unused Escrowed Funds ....................................
All of the Deposits held in escrow might not be used to purchase Equipment Notes before 30 June 2015, the deadline established for purposes of this offering (the “Delivery Period Termination Date”). This may occur because of delays in the delivery of Aircraft or other reasons. See “Description of the Certificates—Obligation to Purchase Equipment Notes”. If any funds remain as Deposits after the Delivery Period Termination Date, such funds will be withdrawn by the Escrow Agent and distributed, with accrued and unpaid interest, to the Certificateholders after at least 15 days’ prior written notice. See “Description of the Deposit Agreement—Unused Deposits”.
Obligation to Purchase Equipment Notes ...........
The Trustee, the Issuer and Turkish Airlines, as lessee, will enter into the Note Purchase Agreement. Pursuant to the Note Purchase Agreement, the Trustee will be obligated to purchase the Equipment Notes issued with respect to each Aircraft, and Turkish Airlines will be obligated to take each Aircraft on lease from the Issuer pursuant to the applicable Lease for such Aircraft. The Trustee will not be obligated to purchase Equipment Notes if, at the time of issuance of such Equipment Notes, Turkish Airlines is subject to an insolvency or analogous proceeding or certain other events of default or payment defaults have occurred. See “Description of the Certificates—Obligation to Purchase Equipment Notes”.
Possible Issuance of Additional Certificates.......
On or after the Issuance Date, Additional Certificates, which will evidence fractional undivided ownership interests in additional Equipment Notes (“Additional Equipment Notes”) secured by Aircraft, may be issued. If Additional Certificates are issued, holders of Additional Certificates will have the right to purchase all, but not less than all, of the Class A Certificates under certain circumstances after a bankruptcy, reorganization or other insolvency proceeding of Turkish Airlines at the outstanding principal balance of the Certificates, plus accrued and unpaid interest and other amounts due to Certificateholders, but without a premium.
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Consummation of any such issuance of Additional Certificates will be subject to satisfaction of certain conditions, including receipt of confirmation from Moody’s and S&P that it will not result in a withdrawal, suspension or downgrading of the rating of the Class A Certificates that remain outstanding. The proceeds of any issuance of Additional Equipment Notes and Additional Certificates will be paid to Turkish Airlines. Leases .................................................................
The Issuer will lease each Aircraft to Turkish Airlines pursuant to a finance lease. Payments under the Leases will be sufficient to make required interest and principal payments on the Equipment Notes that can be passed through to Certificateholders. The terms of the Lease Agreements may not vary from the Required Terms (as defined herein). In addition, Turkish Airlines must certify to the Trustee that any substantive modifications to terms other than the Required Terms do not materially and adversely affect the Certificateholders, and must also obtain written confirmation from the Rating Agencies that if the Lease Agreements are modified in any material respect from the forms attached to the Note Purchase Agreement, the modification will not cause a withdrawal, suspension or downgrading of the rating of the Class A Certificates.
Equipment Notes (a) Issuer.............................................................
Bosphorus 2015 LLC
(b) Interest ..........................................................
The Equipment Notes held in the Trust will accrue interest at the rate per annum for the Class A Certificates set forth on the cover page of this offering memorandum. Interest will be payable on 15 March and 15 September of each year, commencing on the first such date after issuance of such Equipment Notes. Interest is calculated on the basis of a 360-day year consisting of twelve 30-day months.
(c) Principal........................................................
Principal payments on the Equipment Notes are scheduled on 15 March and 15 September of each year, commencing on 15 September 2015.
(d) Redemption ...................................................
Aircraft Total Loss. If a Total Loss (as defined herein) occurs with respect to an Aircraft, all of the Equipment Notes issued with respect to such Aircraft will be redeemed. The redemption price in such case will be the unpaid principal amount of such Equipment Notes, together with accrued but unpaid interest, but without any premium or Make-Whole Amount. Lease Event of Default. To the extent that any Equipment Notes are required to be redeemed as a result of a Lease Event of Default, the redemption price will be the unpaid principal amount of such Equipment Notes, together with accrued but unpaid interest, but without any premium or Make-Whole Amount.
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Certain Other Mandatory Redemptions. If Turkish Airlines exercises its early termination options and terminates a Lease with respect to an Aircraft prior to such Lease’s scheduled termination, including upon the occurrence of certain illegality events or a requirement arising under a Lease that Turkish Airlines make withholdings and gross-up payments or make tax indemnity payments, the Issuer will be required to redeem all of the Equipment Notes issued with respect to such Aircraft. The redemption price in each such case will be the unpaid principal amount of such Equipment Notes, together with accrued but unpaid interest, but without any premium or Make-Whole Amount. (e) Optional Redemption ....................................
All, but not less than all, of the Equipment Notes with respect to an Aircraft may be redeemed prior to their maturity at any time, at Turkish Airlines’ option and with the consent of the Issuer, only if all outstanding Equipment Notes with respect to all other Aircraft are simultaneously redeemed. The redemption price will be the unpaid principal amount of the Equipment Notes, together with accrued but unpaid interest, plus a Make-Whole Amount.
(f) Security ..........................................................
Security for Equipment Notes. The Equipment Notes issued with respect to each relevant Aircraft will be secured by a security agreement from the Issuer which will consist of an aircraft mortgage over such Aircraft and an assignment by way of security over the Issuer’s interests in the related Lease and assignment of the right to receive certain insurance proceeds, which shall be assigned first by Turkish Airlines to the Issuer. There shall also be a separate Turkish law aircraft mortgage granted by the Issuer over each Aircraft. General Security. The membership interests of the Issuer will be pledged to secure the Equipment Note obligations. Any bank accounts held by the Issuer to receive any payments will be pledged by it to secure the Equipment Note obligations.
(g) Cross-Collateralization.................................
The Equipment Notes will be cross-collateralized. This means that any proceeds from the exercise of remedies with respect to an Aircraft will be available to cover shortfalls then due under Equipment Notes issued with respect to the other Aircraft.
(h) Cross-Default ................................................
There will be cross-default provisions among the Indentures and there will be cross-default provisions among the Leases. A Lease Event of Default will also constitute an Indenture Event of Default. See “Description of the Leases—General—Lease Events of Default” and “Description of the Equipment Notes—Events of Default, Notice and Waiver”.
(i) Cape Town .....................................................
The Loan Trustees for the Equipment Notes will be entitled to the benefit of the Cape Town Convention and Alternative A under the related Protocol as adopted by Turkey in the exercise of its remedies. See “Description of the Leases— General—Ability to Repossess the Aircraft”.
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Certain Tax Matters ............................................
Prospective investors in the Certificates should carefully consider the tax consequences of investing in the Certificates. See “Certain U.S. Federal Income Tax Considerations” and “Certain Delaware Taxes”.
Certain U.S. ERISA Considerations ...................
Each person who acquires a Certificate will be deemed to have represented that either: (a) no employee benefit plan assets have been used to purchase or hold such Certificate or (b) the purchase and holding of such Certificate is exempt from the prohibited transaction restrictions of the United States Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and the United States Internal Revenue Code of 1986 (the “Code”) pursuant to one or more prohibited transaction statutory or administrative exemptions. In addition, if a person acquiring or accepting a Certificate or an interest therein is a governmental, church, non-U.S. or other employee benefit plan that is subject to any federal, state, local or non-U.S. law that is substantially similar to the provisions of Title I of ERISA or Section 4975 of the Code, such person will be deemed by such acquisition or acceptance to have represented and warranted that the purchase and holding of such Certificate or an interest therein do not constitute or result in a non-exempt violation of any such substantially similar law. See “Certain U.S. ERISA Considerations”.
Rating of the Certificates ....................................
It is a condition to the issuance of the Certificates that they be rated by the Rating Agencies not less than the ratings set forth below: Certificates
Moody’s
S&P
Class A..................
A2
A-
A rating is not a recommendation to purchase, hold or sell Certificates, because such rating does not address market price or suitability for a particular investor. There can be no assurance that such ratings will not be lowered or withdrawn by either or both of Moody’s and S&P. Moody’s P-1
S&P A-2
Threshold Rating for the Depositary ..................
Short-Term.............
Depositary Rating ...............................................
The Depositary meets the Depositary Threshold Rating requirement.
Threshold Rating for the Liquidity Provider...............................................
Long-Term ............
Moody’s Baa2
S&P BBB
Liquidity Provider Rating ...................................
The Liquidity Provider meets the Liquidity Threshold Rating requirement.
Transfer Restrictions...........................................
The Certificates have not been and will not be registered or approved for sale under the Securities Act or the securities laws of Turkey, the European Union (the “EU”), any state of the United States or any foreign jurisdiction. Accordingly, the Certificates are being offered (a) in the United States only to persons who are QIBs, in reliance on Rule 144A under the Securities Act and (b) to certain non-U.S. persons in
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transactions outside the United States in reliance on Regulation S under the Securities Act. The Certificates are not transferable except in accordance with the restrictions described in this offering memorandum. See “Transfer Restrictions”. No Registration Rights .......................................
Turkish Airlines has no obligation or intention to register the Certificates for resale under the Securities Act or the securities laws of any other jurisdiction or to offer to exchange the Certificates for registered Certificates under the Securities Act or the securities laws of any other jurisdiction.
Listing and Admission to Trading ......................
Application has been made to the Irish Stock Exchange for the approval of the offering memorandum as Listing Particulars and for the Certificates to be admitted to the Official List and trading on the Global Exchange Market, which is the exchange regulated market of the Irish Stock Exchange. The Global Exchange Market is not a regulated market for the purposes of Directive 2004/39/EC.
No Established Trading Market ..........................
The Certificates are a new issue of securities with no established trading market. Although application has been made to the Irish Stock Exchange for the Certificates to be admitted to the Official List and trading on the Global Exchange Market, Turkish Airlines cannot assure you that an active or liquid trading market for the Certificates will develop. If an active or liquid trading market for the Certificates does not develop, the market price and liquidity of the Certificates may be adversely affected.
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RISK FACTORS An investment in the Certificates involves certain risks. You should carefully consider the risks described below, as well as the other information included in this offering memorandum, before making an investment decision. Turkish Airlines’ business, financial condition or results of operations, or the value and other attributes of the Certificates, including the collateral securing the Certificates, could be materially adversely affected by any of these risks, as well as other risks of which Turkish Airlines is not currently aware or which it currently deems to be immaterial. The market price of the Certificates could decline due to any of these risks or other factors, and you may lose all or part of your investment. Risks Relating to Turkish Airlines’ Business Certain of the principal risks which may affect Turkish Airlines’ business and/or its general financial condition are set forth below. Damage to Turkish Airlines’ reputation or brand names could have a material adverse effect on its financial condition and results of operations. Turkish Airlines has made a significant investment in its reputation and brand names over the years and those brands now have significant commercial value and are critical to Turkish Airlines’ maintenance of its relationships with its customers and other key stakeholders. In particular, Turkish Airlines relies on positive brand recognition to attract and maintain customers and investors and damage to its brands, and to Turkish Airlines’ wider reputation, could have a material adverse effect on its business. Slot allocations and airport capacity, including capacity limits at Atatürk Airport and Sabiha Gökçen Airport, or any event resulting in the complete or partial loss of any terminal at these airports could affect the competitiveness and financial condition of Turkish Airlines and may have a negative impact on Turkish Airlines’ growth. Turkish Airlines is exposed to constraints on its ability to increase capacity at Atatürk Airport and Sabiha Gökçen Airport, its most important traffic hubs. Factors affecting such capacity, on either a short- or longterm basis, could have a material adverse effect on Turkish Airlines’ financial condition and results of operations. For example, Atatürk Airport is currently operating at its capacity limit and its ability to grow in line with the current expansion of the city of Istanbul or to meet the demands of Istanbul’s increasing popularity as a convenient transfer hub is limited. This is evidenced by the increasing competition over slot times faced by airlines that arrive and depart from Atatürk Airport and the current lack of available space at the airport to build an additional runway. Because of Atatürk Airport’s limited capacity, the Turkish Civil Aviation Authority does not currently permit additional cargo or charter flights to the airport and any airlines that want to open new routes or add additional flights into or out of Istanbul require additional capacity. A new airport is currently under construction north of Istanbul on the European side of the city near the Black Sea and the first phase of which is expected to be completed by the end of 2017. The new Istanbul airport is key to Turkish Airlines’ growth strategy. However, there is no guarantee that the construction schedule of the new airport will be maintained or that the new airport will not face additional challenges that prevent it from being utilized on time. Any delay in construction or completion of the airport could adversely impact Turkish Airlines’ revenue, results of operations and liquidity. Furthermore, the complete or partial loss or temporary closure of any terminal at Atatürk Airport or Sabiha Gökçen Airport—for instance due to fire, collapse of the building, a major air crash at the site, a terrorist or similar security incident or to strikes—would not only exacerbate the current capacity limitations but, as Turkish Airlines’ hubs of operations, could also result in the disruption of Turkish Airlines’ operations and have a material adverse effect on Turkish Airlines’ and its partners’ business, operations, financial condition and results of operations.
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The airline industry is highly competitive and Turkish Airlines faces competition from other airlines. The airline industry is highly competitive. Competition comes from many industry participants including legacy carriers, new airlines entering the market, the expansion of existing airlines, routes and frequency of flights, and consolidation, or formation of alliances, between airlines. A number of competitor airlines may have a lower cost structure than Turkish Airlines and can offer flights at lower prices. While competitive intensity varies across different routes depending on the number and nature of competitors operating on any route, the applicable regulatory environment and associated barriers to entry (such as operating licences, capital requirements and availability of slots), an increase in the percentage of routes on which Turkish Airlines competes with airlines having lower operating costs could adversely affect Turkish Airlines’ revenue and liquidity, which in turn could affect its ability to make payments on the Leases that could be used by the Issuer to make payments on the Equipment Notes. While Turkish Airlines’ extensive route network and its ability to tap the increasing local revenue source of a growing Turkish population provide the airline with a competitive advantage over many of its peers, Turkish Airlines still faces significant competition from other airlines, particularly in cities in Western Europe and Asia, which are served by a number of other airlines. Turkish Airlines faces competition from low cost carriers, deeply-discounted promotional fares and corporate discounting offered by its competitors. In addition to the general revenue risk faced by Turkish Airlines as a result of the competitive nature of the airline industry, Turkish Airlines also operates in many markets characterised by high levels of price competition from low-cost carriers such as Pegasus Airlines. Aggressive pricing or capacity increases by airlines such as Pegasus Airlines can affect Turkish Airlines’ revenue and yield performance on similar routes. In addition, as the airline industry is characterised by low profit margins and high fixed costs, a decision to match competitors’ fares to maintain passenger traffic may result in reduced yields which, in turn, may have a significant effect on Turkish Airlines’ operating and financial results and liquidity. As the costs of operating any particular flight do not vary significantly with the number of passengers carried, a relatively small change in the number of passengers or in fare pricing or traffic mix may have a material adverse effect on Turkish Airlines’ operating and financial results and liquidity and thereby its ability to make payments on the Leases that the Issuer could use to make payments on the Equipment Notes. Global economic conditions could have an adverse impact on Turkish Airlines’ business. Turkish Airlines’ revenue, like the revenue of airlines generally, is sensitive to both global economic conditions and economic conditions in the markets in which it operates. Demand for air travel depends on economic conditions, employment levels, consumer and business confidence and the availability of consumer credit. The financial results of the airline industry are significantly adversely affected during economic downturns as travellers often choose to reduce their transportation or reduce the price they pay for such transportation. In addition, premium services, which consist of ticket sales for business class and comfort class seating, could become less desirable during a significant economic downturn, which could disproportionately affect Turkish Airlines’ revenues. Premium services accounted for 20.9% of Turkish Airlines’ total passenger revenue during the year ended 31 December 2014. Further, an economic downturn tends to result in a decrease in air cargo revenue, as international trade decreases and businesses look to run down their inventories and send freight by more economical routes. During the year ended 31 December 2014, air cargo services accounted for 8.8% of Turkish Airlines’ total sales revenue. In addition, as is the case for airlines generally, Turkish Airlines is exposed to contractions in the economy resulting from management of the U.S. fiscal deficit as well as from debt ceiling issues, each of which could have a substantial impact on Turkish Airlines’ results of operations. Airlines that operate in Europe, such as Turkish Airlines, also have exposure to the Eurozone periphery. During the year ended 31 December 2014, Turkish Airlines derived 5.0% of its revenue on routes to Italy, Spain, Portugal and Greece, each of which has experienced some form of economic hardship in the recent past that continues today. Any further recession in European economies may, inevitably, affect the number of airline passengers overall for both Turkish Airlines and other European air carriers. 19
Furthermore, as is discussed in more detail under “—Political Instability, terrorist attacks, military conflicts and their aftermath may have an on-going material adverse effect on Turkish Airlines’ business”, political instability in areas where Turkish Airlines operates such as the Middle East, Russia and the Ukraine, could result in economic deterioration or contraction in these regions. In addition, any quantitative easing applied by the European Central Bank may result in the depreciation of the Euro, the primary income currency of Turkish Airlines, against other currencies, resulting in a relative decrease in Turkish Airlines’ revenue. Any significant economic deterioration or contraction could have a material adverse effect on Turkish Airlines’ business and the airline industry overall. A failure to successfully implement its growth strategy could harm Turkish Airlines’ business. Turkish Airlines has grown rapidly since 2003 with significant increases in revenue as well as increased flight frequencies, an expanded route network and significant fleet additions. During the year ended 31 December 2014, Turkish Airlines announced 17 new international routes and one new domestic route and added 28 aircraft to its fleet. Furthermore, Turkish Airlines intends to continue to increase the frequency of flights on its current routes, add new destinations to its current network and expand its fleet. The successful implementation of Turkish Airlines’ growth strategy is critical in order for its business to achieve economies of scale, sustain and increase its profitability, gain a larger market share and secure its position within the airline industry. Turkish Airlines’ ability to increase flight frequencies and the number of destinations it serves depends on its ability to identify appropriate markets, to access suitable airports and to obtain and maintain aircraft arrival and departure times and slots, as the case may be, at peak times both domestically and at airports located in other targeted geographic markets. Turkish Airlines’ ability to increase the number of international destinations that it serves is also subject to obtaining traffic rights to such destinations. Any condition that would deny, limit or delay Turkish Airlines’ access to the airports and destinations it seeks to serve in the future will constrain its ability to grow. Further, new markets that Turkish Airlines enters may not provide sufficient passenger traffic to make its operations in those new markets profitable, which may result in termination of new routes and adversely affect its business, financial condition and results of operations. In the short term, the implementation of Turkish Airlines’ growth strategy will lead to higher operating costs resulting from the purchase and lease of additional aircraft, increased fuel costs and higher maintenance and labor expenses prior to generating offsetting revenue. If Turkish Airlines’ growth strategy is not implemented successfully, these additional aircraft may not be put to use in generating revenue, which would have an adverse effect on its results of operations and liquidity, which in turn could affect its ability to make payments on the Leases. Following the launch of a new route, Turkish Airlines also commonly offers discounted fares for a specific period to stimulate demand on that route, which can affect its yield and passenger revenues from new routes after their launch. Growing its fleet of aircraft, increasing flight frequencies and opening new destinations has required and will continue to require Turkish Airlines to make significant investments in new aircraft. Since 2009, Turkish Airlines has placed firm purchase orders with Boeing and Airbus for a mix of 344 new wide and narrow body aircraft, of which 99 have been delivered as of 31 December 2014, with the remainder scheduled to be delivered by 2021. See “Business—Aircraft Fleet”. Based on expected prices at the date of delivery, Turkish Airlines’ expected capital expenditures related to the remaining 28 firm order wide body aircraft and the 186 firm order narrow body aircraft and 30 option aircraft (assuming this option is exercised in full) amount to approximately U.S.$15.2 billion. For a general discussion of the capital expenditures related to Turkish Airlines’ aircraft orders, see “Operating and Financial Review—Liquidity and Capital Resources—Capital Expenditures”. Although Turkish Airlines expects to use a portion of the proceeds of the offering to finance investments in three new wide body aircraft, there can be no assurance that it will have the financial resources to make all the investments it has planned, and, as a result, it may be subject to delays in aircraft deliveries and resulting delays in implementing its growth strategy. If growth in passenger traffic and Turkish Airlines’ revenues fail to keep pace with the planned expansion of its fleet, Turkish Airlines also could suffer from overcapacity and its results of operations and ability to fund scheduled aircraft purchases and service its debt could be materially adversely affected. Expansion will also require Turkish Airlines to invest in a substantial amount of resources, including additional skilled personnel and equipment and facilities even before the new services commence, and significant time commitments of senior management. An inability to hire and retain skilled personnel or to 20
secure the required equipment and facilities efficiently and cost-effectively may affect Turkish Airlines’ ability to achieve its growth strategy. In addition, increasing the number of its destinations and expanding its services may strain Turkish Airlines’ existing management resources and operational, financial and management information systems, including its online reservation system, to the point that they may no longer be adequate to support its operations, requiring Turkish Airlines to make significant expenditures in these areas. Turkish Airlines expects that it will need to develop further financial, operational and management controls, reporting systems and procedures to accommodate future growth. There can be no assurance that Turkish Airlines will be able to develop these controls, systems or procedures on a timely basis, and the failure to do so could have a material adverse effect on its business, financial condition and results of operations. In addition, as Turkish Airlines expands into geographic areas where it may have limited operating experience, it may encounter operating, marketing, financial and legal challenges that are different from those it encounters in its existing markets, which could have a material adverse effect on its results of operations and its ability to make payments on the Leases that could be used to make payments on the Equipment Notes. Macroeconomic factors and regulatory or governmental policy changes may have a negative impact on Turkish Airlines. Macroeconomic decisions may impact taxes, duties or other charges to which Turkish Airlines is subject which could have a material adverse effect on its financial condition and results of operations. Certain markets in which Turkish Airlines operates are subject to government regulation controlling capacity and/or restricting market entry. Relaxation of such restrictions, while creating growth opportunities for Turkish Airlines, could impact competition and therefore have a negative impact on its margins and result in a material adverse effect on its financial condition and results of operations and its ability to make payments on the Leases that could be used to make payments on the Equipment Notes. Turkish Airlines is dependent on good relations with its employees and union. Turkish Airlines’ staff members, including pilots and crew members, are represented by a single union, the Turkish Civil Aviation Union (“Hava-Is”). A collective labor agreement between Turkish Airlines and Hava-Is is negotiated every two years. The current agreement is valid until 2016 which means that negotiations on a new collective labor agreement will likely begin in December 2015. Although the negotiation process between Turkish Airlines and Hava-Is is generally cooperative and the strikes that have occurred in the recent past have not had a material adverse impact on Turkish Airlines—such as the May 2013 strike that occurred during the collective bargaining process as a result of the then recent lay-off of approximately 300 employees—any serious breakdown in the bargaining process in the future could potentially disrupt operations and adversely affect business performance. In addition, any drawn out industrial dispute including the prospect of industrial action, even if it does not ultimately result in strikes taking place, could have a material adverse effect on Turkish Airlines’ reputation and cause customers to book with its competitors which, in turn, might have a material adverse effect on Turkish Airlines’ financial condition and results of operations. Further, although Turkish Airlines’ vertically integrated supply chain mitigates risks related to labor disputes at Turkish Airlines’ suppliers when compared to some other airlines that outsource all of these functions to third-party suppliers, to the extent there was a significant labor issue at a Turkish Airline supplier, it could have a material adverse effect on the airline and its ability to make payments on the Leases that could be used to make payments on the Equipment Notes. See also “—Turkish Airlines is exposed to credit risk and failure of counterparties and is dependent on certain third party service and facility providers”. Furthermore, any strikes or other industrial action associated with Turkish Airlines’ fellow Star Alliance members or codeshare partners could negatively reflect on it to the extent that customers booked on Turkish Airlines’ codeshare flights are affected by such strikes. For more information on Star Alliance and codeshare arrangements, see “—Turkish Airlines faces risks from its strategic alliances”.
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Turkish Airlines has a substantial amount of debt and substantial future financing needs. Because the airline industry is capital intensive, Turkish Airlines has incurred indebtedness and capital commitments to finance its acquisition of aircraft. All of its existing borrowings are secured by Turkish Airlines’ assets. Turkish Airlines’ ability to finance on-going operations, committed aircraft orders and future fleet growth plans are vulnerable to various factors including its own financial condition as well as global financial market conditions that could adversely affect its ability to access debt and equity capital markets. Turkish Airlines’ capital structure includes operating leases, commercial finance leases, Japanese operating leases, Export Import Bank of the United States (“Ex-Im Bank”) finance leases and European Export Credit Agency (the “EECA”) finance leases. At 31 December 2014, Turkish Airlines’ total finance lease obligations and off-balance sheet operational lease obligations with respect to aircraft was U.S.$5.9 million and U.S.$0.8 billion, respectively, which resulted in a total of U.S.$6.7 billion. The amount of Turkish Airlines’ indebtedness could have negative consequences, such as requiring Turkish Airlines to dedicate a substantial portion of its cash flow from operating activities to payments on its indebtedness and limiting its ability to obtain additional financing to fund growth, working capital or capital expenditures. At 31 December 2014, Turkish Airlines has outstanding firm order commitments totaling U.S.$13.4 billion in respect of 215 aircraft, and had credit facilities in place for aircraft purchases of U.S.$2.6 billion, of which U.S.$49.5 million was drawn with respect to the delivery of one Boeing 737-900ER aircraft as at 28 February 2015, Turkish Airlines typically pays pre-delivery payments for aircraft from cash rather than financing these payments. Normally, agreements between airlines and manufacturers contain a sale and purchase commitment for various aircraft over a period of time which, in most cases, is between four and six years. It is important, therefore, for Turkish Airlines to be able to correctly anticipate its fleet requirements. Turkish Airlines has backstop agreements in place with manufacturers for future deliveries. For more information on Turkish Airlines’ fleet procurement, see “—A failure to successfully implement its growth strategy could harm Turkish Airlines’ business” above and “Business—Aircraft Fleet” below. Turkish Airlines is exposed to operational disruptions due to regular maintenance. From time to time, Turkish Airlines’ fleet requires regular maintenance work, which may cause operational disruption. In addition, on occasion, airframe manufacturers and/or regulatory authorities require mandatory or recommended modifications to be made across a particular fleet which may mean having to ground a particular type of aircraft. This may cause operational disruption to and impose significant costs on Turkish Airlines. Any material defect in Turkish Airlines’ aircraft maintenance or grounding of aircraft for any reason, including regulatory requirements, could result in low reliability, flight delays for technical reasons, unscheduled stops and aircraft on ground status. In an extreme case, aircraft incidents could occur which, regardless of whether or not they relate to a defect in Turkish Airlines’ maintenance or modification programs for its aircraft fleet, could adversely impact operations and financial performance. Turkish Airlines’ subsidiary Turkish Technic performs 61.0% of the maintenance work performed on its aircraft. In June 2014, Turkish HABOM, a maintenance facility invested in by Turkish Airlines at Sabiha Gökçen Airport, became fully operational, increasing Turkish Airlines’ maintenance capacity by 193.0%. Any loss of capacity at Turkish Technic or Turkish HABOM or any inability of Turkish Technic to provide maintenance for Turkish Airlines’ aircraft could have an adverse impact on its results of operations.
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The acquisition of some of Turkish Airlines’ aircraft is financed with credit support provided by Ex-Im Bank or the EECA, which may result in the repossession of such aircraft by Ex-Im Bank, the EECA or the lenders in the event of a default under the related financing documents. The acquisition of 40 of the Boeing aircraft in Turkish Airlines’ fleet has been financed with Ex-Im Bank supported credit facilities and the acquisition of 53 of the Airbus aircraft in Turkish Airlines’ fleet has been financed with EECA supported credit facilities. As is the case generally for airlines utilizing Ex-Im Bankand EECA-supported credit facilities, including Turkish Airlines, these facilities require non-affiliated special purpose vehicles to hold title to such aircraft, which are then leased to the relevant airline under finance leases. See “Operating and Financial Review—Liquidity and Capital Resources—Indebtedness— Aircraft Financing”. Each such aircraft is subject to a first priority mortgage in favor of a security trustee for the benefit of Ex-Im Bank or the EECA, as applicable, and the lenders, under aircraft financing arrangements. Furthermore, as is the case generally for these types of facilities, each of Turkish Airlines’ Ex-Im Bank- or EECA-supported credit facilities contains cross-default and cross-collateralization provisions, which could result in Ex-Im Bank or the EECA, as applicable, and the lenders having a right to repossess the related aircraft upon the occurrence and continuation of an event of default, and the expiration of any agreed upon grace period, under another cross-collateralized Ex-Im Bank- or EECA-supported credit facility. Repossession of an aircraft under these circumstances would put Turkish Airlines in a position where it is unable to operate such aircraft, which would have a material adverse effect on its financial condition and results of operations. Rent payable by Turkish Airlines to the special purpose vehicles under these finance leases must equal, in all circumstances, the amount of principal and interest payable by the special purpose vehicles under the corresponding loans. Moreover, Turkish Airlines’ obligation to pay rent under the finance leases is absolute and unconditional, subject to the provisions of each related lease agreement. There are risks associated with Turkish Airlines’ presence in international emerging markets, including political or economic instability and failure to adequately comply with existing legal requirements. Turkish Airlines currently operates flights to a number of emerging markets and, consistent with its growth strategy, plans to continue to expand its route network with new scheduled flights to other emerging markets, in particular to the Middle East, Africa, Central and Eastern Europe and CIS countries. Emerging markets are countries which have less developed economies that are vulnerable to economic and political problems, such as significant fluctuations in gross domestic product and interest and currency exchange rates, high levels of inflation, civil disturbances, government instability, nationalisation and expropriation of private assets and the imposition of taxes or other charges by governments and expansion into such markets may have political, legal, economic and operational risks. In addition, the judicial systems of emerging markets are often less established than those of developed countries. Therefore, it may be more difficult for Turkish Airlines to enforce its rights or defend itself to the extent it would be required to do so in an emerging market. The occurrence of any of the events described above in markets served by Turkish Airlines and any resulting instability may materially adversely affect Turkish Airlines’ business, results of operations and liquidity, which in turn could affect its ability to make payments on the Leases. Further, to the extent an Indenture Event of Default exists that would allow the Certificateholders to enforce remedies, including attempting to foreclose on and repossess the Aircraft, it may be more difficult to do so if the Aircraft were located in an emerging market, which risk would be exacerbated if the country in which the Aircraft was located was the subject of sanctions imposed by the U.S., the EU, Turkey or the United Nations. Turkish Airlines emphasizes legal compliance in its locations around the world and has implemented policies, procedures and on-going employee training specifically with respect to its operations in emerging markets. However, if Turkish Airlines fails to enforce its policies and procedures properly, it may be subject to sanctions and related costs which, in turn, could materially adversely affect its results of operations and cash flow.
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Turkish Airlines is dependent on uninterrupted operation of its processing systems and any failure of critical IT systems could have a negative impact on its business. Turkish Airlines’ ability to manage ticket sales, receive and process reservations, manage its network and perform other critical business operations is dependent on the efficient and uninterrupted operation of the computer, internet and communication systems used by it, as well as the systems used by third parties in the course of their interaction with and/or provision of services to Turkish Airlines (such as those systems used by Turkish Technic and Turkish Airlines’ catering service, Turkish Do&Co). As computer and communication systems are vulnerable to disruption, power outages, acts of sabotage, computer viruses, fires and other events, there can be no assurance of efficient and uninterrupted operation of these systems. Turkish Airlines currently runs two main IT systems—one for internal accounting and revenue management and a separate booking system. Over the next few years, Turkish Airlines plans to implement several new IT projects that will modernize its customer service, including the introduction of a new reservation system for both passenger and cargo services. However, there is no assurance that Turkish Airlines will be successful in its modernization projects or that it will be able to recognize all of the benefits anticipated. In addition, Turkish Airlines consistently operates both internal and external checks of its IT systems and has disaster recovery procedures in place, including the remote backup of critical sales- and operations-related systems at a facility in Antalya. There is no assurance, however, that an incident affecting Turkish Airlines’ IT systems will not occur, and any disruption to computer and communication systems used by Turkish Airlines could significantly impair its ability to operate its business efficiently and could have a material adverse effect on its financial condition, results of operations and liquidity, which in turn could affect its ability to make payments on the Leases. Turkish Airlines is exposed to credit risk and failure of counterparties and is dependent on certain third party service and facility providers. Turkish Airlines is exposed to credit risk to the extent of non-performance by its counterparties in respect of financial assets receivable. Treasury activities, which include placing money market deposits, fuel hedging and foreign currency transactions, could lead to a concentration of different credit risks with the same counterparty. Turkish Airlines uses a variety of tools to manage its risk in this area and to protect itself from the risk of its counterparties’ non-performance or default, including entering into credit support agreements with its hedge counterparties prior to trading and entering into bilateral credit support agreements through which Turkish Airlines periodically monitors valuations of derivatives and attempts to minimize potential loss. Furthermore, the Turkish Airlines’ board of directors approved risk management methodologies covering derivatives and deposits which take into consideration counterparty credit ratings and various other ratios in an effort to avoid creating a concentration of unacceptable risks on a single counterparty. However, no assurance can be given that any of these measures will be effective. Turkish Airlines is also exposed to credit risk to the extent of non-performance by its insurance counterparties. This risk is mitigated by THY’s membership in the Lufthansa Aviation Insurance Group which monitors ratings of potential insurers in order to secure a strong financial insurance and reinsurance program for its members. In addition to having high credit ratings, all of Turkish Airlines’ insurance parties are also approved by the Ex-Im Bank and the EECA. While these methodologies, features and characteristics limit the risks arising from unforeseeable events with respect to various counterparties and insurers, it is not possible to guarantee that these parties will remain viable and a failure of any of Turkish Airlines’ counterparties could have a material adverse effect on its financial condition, results of operations and liquidity, which in turn could affect its ability to make payments on the Leases. Although Turkish Airlines is able to mitigate third party risk through its business model of vertical integration (which means that many of its suppliers are its subsidiaries), Turkish Airlines remains exposed to the failure of a number of third parties for certain other principal material business services—which, in the current economic climate, is an increased risk—such as airport operators, airport authorities, aircraft lessors, airframe and engine manufacturers, aircraft fuel providers, aircraft maintenance providers, global distribution systems (“GDS”), credit card companies, air traffic controllers, ground handlers, caterers, security personnel, check-in staff, baggage handlers and distributors as well as other general airport 24
services and the availability of the requisite airport infrastructure. If one or more of these third party services were restricted or temporarily unavailable as a result of events such as strikes or technical problems or were permanently unavailable or were only available on uncommercial terms or if lessors and airframe and engine manufacturers were to delay delivery of aircraft, make scheduled deliveries of aircraft late, or deliver goods which do not meet the standards and specifications contracted for, this could have a material adverse effect on Turkish Airlines’ business. For example, the infrastructure that provides jet fuel to Atatürk Airport and other airports from which Turkish Airlines operates is critical to its operations. Any breakdown in this infrastructure and/or contamination of the fuel supply would have a significant impact on operations and could have a material adverse effect on Turkish Airlines’ financial condition and results of operations. Moreover, contracts with third parties, including airport operators and GDS, will need to be renewed in the future which could have higher cost implications. Political instability, terrorist attacks, military conflicts and their aftermath may have a material adverse effect on Turkish Airlines’ business. The airline industry is exposed to the instability of foreign governments in a number of different countries and markets, such as in the Ukraine and various countries in the Middle East and Africa. For example, on 28 February 2014, Turkish Airlines suspended flights between Istanbul and Simferopol International Airport in Crimea, Ukraine due to civil unrest in the area. Furthermore, shortly after Malaysia Airlines flight 17 was shot down in the Ukraine on 17 July 2014, Turkish Airlines announced that it was rerouting its flights to avoid airspace over the conflict zone in the Ukraine. Although the impact of this suspension and the rerouting of its flights on Turkish Airlines was limited, these events serve as an example of the fact that local, regional and international political conditions in markets that are material to Turkish Airlines’ strategy could affect its business, such as by causing problems in both maintaining flights to and from these markets as well as transferring money from these markets. To the extent Turkish Airlines is required to reroute a significant amount of flights in response to future events, it could have a material adverse effect on its operations. In addition, since January 2011, there have also been various incidents of political instability and public protests in the areas surrounding Turkey. Most notably, as a result of the unrest in Syria, thousands of Syrian refugees have fled to Turkey and more can be expected to cross the Turkish-Syrian border if such unrest continues. Moreover, tensions between Turkey and Syria have recently escalated and hostilities between the two countries have broken out over a series of incidents, including mortar fire by Syrian forces into Turkey that killed a number of Turkish civilians in October 2012. On 14 October 2012, Turkey’s foreign minister announced a ban on all Syrian aircraft entering Turkey’s airspace, which ban remains in place. Such tensions and hostilities between Syria and Turkey may escalate further and there can be no assurance that they will not have political repercussions within Turkey, which in turn could affect air travel in Turkey and thereby have a material adverse effect on Turkish Airlines’ results of operations and cash flows. More generally, terrorist attacks and military conflicts worldwide have in the past had a significant adverse effect on the airline industry. The adverse consequences of such events, and the threat of such events, could include reduced demand for air travel, limitations on the availability or amount of insurance coverage, increased costs associated with security precautions and flight restrictions over war zones. Turkish Airlines has faced these challenges in the past including following the 9/11 terrorist attack in the United States, the wars in Iraq, the uprisings during the Arab Spring and other periods of political unrest in Turkey and in the regions surrounding Turkey. No assurance can be given that similar events will not happen in the future that could have a material adverse effect on Turkish Airlines’ financial condition and results of operations. Any such events could also make it difficult, or even impossible, for Turkish Airlines to obtain new credit lines or other financial instruments, or to pay off existing ones.
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Insurance coverage in the event of natural or man-made disasters, including loss of aircraft and impacts of terrorist attacks, may be insufficient. Turkish Airlines’ ability to manage its airline business with an adequate level of insurance coverage against risk of losses from man-made and natural disasters is dependent on, among other things, the availability of insurance policies. These policies stipulate a number of conditions under which the insurers may terminate policies. In addition, the policies must be renewed at regular intervals. There can be no assurance that the amount of insurance coverage, if any, available to Turkish Airlines upon the occurrence of a man-made or natural disaster, including the loss of one or more of Turkish Airlines’ aircraft for any reason, would be adequate to cover the resulting losses. Turkish Airlines could be obliged to bear substantial costs if (i) Turkish Airlines’ insurance policies do not cover a specific claim; (ii) the amounts insured under such policies are insufficient; or (iii) an insurer is not able to pay the insured amounts. An accident or other incident involving aircraft belonging to any of Turkish Airlines’ brands could involve significant potential claims by injured passengers or others, in addition to the cost of the repair or replacement of damaged aircraft and its consequential temporary or permanent loss from service. Substantial claims resulting from an accident in excess of Turkish Airlines’ related insurance coverage could harm its business and financial results. In addition, any aircraft accident or other incident related to any of Turkish Airlines’ brands, even if fully insured, could cause a public perception that the Turkish Airlines’ brands are less safe or reliable than other airlines, which would harm Turkish Airlines’ reputation and, in turn, its business. Turkish Airlines insures its aircraft fleet according to the practices followed by other major carriers in the industry and pursuant to applicable legislation regarding the payment of compensation. Turkish Airlines believes that, based on such criteria, the coverage of such insurance is sufficient to run its business activities. The airline industry is exposed to the risk of insurance coverage for aviation air traffic risks becoming too expensive or too difficult to obtain. For example, future terrorist attacks or acts of sabotage, especially if they were to be directed against air traffic, or the occurrence of other incidents such as a natural or man-made disaster, could result in insurance coverage for aviation risks becoming more expensive and/or certain risks becoming uninsurable. Any of these events could result in the disruption of Turkish Airlines’ operations and/or have a material adverse effect on its business, operations, financial condition and results of operations. Turkish Airlines is exposed to the risk of losses from major safety or security incidents. Failure to prevent or respond to a major safety or security incident could adversely impact Turkish Airlines’ reputation, operations and financial performance. Moreover, aircraft crashes or similar incidents involving another airline could impact general passenger confidence and lead to a reduced demand for air travel that may adversely impact Turkish Airlines, particularly if the crash or incident were due to a fault in a type of aircraft used by Turkish Airlines in one of its brands’ fleet. Furthermore, an aircraft crash or similar incident involving a subsidiary of Turkish Airlines, a Star Alliance member or another airline with which Turkish Airlines has a codeshare arrangement might be associated with it in the public view, and cause it, potentially, to suffer reputational damage (and associated losses) as a result, even if none of its aircraft is involved. Such associated losses may involve not only the costs associated with the repair or replacement of damaged or lost aircraft and its or their consequent temporary or permanent loss from service, but also claims by affected passengers, owners and third parties as well as possible reputational damage (and associated losses). Failure to prevent or respond effectively to a major safety or security incident may adversely impact Turkish Airlines’ financial condition and results of operations.
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Epidemics, pandemics, severe weather conditions, natural disasters or other “Acts of God” can materially adversely affect operations and the demand for air travel. Several possible events may cause a significant network disruption. Epidemics and pandemics (such as avian influenza and SARS and Ebola-type viruses), natural disasters (such as volcanic ash), severe weather conditions or other “Acts of God” (whether on a regional or global scale) could have a material adverse effect on the airline industry and result in substantial reductions in, and/or cancellations of, bookings and flights not only to the affected region but also more generally, thereby reducing overall demand for Turkish Airlines’ (and airlines generally) services. If an event or circumstance described above were to weaken the demand for air travel or materially affect airline operations during that period, this could have a disproportionate effect on Turkish Airlines’ results for the relevant financial year. Therefore, the occurrence and timing of such events, together with the reaction of aviation authorities to such events, cannot be predicted or controlled by Turkish Airlines. Turkish Airlines may be exposed to risks associated with the limitation of greenhouse gas emissions and related trading schemes for allowances. Under the United Nations Framework Convention on Climate Change and the Kyoto Protocol, certain contracting states entered into obligations to control and reduce the emission of greenhouse gases. To comply with its obligations under public international law, the EU introduced the Emissions Trading Scheme (“ETS”) in 2003 to limit greenhouse gas emissions and for trading of allowances which applies to certain industrial installations. In 2012, the ETS was expanded to include intra-EU flights with the intention to extend the scheme outside the EU in 2014. Further increases, or the extension of the ETS to flights outside the EU, could have an adverse impact upon demand for air travel and/or reduce the profit margin per ticket. Due to the European focus of the scheme and the significant proportion of flights Turkish Airlines operates into, out of or within the EU, Turkish Airlines might also face competitive disadvantages in comparison to non-European air carriers who operate a lower proportion of routes into, out of or within the EU. The EU is, as far as Turkish Airlines is aware, the only area that has implemented an emissions trading scheme, which applies on a mandatory basis to international aviation authorities. Although the impact of EU-ETS scheme is mitigated by Turkey’s central location, all of these factors may still serve to increase costs and therefore have a material adverse effect on Turkish Airlines’ financial condition and results of operations. Customer attitudes to environmental and climate issues may also change and this may lead to a reduced demand for air travel. Turkish Airlines is exposed to risks associated with aviation fuel price trends. Aviation fuel has been, and is expected to remain, subject to significant price volatility. Prices for aviation fuel are strongly correlated to the price of petroleum and are influenced by a number of factors, including political events, war or the threat of war, and the coordinated pricing decisions of the Organisation of Petroleum Exporting Countries producer cartel. Turkish Airlines used approximately 3.8 million metric tons of jet fuel in 2014. Volatility in the price of oil and petroleum products can have a material impact on Turkish Airlines’ operating results. During the years ended 31 December 2014, 31 December 2013 and 31 December 2012, fuel and oil costs amounted to 37.0%, 37.0% and 38.0%, respectively, of its total operating expenses. Based on market conditions as of 31 December 2014, and taking into account hedging transactions, Turkish Airlines estimates that an increase in the price of kerosene by U.S.$10 per metric ton would have the effect of increasing Turkish Airlines’ operating expenditure by U.S.$44 million in 2015 assuming the use of a total of 4.4 million metric tons of kerosene. Based on 2015 estimates, for a full year before the impact of any hedging transactions, Turkish Airlines estimates that a 1.0% increase in fuel price increases its fuel cost by approximately U.S.$35 million. 27
Turkish Airlines manages such risks with natural hedging methods where possible. In situations where such methods are insufficient or impractical, Turkish Airlines uses derivative instruments to manage financial risks. For example, through a live fuel surcharge policy, Turkish Airlines aims to pass approximately 50.0% of its fuel cost to its customers in ticket sales. Additionally, Turkish Airlines expects to hedge the remaining risks through the use of oil derivatives in the OTC markets, which may generate a profit or a loss. However, no assurance can be given that this hedging strategy will be effective. If Turkish Airlines is exposed to significant price volatility and/or increases in prices for aviation fuel, despite the use of oil hedging and fuel surcharges, there can be no assurance that it will be able to fully offset such volatility and increases by passing portions of these costs on to customers (including through fuel surcharges) and/or by cost reductions and/or through fuel hedging, nor can Turkish Airlines predict the movement of either short or long-term aviation fuel prices. Fluctuations in currency exchange rates could have a material adverse effect on Turkish Airlines’ financial condition and results of operations. Turkish Airlines is exposed to currency risk due to the mismatch between the currencies in which revenue, operational expense, purchases and borrowings are denominated. Turkish Airlines seeks to reduce these foreign exchange exposures through a policy of matching, as far as possible, receipts and payments in each individual currency. However, even following such matching, Turkish Airlines is mainly in a net payer position with respect to U.S. Dollars and Turkish Lira and is in a surplus position with respect to Euros. Currency options are used to cover Turkish Airlines’ forecasted cash flow for the upcoming months, which includes all cash inflows and outflows resulting from its operating and non-operating activities. No assurance can be given that the measures will be effective. In addition, Turkish Airlines’ functional and reporting currency in accounting is U.S. Dollars, hence the Turkish Lira value of its debt is not relevant and does not affect its financial results. All Euro and Yen denominated debt is translated into U.S. Dollars and therefore Turkish Airlines’ foreign exchange risk may result from changes in the relevant exchange rates. Air traffic and the aviation industry are heavily regulated. Turkish Airlines is subject to regulatory requirements in Turkey and to the laws and regulations of other jurisdictions including the EU and other nations (such as the U.S.), international organizations and international, bilateral and multilateral treaties. The scope of such laws and regulations includes (among other things) infrastructure issues relating to slot capacity and route flying rights, environmental and security requirements, safety, licensing, competition, customer protection, privacy and tax. Additional laws, regulations, taxes and airport rates and charges have been proposed from time to time that could notably increase the cost of airline operations or reduce revenues, including significant increases in air passenger duties. Furthermore, while Turkish Airlines cannot fully anticipate all changes that may be made in the future, or the possible adverse impact of such changes, Turkish Airlines’ ability to comply with such regulations is key to maintaining its operational and financial performance. In addition, to the extent that the cost of compliance with new regulations is significant and Turkish Airlines is unable to pass such costs on to its customers, it could have a notable impact on Turkish Airlines’ financial condition, results of operation and liquidity, which, in turn, could affect its ability to make payments on the Leases. Airport, transit and landing fees, along with charges and the costs that airlines must pay to ensure air traffic security, may continue to increase. Airlines are exposed to increases in airport, transit and landing fees, along with changes in air security policies and air traffic security costs. Airport, transit and landing fees and security charges or initiatives represent a significant operating cost to Turkish Airlines and have an impact on its operations. During the year ended 31 December 2014, total airport charges (fees for landing, aircraft parking, air bridge use and other airport services) and air navigation charges (en route and approach) represented 3.9% of Turkish Airlines’ operating expenses (excluding air traffic controller expenses).
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There can be no assurance that such costs will not increase or that Turkish Airlines will not incur new costs in Turkey or elsewhere, particularly in the U.S. or the EU, specifically in the event of terrorist attacks. By way of example, implementation of the policy restricting liquids carried in passengers’ hand luggage had a considerable impact on the operations and costs of the airline industry, as did the advance passenger information system implemented by the United States. If Turkish Airlines is not able to pass any increases in charges, fees or other costs on to its customers, these increases could have a material adverse effect on its competitiveness, financial condition and results of operations. Future restrictions on passenger charges may have an adverse effect on Turkish Airlines’ business Under Turkish legislation, there is currently no ceiling price or other similar restrictions imposed on passenger charges and fees, such as fuel surcharges. Therefore, currently Turkish Airlines has the flexibility to set its passenger charges freely. However, the Air Transportation Department of the Turkish Civil Aviation Authority has the right to introduce minimum and maximum prices in respect of the civil aviation services, including prices for passenger transportation, if it is needed in order to sustain free, fair and continuous competition in coordination with the Ministry of Transport, Maritime Affairs and Communication of the Republic of Turkey (the “Ministry of Transportation”) and relevant departments. If the Ministry of Transportation decides to introduce such minimum or maximum prices on passenger charges in the future, this may have an adverse impact on the operations and financial conditions of Turkish Airlines. Turkish Airlines faces risks from its strategic alliances and bilateral co-operation arrangements. The maintenance and development of alliances and other strategic relationships is critical to Turkish Airlines’ business. It is a member of the Star Alliance, a brand marketing and services alliance between Turkish Airlines and, among others, United Airlines, Lufthansa, Air Canada, Thai Airways, Swissair and Air China. The Star Alliance is designed to maximize members’ service offerings to customers by providing greater network coverage and benefits. In addition, Turkish Airlines has also entered into bilateral arrangements with 33 airlines as of 31 December 2014. Through the Star Alliance and its bilateral arrangements, customers have increased options in terms of the routes available to them, stop-overs and fare types, greater access to lounges and opportunities to earn more frequent flyer points. These customer benefits make the member airlines more attractive to customers, giving members the opportunity to optimise their load factors, traffic and revenue. No assurance can be given that the Star Alliance will not lose member airlines, whether as a result of one or more member airlines terminating their membership or having their membership suspended, for example, due to being wound up in the context of insolvency proceedings or, as is the case for US Airways which was acquired by American Airlines, due to consolidation with an airline in a different alliance. No assurance can be given that Turkish Airlines’ bilateral arrangements will remain in place or will continue to operate under the same terms. Furthermore, no assurance can be given that the Star Alliance will be able to attract the new members it may need to be successful in the future. In addition, the success of the Star Alliance depends in part on the actions, brands and strategic plans of other airlines over which Turkish Airlines has little control. If the Star Alliance were to lose its appeal as a result of changes in its membership or the actions of another member or if the Star Alliance were to dissolve, this could negatively affect, among other things, the network of flights that Turkish Airlines is able to offer its customers. In addition, should a key member leave the Star Alliance or otherwise fail to meet its obligations thereunder, Turkish Airlines’ business could be adversely impacted. See “Business—Turkish Airlines’ Business—Strategic Alliances” for more information. High fixed costs mean that the airline industry is vulnerable to relatively small changes in the number of passengers and/or the fares paid. Although the split between variable and fixed costs has changed over time, the nature of the airline business is such that a substantial percentage of a carrier’s operating expenses are fixed costs that do not vary proportionally based on its production, in particular, ASK and ATK and the number of passengers or the amount of cargo carried. These costs include the costs of the aircraft, employee costs (including the costs of specialist workers such as pilots) and slots. For example, a relatively small change in a carrier’s unit revenues by ASK, whether caused by load factor changes or yield fluctuations, can have a major effect on the profitability of a carrier, such as Turkish Airlines. 29
As a result of its high amount of fixed costs, should Turkish Airlines be required to reduce overall capacity or the number of flights operated, it may not be able to successfully reduce certain fixed costs in the short term and may be required to incur important restructuring costs, which could have a material adverse effect on Turkish Airlines’ business, results of operations, financial condition and liquidity, which in turn could affect its ability to make payments on the Leases. Turkish Airlines faces risks from legal and arbitration proceedings. Turkish Airlines is involved in lawsuits and claims, the majority of which arise as a consequence of the normal course of its business and out of its relationships with employees, staff, public bodies, customers and suppliers, as well as out of industrial activities. Although Turkish Airlines believes that none of its current litigation is material, the results of on-going lawsuits and claims can be uncertain and cannot therefore be precisely determined. No assurance can be given that any provisions made in relation to any on-going investigations, legal and/or arbitration proceedings will be sufficient should any of the investigations or proceedings have a negative outcome. A negative outcome in any investigation or claim could have a material adverse effect on Turkish Airlines’ financial condition and results of operations. Turkish Airlines’ international activities increase the compliance risks associated with economic and trade sanctions imposed by the United States, the EU and other jurisdictions. Turkish Airlines’ international operations could expose it to trade and economic sanctions or other restrictions imposed by the United States or other governments or organizations, including the United Nations, the EU and their member countries. In particular, the U.S. Department of the Treasury’s Office of Foreign Assets Control, or “OFAC”, administers certain laws and regulations that impose restrictions upon U.S. companies and persons and, in some contexts, foreign entities and persons, with respect to activities or transactions with certain countries, governments, entities and individuals that are the subject of such sanctions laws and regulations. Although Turkish Airlines is not currently subject to OFAC or similar regulations in Turkey or elsewhere, Turkish Airlines has in the past and may continue to fly to and from countries subject to U.S. sanctions laws, including Iran and Sudan. Turkish Airlines continuously monitors developments in the United States, the EU and other jurisdictions that maintain sanction programs, including developments in the implementation and enforcement of such sanctions programs. Expansion of sanctions programs, embargoes and other restrictions in the future (including additional designations of countries subject to sanctions), or modifications in how existing sanctions are interpreted or enforced, could affect Turkish Airlines’ ability to do business in countries that are subject to sanctions or may subject Turkish Airlines to fines or other adverse outcomes by the issuing body. Therefore, to the extent regulatory bodies in Turkey, or other regulatory entities to which Turkish Airlines may be subject, expand or modify these sanctions, it may have a material adverse effect on Turkish Airlines’ business, results of operations and financial condition. Turkish Airlines must comply with bribery and privacy laws. Although Turkish Airlines attempts to mitigate any risk associated with bribery and privacy laws with its thorough internal code of conduct, Turkish Airlines is exposed to the risk of individual employee’s or groups of employees’ unethical behavior resulting in fines or losses. While there is no specific legislation governing data protection currently in effect in Turkey, any mishandling of customer information or allegations of bribery may result in the imposition of criminal sanctions imposed on those who have committed such misconduct and would likely cause reputational damage to Turkish Airlines.
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Turkish Airlines may face anti-trust compliance risk due to its dominant position in the domestic market. Turkish Airlines has traditionally held a dominant position in its domestic market with a share of 53.0% of passengers carried by Turkish Airlines in 2014 according to the General Directorate of State Airports Authority (“DHMI”). Although having a dominant position in a given market is not in itself prohibited by the Turkish Antitrust Law, undertakings with a dominant position are at risk of violating the Turkish Antitrust Law if such undertakings engage in abusive behavior that exploits their market power. Although the Turkish Antitrust Law provides for a list of examples of abusive behavior, these examples are not meant to be exhaustive and the determination as to whether or not an undertaking with a dominant position engages in abusive behavior is assessed by the Turkish Competition Board on a case-by-case basis. In any event, an undertaking with a dominant position primarily must not: (i) distort the market; (ii) act unfairly towards their customers; or (iii) reduce the threat of competition by excluding their rivals. Turkish Airlines has complied with the Turkish Antitrust Law by adhering to a detailed set of rules and requirements imposed by the Turkish Competition Authority as well as through a system of internal controls. Even so, no assurances can be given that the Turkish Competition Board will not review Turkish Airlines’ compliance with the Turkish Antitrust Law and any negative finding may have a material adverse effect on Turkish Airlines’ business, results of operations and financial condition. For example, Turkish Airlines has been the subject of a Turkish Competition Board investigation which was reinitiated after an administrative court annulled the Turkish Competition Board’s previous unanimous decision that Turkish Airlines did not abuse its dominant market position. The administrative court based its annulment on the grounds that the Turkish Competition Board should further investigate: (i) the price analysis of Pegasus Airlines (the complainant), (ii) whether Turkish Airlines holds the dominant market position and (iii) whether Atatürk Airport and Sabiha Gökçen Airport are substitutes of each other. The Competition Board’s investigation of Turkish Airlines was completed on 8 January 2015. As a result of the investigation, the Competition Board decided that there was no detectable indication that Turkish Airlines abused its dominant position via discriminatory practices against the competitor regarding domestic and international lines from Istanbul. Consequently, it was concluded that no administrative fines would be imposed on Turkish Airlines. However, no assurance can be given that similar investigations will not lead to fines or otherwise affect the manner in which Turkish Airlines operates its business. Risks Relating to Turkey Turkish Airlines’ operations are affected by economic and political developments in Turkey, which are, to some extent, influenced by international developments. Turkey is generally considered by international investors to be an emerging market and investing in the securities of issuers, such as Turkish Airlines, that have operations primarily in emerging markets, like Turkey, generally involves a higher degree of risk than investing in the securities of issuers with operations in more developed markets such as the United States, EU countries and similar jurisdictions. Additional risks and uncertainties relating to Turkey that do not currently exist or of which Turkish Airlines is unaware and which are not necessarily related to Turkish Airlines’ financial performance may also become important factors that could have a material adverse effect on Turkish Airlines’ results of operations and financial condition and an investment in the Certificates. Certain of these risks and uncertainties relate to Turkey’s macroeconomic and political environment and are set out below. You should carefully consider these features of the Turkish macroeconomic environment and political environment before investing in the Certificates. Turkey’s economy is subject to ongoing structural and macroeconomic risks. In general, investing in the securities of issuers that have operations primarily in emerging markets like Turkey involves a higher degree of risk than investing in the securities of issuers that have substantial operations in the U.S., the member states of the EU or other similar jurisdictions. The market for securities issued by Turkish companies is influenced by economic and market conditions in Turkey, as well as, to varying degrees, by market conditions in both emerging market countries and more developed economies, including those in the U.S. and the EU. Financial turmoil in any emerging market country tends to adversely affect the prices of equity and debt securities of all emerging market countries as investors move their money to more stable, developed markets. An increase in the perceived risks associated with 31
investing in emerging economies could dampen capital flows to Turkey and adversely affect the Turkish economy. Turkish Airlines’ business is potentially vulnerable to any declining or low economic growth in Turkey. Although domestic flights only constituted 14.0% of Turkish Airlines’ total passenger revenue during the year ended 31 December 2014, a substantial portion of Turkish Airlines’ operations are conducted, and approximately 28.0% of its tickets are sold in Turkey. Accordingly, the success of Turkish Airlines’ operations is dependent on the economic conditions prevailing in Turkey and any downturn or constraint on economic growth in Turkey’s economy in the future, or its attractiveness as a destination, could have a material adverse effect on Turkish Airlines’ business, financial condition and results of operations. Since the mid-1980s, the Turkish economy has undergone a transformation from a highly protected and regulated system to a free market system. Reforms have, among other things, largely removed price controls and reduced subsidies, reduced the role of the public sector in the economy, emphasized growth in the industrial and service sectors, liberalised foreign trade, reduced tariffs, promoted export growth, eased capital transfer and exchange controls, encouraged foreign investment, strengthened the independence of the Turkish Central Bank, led to full convertibility of the Turkish Lira and overhauled the tax system. The Turkish economy has generally improved in response to this transformation and Turkey’s economic performance has generally been stronger and more stable than most other emerging market countries. Turkey experienced fairly stable GDP growth until the advent of the global economic crisis in 2008 and into 2009 and, following the implementation of fiscal and monetary measures, the Turkish economy began to recover in the fourth quarter of 2009 and has grown, in terms of GDP, in each of 2010, 2011, 2012, 2013 and 2014. Conditions for sustained growth, however, remain fragile as Turkey remains vulnerable to both external and internal shocks, including liquidity problems, escalating oil prices and domestic political uncertainty. In addition, Turkey has also experienced a succession of financial crises and severe macroeconomic imbalances since its transformation to a free market system, which have led to budget and balance of payments deficits, high rates of inflation, high real rates of interest and considerable levels of unemployment. Turkey’s budget deficit and government debt could have negative consequences for Turkish Airlines’ business, results of operations and financial condition. In order to keep the economy competitive, the Turkish Government will likely need to spend more funds on education and on the development of Turkey’s infrastructure, including in the transportation sector. Without making progress in formalisation of the shadow economy, such spending may further increase the existing budget deficit and, consequently, government debt. A growing budget deficit can be expected to reduce supply of credit for private investments and drive up interest rates. An increase in interest rates could negatively affect Turkish Airlines’ financing costs and impede its growth and could attract more foreign and domestic investors in search for higher return on Turkish assets. As a result, the real exchange rate of the Turkish Lira could appreciate relative to other currencies. An increase in interest rates and appreciation of the Turkish Lira could diminish the competitive advantage of relatively low labor costs in Turkey, which could lead to a decrease in long-term investments in and exports from Turkey. As a consequence, the economy’s growth rate could decline and its current account deficit could rise. Since both indicators are considered by investors as important measures of profitability, a negative trend in their development may have adverse effects on long-term direct foreign investments in Turkey, particularly in GDP-driven industries, such as air transport. The level of inflation in Turkey could also adversely affect Turkish Airlines’ business, financial condition and results of operations. The Turkish economy has experienced significant inflationary pressures in the past, which pressures may result in Turkish inflation exceeding the Turkish Central Bank’s inflation target, which may cause the Turkish Central Bank to modify its monetary policy. Inflation-related measures that may be taken by the Turkish Government in response to increases in inflation could have an adverse effect on the Turkish economy. If the level of inflation in Turkey were to fluctuate significantly, it is possible that Turkish Airlines’ business, financial condition and results of operations would be materially adversely affected.
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The state of the current account deficit in Turkey could lead to exchange rate adjustments and inflation, which could also lead to increased volatility in the Turkish economy. The Turkish Lira appreciated by approximately 4.6% between the end of 2003 and the end of 2013 according to the Turkish Central Bank’s consumer price index based on the Real Effective Exchange Rate Index. However, given the widening current account deficit and the resulting surge in external financing needs, some economists are concerned about currency stability. In a period of global economic uncertainty, the persistent growth of Turkey’s current account deficit may lead to a sudden adjustment in the Turkish Lira, with inflationary consequences. To date, Turkey’s current account deficit has been funded largely through short-term foreign capital borrowing and foreign portfolio investments. If the downturn in the global financial markets continues, it could have an adverse effect on Turkey’s ability to finance its deficits, leading to increased volatility in the Turkish economy. Turkish Airlines is a global company which derived 72.0% of its revenue during the year ended 31 December 2014 from sources outside Turkey. However, there is no guarantee that the risks and considerations described above as well as other adverse developments with respect to the macroeconomic environment in Turkey would not have a material adverse effect on Turkish Airlines’ business, results of operations and financial condition. Turkey is located in a high-risk earthquake zone. Earthquakes could adversely affect the Turkish economy. Almost all of Turkey is classified by seismologists as being on active fault lines and prone to major earthquakes. As of 2004, 45.0% of Turkey’s population and most of its economic resources are located in a first degree earthquake risk zone (the zone with the highest level of risk of damage from earthquakes). In August 1999, an earthquake measuring 7.6 on the Richter scale struck the area surrounding İzmit, near Istanbul. In November 1999, an earthquake measuring 7.2 on the Richter scale occurred in the city of Düzce, between Ankara and Istanbul. More recently, in October 2011, an earthquake measuring 7.2 on the Richter scale struck Eastern Turkey near the city of Van. The occurrence of a severe earthquake could have a material adverse effect on the Turkish economy, including air travel, and Turkish Airlines’ business, results of operations and financial condition. Political developments in Turkey may have a material adverse effect on Turkish Airlines’ business, financial condition and results of operations. Political developments in Turkey may have a material adverse effect on Turkish Airlines’ business, financial condition and results of operations. Negative changes in the government and political environment, including the failure of the Turkish Government to devise or implement appropriate economic programs, may adversely affect the stability of the Turkish economy and, in turn, Turkish Airline’s business, financial condition and/or results of operations. Turkey has been a parliamentary democracy since 1923. Unstable coalition governments have been common, and in the 90 years since establishing its parliamentary system, Turkey has had 61 governments, with political disagreements frequently resulting in early elections. Furthermore, though its role has diminished in recent years, the Turkish military establishment has historically played a significant role in the Turkish government and the country’s politics even to the extent of intervening in the political process. Protests starting in May 2013 in Istanbul, and spreading to Ankara and other major cities in Turkey, against plans to replace Gezi Park, an urban park in Istanbul’s central Taksim Square, with a commercial development, and resulting confrontations among protestors and security forces, contributed to a significant increase in the volatility of Turkish financial markets. The increased volatility in the Turkish financial markets during the summer was partly due to perceived political risks and partly due to the market’s expectation of U.S. Federal Reserve reductions in its quantitative easing. Following the protests, in late 2013, Turkish politics have become particularly volatile, commencing with a series of arrests of prominent businessmen and family members of some cabinet ministers (who have since resigned) on suspicions of corruption. These events, which coincided with the U.S. Federal Reserve’s decision to reduce monthly asset purchases, have contributed to significant declines in the value of the Turkish stock market and the Turkish Lira. 33
These events took place prior to the municipal elections that were held in Turkey on 30 March 2014 and the presidential elections held in August 2014. At the March elections, the Justice and Development Party (Adalet ve Kalkınma Partisi) (“AKP”) candidate secured a majority of the popular vote. The AKP has been in power since 2002, when it became the first party since 1987 to have a parliamentary majority. The AKP established a new single party government that same year and has been able to govern without reliance upon a coalition since then. AKP maintained its position in the most recent legislative elections held on 12 June 2011. The current Turkish Government’s agenda includes controversial reforms, such as the drafting of a new constitution. The next series of legislative elections will be held in June 2015. While Turkish Airlines’ management does not believe that these conflicts will have a material long-term negative impact on Turkey’s economy or Turkish Airlines’ business, financial condition or results of operation, it is possible that any negative changes in the political environment including these (or other) protests, further conflicts between senior politicians, any perceived or actual political instability or any failure of the Turkish Government to devise or implement required or appropriate economic programs and related circumstances could have such an impact or a negative impact generally on investors’ perception of Turkey, the strength of the Turkish economy and/or the value of the Certificates. These and any similar disturbances or continued political instability and military tensions in the Middle East or North Africa could have a material adverse effect on the Turkish economy and on Turkish Airlines’ business, financial condition and results of operations. Disclosure obligations and corporate governance requirements may be less extensive than, and differ from, certain jurisdictions in the EU or other developed economies. The financial and other disclosure standards applicable to public companies in Turkey differ in certain respects from those applicable to similar companies in the United States, the United Kingdom or other jurisdictions with major capital markets and the level of publicly available information, responsibilities of board members and rights of securities holders in Turkey may be different in certain material respects from what is customary in jurisdictions with major capital markets. Although Turkish regulators have enhanced the disclosure requirements for public companies, such requirements are relatively new and have not yet been subject to judicial or regulatory interpretation, and therefore the consistency and uniformity of their interpretation and application remains uncertain. As a result, investors might not have access to the same depth of disclosure relating to Turkish Airlines as they would for investments in companies in the United States, the EU and other more-developed markets. On 3 January 2014, the Capital Markets Board of Turkey (the “CMB”) published the Corporate Governance Communiqué of the CMB No. II-17.1 (the “Corporate Governance Communiqué”) which reflects the new corporate governance principles under the Capital Markets Law No. 6362. The Corporate Governance Communiqué was designed to implement certain improvements to Turkish corporate governance standards, and provides certain compulsory and non-mandatory principles applicable to all companies incorporated in Turkey and listed on Borsa Istanbul (“BIST”). The Corporate Governance Communiqué address four major areas: (i) shareholders’ rights and equal treatment of shareholders; (ii) public disclosure and transparency; (iii) stakeholders; and (iv) management. See “Regulation—Corporate Governance Communiqué”. Despite these developments, the standards of corporate governance expected by Turkish law or regulation may not be as high (or cover the same areas) as those set out by the rules of other jurisdictions (such as the United States or the United Kingdom) and are subject to change.
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Risk Factors Relating to the Certificates and the Offering None of the Certificates or Equipment Notes are Turkish Airlines’ obligations. Turkish Airlines will have no obligations under and will not guarantee obligations under the Certificates or the Equipment Notes. The Certificates will represent limited recourse obligations of the Trust payable only from the cash flows of the Equipment Notes, and to a certain extent, availability under the Liquidity Facility. The Equipment Notes to be held by the Trust will be the obligations of the Issuer. Although Turkish Airlines’ obligations under each of the Leases are expected to be sufficient to enable the Issuer to fulfil its obligations under the Equipment Notes, you will not have any direct recourse against Turkish Airlines for payments on the Certificates. Turkish Airlines is the sole lessee of the Aircraft and, as a result, payments on the Certificates are entirely dependent on Turkish Airlines fulfilling its obligations under the Leases. Turkish Airlines is the sole lessee of the Aircraft. As a result, the Issuer is dependent on Turkish Airlines meeting its obligations under the Leases in order to fulfil its obligations to make payments on the Equipment Notes that can be passed through by the Trustee to Certificateholders. The only other committed source of liquidity for payments on the Class A Certificates is provided under the Liquidity Facility which is limited in amount to three successive interest payments on the Certificates. Accordingly, any event which has a material adverse effect on Turkish Airlines or its ability to perform its obligations or make payments under the Leases will materially and adversely impact the Issuer’s ability to make payments on the Equipment Notes that can be passed through to Certificateholders. The Appraisals are only estimates of Aircraft value. Three independent appraisal and consulting firms have prepared appraisals of the Aircraft. Letters summarizing these appraisals are annexed to this offering memorandum as Appendix II. The appraisals are based on varying assumptions and methodologies, which differ among the appraisers, and were prepared without physical inspection of the Aircraft. Appraisals that are based on other assumptions and methodologies may result in valuations that are materially different from those contained in such appraisals. See “Description of the Aircraft and the Appraisals—The Appraisals”. An appraisal is only an estimate of value. It does not indicate the price at which an Aircraft may be purchased from the Aircraft manufacturer, nor should an appraisal be relied upon as a measure of realizable value. The proceeds realized upon a sale of any Aircraft may be less than its appraised value. In particular, the appraisals of the Aircraft are estimates of values as of delivery dates, most of which are in the future. The value of an Aircraft if remedies are exercised under the applicable Indenture will depend on market and economic conditions, the supply of similar aircraft, the availability of buyers, the condition of the Aircraft and other factors. Accordingly, there can be no assurance that the proceeds realized upon any such exercise of remedies would be sufficient to satisfy in full payments due on the Certificates. Failure to perform maintenance responsibilities may deteriorate the value of the Aircraft. The Leases that Turkish Airlines will enter into for each Aircraft provide that it is responsible for the maintenance, service, repair and overhaul of the Aircraft. If Turkish Airlines fails to perform these responsibilities, the Aircraft may be deemed not to be airworthy which will likely reduce the value of the Aircraft. Even if the Aircraft remain airworthy, failure by Turkish Airlines to fulfil its maintenance, service, repair and overhaul obligations may reduce the value of the Aircraft. In addition, the value of the Aircraft may deteriorate even if Turkish Airlines fulfils its maintenance responsibilities. As a result, it is possible that upon liquidation, there will be less proceeds than anticipated to repay the holders of Equipment Notes. See “Description of the Leases—General—Lease Obligations”.
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Inadequate levels of insurance may result in insufficient proceeds to repay holders of related Equipment Notes. To the extent described in the Leases, Turkish Airlines must maintain, among others, comprehensive airline liability and all-risk aircraft hull insurance on the Aircraft. In addition, under certain circumstances Turkish Airlines is permitted to replace Aircraft that have been damaged or destroyed using the insurance proceeds received in respect of such Aircraft. However, inflation, changes in ordinances, environmental considerations and other factors may make the insurance proceeds insufficient to repair or replace Aircraft if they are damaged or destroyed. In addition, if Turkish Airlines fails to maintain adequate levels of insurance, the proceeds that could be obtained upon an Event of Loss of an Aircraft may be insufficient to repay the related Equipment Notes. See “Description of the Leases—General—Insurance”. It may be difficult and expensive to exercise repossession rights with respect to an Aircraft. The Leases will contain restrictions regarding the registration of the Aircraft in countries (other than Turkey) that from time to time are subject to any relevant sanction or embargo by the United Nations, the EU, the U.S. or Turkey and will also not permit the Aircraft to be based in any such country. Apart from this, however, the Leases will not contain general geographic restrictions on Turkish Airlines’ ability to operate the Aircraft and will not prevent Turkish Airlines from using the Aircraft to operate flights into sanctioned countries. Although Turkish Airlines does not currently intend to do so, it may sublease the Aircraft (which may also entail a change in the jurisdiction of registration) or enter into interchange or pooling arrangements with respect to the Aircraft, in each case, with third parties and subject to the restrictions in the Indentures. It may be difficult, time-consuming and expensive for a Loan Trustee to exercise repossession rights if an Aircraft is located outside of Turkey, is registered in a foreign jurisdiction or is subleased to a foreign or domestic operator. These difficulties could be exacerbated if a sublessee is the subject of a bankruptcy, insolvency or similar event or if, at the time of repossession, an Aircraft is located in an emerging market country, particularly if such country is subject to sanctions imposed by the United Nations, the EU or the U.S. In addition, some jurisdictions may allow for other liens or other third party rights to have priority over the applicable Loan Trustee’s security interest in an Aircraft. As a result, the benefits of the applicable Loan Trustee’s security interest in an Aircraft may be less than they would be if the Aircraft were located or registered in Turkey. Upon repossession of an Aircraft, the Aircraft may need to be stored and insured. The costs of storage and insurance can be significant, and the incurrence of such costs could ultimately result in fewer proceeds to repay the holders of the Equipment Notes. In addition, at the time of foreclosing on the lien on the Aircraft under the related Indenture, an Airframe subject to such Indenture might not be equipped with Engines subject to the same Indenture. In these circumstances, Turkish Airlines will be required to deliver engines attached to the Airframe which are new, improved or equivalent models as the original engines, and transfer title to such engines. If Turkish Airlines fails to transfer title to engines not owned by it that are attached to repossessed Aircraft, it could be difficult, expensive and time-consuming to assemble an Aircraft consisting of an Airframe and Engines subject to the related Indenture. Payments to Certificateholders will be subordinated to certain amounts payable to other parties. Under the Intercreditor Agreement, the Liquidity Provider will receive payment of all amounts owed to it, including reimbursement of drawings made to pay interest on the Class A Certificates, before the holders of the Class A Certificates receive any funds. In addition, the Subordination Agent and the Trustee will receive certain payments before the holders of the Class A Certificates receive distributions.
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Certificateholders may not participate in controlling the exercise of remedies in a default scenario. If an Indenture Event of Default is continuing, subject to certain conditions, the Loan Trustee under such Indenture will be directed by the Controlling Party in exercising remedies under such Indenture, including accelerating the applicable Equipment Notes or foreclosing the lien on the Aircraft securing such Equipment Notes. See “Description of the Certificates—Indenture Events of Default and Certain Rights Upon an Indenture Event of Default”. The Controlling Party will be: The Class A Trustee. If any Additional Certificates have been issued, upon payment of final distributions to the holders of Class A Certificates, the trustee for the Additional Certificates. Under certain circumstances, and notwithstanding the foregoing, the Liquidity Provider. As a result of the foregoing, if the Trustee is not the Controlling Party with respect to an Indenture, the Certificateholders will have no rights to participate in directing the exercise of remedies under such Indenture. The exercise of remedies over Equipment Notes may result in shortfalls without further recourse. During the continuation of any Indenture Event of Default under an Indenture, the Equipment Notes issued under such Indenture may be sold in the exercise of remedies with respect to that Indenture, subject to certain limitations. See “Description of the Intercreditor Agreement—Intercreditor Rights—Limitation on Exercise of Remedies”. The market for Equipment Notes during any Indenture Event of Default may be very limited, and there can be no assurance as to the price at which they could be sold. If any Equipment Notes are sold for less than their outstanding principal amount, Certificateholders will receive a smaller amount of principal distributions under the relevant Indenture than anticipated and will not have any claim for the shortfall against Turkish Airlines, the Issuer, the Liquidity Provider, any Loan Trustee or the Trustee. The Cape Town Treaty has not yet been interpreted in Turkey. A court might interpret the Cape Town Treaty in a manner that does not maximize the benefits of the Cape Town Treaty for the Certificateholders. Turkish Airlines is incorporated under the laws of Turkey. Accordingly, insolvency proceedings with respect to Turkish Airlines would be likely to proceed under, and be governed by, Turkish insolvency law. Turkish insolvency law may not be as favorable to investors as the laws of the United States or other jurisdictions with which investors are familiar. See “Description of the Leases—General—Ability to Repossess the Aircraft”. Although Turkey does not have an equivalent to the protections provided by Section 1110 of the U.S. Bankruptcy Code in U.S. domestic airline bankruptcies, it has ratified the Cape Town Convention on International Interests in Mobile Equipment (the “Convention”) and the related Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (the “Protocol”, and collectively with the Convention, the “Cape Town Treaty”) and effective as of 20 October 2014 has been added to the OECD List of Countries whose airlines are eligible for the Cape Town Treaty discount. Remedies under the Cape Town Treaty, as it has been adopted in Turkey, include the ability to obtain possession of aircraft at the end of 60 calendar days after the commencement of an insolvency-related event (the “60-Day Period”) if Turkish Airlines has not cured all defaults under the Equipment Notes (other than a default caused by the commencement of such insolvency-related event), and agreed to perform all future obligations under the Equipment Notes. Dikici Law Office, Turkish counsel expert in aircraft finance, will provide a legal opinion that the benefits of Article XI, Alternative A of the Protocol to the Cape Town 37
Treaty (“Alternative A”), which provides for this 60-Day Period, will be available to the applicable Loan Trustee with respect to the airframe and engines comprising each Aircraft in any insolvency proceeding relating to Turkish Airlines in Turkey. Pursuant to Law No. 6192, dated 10 March 2011, and a decision of the Cabinet of Ministers on 24 May 2011 in accordance with Article 3 of Law No. 244, dated 31 May 1963, Turkey has duly ratified the Cape Town Treaty pursuant to, and in accordance with, Article 90 of the Constitution of Turkey. By virtue of these actions, the Cape Town Treaty has the force of law in Turkey, and Turkey has taken certain legal actions to give legal effect to the Cape Town Treaty in Turkey. The Cape Town Treaty has only recently entered into force in Turkey, and there is no jurisprudence that would indicate how the Cape Town Treaty will be implemented, interpreted, applied or enforced in Turkey by the courts of Turkey or any other courts which may have jurisdiction, as well as by the related government offices, and there can be no assurance that any court interpreting the Cape Town Treaty as it applies to the Equipment Notes will interpret the Cape Town Treaty in a manner that maximizes the benefits of the Cape Town Treaty for the Certificateholders. Any interpretation of the Cape Town Treaty by a court in a manner that does not maximize the benefits of the Cape Town Treaty with respect to the Certificates may materially adversely affect the related Loan Trustee’s ability to exercise its remedies under the related Indenture and Equipment Notes issued under such Indenture, which may in turn materially adversely affect the Trustee’s ability to enforce or collect payments on the Equipment Notes that may be distributed by the Trust to the Certificateholders. Escrowed funds and cash collateral will not be entitled to the benefits of the Cape Town Treaty. Amounts deposited under the Escrow Agreement are not property of the Issuer or Turkish Airlines and are not entitled to the benefits of the Cape Town Treaty. In addition, any cash held as additional collateral under the Indentures will not be entitled to the benefits of the Cape Town Treaty. Certain Liens may have priority over the interests of the relevant Loan Trustee under the Indentures. Turkey has declared that all categories of non-consensual rights or interests such as certain liens related to customs duty and unpaid airport charges, and certain liens arising by operation of Turkish law, such as taxes and foreclosure expenses relating to attachment, foreclosure and distribution among creditors (other than a right or interest to which Article 40 of the Cape Town Treaty applies) which, under Turkish law, have, and will in the future have, priority over an interest in an object equivalent to that of the holder of a registered international interest shall to that extent have priority over a registered international interest, whether in or outside insolvency proceedings. Turkey has further declared that nothing in the Cape Town Treaty will affect its right or that of any state entity, any intergovernmental organization or other private provider of public services to arrest or detain an object under its laws for payment of amounts owed to Turkey, any such state entity, organization or provider directly relating to the services provided by it in respect of that object or another object. Although no Turkish courts have yet applied the Cape Town Treaty or established any precedents regarding which interests will be deemed superior to the international interests under the Cape Town Treaty, or of the Loan Trustee under the Indentures, such interests may include: (i) costs of the bankruptcy estate incurred during the bankruptcy procedure to be deducted from the liquidation proceeds of the Aircraft; (ii) attachments for the satisfaction of the debts qualifying as public receivables under the Law on the Collection Procedure of the Public Receivables No. 6183 originating from the aircraft; and (iii) attachments for the satisfaction of unpaid Eurocontrol charges. In addition, Turkey may in the future create additional non-consensual rights or interests which would also have priority over the interests of the Loan Trustees under the Indentures. Any such priority in interests may adversely impact the exercise by the Loan Trustees of their respective remedies under the Indentures and may result in the amounts available to the Loan Trustees not being sufficient to satisfy in full the payments due on the Certificates and may also significantly delay the ability of the Loan Trustees to exercise their remedies.
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Recourse against the Issuer is limited and payments by Turkish Airlines under the Leases may not be sufficient to pay all of its obligations. The Issuer is a special purpose company whose sole assets will consist of rights under the applicable Aircraft, Lease and rights under the related transaction documents. The transaction documents will limit the Issuer’s ability to conduct any activity other than owning, leasing and selling the Aircraft, the other activities contemplated by the transaction documents and activities incidental thereto. Upon the occurrence of an Indenture Event of Default under the Equipment Notes, the Controlling Party will be entitled to direct the relevant Loan Trustee in the exercise of all remedies under the applicable Indenture, including foreclosure on the Aircraft, the repossession of such Aircraft from Turkish Airlines under the related Lease and any subsequent re-lease of such Aircraft. Recourse against the Issuer for its obligations under the transaction documents is, as a practical matter, limited to amounts payable to the Issuer under the transaction documents and the collateral securing the Equipment Notes. If Turkish Airlines fails to make payments under each Lease in full when due, the Issuer may not have sufficient funds to pay all of its obligations under the applicable Equipment Notes and the other transaction documents. The Certificates will not provide any protection against highly leveraged or extraordinary transactions, including acquisitions and other business combinations. Turkish Airlines may, from time to time, analyze opportunities presented by various types of transactions, and it may conduct its business in a manner that could cause the market price or liquidity of the Certificates to decline, have a material adverse effect on its financial condition or the credit rating of the Certificates or otherwise restrict or impair its ability to pay amounts due under the Equipment Notes and/or the related agreements. The Certificates, the Equipment Notes and the underlying agreements will not contain any financial or other covenants or “event risk” provisions protecting the Certificateholders in the event of a highly leveraged or other extraordinary transaction, including an acquisition or other business combination, affecting Turkish Airlines or its affiliates. The occurrence of any such event could have a material adverse effect on the value of the Certificates. There are no restrictive covenants in the transaction documents relating to Turkish Airlines’ ability to incur future indebtedness. The Certificates, the Equipment Notes, the Leases and the other underlying agreements will not (i) require Turkish Airlines to maintain any financial ratios or specified levels of net worth, revenues, income, cash flow or liquidity and therefore do not protect Certificateholders in the event that Turkish Airlines experiences significant adverse changes in its financial condition or results of operations, (ii) limit its ability to incur additional indebtedness or (iii) restrict its ability to pledge its assets. In light of the absence of such restrictions, Turkish Airlines may conduct its business in a manner that may cause the market price of the Certificates to decline or otherwise restrict or impair its ability to pay amounts due under the Equipment Notes and/or the related agreements. Under certain circumstances principal on the Certificates could be prepaid without premium, including the return of escrow funds if they are not used to buy Equipment Notes by the Aircraft delivery deadline. Under certain circumstances, all of the funds held in escrow as Deposits may not be used to purchase Equipment Notes by the deadline established for purposes of this offering. See “Description of the Deposit Agreement—Unused Deposits”. If any funds remain as Deposits after such deadline, they will be withdrawn by the Escrow Agent and distributed, with accrued and unpaid interest but without any premium, to the Certificateholders. In addition, if a Total Loss occurs with respect to an Aircraft, certain illegality events occur or tax indemnity amounts become payable by Turkish Airlines or in certain other circumstances described in this offering memorandum, the Certificates could be redeemed, with accrued and unpaid interest but without premium or Make-Whole Amount, to the Certificateholders. If any of these circumstances were to occur, you will not receive the full amount expected in connection with your investment in the Certificates. See “Description of the Deposit Agreement—Unused Deposits”.
39
Holders of the Certificates are exposed to the credit risk of the Depositary during the prefunding period. The holders of the Certificates may suffer losses or delays in repayment if the Depositary fails to pay when due the Deposits or accrued interest thereon for any reason, including by reason of the insolvency of the Depositary. Turkish Airlines is not required to indemnify against any failure on the part of the Depositary to repay the Deposits or accrued interest thereon in full on a timely basis. Holders of the Certificates will not be entitled to registration or similar rights. Turkish Airlines does not currently intend to register the Certificates under applicable securities laws, and there are restrictions on your ability to transfer or resell the Certificates. The Certificates are being offered and sold pursuant to an exemption from registration under the Securities Act and applicable U.S. state, Turkish and foreign securities laws and Turkish Airlines does not currently intend to register the Certificates or to offer to exchange the Certificates for Certificates registered under the Securities Act. The holders of the Certificates will not be entitled to require Turkish Airlines to register the Certificates for resale or otherwise and Turkish Airlines does not intend on undertaking any such registration. Therefore, you may transfer or resell the Certificates in the United States only in a transaction exempt from the registration requirements of the Securities Act, applicable U.S. state securities laws and applicable Turkish and other foreign securities laws. As a result, you may be required to bear the risk of your investment for an indefinite period of time. See “Transfer Restrictions”. There may be a limited market for resale of Certificates. Prior to this offering, there has been no market for the Certificates. Turkish Airlines will apply for the listing of the Certificates on the Official List of the Irish Stock Exchange and for the trading of the Certificates on the Global Exchange Market of the Irish Stock Exchange. However, a secondary market for the Certificates may not develop, even following the listing of the Certificates, if such listing is successful. If a secondary market does develop, it might not continue or it might not be sufficiently liquid to allow you to resell any of your Certificates. In addition, the Initial Purchasers are not required to make a market in the Certificates and any market-making activity may be discontinued at any time without notice at the sole discretion of each Initial Purchaser. If an active market does not develop, the market price and liquidity of the Certificates may be adversely affected. Neither the Certificates nor the Escrow Receipts may be separately assigned or transferred. The liquidity of, and trading market for, the Certificates may also be adversely affected by general declines in the markets or by declines in the market for similar securities. Such declines may adversely affect such liquidity and trading markets independent of Turkish Airlines’ financial performance and prospects. Finally, the transfer restrictions applicable to the Certificates as described above may have a further impact on the development of a secondary market for the Certificates. The rating of the Certificates is not a recommendation to buy and may be lowered or withdrawn in the future. Several ratings agencies were approached in connection with the preparation for the offering. A rating is not a recommendation to purchase, hold or sell Certificates, because such rating does not address market price or suitability for a particular investor. A rating may not remain for any given period of time and may be lowered or withdrawn entirely by any or all of the Rating Agencies if in their judgment circumstances in the future (including, if applicable, Turkish Airlines’ downgrade, or the downgrade of the Depositary or the Liquidity Provider) so warrant. Any decline in the rating of the Certificates could have a material adverse effect on the price of or the outstanding trading market for the Certificates. The rating of the Certificates is based primarily on the default risk of the Equipment Notes and the Depositary, the availability of the Liquidity Facility for the benefit of holders of the Certificates, the collateral value provided by the Aircraft and the cross-collateralization provisions applicable to the Indentures. These ratings address the likelihood of timely payment of interest (at the stated interest rate 40
and without any premium) when due on the Certificates and the ultimate payment of principal distributable under the Certificates by the Final Maturity Date. The ratings do not address the possibility of certain defaults, redemptions or other circumstances, which could result in the payment of the outstanding face amount of the Certificates prior to the final expected Distribution Date, and no assurance can be given that other ratings agencies would have assigned similar ratings to the Certificates. You may be unable to enforce judgments obtained in the United States against Turkish Airlines or Turkish Airlines’ directors and officers. Turkish Airlines is incorporated under the laws of Turkey. In addition, Turkish Airlines’ directors are nonresidents of the United States. A substantial portion of Turkish Airlines’ assets are located outside of the United States. As a result, although it has submitted to the jurisdiction of the U.S. federal and New York State courts in the borough of Manhattan in the City of New York, it may be difficult for investors to effect service of process on Turkish Airlines and its directors and officers in the United States or to enforce in the United States judgments obtained in United States courts against Turkish Airlines based on the civil liability provisions of the United States securities laws. Uncertainty exists as to whether courts in Turkey will enforce judgments obtained in other jurisdictions, including the United States, under the securities laws of other jurisdictions. See “Enforcement of Judgments”. You may face foreign exchange risks by investing in the Certificates. The Certificates will be denominated and payable in U.S. Dollars. If you measure your investment returns by reference to a currency other than that of the Certificates you purchase, an investment in the Certificates entails foreign exchange-related risks, including possible significant changes in the value of U.S. Dollars relative to the currency by reference to which you measure your investment returns because of economic, political and other factors over which Turkish Airlines has no control. Depreciation of the U.S. Dollar against the currency by reference to which you measure your investment returns could cause a decrease in the effective yield of the Certificates below their stated interest rates and could result in a loss to you when the return on the Certificates is translated into the currency by reference to which you measure your investment returns. There may be tax consequences for you as a result of any foreign exchange gains resulting from any investment in the Certificates and you should consult with your own tax advisors regarding any such tax consequences. The Certificates will initially be held in book-entry form and therefore you must rely on the procedures of DTC to exercise any rights and remedies. Unless and until definitive Certificates are issued in exchange for book-entry interests in the Certificates, owners of the book-entry interests will not be considered owners or holders of Certificates. Instead, a nominee of DTC will be the sole registered holder of the Certificates. Payments of amounts owing in respect of the Global Certificates (including principal, premium (if any), interest on the Equipment Notes or interest on the Deposits) will be distributed by the Trustee or the Paying Agent, as applicable. The Trustee or Paying Agent, as applicable, will, in turn, make such payments to DTC or its nominee, which will distribute such payments to participants in accordance with their respective procedures. Unlike holders of the Certificates themselves, owners of book-entry interests will not have the direct right to act upon solicitations for consents or requests for waivers or other actions from holders of the Certificates. Instead, if you own a book-entry interest, you will be permitted to act only to the extent you have received appropriate proxies to do so from DTC or, if applicable, from a participant. Neither Turkish Airlines nor the Issuer can assure you that procedures implemented for the granting of such proxies will be sufficient to enable you to vote on any requested actions on a timely basis.
41
The lack of physical certificates could also: result in payment delays on your Certificates because the Trustee or Paying Agent, as applicable, will be sending distributions on the Certificates to DTC instead of directly to you; make it difficult for you to pledge your Certificates if physical certificates are required by the party demanding the pledge; and hinder your ability to resell your Certificates because some investors may be unwilling to buy Certificates that are not in physical form. The Volcker Rule may adversely impact an investment in or the liquidity of the Certificates. The Issuer is relying on an analysis that it comes under an exception from the definition of “investment company” in Section 3(c)(5) of the Investment Company Act. The Issuer is being structured so as not to constitute a “covered fund” for purposes of the Volcker Rule. The Volcker Rule generally prohibits “banking entities” (which is broadly defined to include U.S. banks and bank holding companies and many non-U.S. banking entities, together with their respective subsidiaries and other affiliates) from (i) engaging in proprietary trading, (ii) acquiring or retaining an ownership interest in or sponsoring a “covered fund” and (iii) entering into certain relationships with such funds. The Volcker Rule became effective on 21 July 2012, and final regulations implementing the Volcker Rule were adopted on 10 December 2013 and became effective on 1 April 2014. Conformance with the Volcker Rule and its implementing regulations is required by 21 July 2015 (subject to the possibility of up to two one-year extensions). In the interim, banking entities must make good faith efforts to conform their activities and investments to the Volcker Rule. Under the Volcker Rule, unless otherwise jointly determined by specified federal regulators, a “covered fund” does not include an issuer that may rely on an exclusion or exemption from the definition of “investment company” under the Investment Company Act other than the exclusions contained in Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act. The general effects of the Volcker Rule remain uncertain. Any prospective investor in the Certificates, including a U.S. or foreign bank or a subsidiary or other affiliate thereof, should consult its own legal advisors regarding such matters and other effects of the Volcker Rule.
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USE OF PROCEEDS Except as described below to the extent the Initial Aircraft is financed on the closing date of this offering, the proceeds from the sale of the Certificates will initially be held in escrow and deposited with the Depositary, pending financing of each Aircraft. The Trust will withdraw funds from the Deposits to acquire Equipment Notes as these Aircraft are financed. It is expected that the proceeds from the Equipment Notes will be used by the Issuer to finance the acquisition of the relevant Aircraft. Turkish Airlines has also made pre-delivery payments in respect of the Aircraft. The Issuer may purchase the Initial Aircraft on the Issuance Date. If the Initial Aircraft is purchased on such date, then on such date the Trust will use a portion of the proceeds from the sale of the Certificates to acquire Equipment Notes from the Issuer, which will use the monies received to purchase the Initial Aircraft. Turkish Airlines will not receive any proceeds from the issuance of the Certificates.
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CAPITALIZATION The following table sets forth Turkish Airlines’ cash, cash equivalents and restricted cash and capitalization (current and noncurrent loans and financing and shareholders’ equity) as of 31 December 2014, on an actual basis. You should read this table together with “Selected Financial Operating Information”, “Operating and Financial Review” and the Financial Statements and related notes thereto included elsewhere in this offering memorandum.
U.S. Dollar millions Current loans and financing(1) .........................................................................
As of 31 December 2014 Actual 632
Noncurrent loans, finance leases and operational leases(2)(3) ..........................
6,210
Equity .............................................................................................................
3,950
Total capitalization .........................................................................................
10,792
___________________ 1.
Includes U.S.$613 million related to obligations under finance leases.
2.
Includes U.S.$5.318 million related to obligations under finance leases. Also includes U.S.$892 million of obligations related to operating leases.
3.
Turkish Airlines also has credit facilities in place for aircraft purchases of U.S.$2.6 billion, of which U.S.$49.5 million was drawn with respect to the delivery of one Boeing 737-900ER aircraft as at 28 February 2015.
There has been no material change in Turkish Airlines’ capitalization since 31 December 2014, except as disclosed in this offering memorandum.
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SELECTED FINANCIAL AND OPERATING INFORMATION The following tables present Turkish Airlines’ selected consolidated financial and operating data for each of the periods presented. The selected consolidated financial data as of, and for the years ended, 31 December 2014, 2013 and 2012 has been derived from, and is qualified in its entirety by reference to, the Financial Statements included elsewhere in this offering memorandum. The Financial Statements have been prepared in a manner consistent with Turkish Airlines’ accounting policies in accordance with IFRS which differs in certain respects from U.S. GAAP. The selected consolidated financial and operating data should be read in conjunction with the sections in this offering memorandum captioned “Presentation of Financial and Other Information”, “Operating and Financial Review” and the Financial Statements and the accompanying notes thereto. The results of operations for the historical periods included in the following tables are not necessarily indicative of the results to be expected for future periods. In addition, see “Risk Factors” for a discussion of risk factors that could impact Turkish Airlines’ future financial condition and results of operations.
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Selected Financial Data Year ended 31 December Consolidated – U.S. Dollar millions Revenues: Passenger and Cargo revenue Passenger ................................................................. Cargo ........................................................................
2014
Total passenger and cargo revenue ......................... Other revenue Technical revenue .................................................... Other revenue........................................................... Total ......................................................................... Sales Revenue ............................................................. Expenses: Fuel expenses ........................................................... Personnel expenses .................................................. Depreciation expenses ............................................. Ground services expenses........................................ Passenger service and catering expenses ................ Air traffic control expenses ..................................... Landing and navigation expenses............................ Commissions and incentive expenses ..................... Maintenance expenses ............................................. Operating lease expenses ......................................... Reservation systems expenses ................................. Advertising and promotion expenses ...................... Short-term aircraft lease expenses ........................... Other expenses ......................................................... Total expenditure on operations .......................... Other operating income ........................................... Other operating expenses ........................................ ADJUSTED OPERATING PROFIT ....................... Income from investment activities, net ................... Share of investments’ profit/loss accounted by using the equity method........................................... OPERATING PROFIT ............................................. Financial income...................................................... Financial expenses ................................................... PROFIT BEFORE TAX ...................................... Tax income / (expense) ........................................ PROFIT FOR THE YEAR ..................................
2013
2012
9,858 973 10,831
8,753 871 9,624
7,390 722 8,112
203 36 239
164 38 202
105 17 122
11,070
9,826
8,234
3,845 1,694 744 627 558 534 408 356 368 171 214 168 372 408 10,467
3,442 1,582 650 555 465 452 347 331 315 149 205 130 299 327 9,249
2,887 1,376 575 461 348 354 277 292 222 175 166 106 68 309 7,616
81 (46) 638 72
115 (41) 651 75
95 (61) 652 271
75 785
55 781
4 927
443 (182) 1,046
27 (306) 502
49 (191) 785
(201) 845
(145) 357
(128) 657
Year ended 31 December U.S. Dollar millions
2014
Cashflow data: Net cash generated from operating activities .......... Net cash used in investing activities ....................... Net cash used in financing activities ....................... Cash and cash equivalents at the beginning of the period ................................................................. Cash and cash equivalents at the end of the period .......................................................................
46
2013
2012
1,125 (423) (694)
1,514 (873) (774)
1,410 (942) (528)
627
760
820
635
627
760
Year ended 31 December U.S. Dollar millions (except as otherwise noted)
2014
Other data: EBITDAR(1) ....................................................................... EBITDAR margin (%)(1).................................................... Adjusted net debt(2) ............................................................ Capital expenditures(3) ....................................................... Net working capital(4) ........................................................ Net working capital as a percentage of revenue (%) ........
2013 2,044 18.5 7,914 1,699 (1,409) (12.7)
2012 1,843 18.8 7,271 1,695 (1,183) (12.0)
1,603 19.5 5,843 1,388 (867) (10.5)
___________________ (1)
EBITDAR is defined as the sum of (a) income from investment incentives and Turkish Airlines’ share of profits in income from subsidiaries (Turkish Airlines’ share of profits in unconsolidated investments) all of which are below adjusted operating profit, and (b) adjusted operating profit adjusted to add back depreciation and amortization and aircraft rent. Aircraft rent includes all operational lease expenses for the period (including heavy maintenance portion of operating lease aircraft) and adjusted wet lease expenses, which are normalized for rent and heavy maintenance portion (55.0% of wet lease expenses). EBITDAR is a measure used by management as a benchmark in the evaluation of its business and also by the investment community in evaluating companies in the airline industry. However, there are limitations to the use of EBITDAR including the fact that there is no uniform definition of EBITDAR and many industry participants calculate the measure differently. As a result, EBITDAR should be considered as a supplement to and in lieu of Turkish Airlines’ results in accordance with IFRS. See “Presentation of Financial and Other Information—Non-IFRS Financial Measures”. The EBITDAR Margin is obtained by dividing EBITDAR by total sales revenue. A reconciliation of EBITDAR to Operating (loss)/profit is set out below: Year ended 31 December U.S. Dollar millions
2014
2013
2012
Sales Revenue ...........................................................................
11,070
9,826
8,234
Adjusted Operating Profit .....................................................
638
651
652
Adjustments .............................................................................
132
104
38
Share of Investments' Profit/Loss Accounted by Using The Equity Method (+)....................................................................
75
55
4
Income From Investment Incentives (+) .................................
57
49
34
Depreciation and Amortization (+) ......................................
744
650
575
EBITDA(1) ....................................................................................
1,514
1,405
1,265
Adjusted Operating Lease Expenses* ......................................
326
274
301
Adjusted Short term Lease Expenses (Wet-lease)** ...............
205
165
37
EBITDAR ....................................................................................
2,044
1,843
1,603
EBITDAR MARGIN ..................................................................
18.5%
18.8%
19.5%
___________________ (1)
EBITDA is defined as the sum of (a) income from investment incentives and Turkish Airlines’ share of profits in income from subsidiaries (Turkish Airlines’ share of profits in unconsolidated investments) all of which are below adjusted operating profit, and (b) adjusted operating profit adjusted to add back depreciation and amortization.
*
Operating lease expenses plus heavy maintenance of operational lease aircraft.
**
Adjusted for aircraft rent and heavy maintenance portion of wet lease expenses (55.0%).
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(2)
Turkish Airlines defines adjusted net debt as finance leases plus capitalized rent net of cash and cash equivalents, time deposits with a maturity of more than three months, current pre-delivery payment receivables for aircraft and restricted cash. In order to capitalize rent, adjusted aircraft rent expenses are multiplied by seven. See “Operating and Financial Review— Results of Operations—Indebtedness”. A reconciliation of adjusted net debt to net debt is set out below: U.S. Dollar millions Cash and cash equivalents ........................................................ Time deposits with maturity of more than three months.......... Finance leases ........................................................................... NET DEBT .................................................................................. Pre-delivery payments made for aircrafts* ............................... Restricted cash* ....................................................................... Capitalised aircraft rent** ........................................................ ADJUSTED NET DEBT ............................................................
Year ended 31 December 2013 2014 (635) (627) (87) (20) 5,931 5,413 4,766 5,209 (990) (521) (20) (40) 3,715 3,066 7,914 7,271
2012 (760) (268) 4,862 3,834 (267) (90) 2,366 5,843
___________________ *
Only short term accounts are included.
**
In order to capitalize rent, adjusted aircraft rent expenses are multiplied by seven. Adjusted aircraft rent expenses include all operational lease expenses for the period (including heavy maintenance portion of operating lease aircraft) and adjusted wet lease expenses, which are normalized for rent and heavy maintenance portion (55.0% of wet lease expenses).
(3)
Capital expenditures are calculated as the sum of cash paid on property and equipment plus amortization and interest on finance leases plus adjusted aircraft rent expenses. See “Operating and Financial Review—Liquidity and Capital Resources—Capital Expenditures”.
(4)
Net working capital is calculated by subtracting trade payables and passenger flight liabilities from the sum of trade receivable and inventories. A reconciliation of net working capital is set out below: U.S. Dollar millions Trade receivables ...................................................................... Inventories ................................................................................. Trade payables .......................................................................... Passenger flight liabilities ......................................................... NET WORKING CAPITAL .....................................................
Year ended 31 December 2013 456 538 195 160 (662) (680) (1,398) (1,201) (1,409) (1,183)
2014
2012 434 145 (510) (936) (867)
Year ended 31 December U.S. Dollar millions
2014
Balance Sheet data: Cash, cash equivalents and short-term investments ............................................................. Other current assets................................................. Property, equipment and intangible assets ............. Other non-current assets ......................................... Total assets .............................................................. Passenger flight liabilities....................................... Other current liabilities ........................................... Total debt and finance leases .................................. Other non-current liabilities.................................... Total liabilities ........................................................ Total equity ............................................................. Total liabilities and equity ......................................
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2013
2012
722 2,109 9,284 1,631 13,746
647 1,478 8,108 1,669 11,902
1,028 1,138 7,150 1,207 10,523
1,398 1,656 5,931 811
1,201 1,359 5,413 667
936 1,108 4,862 584
9,796 3,950 13,746
8,640 3,262 11,902
7,490 3,033 10,523
Selected Operating and Financial Highlights The following table sets forth selected operating and financial highlights of Turkish Airlines’ performance for the periods indicated: Year ended 31 December 2013
2014 Traffic and capacity: Revenue passengers carried ........................................... International transfer passengers carried ....................... Available seat km (ASK) .............................................. Revenue passenger km (RPK) ...................................... Passenger load factor .................................................... Number of destinations ................................................. Number of landings ...................................................... Km’s flown ................................................................... Tons of cargo carried .................................................... Tons of mail carried ...................................................... Tons of excess baggage carried .................................... Cargo ton-km (CTK) .................................................... Available ton-km (ATK) .............................................. Revenue ton-km (RTK) ................................................ Overall load factor ........................................................ Operations: Aircraft in service at year end ...................................... Average fleet age ........................................................... Aircraft utilization (average hours per aircraft per day) ............................................................................... Financial: Yield - Passenger revenue per RPK ............................. Passenger revenue per ASK ......................................... Cargo revenue per CTK ................................................ Average fuel price (USD/ton) ...................................... Interest cover ................................................................ Total traffic revenue per ATK ...................................... Total traffic revenue per ASK ......................................
000 ‘000 m m %
‘000 ‘000 ‘000 ‘000 m m m %
p p p times p p
49
2012
54,675 13.969 135,330 106,787 78.9 261 413,376 792,438 641,757 25,987 7,984 2,609 22,010 13,366 60.7
48,267 11,637 116,399 92,000 79.0 243 370,158 690,633 546,822 18,569 6,231 2,210 17,519 11,571 66.0
39,045 8.991 96,131 74,658 77.7 217 302,416 542,293 454,293 16,570 3,683 1,821 14,288 9,425 66.0
261 7.2
233 6.7
202 6.6
12:43
12:40
12:12
9.23 7.28 37.29 1,011 9.7 49.21 8.00
9.51 7.52 39.41 1,055 10.7 54.93 8.27
9.93 7.69 39.70 1,074 10.8 56.78 8.44
OPERATING AND FINANCIAL REVIEW The following discussion should be read in conjunction with Turkish Airlines’ selected consolidated financial and operating data and the Financial Statements included elsewhere in this offering memorandum. This discussion and analysis contains forward-looking statements that reflect Turkish Airlines’ current views with respect to future events and its financial performance. Turkish Airlines’ actual results may differ materially from those anticipated in these forward-looking statements as a result of any number of factors, including those set forth under “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Information”. This discussion and analysis also contains certain financial measures which may differ from similarly titled measures and calculations used by others and, accordingly, are not meant to be a substitution for recorded amounts presented in conformity with IFRS nor should such amounts be considered in isolation. See “Presentation of Financial and Other Information—Non-IFRS Financial Measures”. Turkish Airlines has prepared its Financial Statements in accordance with IFRS which may differ in certain significant respects from generally accepted accounting principles in other countries, including the United States. Overview Turkish Airlines is Turkey’s largest international scheduled airline and the largest airline in the world by the number of destinations served from a single hub. Turkish Airlines’ principal place of business is Istanbul with significant presences at Atatürk Airport, Sabiha Gökçen Airport, Antalya Airport and Ankara Esenboğa Airport. Turkish Airlines primarily offers air transportation for (i) passengers through the operation of both short haul and long haul routes, and (ii) cargo. Turkish Airlines’ air transportation business constitutes its primary reporting business segment, and has historically been and continues to be its largest revenue source. Turkish Airlines’ other businesses are related to air transportation services and include, among others, numerous aircraft maintenance services and catering services for itself and other domestic and international airlines, jet fuel storage and ground handling services at certain airports in Turkey, and aircraft training programs. Turkish Airlines had total sales revenue of U.S.$11.07 million and U.S.$9.826 million, gross profit of U.S.$2.002 million and U.S.$1.823 million and adjusted operating profit of U.S.$638 million and U.S.$651 million for the years ended 31 December 2014 and December 2013, respectively. For the year ended from 31 December 2013 to 31 December 2014, this represents an increase of 12.7% in total sales revenue, 9.8% in gross profit and a 2.0% decrease in adjusted operating profit. Significant Accounting Policies and Critical Accounting Judgments The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. These estimates and associated assumptions are based on historical experience and various other factors believed to be reasonable under the circumstances. Actual results could differ from these estimates. Turkish Airlines’ significant accounting policies and a summary of the critical accounting estimates and judgments that are made in preparing the Financial Statements are set out in Note 2 to the Financial Statements. Factors Affecting Results of Operations Turkish Airlines’ business, results of operations and financial condition have been, and it is expected they will continue to be, affected by a number of factors and risks, many of which are beyond its control. The key factors affecting Turkish Airlines’ results of operations and business performance are the global demand for air travel, competition, fuel prices and capacity at its hub airport, as discussed in the section titled “Risk Factors”.
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Revenues Substantially all of Turkish Airlines’ revenue is generated by two operating segments: airport transport revenue and technical maintenance services revenue.
Air Transport Revenues
Turkish Airlines generates the largest portion of its revenue from its air transport operations, which consist of domestic and international passenger and cargo air transportation. Passenger revenues consist of scheduled passenger, unscheduled passenger and other passenger revenues. Scheduled passenger revenues are derived from passengers transported on flights operated by Turkish Airlines and AnadoluJet. Unscheduled passenger revenues are derived from charter and hajj sales made by Turkish Airlines. Other passenger revenues are derived from fuel and security surcharges, excess baggage charges, and tickets sold but not used for transportation. Passenger fares and cargo revenues are recorded as revenue when the transportation service is provided. Tickets sold but not yet used are recorded as passenger flight liabilities. The following table sets forth the revenue attributable to passenger and cargo operations as a percentage of total sales revenue for the years ended 31 December 2014, 2013 and 2012. Year ended 31 December 2014 (U.S.$ millions) Passenger Revenue Scheduled flights......................... Unscheduled flights .................... Total passenger revenue .......... Cargo Revenue Carried by passenger aircraft ...... Carried by cargo aircraft ............. Total cargo revenue .................. Total passenger and cargo revenue .......................................
2013 (U.S.$ millions)
(%)
2012 (U.S.$ millions)
(%)
(%)
9,774 84 9,858
88.3 0.8 89.1
8,682 71 8,753
88.4 0.7 89.1
7,323 67 7,390
89.0 0.8 89.8
555 418 973
5.0 3.8 8.8
488 383 871
5.0 3.9 8.9
455 267 722
5.5 3.3 8.8
10,831
97.8
9,624
98.0
8,112
98.6
As further described below, in analyzing its passenger revenue performance, Turkish Airlines looks not only at the total amount of revenue but also at other metrics, in particular unit revenue, which helps measure the profitability of its routes. Turkish Airlines’ strategy is to operate on a low unit cost basis through high fleet utilization levels, employee productivity and effective cost management. Metrics that Turkish Airlines uses to analyze passenger revenues include the following:
capacity, or the number of seat kilometers offered, measured in terms of ASK;
traffic, or the number of seat kilometers utilized by fare-paying passengers, measured in terms of RPK;
passenger load factor, or the percentage of Turkish Airlines’ capacity that is utilized by fare-paying passengers, calculated by dividing RPK by ASK;
yield, or the amount of revenue earned for each RPK, calculated by dividing passenger revenue by RPK; and
unit revenue, or the amount of revenue earned for each ASK, calculated by dividing passenger revenue by ASK.
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The table below sets forth the metrics described above for the years ended 31 December 2014, 2013 and 2012. Year ended 31 December 2013
2014 Capacity – available seat kilometers (ASK) (m) ......... Traffic – revenue passenger kilometers (RPK) (m) .... Passenger load factor (%) ........................................... Yield – passenger revenue per RPK (p) ...................... Unit revenue– traffic revenue per ASK (p) .................
135,330 106,787 78.9 U.S. Cents 9.23 U.S. Cents 8.00
2012
116,399 92,000 79.0 U.S. Cents 9.51 U.S. Cents 8.27
96,131 74,658 77.7 U.S. Cents 9.93 U.S. Cents 8.44
With respect to capacity, Turkish Airlines has steadily increased its ASK through the strategic use of narrow and wide body aircraft, by optimizing and expanding its flight network and by taking advantage of Istanbul’s geographic location to capture a high volume of transfer passengers, in each case in order to maximize efficiency and increase productivity and fleet utilization. Going forward, Turkish Airlines expects that both its international and domestic ASK will increase as it launches new routes at home and around the world. Traffic as measured by RPK, which increased steadily for Turkish Airlines over the last five years, is primarily a function of demand for Turkish Airlines’ flights. Various factors affecting such demand include general economic conditions, consumer sentiment, changes in exchange rates, international political events and events that have a temporary impact on air travel, such as natural disasters and adverse weather conditions, as well as competition from other airlines. While Turkish Airlines has a strategic plan for balanced, rapid growth which will further increase traffic and passenger loads, it already boasts a diverse base of revenue sources that may help mitigate any change in demand for its flights. The table below sets forth the geographical distribution of revenue from scheduled flights for the years ended 31 December 2014, 2013 and 2012. Year ended 31 December U.S. Dollar millions
2013
2014
2012
Europe ............................................................... Asia ................................................................... Middle East ....................................................... America ............................................................. Africa.................................................................
3,547 2,525 1,259 1,221 894
3,193 2,213 1,077 1,037 804
2,628 1,814 1,056 842 548
Total international flights ..................................
9,446
8,324
6,888
Total domestic flights ........................................
1,385
1,300
1,224
Total scheduled flights ......................................
10,831
9,624
8,112
Yield is primarily affected by pricing. Changes in pricing for both Turkish Airlines’ international and domestic flights are based mainly on an analysis of supply and demand, as well as prices offered by competitors, and an analysis of route characteristics such as niche markets. As discussed below under “— Factors Affecting Results of Operation—Operating Costs—Aviation Fuel”, airfare also reflects the portion of any fuel price increases that are passed on to customers in the form of higher fares and fuel surcharges. Turkish Airlines looks to unit revenue to assess whether it is achieving an optimal balance between its passenger load factor and yield in order to maximize its profitability. Turkish Airlines’ management considers unit revenue to be particularly important because none of its major expenses, as described below, increase significantly due to increases in load factor or yield. Significant improvements in passenger load factor can be achieved through efficient allocation of aircraft to flights so that seat capacity matches the level of demand as closely as possible. This is an area where Turkish Airlines’ ability to utilize narrow body aircraft is advantageous—the unit cost on a narrow body aircraft after 2.5 hours in flight is equal to that of a wide body aircraft after six hours in flight. Increases in passenger load factor can also be achieved by lowering pricing on routes. However, lower pricing will generally result in downward pressure on yields, which may have a negative effect on unit revenue and overall profitability. Turkish Airlines’ 52
strategic plan for balanced, rapid growth is intended to strike an optimal balance through careful allocation of its resources to high-yielding routes, allocation of seats to various price categories, including an emphasis on gaining business travellers on its expanding network of long haul flights due to the resulting positive effect on yields and unit revenue, and an emphasis on attracting transfer passengers.
Technical Maintenance Services Revenue and Other Revenues
For the year ended 31 December 2014, Turkish Airlines generated 1.8% of its total sales revenue from the technical maintenance services provided by Turkish Technic and THY Habom, which provide aircraft repair and maintenance services mainly to Turkish Airlines and also to the Turkish civil aviation sector and international third party airlines. Revenue from aircraft maintenance and infrastructure support services are accrued pursuant to invoices prepared subsequent to the provision of the related services. Other revenues consist primarily of revenues generated from other businesses, including training and advertisement and other miscellaneous businesses. The table below sets forth Turkish Airlines’ technical revenue and other revenue as a percentage of total sales revenue for the years ended 31 December 2014, 2013 and 2012. Year ended 31 December 2013
2014 (U.S.$ millions) Technical Revenue .... Other Revenue .......... Total ......................... Total sales revenue .....................
(%)
(U.S.$ millions)
2012 (%)
(U.S.$ millions)
(%)
203 36
1.8 0.3
164 38
1.7 0.4
105 17
1.2 0.2
239
2.2
202
2.1
122
1.4
11,070
100.0
9,826
100.0
8,234
100.0
Operating Costs The table below sets forth Turkish Airlines’ operating costs by category for the years ended 31 December 2014, 2013 and 2012. Year ended 31 December U.S. Dollar millions Fuel expenses ................................................... Personnel expenses .......................................... Depreciation expenses ..................................... Ground services expenses ................................ Passenger service catering expenses ................ Air traffic control expenses .............................. Landing and navigation expenses .................... Commissions and incentive expenses .............. Maintenance expenses ...................................... Operating lease expenses ................................. Reservation system expenses ........................... Advertising and promotion expenses ............. Short-term aircraft lease expenses ................. Other expenses .................................................
2014
2013
2012
Total expenditure on operations ...................
3,845 1,694 744 627 558 534 408 356 368 171 214 168 372 408 10,467
3,442 1,582 650 555 465 452 347 331 315 149 205 130 299 327 9,249
2,887 1,376 575 461 348 354 277 292 222 175 166 106 68 309 7,616
Total expenditure excluding fuel ..................
6,622
5,807
4,729
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Fuel Expenses
For the year ended 31 December 2014, Turkish Airlines’ aviation fuel costs amounted to U.S.$3.845 million, 36.7% of its total operating expenditure, representing the single largest portion of its operating costs. Prices for aviation fuel, or kerosene, are volatile, are strongly correlated to the price of petroleum and are influenced by a number of factors, including fluctuations in the Euro/U.S. Dollar exchange rate, political events, war or the threat of war, and the coordinated pricing decisions of producer cartels such as the Organisation of the Petroleum Exporting Countries. Volatility of fuel prices can have a material impact on Turkish Airlines’ business, operations, financial condition and results of operations. The following table sets forth Turkish Airlines’ fuel and oil costs for the years ended 31 December 2014, 2013 and 2012: Year ended 31 December 2014 Average fuel price before hedging (USD/per ton) ........................................ Volume of aviation fuel purchased (000s of tons) ...................................................... Fuel and oil costs as a % of total operating expenses................................................. Fuel and oil costs as a % of total sales revenue ..................................................
2013
2012
1,011
1,055
1,074
3,801
3,260
2,688
36.7
37.2
37.9
34.7
35.0
35.1
Turkish Airlines, like many other airlines, passes on a portion of its fuel costs to its customers by including a fuel surcharge as part of the price of air transportation. Due to the competitive nature of the airline industry, Turkish Airlines does not expect to be able to pass all increases in aircraft fuel costs on to its customers in the form of higher airfares without having an adverse effect on customer demand for its services. The targeted surcharge level is 50.0% of the total fuel cost. Turkish Airlines engages in various hedging transactions to reduce its exposure to jet fuel price volatility, including crude oil based swaps and options and futures contracts and derivative instruments to manage financial risks. Turkish Airlines executes a monthly gradually decreasing layered hedging strategy with the aim of reducing the extent of price fluctuations and gaining time to enable pricing to adjust against volatility. Fuel prices are hedged with a time horizon of 24 months and an aim of reaching 50.0% of the upcoming month’s fuel consumption using swaps and option based structures with zero premiums. As of 28 February 2015, 47.0% of Turkish Airlines’ total jet fuel consumption for the first two months of 2015 was hedged and the hedge ratio for March 2015 is 50.0% of the total budgeted consumption. Based on market conditions as of 28 February 2015, and taking into account hedging transactions, Turkish Airlines estimates that an increase in the price of kerosene by U.S.$10 per metric ton would have the effect of increasing Turkish Airlines’ operating expenditure by U.S.$44 million for the year ended 31 December 2015. As at 28 February 2015, Turkish Airlines had entered into fuel hedging contracts with respect to 43.0% of its 2015 projected aviation fuel requirements assuming the use of a total of 4.4 million metric tons of kerosene. For more information regarding Turkish Airlines’ hedging activities with respect to jet fuel prices, see “Operating and Financial Review—Quantitative and Qualitative Disclosure about Market Risk—Fuel Price”.
Personnel Expenses
Personnel costs primarily consist of compensation and benefits for Turkish Airlines’ employees. For the years ended 31 December 2014, 2013 and 2012, personnel costs were Turkish Airlines’ second largest operating expense behind fuel expenses, accounting for 16.2%, 17.1% and 18.1% of the airline’s total operating expenses, respectively. Personnel expenses for Turkish Airlines have increased at a rate of approximately 23.1% over the three year period from 2012 to 2014, which is only 1.8% higher than the rate of personnel growth for the same period, which was 31.4% from 31 December 2012 to 31 December 2014. 54
Turkish Airlines’ total number of personnel, including its fully consolidated subsidiaries, increased from 19,108 as of 31 December 2012 to 25,117 as of 31 December 2014. However, Turkish Airlines’ personnel cost per ASK decreased by 12.5% from 31 December 2012 to 31 December 2014 or from 1.43 to 1.25, respectively. This growth and decreased cost per ASK is consistent with and integral to Turkish Airlines’ strategic plan for balanced, rapid growth and indicative of the airline’s employee productivity and effective cost management.
Depreciation Expenses
Turkish Airlines records depreciation expenses for aircraft that it owns and finance leases, and for other property and equipment that it owns. Depreciation is charged so as to write-off the cost or valuation of assets, other than land and properties under construction, over their estimated useful lives, using the straight-line method. Expected useful life, residual value and the depreciation method are reviewed each year for the possible effects of changes in estimates, and they are recognized prospectively if there are any changes in estimates. Assets acquired under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease. Land and properties under construction that are held for rental or any other administrative or undefined purposes are carried at cost (including legal fees) less any impairment loss, if any. Borrowing costs are capitalized for assets that need substantial time to prepare the asset for its intended use or sale. As is the case for other fixed assets, depreciation of such assets begins when they are available for use. Turkish Airlines has classified the cost of assets that are acquired directly or through finance leases into the following categories: (i) renewal or replacement of significant parts of the relevant aircraft that are identified during the overhaul maintenance and the overhaul of aircraft fuselage and engine; (ii) fuselage and overhaul maintenance for the fuselage; and (iii) engine and overhaul maintenance for the engines. Overhaul maintenance for the fuselage and overhaul engine repair parts are depreciated over the shorter of the remaining period to the next scheduled maintenance or the remaining period of the aircraft’s useful life. These amounts are capitalized subsequent to the performance of the relevant overhaul maintenance for the fuselage and engines. Depreciation expenses have increased from 31 December 2012 to 31 December 2014 due to the increase in the number of finance leased aircraft. Given the relatively young average age of Turkish Airlines’ fleet and its orderbook of planned aircraft additions, it anticipates that its expenses related to depreciation will show a relatively stable trend in the future.
Ground Services Expenses
Turkish Airlines ground services are conducted by TGS Ground Services (“TGS”), its 50%-50% joint venture with HAVAȘ Havaalanlari, which constitutes 34.2% of all of Turkish Airlines’ handling costs and are contracted in Turkish Lira. Ground services expenses include charges from handling agents for passenger and baggage handling (including costs associated with checking-in passengers and issuing tickets and boarding passes), passenger delay costs including compensation, third party aircraft handling costs and other operating costs, including aircraft cleaning, push-back and towing, de-icing and anti-icing and the cost of cleaning airport lounges. TGS provides ground services to Turkish Airlines at the following eight airports in Turkey: Atatürk Airport, Sabiha Gökçen, Izmir, Ankara, Antalya, Adana, Bodrum and Dalaman. At all of the other airports at which Turkish Airlines operates domestically and internationally, handling services are contracted from other handling service providers. As of 31 December 2014, 24.0% of the handling costs incurred by Turkish Airlines at international airports were charged in Euros and hence variations in exchange rates are reflected on the ground services expenses. Ground services are provided by other companies in other airports and such agreements’ terms are limited by the terms of the relevant concession agreements.
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Passenger Service and Catering Expenses
Turkish Airlines’ passenger services and catering expenses include all inflight entertainment items (“IFE”) such as IFE systems and screens, Live TV, wireless internet, magazines and newspapers, premium cabin offerings such as sleeping sets and personal care sets along with catering services provided on board and at Turkish Airlines’ airport lounges. More than 90.0% of Turkish Airlines’ on board and in lounge catering services are provided by Turkish Do&Co, its joint venture with Do&Co Restaurants & Catering AG. Turkish Airlines considers its award winning catering service an essential part of its branding and marketing and therefore continuously invests in its quality. Catering expenses have increased steadily— by 33.6% in 2013 and 20.0% in 2014—as Turkish Airlines introduced a new catering concept in 2013, increased the number of flying chefs on board for superior service quality, invested in the Lounge Istanbul at Atatürk Airport, which was expanded in 2013 and opened new additional lounges such as those at Izmir Airport and Sabiha Gökçen Airport. Turkish Airlines expects that expenses associated with catering will increase for a few more years as it aims to employ a flying chef on every international flight and as it continues to improve this customer service.
Navigation Expenses and Landing Expenses
Navigation expenses consist primarily of routing taxes and other fees related to navigation paid to various air traffic authorities while landing expenses consist primarily of airport and security fees and landing fees. Landing fees are determined through negotiations between industry and airport organizations and vary depending on the maximum take-off weight of the aircraft type. As 54.0% of navigation and landing expenses are based in Euro, fluctuations in the Euro/U.S.$ exchange rate are reflected in the total cost of navigation and landing expenses to Turkish Airlines. Turkish Airlines has experienced increases in its navigation and landing expenses in line with its network and capacity growth throughout the years.
Commissions and Incentives Expenses, Reservation Systems Expenses and Advertising and Promotion Expenses
These expenses constitute marketing and sales expenses of Turkish Airlines, such as commissions and incentives paid to ticket sales agencies, royalty fees and credit card charges, reservations systems expenses incurred by Turkish Airlines in the course of collecting passenger bookings, and advertising and promotion expenses, which are principally comprised of expenditures on marketing, advertisements and other corporate sponsorship activities. Reservation systems expenses have increased by 29.0% since 2012 in line with sales growth, and advertising and promotion expenses have increased by 58.0% since 2012 due to Turkish Airlines’ targeted marketing campaign aimed at solidifying and raising awareness of its brand.
Maintenance Expenses
Turkish Airlines’ maintenance services are provided by Turkish Technic and Turkish Habom, both whollyowned subsidiaries of Turkish Airlines, and Turkish Engine Center, which is a joint venture company with Turkish Airlines and Pratt & Whitney. Maintenance expenses are primarily related to procuring parts, line maintenance and routine maintenance costs relating to Turkish Airlines’ fleet, including annual airframe checks. These costs are reflected in profit or loss as they are incurred. Overhaul maintenance (heavy maintenance) costs are capitalized and depreciated over the remaining period to the next scheduled maintenance and hence are not reflected under maintenance expenses. Maintenance expenses increased by 25.0% in 2014 due to Turkish Airlines’ growing fleet.
Operating Lease Expenses
Aircraft operating lease expenses are comprised of aircraft and engine operating lease expenses. As of 31 December 2014, Turkish Airlines had 95 aircraft in its fleet that are operated under operating leases. Operating lease expenses increased by 14.8% in 2014 due to the net addition of two aircraft operated under operating leases to Turkish Airlines’ fleet. 56
Short-Term Aircraft Lease Expense
Short-term aircraft lease expenses are comprised of wet leases and subcharter expenses. As of 31 December 2014, Turkish Airlines had 31 wet leased aircraft in its fleet, 29 (26 aircraft for AnadoluJet and 3 aircraft for Turkish Airlines) of which are wet leased from its subsidiary SunExpress. Due to the transition period of all AnadoluJet operations to SunExpress which occurred in January 2014, Turkish Airlines wet lease expenses increased 339.7% in 2013 and 24.4% in 2014. The rest of the aircraft held under wet leases are interim aircraft that have been leased for a short period in order to meet increased aircraft demand. Wet lease contracts are made to cover all aircraft rent, crew, maintenance and insurance (ACMI) costs, hence, as the number of aircraft in Turkish Airlines’ fleet that are operated under wet leases increases, unit personnel and maintenance costs will correspondingly decrease.
Other Expenses
Other expenses comprise mainly insurance, tax, IT, communication and other miscellaneous operating expenses. Seasonality Generally, the revenues from, and profitability of, Turkish Airlines’ flights reach their highest levels during the second and third quarter of each year whereas the first quarter is usually accompanied by a decrease in passenger numbers, load factor and revenues. Given Turkish Airlines’ high proportion of fixed costs, this seasonality tends to cause profitability to vary significantly from quarter to quarter. Although the impacts of seasonality are mitigated to a certain extent by Turkish Airlines’ diversified and expansive route network, historically, Turkish Airlines’ results of operations for the first and fourth quarter of each year have been the weakest among the four fiscal quarters. On the other hand, Turkish Airlines’ results of operations for the third quarter of each year have historically been the strongest among the four quarters. Current Operating Environment Over the past ten years, Turkish Airlines has seen passenger growth in both domestic and international markets and believes that the current environment provides it with a number of opportunities for further growth. Turkish Airlines believes that, as a general trend, global demand for passenger air transportation will continue to expand, allowing it to successfully create new routes and expand its current routes with an eye on maximizing profit.
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Results of Operations The following table summarizes Turkish Airlines’ results of operations for the periods indicated, which are derived from the Financial Statements included elsewhere in this offering memorandum. See “Presentation of Financial and Other Information”. Summary Consolidated Income Statement Data Year ended 31 December U.S. Dollar millions
2013
2014
PROFIT OR LOSS Sales Revenue............................................... Operational Expenses ................................... Other Operating Income ............................... Other Operating Expense ............................. ADJUSTED OPERATING PROFIT ....... Income from Investment Activities, net ...... Share of Investments’ Profit / Loss Accounted by Using the Equity Method....
2012
11,070 (10,467) 81 (46)
9,826 (9,249) 115 (41)
8,234 (7,616) 95 (61)
638 72
651 75
652 271
OPERATING PROFIT .............................
75 785
55 781
4 927
Financial Income ..........................................
443
27
49
Financial Expenses .......................................
(182)
(306)
(191)
PROFIT BEFORE TAX ...........................
1,046
502
785
Tax Expense .................................................
(201)
(145)
(128)
NET PROFIT .............................................
845
357
657
Available seat kilometers (ASK) (m) ...........
135,330
116,399
96,131
Revenue passenger kilometers (RPK) (m) ...
106,787
92,000
74,658
Passenger load factor (%) .............................
78.9
79.0
77.7
Passenger revenue per ASK (p) ....................
$7.22
$7.52
$7.69
Passenger revenue per RPK (p) .................... Non-fuel costs per ASK (p) .........................
$9.23 $4.89
$9.51 $4.99
$9.93 $4.92
CONTINUING OPERATIONS
2014 Compared to 2013
Business Combinations
In May 2013, Turkish Airlines acquired 100.00% of the shares of MNG Teknik Ucak Bakim Hizmetler Anonim Sirketi (“MNG Teknik”), which further merged with Habom in August 2013. The merger was carried out under MNG Teknik’s legal structure via a transfer of all assets, liabilities, rights and obligations of Habom to MNG Teknik. As a result of the merger, the resulting company’s title is registered at THY HABOM A.S. The acquisition was funded from Turkish Airlines’ equity. If the acquisition had occurred on 1 January 2013, it is estimated that consolidated revenue would have been higher by U.S.$20 million and consolidated net income would have been lower by U.S.$11 million.
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Adjusted Operating Profit
Turkish Airlines’ adjusted operating profit for the year ended 31 December 2014 was U.S.$638 million (a 2.0% decrease compared to the year ended 31 December 2013). Turkish Airlines increased its capacity (ASK) by 16.0% in the year ended 31 December 2014 and despite the pressure that this capacity growth places on yields due to competitive factors, its unit cost and ex-fuel unit cost were lower in the same period, leading to increased profitability. However, due to the net change in other operating income between the year ended 31 December 2013 and the year ended 31 December 2014, adjusted operating profit decreased by 2.0%.
Financial Income/Expense
Turkish Airlines’ financial income increased to U.S.$443 million in the year ended 31 December 2014 from U.S.$27 million in the year ended 31 December 2013 due to foreign exchange gains arising from Euro and Japanese Yen liabilities relating to financial lease debt on the balance sheet and the devaluation of these currencies against the U.S. Dollar in the year ended 31 December 2014.
Net Profit
Resulting mainly from foreign exchange rate gains in 2014, Turkish Airlines’ net profit for the year ended 31 December 2014 was U.S.$845 million, more than double Turkish Airlines’ net profit for the year ended 31 December 2013. 2013 Compared to 2012
Adjusted Operating Profit
Turkish Airlines’ adjusted operating profit for the year ended 31 December 2013 was U.S.$651 million, a 0.2% decrease compared to the year ended 31 December 2012. Turkish Airlines increased its capacity (ASK) by 21.0% in the year ended 31 December 2013 and its total operating expenses also grew in line with its capacity growth. In connection with the opening of new routes and an increase in stage length, Turkish Airlines’ passenger revenue per ASK decreased 2.2% from 7.69 in the year ended 31 December 2012 to 7.52 in the year ended 31 December 2013. This downward change in unit revenue resulted in 19.0% revenue growth in 2013 and is the main reason for the decrease in adjusted operating profit.
Financial Income/Expense
Turkish Airlines’ financial expenses increased from U.S.$191 million in the year ended 31 December 2012 to U.S.$306 million in the year ended 31 December 2013 due to foreign exchange losses arising from Euro and Japanese Yen liabilities relating to financial lease debt on the balance sheet and the appreciation of these currencies against U.S. Dollars in the year ended 31 December 2013.
Net Profit
As a result of the increase in total operating expenses and financial expenses described above, Turkish Airlines’ net profit for the year ended 31 December 2013 was U.S.$357 million, a 46.0% decrease compared to U.S.$657 million in the year ended 31 December 2012. Income from investment activities include government tax incentives, interest income obtained from time deposits maturing over three months and reversal of provision provided for “available for sale assets”. In 2011, Turkish Airlines classified seven of its Airbus A340 aircraft as “assets available for sale” and recognized impairment on these assets due to their market valuation but due to changes in Turkish Airlines’ business plans in 2012, those assets were reclassified as “property and equipment” and the impairment charge was reversed. The impairment charge was U.S.$197 million, which increased the income from investment activities in 2012.
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Liquidity and Capital Resources Turkish Airlines’ capital and liquidity needs principally relate to the purchase or lease of aircraft, product investment, debt service and IT investments. As at 31 December 2014, Turkish Airlines had U.S.$5.931 million of finance lease obligations. Turkish Airlines’ liquidity resources are subject to change as market and general economic conditions evolve. Decreases in liquidity could result from a lower than expected cash flow from operations, including decreases caused by lower demand, weaker prices for Turkish Airlines’ products, particularly airline tickets, and higher operating costs such as increased fuel costs. In addition, any potential acquisitions in which all or a portion of the consideration would be payable in cash could have a significant effect on Turkish Airlines’ liquidity resources. Turkish Airlines’ liquidity could also be impacted by its ability to refinance existing debt and raise additional debt and the associated terms of such debt. As at 28 February 2015, Turkish Airlines had an order book that includes 28 firm orders for wide body aircraft and 186 firm orders and 30 options for narrow body aircraft. See “—Contractual Obligations and Commitments—Capital Expenditure Commitments”. Turkish Airlines meets its capital and liquidity needs mainly from cash flow from operations, liquidity lines, letters of credit and letters of guarantee from financial institutions and aircraft leasing arrangements. As of 31 December 2014, Turkish Airlines had cash and cash equivalents of U.S.$635 million. Turkish Airlines expects to make future aircraft acquisitions through a variety of funding sources including export credit agency supported funding, commercial finance leases and capital market instruments where appropriate. Cash Flows The table below summarizes Turkish Airlines’ cash flows for the years ended 31 December 2014, 2013 and 2012. Year ended 31 December U.S. Dollar millions
2013
2014
Net cash generated from operating activities .................... Net cash used in investing activities ................................. Net cash used in financing activities .................................
2012
1,125 (423) (694)
1,514 (873) (774)
1,410 (942) (528)
Net (decrease)/increase in cash and cash equivalents...
8
(133)
(60)
Cash and cash equivalents at beginning of the year ..........
627
760
820
Cash and cash equivalents at end of the year ...............
635
627
760
For the year ended 31 December 2014, net cash generated from operating activities was U.S.$1.125 million. Net cash used in investing activities in the same period was U.S.$(423) million, principally reflecting the net cost of capital expenditures. The net cash used in financing activities in 2014 was U.S.$(694) million, principally comprised of lease payments. The decrease in net cash generated from operating activities compared to the previous year was primarily due to changes in working capital. For the year ended 31 December 2013, net cash generated from operating activities was U.S.$1.514 million. The increase in net cash generated from operating activities compared to the previous year was primarily due to a 20.0% growth in ticket sales. Net cash used in investing activities in the same year was U.S.$873 million, principally reflecting the net cost of capital expenditures. The net cash used in financing activities in 2013 was U.S.$774 million, principally comprising lease payments. For the year ended 31 December 2012, net cash generated from operating activities was U.S.$1.410 million. Net cash used in investing activities in the same year was U.S.$942 million, principally reflecting the net cost of capital expenditures. The net cash used in financing activities in 2012 was U.S.$528 million, principally comprised of lease payments. 60
Capital Expenditures Turkish Airlines’ capital expenditures are principally related to the acquisition of aircraft, equipment and property. Turkish Airlines has funded its capital investments through financings and equity. The following table sets forth information with respect to Turkish Airlines’ capital expenditures for the years ended 31 December 2014, 2013 and 2012: Year ended 31 December U.S. Dollar millions Cash paid on purchase of property and equipment .. Amortization and interest on finance leases .............. Operating/wet leases expense and their heavy maintenance ..................... Total additions ..............
Fleet
Property
Equipment
2014
2013
2012
142
106
223
471
577
506
697
0
0
697
680
542
531
0
0
531
438
338
1,370
106
223
1,699
1,695
1,388
For the year ended 31 December 2014, Turkish Airlines made capital expenditures of U.S.$1.699 million, U.S.$1.370 million of which was related to fleet acquisitions, operational and finance lease payment related to aircraft. Indebtedness As of 31 December 2014, Turkish Airlines had U.S.$5.931 million outstanding from debt financings, which comprises the current and non-current portions of borrowings and finance leases. Management monitors Turkish Airlines’ indebtedness in the context of short, medium and long term funding and liquidity needs. This includes maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. In addition, Turkish Airlines’ management manages liquidity risk by keeping estimated and actual cash flows under control and by maintaining adequate funds and borrowing reserves through matching the maturities of financial assets and liabilities. As of 31 December 2014, 2013 and 2012 Turkish Airlines’ outstanding cash and cash equivalents and indebtedness was as follows:
U.S. Dollar millions Cash and cash equivalents ...................................................... Time deposits with maturity of more than three months ........ Finance leases ......................................................................... NET DEBT ...............................................................................
Year ended 31 December 2014 2013 2012 (635) (627) (760) (87) (20) (268) 5,931 5,413 4,862 5,209 4,766 3,834
Net debt comprises the current and non-current portions of finance leases net of cash and cash equivalents and time deposits with maturity of more than three months.
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Short-Term and Long-Term Borrowings
Turkish Airlines’ short-term and long-term borrowings consist of leasing obligations. As of 31 December 2014, 2013 and 2012, Turkish Airlines’ total short-term and long-term borrowings, which are denominated in U.S. Dollars, Euros and Japanese Yen, were as follows: Year ended 31 December U.S. Dollar millions
2013
2014
2012
(1)
Finance leases : Euros ....................................................... Japanese Yen ........................................... U.S. Dollars ............................................. Total ........................................................... At period end
2,501 1,580 1,850 5,931
2,686 678 2,049 5,413
2,553 2,309 4,862
5,931
5,413
4,862
___________________ 1.
Figures are USD equivalents.
All of Turkish Airlines’ debt is related to finance leases for the purchase of aircraft and 100.00% of all debt is secured. In addition, Turkish Airlines’ finance leases include customary representations, positive and negative general undertakings and events of default. For more information on Turkish Airlines’ short-term and long-term borrowings see Note 8 of its Financial Statements included elsewhere in this offering memorandum.
Aircraft Financing
Turkish Airlines principally uses finance leases to finance aircraft including commercial finance leases, ExIm Bank guaranteed finance leases and ECA finance leases. As of 31 December 2014, Turkish Airlines had 53 aircraft financed under ECA finance leases, 40 aircraft financed under Ex-Im Bank guaranteed finance leases, 42 aircraft financed under JOLCO leases, 57 aircraft financed under operational leases and 10 aircraft financed under commercial finance leases and Turkish Airlines owned 32 aircraft. As of 31 December 2014, Turkish Airlines had U.S.$2.6 billion of undrawn committed aircraft financing facilities. Long-Term Debt Maturity Schedule The maturity schedule of Turkish Airlines’ long-term debt as of 31 December 2014 is set forth below: Maturity Schedule U.S. Dollar millions Finance Leases ............................................... Long-term debt at period end......................
Total 5,931 5,931
Less than 1 Year 612 612
1-5 Years 2,436 2,436
Over 5 Years 2,883 2,883
Contractual Obligations and Commitments The following table presents Turkish Airlines’ aggregate finance lease and operating lease commitments as of 31 December 2014:
U.S. Dollar millions Finance leases .................................................. Operating lease commitments – Fleet ........................................................ – Property and equipment ..........................
Total 5,931
816 76 62
Payments Due by Period Less than 1 Year 1-5 Years 612 2,436
190 5
530 24
After 5 Years 2,883
96 47
Finance Lease Commitments As discussed above, Turkish Airlines principally uses finance leases to acquire aircraft. These leases have both renewal options and purchase options. Operating Lease Commitments Turkish Airlines has entered into commercial leases on certain properties, equipment and aircraft. These leases have durations ranging from two to 14 years for aircraft to one to 25 years for ground leases. Certain leases also contain options for renewal. Capital Expenditure Commitments As of 31 December 2014, total capital expenditure commitment authorized and contracted for but not provided for in the Financial Statements amounts to U.S.$13.4 billion for 215 firm order aircraft. The majority of capital expenditure commitments are denominated in U.S. Dollars. The outstanding commitments include U.S.$15.2 billion for the acquisition of 245 aircraft including 30 optional aircraft. Contingent Liabilities As at 31 December 2014 and 31 December 2013, Turkish Airlines had provided provisions for lawsuits due to its operations. The lawsuits against Turkish Airlines are typically reemployment lawsuits by former employees or related to damaged luggage or cargo, amounting to U.S.$16 million and U.S.$14 million, respectively. These contingent liabilities include certain guarantees, indemnities, claims, regulatory proceedings and litigation related to its operations. Turkish Airlines files income tax returns in some jurisdictions throughout the world. Various tax authorities are currently examining Turkish Airlines’ income tax returns. Tax returns contain matters that could be subject to differing interpretations of applicable tax laws and regulations and the resolution of tax positions through negotiations with relevant tax authorities, or through litigation, can take several years to complete. While it is difficult to predict the ultimate outcome in some cases, Turkish Airlines does not anticipate that there will be any material impact on its financial position or results of operations. Off-Balance Sheet Arrangements An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity, or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support, or that engages in leasing, hedging or research and development arrangements. Turkish Airlines’ primary off-balance sheet arrangements are operational leased aircraft, which are summarized in the contractual obligations table above. As of 31 December 2014, Turkish Airlines had 57 aircraft under operational leases which were recorded as off-balance sheet amounting to an obligation of U.S.$190 million for the year 2015. Quantitative and Qualitative Disclosure about Market Risk In the normal course of business, Turkish Airlines is exposed to risks arising from fluctuations in aircraft fuel prices, currency exchange rates and interest rates. In order to manage these risks, Turkish Airlines uses derivative financial and commodity instruments to reduce its exposure to market rates and prices. Turkish Airlines uses derivatives only for the purposes of hedging identified exposures and does not invest in derivatives for trading or speculative purposes. The instruments used include swaps, forward contracts and options in the currency, interest rate and fuel markets. The estimated financial impact from fluctuations in aircraft fuel and foreign currency exchange rates are based on assumptions as to various factors including, but not limited to, aircraft fuel consumption, transaction amount in foreign currencies and hedge ratio. For additional information on quantitative market risks see Note 39 to the Financial Statements. 63
Fuel Price Prices for jet fuel are volatile, strongly correlated to the price of petroleum and are influenced by a number of factors, including political events, war or the threat of war, and the impact of pricing of coordinated supply decisions of producer cartels such as the Organization of the Petroleum Exporting Countries. Volatility of these prices can have a material impact on Turkish Airlines’ business, operations, financial condition and results of operations. Turkish Airlines manages such risks with natural hedging methods where possible. In situations where such methods are insufficient or impractical, Turkish Airlines uses derivative instruments to manage financial risks. Additionally, Turkish Airlines expects to hedge the remaining risks through the use of oil derivatives in the OTC markets, which may generate a profit or a loss. However, no assurance can be given that this hedging strategy will be effective. If Turkish Airlines is exposed to significant price volatility and/or increases in prices for aviation fuel, despite the use of oil hedging and fuel surcharges, there can be no assurance that it will be able to fully offset such volatility and increases by passing portions of these costs on to customers (including through fuel surcharges) and/or by cost reductions and/or through fuel hedging, nor can Turkish Airlines predict the movement of either short or long-term aviation fuel prices. For additional information on the effect an increase or decrease in fuel prices could have on Turkish Airlines’ results of operations, see “—Factors Affecting Results of Operations—Revenues—Fuel Expenses”. Foreign Currency Exchange Rate Fluctuations Turkish Airlines is exposed to foreign currency risk on transactions denominated in foreign currencies, including the cost of aircraft lease payments, due to the mismatch between the currencies in which revenue, operational expense, purchases and borrowings are denominated. In order to protect against foreign exchange rate movements, Turkish Airlines has a policy of matching, as far as possible, receipts and payments in each individual currency. Currency options are used to cover Turkish Airlines’ forecasted cash flow for the upcoming months, which includes all cash inflows and outflows resulting from its operating and non-operating activities. No assurance can be given that the measures will be effective. In addition, Turkish Airlines’ subsidiaries all have a U.S. Dollar functional currency and Turkish Airlines’ presentational reporting currency is U.S. Dollars, hence the Turkish Lira value of its debt is not relevant and does not affect its financial results. All Euro and Yen denominated debt is translated into U.S. Dollars and therefore Turkish Airlines’ foreign exchange risk may result from changes in the relevant exchange rates. For additional information on the effect an increase or decrease in currency exchange rates could have on Turkish Airlines’ results of operations, see “—Results of Operations—Financial Income/Expense”.
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BUSINESS Overview Turkish Airlines, Turkey’s flag carrier airline, offers air transportation and related services in Turkey and across the globe. Turkish Airlines was founded in 1933 and grew steadily over the next eight decades. The airline’s route network expanded from three destinations in 1933 to 112 at the end of 2000. The airline flew its first international route in 1947, expanded into Europe in the 1960s and 1970s and further expanded into the Far East and North America in the late 1980s. Since 2000, Turkish Airlines has continued to add destinations to its flight network, including 33 destinations in the Middle East and 43 destinations in Africa by 31 December 2014, and has increased flight frequency on its existing routes. In 2008, Turkish Airlines joined Star Alliance. Originally a 100.0% state owned airline, in 1990 Turkish Airlines began the process of privatization; the most recent iteration of which occurred in 2006. As of 31 December 2014, Turkish Airlines was 50.88% publicly owned. During the year ended 31 December 2014, Turkish Airlines carried 54.7 million passengers across the world and generated total sales revenue of U.S.$11.07 million, EBITDAR of U.S.$2.044 million and adjusted operating profit of U.S.$638 million. Turkish Airlines’ total number of employees was 25,117 as of 31 December 2014. Turkish Airlines’ principal place of business is Atatürk Airport from which it has created and currently maintains a well-balanced and extensive route network both directly and through alliances and codeshare arrangements. In addition, Turkish Airlines has a significant presence at Sabiha Gökçen Airport. As of 31 December 2014, Turkish Airlines flew to more than 260 destinations worldwide and was able to reach 115 additional destinations through its Star Alliance partners. Turkish Airlines operated regularly scheduled flights to 43 cities in Turkey, 102 cities in Europe and the CIS, 33 cities in the Middle East, 43 cities in Africa, 31 cities in the Far East and 10 cities in the Americas as of 31 December 2014. With service to 108 countries as of 31 December 2014, Turkish Airlines is the largest airline in the world by number of countries served. Turkish Airlines generated 97.8% of its revenue from its air transport operations during the year ended 31 December 2014, which consist of domestic and international passenger and cargo operations. Scheduled passenger revenues are derived from passengers transported on flights operated by Turkish Airlines and AnadoluJet, which is a wholly-owned sub-brand of Turkish Airlines that operates as a low cost carrier. Cargo revenues are derived from cargo transported by Turkish Cargo, a sub-brand of Turkish Airlines. Other revenues consist primarily of maintenance service revenues which are derived from the operations of Turkish Technic and Turkish HABOM, both 100.0% owned subsidiaries of Turkish Airlines whose financial results are fully consolidated with Turkish Airlines. Turkish Airlines has been awarded “Best Airline in Europe” and the “Best Airline in Southern Europe” for the last four consecutive years as part of the Skytrax World Airline Awards and was named “Airline of the Year” at the 2013 Centre for Asia Pacific Aviation Awards for Excellence, an award presented to the air carrier that has made the greatest impact on the development of the airline industry, established itself as a leader and is a benchmark to follow. Turkish Airlines was incorporated under the “Law on the State Airlines Operation Administration” No. 2186, published in the Official Gazette dated 27 May 1933 (the “Incorporation Law”). The exact date of incorporation is 1 June 1933, the effective date of the Incorporation Law. Turkish Airlines is registered with the Istanbul Trade Registry, with registration number 75184, a registered phone number of +90 212 436 63 63, and a registered address of “Yeşilköy Atatürk Hava Limanı, Bakırköy, İstanbul”. As of 31 December 2014, 49.12% of Turkish Airlines’ share capital was directly held by the Privatisation Administration (the “Administration”) under Turkish Airlines’ inclusion in Turkey’s privatization scheme. Turkish Capital Markets Law No. 6362 and the Law on the Privatisation Applications No. 4046 prohibits any abusive practice (such as insider trading) of the Administration on corporations which are listed and included in Turkey’s privatization scheme. 65
Turkish Airlines’ Competitive Strengths Turkish Airlines’ key competitive strengths lie in its central location between Europe and Asia, strong flight network, low unit cost, focus on customer satisfaction, high brand awareness and commitment to balanced, planned and rapid growth. Turkish Airlines operates from a natural aviation hub. Turkish Airlines has a natural advantage due to the prime location of its hub at Atatürk Airport in Istanbul, with close connectivity to Europe, the Middle East, Central Asia and North Africa—constituting more than 40.0% of all worldwide international air traffic and covering more than 55 national capitals—with its narrow body fleet, as well as competitive coverage of the Americas and the Far East with its wide body aircraft such as the Boeing 777-300ER. Turkish Airlines’ wide body fleet has grown by 175.0% since 31 December 2009 and Turkish Airlines expects that the addition of the three Boeing 777-300ER aircraft financed with the proceeds of this offering will complement the airline’s current structure by increasing utilization, load factor, premium revenue, network connectivity and cargo transport capabilities. The following diagrams demonstrates Turkish Airlines’ potential for global flight coverage using both narrow body and wide body aircraft. See “Turkish Airlines’ Business Strategy—Increasing its revenue generation by targeting untapped potentials” for further discussion of the addition of wide body aircraft to Turkish Airlines’ fleet.
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Increased Utilization and LF Hrs/day
77.7%
mm USD
12:39
12:43
57%
1,038
12:11
12:02
11:40
11:39
2011 Utilization
354 2012 2013 Load Factor
2014
Increased Network Connectivity
2009
WB Fleet Size 18%
19%
54%
57%
20
29
2009
2010
18%
35
36
42
2011
2012
2013
WB Fleet Size
507
2010 2011 2012 Premium Pax Revenue
34%
36%
5.5
6.2
2009
2010
2011
9.0
2014
Increased Cargo Business
45% 38%
11.6
2013
42%
46%
43%
31% 663
14.0 238
2012
2013 2014/11 % of WB Revenue
WB Ratio
31%
4.4
Int. Transfer Pax
39%
43%
1,308
55
(‘000 tonnes)
USD cents
1,306
742
21% 18%
15%
34%
51%
33%
72.6%
70.9%
2010
78.9%
39%
73.7%
2009
79.0%
Increased Premium Revenue
2014
2009
316
2010
388
2011
Cargo Volume
% of Transfer Pax in Total Int. Pax
471
531
2012
2013
2014
% of WB Belly Cargo
In addition, all of Europe, the Middle East, Central Asia and North Africa, together constituting more than 40.0% of all worldwide international air traffic and covering more than 55 national capitals, are within narrow body aircraft range of Istanbul. Narrow body aircraft have a lower breakeven load factor to cover their direct operational costs, which creates the opportunity for profit generation on flights to cities with low passenger potential. Being able to reach all of these destinations with narrow body aircraft allows Turkish Airlines to penetrate many smaller underserved cities and serve them with greater frequency, differentiating its product from that of its main competitors. Turkish Airlines offers one of the highest numbers of O&D pair options for its passengers in the airline industry. In addition, as noted in the following illustrations, a route traveling through Istanbul when connecting Europe to Asia, the Middle East or Central Asia will generally have a lower detour factor than competing flights that connect in other locations in Europe or the Middle East.
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Connectivity by Number of O&D Pairs (Top Three)
Europe to the World Turkish Airlines British Airways Lufthansa
Detour* Advantage
16,936 8,370 8,208
Middle East to the World Turkish Airlines Qatar Airways Lufthansa
7,557 2,889 2,380
Africa to the World Turkish Airlines Air France British Airways
9,240 4,386 2,970
Far East to the World United Airlines Turkish Airlines Delta
From Europe
To Far East
Via Istanbul
17%
10%
6%
To Africa
To Middle East
10,990 7,161 5,418
_____________________ * Increase in the flight distance compared to a non-stop flight is forecasted by using 6,000 arrival-departure cities.
Istanbul’s prime geographical location also plays an important role in Turkish Airlines’ low unit cost structure. Operating from Istanbul allows Turkish Airlines to operate at an average stage length of 1953km for international flights. This flight distance is long enough to achieve minimum unit costs with a narrow body aircraft while Istanbul’s central location also allows Turkish Airlines to take advantage of the optimum range for wide body aircraft such as the Boeing 777-300ER. Operating from a central location as a main hub has assisted Turkish Airlines’ in creating a balanced network structure and, in return, achieving higher aircraft utilization levels. CASK, USD
Narrow Body Optimum Range
Current THY Destinations
16
A330 Optimum Range B777 Optimum Range 14
B777 A330
12
Usd cents
Narrow Body
10
8
6
4 -
2.000
4.000
6.000
8.000
10.000
12.000
14.000
Stage Length (Km)
75% of all Turkish Airlines production takes place in an optimum stage length
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Turkish Airlines takes advantage of Turkey’s and Istanbul’s economic and demographic potential. Turkey is a growing country with a population, as of 31 December 2014, of 77.7 million people and Istanbul, specifically, is a city with a young, growing population, as of 31 December 2014, of 14.3 million people. Turkey, and particularly Istanbul, is fast becoming one of the most visited destinations in the world and Turkish Airlines believes it will continue to grow as a tourist destination, given its strategic central location between Europe and Asia. In 2014, Istanbul ranked as the third largest air travel city in Europe (see “Industry Overview” for more information). This growth creates a continuous increase in direct passenger potential for Turkish Airlines and provides leverage for its operations by reducing its dependence on transfer passengers, which is a highly competitive area for passenger transportation. In 2014, 56.0% of Turkish Airlines’ international passengers flew directly into or out of Turkey, while the remaining 44.0% were international to international transfers. International-to-International Transfer Passengers (in millions) 20.0 18.0 International Direct 19%
16.0 14.0 14.0 11.6
12.0 10.0
Domestic 41%
9.0
8.0
2014: 54.7 mm Passengers Carried
InternationalDomestic Transfer 14%
6.2 6.0
5.1 4.4
4.0
InternationalInternational Transfer 26%
2.0
2009
2010
2011
2012
2013
2014
Turkish Airlines is an industry leader with a strong flight network. As of 31 December 2014, Turkish Airlines offered flights to 108 countries (including Turkey)—more countries than any other airline. In addition, throughout the course of 2013 and 2014, Turkish Airlines positioned itself as the largest air carrier in the world by number of international destinations served from a single hub, with 219 international destinations served from its Istanbul hub as of 28 February 2015. Turkish Airlines continuously adds destinations to its flight network, with 18 new destinations added in 2014, including Rotterdam, Astrakhan, Boston, Montreal, Bordeaux and Münster. Turkish Airlines expects that the addition of the three new Boeing 777-300ER wide body aircraft will expand the airline’s reach and permit it to add additional international destinations to its network. Turkish Airlines has also made an effort to specifically expand its presence in the Middle East, Asia and Africa due to its strategy of capitalizing on Istanbul’s geographical position as a natural bridge between Europe, the Middle East, Asia and Africa and Istanbul’s position as the fastest growing aviation center worldwide by air travel connectivity. As of 28 February 2015, Turkish Airlines offered service to 31 destinations in Asia, and 75 destinations in the Middle East and Africa. Furthermore, Turkish Airlines offers one of the highest number of O&D pairs than any other airline. In 2014, 14 million international passengers arrived from one point via Turkish Airlines and transferred in Istanbul to fly to another international destination. Notably, this number is 20.0% higher when compared to 2013. As part of its strategy to further strengthen its flight network and improve its connectivity across the globe in 2015, Turkish Airlines has plans to introduce 9 new routes, such as San Francisco, Taipei and Manila, and to increase the frequency of 71 current routes, including Birmingham, Manchester, Frankfurt and Berlin. 69
Turkish Airlines’ low unit cost is a major competitive advantage. Turkish Airlines has a lower cost base than most of its full service competitors. During the year ended 31 December 2014, its total unit cost base was U.S.$7.73 per ASK. The primary driver of this low cost structure is the geographic location of Istanbul, Turkish Airlines’ main hub, which enables Turkish Airlines to operate at optimum stage lengths and with high utilization rates using lower cost narrow body aircraft. During the year ended 31 December 2014, approximately 27.0% of Turkish Airlines’ total costs were fixed costs, permitting greater production with the same assets and lower unit costs. Turkish Airlines’ relatively young average fleet age of 7.3 years also contributes to the airline’s operational efficiency. In order to preserve its competitive advantage through a low cost base, Turkish Airlines has implemented efficient fuel consumption policies, employee efficiency strategies, cost cutting strategies and financial risk management strategies. Aircraft fuel costs stemming from fluctuations in oil prices are controlled through the use of strategic financial instruments and, in order to reduce sales costs, Turkish Airlines has implemented strategies designed to increase sales via direct sales channels. Turkish Airlines plans to continue investing in new generation technologies to decrease costs, increase efficiency and enhance its customers’ product experience.
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Turkish Airlines’ management is focused on customer satisfaction. Customer satisfaction is integral to Turkish Airlines’ business model. The airline’s commitment to maintaining a high level of customer satisfaction is evident in every service that it provides, from Turkish Airlines’ “Lounge Istanbul” at Atatürk Airport—which was nominated to the list of the world’s top ten premium airport lounges and was awarded “Best Business Class Lounge Dining” by Skytrax in 2014—to Turkish Airlines’ award winning catering service—which was named “Best Business Class Catering” by Skytrax in 2014 for the second year in a row. On all of its aircraft delivered in and after 2008, Turkish Airlines delivers a comprehensive inflight entertainment system where every seat is provided with its own screen and, on its long haul flights, Turkish Airlines provides live inflight television, dubbed “Live TV”, and wireless internet services. Turkish Airlines also provides comfortable seating with 30 to 31 inch seat pitches on its economy class and between 45 and 78 inch seat pitches on its business class narrow body and wide body aircraft, respectively. Turkish Airlines is committed to creating, providing and maintaining a product that customers are satisfied with and can trust. Indicative of Turkish Airlines’ focus on customer satisfaction, and one of the airlines’ most important assets, is its human resources. As of 31 December 2014, the total number of employees working for Turkish Airlines stood at 19,902, including 3,892 captain pilots from 53 different nationalities. In 2014, the average length of service at Turkish Airlines was 6.5 years and the personnel number per aircraft was 76. Together with its fully consolidated subsidiaries, Turkish Airlines’ employs 25,117 personnel as of 31 December 2014. In an effort to maintain and capitalize on its work force, Turkish Airlines implemented the Cultural Unity Project in 2012 in order to develop the following set of core cultural values: team collaboration, hospitality, agility, family and trust. Turkish Airlines’ commitment to providing a high level of customer service also extends to its punctuality. As of 31 December 2014, the airlines’ on-time departure rate was over 80.0%. In addition, the rate of missing or lost bags on Turkish Airlines’ flights, which is an important part of customer satisfaction, decreased in 2013 and 2014 and Turkish Airlines is committed to keeping this rate low and to continuing to increase the quality of the services that it provides overall while also enhancing its current product offerings through further innovation. Turkish Airlines benefits from high brand awareness. In 2013 and 2014, awareness of the Turkish Airlines brand increased due to its extensive flight network and quality service. With the newly adopted slogan “Widen Your World”, the airline actively encourages passengers to take advantage of Istanbul as a bridge between two continents by introducing potential and existing customers to the airline’s extensive route network. In order to increase brand awareness and brand value, during this period, Turkish Airlines conducted social media campaigns for flights, granted several sponsorships and used celebrity advertising effectively. As a consequence of these activities, Turkish Airlines believes it gained strength against traditional airline brands and has become a preferred airline globally. Turkish Airlines’ growth is balanced, planned and rapid. Underpinning each of Turkish Airlines’ strengths described above is a balanced, planned and rapid growth strategy. Turkish Airlines demonstrated a stable and sustainable growth over the last decade—the airline has posted a profit every year since 2006 and was one of the few full service airlines to remain profitable throughout the recent financial crisis. Turkish Airlines continues to strive daily to maintain its position among the top of the airline industry in network strength and expansion, operational efficiency, customer satisfaction and brand awareness and each effort is carefully and strategically reviewed and planned by management. After starting in 1933 with five aircraft, Turkish Airlines has pursued a targeted goal, which it continues to work towards today, of acquiring the youngest and most modern fleet in Europe by purchasing aircraft that meet growing passenger traffic and changing customer needs, emphasize passenger comfort and safety, are equipped with the latest technology and are economical and environmentally sensitive. As of 28 February 2015, the number of aircraft in Turkish Airlines’ fleet was 263, with an average fleet age of 7.3 years. Over the next seven years, Turkish Airlines plans to add a total of 245 more aircraft to its fleet, including 217 narrow body and 28 wide body passenger aircraft. Since 2003, Turkish Airlines has increased its capacity in ASK by 17.0% on average annually (CAGR). With this growth rate, Turkish Airlines’ global market share in terms of ASK capacity more than tripled reaching 1.8% in 2014 compared to 0.5% in 2003 according to reports from the International Air Transport 71
Association (the “IATA”). In 2013 and 2014, Turkish Airlines capacity increase was 21.1% and 16.3%, respectively, compared to global ASK increases of 4.8% and 5.6%, respectively, for the same years according to the IATA. Turkish Airlines’ capacity growth plans are made for ten years and are updated annually. Capacity increase is planned along flight network strategies taking transfer and local passenger potential into consideration. The growth projection for the following year is disclosed to the public in December of every year. The capacity increase target for 2015 is 15.0%, which results in a target for 2015 of a total of 63.2 million passengers. Turkish Airlines’ goal is to increase international transfer passengers in the same pace with total passengers while utilizing Istanbul’s advantageous geographical location. Increasing airport capacity is also an important part of Turkish Airlines’ growth strategy. Atatürk Airport, Turkish Airlines’ main hub, was the busiest airport in Turkey and the third busiest airport in Europe in terms of total passenger traffic as of 31 December 2014. In order to support Turkish Airlines’ growth plans, the Turkish Government finalised the tender for a third airport in Istanbul in 2013 and broke ground on the new facility in June 2014. The new airport will be one of the biggest airports in the world at its final stage with six runways, four terminals and 500 aircraft park positions on an area of 77 square kilometers and will have the ability to handle more than 150 million passengers. It is anticipated that the first phase of the airport will be operational by 2017 and will be able to handle 90 million passengers. Turkish Airlines’ Business Strategy Ensuring the safety of its flight operations is Turkish Airlines’ single most important business goal, and it intends to continue to strengthen its deeply ingrained safety culture. Keeping this commitment to safety at the forefront, Turkish Airlines’ key strategies for developing its standing as a global airline include: Expanding, diversifying and deepening its flight network, including through the addition of wide body aircraft to its fleet. In order to increase its global market share, Turkish Airlines plans to expand its long haul coverage through the addition of new destinations and increased frequency on current long haul routes as well as through the addition of new wide body aircraft to its fleet, including the new three Boeing 777300ER aircraft financed with the proceeds of this offering. Turkish Airlines is also increasing the frequency of flights on its short and medium haul routes in order to create and maintain a mature, efficient network. As of 31 December 2014, Turkish Airlines flew to approximately 69.0% of its destinations at least daily and it aims to increase this level to 95.0% within five years’ time. This strategy of expanding, diversifying and deepening its flight network is intended to increase Turkish Airlines’ international and domestic connectivity and solidify Istanbul as one of the largest aviation hubs in the world. Demand for international air travel is forecast to grow over the next twenty years. Assuming demand and economic growth are closely correlated; Turkish Airlines anticipates growth across its key markets, especially Asia and Africa. Istanbul’s competitive advantage lies in its geographical position as a bridge between Europe, the Middle East, Asia and Africa, which allows Turkish Airlines to penetrate smaller and underserved markets, differentiating itself from its competitors in Dubai, Frankfurt and Paris. One example of Turkish Airlines’ strategy for additional growth is Africa. Aviation in Africa is growing rapidly and as of 28 February 2015, Turkish Airlines flew to 43 airports in 27 African countries. In the future, Turkish Airlines plans to further increase the connection between Africa and the rest of the world as the continent’s main carrier through the addition of new destinations and increased flight frequency to current destinations. During the course of 2013 and 2014, Turkish Airlines added 26 and 18 new destinations, respectively, to its network and increased the frequency of flights on many current routes. In addition, in order to increase capacity for transfer passengers at Atatürk Airport, Turkish Airlines has begun to direct local point-to-point traffic on some of its high demand routes to Sabiha Gökçen Airport. With its current network of 219 destinations as of 28 February 2015, Turkish Airlines serves the highest number of international destinations in the world from a single hub. Despite this fact, Turkish Airlines has only half the number of weekly flights when compared to mature European airlines. Realizing the growth potential due to its geographic location, Turkish Airlines tripled its global market share from 0.5% in 2003 to 1.8% in 2014 on ASK terms. Growing at rates that are higher than the industry growth rates in every region that it serves, Turkish Airlines aims to continue to gain market share globally. Istanbul’s new airport will play an important role in support of Turkish Airlines’ growth as it creates increased capacity, and further strengthens connectivity, in Istanbul. 72
Taking advantage of modern aircraft capabilities and creating a competitive fleet that balances demand and capacity. Turkish Airlines’ order book, which included 28 firm orders for wide body aircraft and 186 firm orders and 30 options for narrow body aircraft as of 28 February 2015, will provide improved operating economics and passenger experience. Turkish Airlines intends to take full advantage of the capabilities of each type of aircraft on its order book by assigning them to routes in its network based on specific characteristics including seat capacity and flight range capability. For example, new generation narrow body aircraft will be used to increase the frequency of flights to smaller markets within short and medium range of Istanbul, such as flights to Africa, Europe and Central Asia. The addition of the Boeing 777 wide body aircraft will allow Turkish Airlines to expand its network to include additional North American, South American and Asian routes and, together with the Airbus 330, will be used to increase flight frequency on certain strategically important routes in the Americas and the Far East. The use of these modern aircraft will allow Turkish Airlines to capture profit opportunities in underserved markets and improve returns on existing medium and long haul routes as a result of the improved economics of newer aircraft. Turkish Airlines’ new modern aircraft and competitive fleet structure will also provide additional efficiency on mature routes, a more enhanced flying experience and additional capacity on dense routes that are subject to capacity restrictions. Increasing its revenue generation by using wide body aircraft to access new markets and expand its global network. Turkish Airlines’ total sales revenue has grown 18.9% annually (CAGR) during the last ten years and has become significantly more diversified as Turkish Airlines has expanded and diversified its network globally. Turkish Airlines expects its unit revenue to increase with the delivery of wide body aircraft orders, as they are configured to hold a larger number of the higher revenue generating premium passengers and increased cargo capacity when compared to narrow body jets. Even with this growth, Turkish Airlines has a lower unit revenue base compared to most of its global competitors primarily due to Turkish Airlines’ narrow body dominated fleet structure, which has less potential for business class passengers and cargo contribution. As of 31 December 2014, only 21.0% of Turkish Airlines’ total sales revenue was generated by business class sales, which is a lower figure than that of most of its competitors. A typical Turkish Airlines narrow body aircraft has 16 business class seats while its wide body aircraft on order will have 49 business class seats. The following diagram depicts the shift in revenue by passenger class over the period from 2009 to 2014. Given the passenger preference for business class on long haul destinations and the increase in the number of wide body aircraft in its fleet, Turkish Airlines anticipates that business class service will contribute a growing percentage to its total sales revenue as the airline increases its wide body fleet size.
Revenue by Passenger Class 2009
2014
Busine ss 12.0%
Comfort 2.5% Business 18.4%
Econo my 88.0%
Economy 79.1%
Note: Comfort class operations started in 2010.
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In addition, as of 31 December 2014, revenue from Turkish Airlines’ cargo transportation business amounted to 8.8% of the airline’s overall revenue. More than 60.0% of Turkish Airlines’ cargo is carried in the belly of passenger aircraft and therefore produces incremental revenue to the aircraft with little additional costs. The following diagram depicts the shift in revenue by type over the period from 2009 to 2014. As the cargo capacity for wide body aircraft is significantly higher than that of narrow body aircraft, Turkish Airlines expects cargo revenue as a share of total sales revenue to reach 15.0% over the next five years through increased use of wide body aircraft.
Revenue by Type 2009
2014
Technic Other 2.3%
Cargo 2.7% 6.3%
Cargo 8.8%
PAX 88.7%
Technic Other 1.8% 1.1%
PAX 88.3%
In addition to the structural mix effects from business class and cargo revenues, Turkish Airlines also continuously invests in brand recognition and focuses on developing its corporate agreements in order to increase its revenue per ASK. Becoming a five-star airline through investments in superior service and premium products. Turkish Airlines is currently the only European carrier that has earned four stars from Skytrax under its airline rating system in all categories—including seat comfort, inflight entertainment and service efficiency. By 2014, Turkish Airlines had been chosen as the “Best Airline in Europe” and the “Best Airline in Southern Europe” four years in a row as part of the Skytrax World Airline Awards. Additionally, Turkish Airlines was awarded the “Best Business Class Onboard Catering” and “Best Business Class Lounge Dining” at the Skytrax World Airline Awards in 2014. Aiming to become a five star airline, Turkish Airlines has invested heavily in its products and services through the introduction of an award winning catering concept, CIP lounges, premium cabin offerings, inflight entertainment systems, enhanced cabin comfort and specialized cabin attendant and customer service training for its personnel. In recent years, these superior products and services, combined with the numerous prestigious awards from prominent bodies of the airline industry, have resulted in increased brand awareness for Turkish Airlines and, Turkish Airlines believes, an increased appreciation of the airline that will pave the way for Turkish Airlines to become the first five-star airline in Europe. Becoming a global aviation group with the growth of its subsidiary service provider companies. Turkish Airlines currently has many subsidiaries that provide services to the airline industry such as aircraft maintenance, handling, catering and aviation fuels. With the opening of Istanbul’s new airport (the first phase is expected to be completed by the end of 2017) which is set to be one of the largest airports in the world, Istanbul’s importance as an aviation hub should increase. Turkish Airlines believes that its subsidiary service provider companies will grow due to Turkish Airlines’ growth and by serving other airlines in Turkey and abroad. Together with its subsidiaries, Turkish Airlines envisions itself as a global aviation group. 74
In particular, Turkish Airlines’ technical maintenance subsidiaries stand out among its subsidiary companies and are expected to become an important regional resource. Turkish Airlines provides technical maintenance services through its consolidated subsidiaries Turkish Technic, Turkish HABOM and its joint ventures, TEC (Turkish Engine Centre) and Goodrich Turkish Airlines Technical Service Centre. Turkish Technic provides line and base maintenance services for Boeing 737 Classic and Next Generation (NG) aircraft, Boeing 777 aircraft, Airbus A320, A300, A310, A330 and A340 aircraft, Gulfstream G-IV, G550 aircraft, Cessna 172 aircraft and Diamond DA42 aircraft. In addition, it has the ability to conduct a full range of maintenance-repair services on an aircraft, including landing gear, avionics components, hydraulic/pneumatic components, brake systems, tires and rims and mechanical components. Turkish Airlines offers all necessary maintenance and repair activities in its own facilities for the aforementioned aircraft. Until 2013, Turkish Technic operated out of four hangars in Istanbul and Ankara. In May 2013, Turkish Airlines acquired 100.0% of the shares of MNG Teknik which further merged with HABOM and was renamed Turkish HABOM in August 2013. This acquisition and subsequent merger with Habom enabled Turkish Airlines to further expand its technical workforce resulting in considerably increased maintenance capacity. In June 2014, Turkish Airlines launched its new maintenance and repair facility in Sabiha Gökçen Airport, built with an investment cost of U.S.$550 million. With this new facility Turkish HABOM will service Turkish Airlines and third party airlines, taking advantage of Istanbul’s key location lying within a flight distance of 3.5 hours from 55 countries in Europe, Asia, the Middle East and Africa. Since Turkish Technic is a wholly-owned subsidiary of Turkish Airlines, providing increased service to third party airlines will increase Turkish Airlines’ consolidated revenues as well as decrease the fixed cost of the total investment that is attributable to Turkish Airlines. Turkish Airlines’ Business Aircraft Fleet Turkish Airlines updates its fleet plan at the end of each year with the following goals: exploiting opportunities, managing risk, sustainability, dynamic capacity planning, expanding the flight network and increasing the frequency of flights on current routes. Throughout the year, the fleet plan is revised according to deliveries and demand and fleet rejuvenation needs. Interim solutions, if necessary, are implemented, such as using leased aircraft in light of market conditions. As of 28 February 2015, Turkish Airlines had 263 aircraft in service. Of those 263 aircraft, 85 are subject to off-balance sheet operating leases and the remaining 176 are recorded on-balance sheet as either owned by Turkish Airlines or subject to financing. For more information on Turkish Airlines’ financing arrangements, see “Operating and Financial Review—Liquidity and Capital Resources” in this offering memorandum.
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The following table sets forth Turkish Airlines’ aircraft fleet for the periods indicated: On-Balance Sheet fixed assets Wide Body A330-200 ........................ A330-300 ........................ A340-300 ........................ B777-300ER ................... Total ................................ Narrow Body B737-900ER ................... B737-800 ........................ B737-800WL .................. B737-700 ........................ B737-700WL .................. A320-200 ........................ A321-200 ........................ A319-100 ........................ E190 ................................ Total ................................ Cargo A310-300 ........................ A330-200 ........................ Wet Lease ....................... Total ................................
On-Balance Sheet finance leases
Off-Balance Sheet operating leases
Total 28 February 2015
5 18
11
11
16 18 5 16 55
10 20 3 6 21 4 8 1 73
11 68 20 3 6 33 43 14 1 199
5 5
16 39
25
11 33
12 39 6 25
101
2 2
5
2 2
2 5 2 9
32
145
86
263
5
TOTAL(1)
___________________ 1.
Includes jets operated by AnadoluJet. Does not include aircraft operated by SunExpress, a venture 50.0% of which is owned by Turkish Airlines and 40.0% of which is owned by Lufthansa.
Turkish Airlines continues to invest in new aircraft and as of 31 December 2014 had contracted for the delivery of 245 aircraft (including options for 30 aircraft) as follows: A330-300 ........................ B777-ER ......................... Total Wide Body ............ B737-900ER ................... B737-9 MAX .................. B737-800 ........................ B737-8 MAX* ................ A321 ............................... A320 NEO ...................... A321 NEO** .................. Total Narrow Body........ Total Fleet ......................
2015 7 7 14 5
2016 5 6 11
2017
2019
2020
2021
5
5
20
10
25
10
27 47 47
25 40 40
32 62 62
4 14 14
3 3
20 13
10
2
18 32
30 41
4 6 9
___________________ * **
2018
Including 10 optional aircraft in 2021. Including 20 optional aircraft in 2020.
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Passenger Transportation Turkish Airlines offers passenger transportation services to both domestic and international short haul and long haul destinations covering a large geographical area. Passenger transportation operations are carried out with two brands: Turkish Airlines and AnadoluJet (a sub-brand of Turkish Airlines that serves mostly domestic flights originating from Ankara Esenboğa Airport and constitutes 5.8% of total ASK capacity). Turkish Airlines’ passenger business is divided into three main cabin groups: business, comfort (premium economy) and economy. Premium traffic on both long haul and short haul routes (including comfort class) accounted for up to 5.0% of total passenger numbers for the year ended 31 December 2014 and approximately 21.0% of total passenger revenues for the same period. TOTAL 2014 Number of Landing Available Seat Km (m) Revenue Passenger Km (m) Passenger Load Factor (%) Passengers Carried (000) Cargo and Mail (Tons)
2013 413,376 135,330 106,787 78.9 54,675 667,743
2012 370,158 116,399 92,000 79.0 48,267 565,315
302,416 96,131 74,658 77.7 39,045 470,636
DOMESTIC 2014 Number of Landing Available Seat Km (m) Revenue Passenger Km (m) Passenger Load Factor (%) Passengers Carried (000) Cargo and Mail (Tons)
2013 172,290 17,557 14,248 81.2 22,708 51,619
2012 157,363 15,433 12,301 79.7 20,053 47,544
128,514 12,012 9,511 79.2 15,906 40,107
INTERNATIONAL 2014 Number of Landing Available Seat Km (m) Revenue Passenger Km (m) Passenger Load Factor (%) Passengers Carried (000) Cargo and Mail (Tons)
2013 241,086 117,773 92,539 78.6 31,967 616,124
2012 212,819 100,966 79,700 78.9 28,215 517,772
173,902 84,118 65,147 77.4 23,139 430,529
Turkish Airlines’ international network covers five geographical regions: Europe, the Middle East, Asia, Africa and the Americas. The following table sets forth certain international operational data (excluding codeshare flights operated by other airlines) by region for the year ended 31 December 2014: 2014 Number of Landing Available Seat Km (m) Revenue Passenger Km (m) Passenger Load Factor (%) Passengers Carried (000) Cargo and Mail (Tons)
Europe
Middle East
145,828 41,282 31,978 77.5 18,195 218,581
34,376 11,923 8,729 73.2 4,446 67,367
Asia 22,792 31,576 25,423 80.5 4,043 200,447
___________________ *
The data above includes only scheduled flights, excluding haff and charter flights.
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Americas 7,465 18,967 15,911 83.9 1,821 59,015
Africa 23,141 11,247 8,437 75.0 2,475 59,949
Cargo Transportation Turkish Airlines cargo operations are carried out through Turkish Cargo, a brand of Turkish Airlines. In the year ended 31 December 2014, Turkish Airlines carried 668 thousand tons of cargo to 47 destinations throughout the world with nine dedicated cargo aircraft and 261 destinations with 252 passenger aircraft. Total sales revenue for cargo transportation to Turkish Airlines during the period was U.S.$973 million , which represented 8.8% of Turkish Airlines’ total sales revenue. While 2012 was a difficult year worldwide in terms of cargo transportation, with high oil prices and economic recession negatively affecting world economies, Turkish Airlines managed to carry a 21.9% larger cargo volume than in 2011 and increased its carried freight revenue by 5.7%. These trends continued into 2013 and 2014 where Turkish Cargo carried 20.0% and 18.0% more cargo, respectively. Construction of a new cargo terminal at Atatürk Airport began in April 2013 and was completed in September 2014. With this project, Turkish Airlines cargo terminal capacity increased to handle 1.2 million tons annually. Meanwhile, Turkish Airlines existing cargo IT infrastructure has been improved. The TACTIC system implemented for cargo process management over the past 20 years was replaced in the beginning of 2013 by the Cargo Operations Management and Information System (“COMIS”). Turkish Cargo has won numerous awards such as Best Asia-Pacific Airline in 2013, International Air Cargo Winner in 2013, India Cargo Airline of the Year in 2014 and Best European Cargo Airline by Air Cargo News in 2014. Location and Facilities Turkish Airlines’ principal place of business is in Istanbul at Atatürk Airport, where it implements its single hub global network strategy in connecting all of its 219 international and 43 domestic destinations. With the new Istanbul Airport expected to be completed by the end of 2017, Turkish Airlines will move its Atatürk Airport operations to Istanbul Airport and use the new airport as its main hub. In addition to Atatürk Airport, Turkish Airlines also operates from Sabiha Gökçen Airport, which is on the Asian side of Istanbul and has its own catchment area reaching a population close to 14 million people together with the surrounding cities such as Izmit, Bursa and Bolu. From this airport Turkish Airlines aims to capture this additional catchment area with a narrow body fleet and a short-medium haul network consisting of destinations in Europe, the Middle East, North Africa and Central Asia as well as domestic destinations. Turkish Airlines also operates from Ankara Esenboğa Airport with its low-cost sub-brand AnadoluJet. The AnadoluJet network covers 35 domestic destinations and Ercan in the Turkish Republic of Northern Cyprus and aims to increase connectivity and air travel within Turkey. In addition, Turkish Airlines rents certain facilities at other airports. Competition The markets in which Turkish Airlines operates are highly competitive with levels of competition that vary region by region. Turkish Airlines competes with all global network carriers (and most specifically with the EU carriers and the Gulf carriers) in a significant number of the regions to which it operates. While competition is fierce, Turkish Airlines’ diverse network, together with its ability to fly into smaller underserved cities and provide the most number of O&D pairs between Europe and the Middle East and Asia with increased flight frequencies and the shortest connection time permits Turkish Airlines to differentiate its product and distinguish itself from its competitors. See “—Turkish Airlines Strengths” above.
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Certain international routes are governed by bilateral air services agreements between governments, which limit the number of flights on such routes that can be operated by foreign carriers. While many of these bilateral air services agreements grant sufficient capacity to allow all interested airlines access, there are a limited number that restrict access and hamper competition, for example, to and from India and China. See “Industry Overview” and “Risk Factors—The airline industry is highly competitive and Turkish Airlines faces competition from other airlines as well as from alternative means of transportation”. Turkish Airlines is working closely with the Turkish Government in continuously improving the relationships in these markets for increased frequencies and flight rights. In addition, Turkish Airlines faces competition from the low cost airline operators in Turkey. Strategic Alliances and Co-Operation
Star Alliance
Turkish Airlines is a member of the Star Alliance. The Star Alliance brings together 27 of the world’s major airlines which, as of 28 February 2015, collectively serve 1,321 destinations in 193 countries. The Star Alliance is designed to maximize Turkish Airlines offering to customers by providing greater network coverage and benefits. Through the alliance, customers have increased options in terms of the routes available to them, stop-overs and fare types, greater access to airport lounges and opportunities to earn more frequent flyer points. Meanwhile, members of the Star Alliance have the opportunity to increase their load factors, traffic and revenues.
Codesharing and other bilateral contracts
A codeshare arrangement allows an airline to sell tickets on flights operated by another airline, coded with the flight number of the selling airline. The operating airline will also continue to sell seats on such flights, coded with its own flight number. This means that flights operated by a single airline are included within both airlines’ route networks, and flights on that route may be sold by both airlines in exchange for an agreed amount or portion of the overall fare. Turkish Airlines has bilateral agreements with 37 airlines, some of which are also members of the Star Alliance, covering code sharing, links between frequent flyer programs and various other activities. In addition to flight sharing, some codeshare arrangements also include traffic rights and incremental revenue. Overall, Turkish Airlines’ codeshare arrangements add 114 destinations to its total number of destinations. Turkish Airlines codesharing arrangement with Lufthansa ended in March 2014. The impact on Turkish Airlines is limited—it currently flies to 12 cities in Germany and a total of 90 other cities in Europe and has a growing presence in the United States. Due to its extensive network, Turkish Airlines has managed to continue to operate efficiently without a dependency on Lufthansa or any other airline for connecting flights. Loyalty Programs Turkish Airlines’ frequent flyer program, called “Miles & Smiles”, allows members to earn and use miles with program partner companies. The Miles & Smiles program builds customer loyalty by offering awards and services to program participants. Members in this program earn mileage credit for flights on Turkish Airlines as well as on flights with other Star Alliance members. In addition, Turkish Airlines has a credit card partnership with Garanti Bank that is currently part of a five year agreement expiring in 2017. Miles can also be earned by purchasing the goods and services of non-airline partners, and mileage credit can be redeemed towards both travel and non-travel awards. In addition, in December 2014, Turkish Airlines launched its program “Shop & Miles” which allows members to purchase a range of items, including toys, home appliances, bags and wallets, electronics, perfumes and cosmetics, luggage and a special “Turkish Airlines Private Collection”, all tailored to the needs and interests of Turkish Airlines’ passengers. Members may purchase items from a website or 79
through a catalog provided in the seatback on Turkish Airline flights using cash, miles or a combination of both cash and miles. The program is currently operational in the United Arab Emirates, Belgium, France, Germany, Italy, the Netherlands, Russia, Spain, the United Kingdom and the United States. In addition to customer loyalty, Miles & Smiles has also earned accolades from the airline industry. In 2012, Miles & Smiles won two Freddie Awards, one for “Program of the Year (Europe and Africa)” and the other in the co-branded credit card category. Miles & Smiles also took second place in the Mega Awards organized in the U.S. in the Campaign of the Year category for 2012. Turkish Airlines has also launched a customer loyalty campaign called “We’re From Turkey”, or WE’R, that promotes and markets local Turkish products such as soaps, towels, food, china and clothing, representing thousands of years of rich Turkish culture. These products are initially for sale in duty free shops in select airports with the intention that they will also be available for purchase online. WE’R is a social responsibility project for Turkish Airlines intended to build customer loyalty and travel by promoting both the airline and Turkey itself. Subsidiary Service Providers and Joint Ventures
Air Transportation Services
SunExpress Airlines Founded in 1989, SunExpress is a joint venture of Turkish Airlines and Lufthansa, in which Turkish Airlines holds a 50.0% stake, Lufthansa holds a 40.0% stake and the remaining 10.0% stake is held by individuals in order to comply with the foreign ownership cap under Turkish regulations. SunExpress provides both charter and seat only passenger transportation services from its two hubs in Antalya and Izmir to both domestic and international destinations. Having inaugurated flights in 1990, SunExpress has served the charter market for many years. It began flying the Antalya to Frankfurt route as the first privately owned airline in Turkey to operate regularly scheduled international flights. Currently from Antalya and Izmir, SunExpress serves 22 cities in Germany, 20 cities in Turkey and 43 cities in other countries. In 2011, SunExpress Germany, fully owned by SunExpress Turkey was founded in Frankfurt and operates charter and scheduled flights from Germany to many leisure destinations. SunExpress also operates 29 aircraft for Turkish Airlines (26 aircraft for AnadoluJet and 3 aircraft for Turkish Airlines) under a wet-lease contract beginning in 2013. Turkish Airlines aims to lower AnadoluJet cost base with this agreement by taking advantage of lower operating costs of SunExpress. As of 31 December 2014, SunExpress including Sun Express Germany, has a fleet of 63 aircraft and serves its customers with 2,978 employees. SunExpress and Sun Express Germany earned consolidated revenue of U.S.$1.330 million in 2014 and had consolidated net profit of U.S.$57 million.
Service Provider Companies
Turkish OPET Aviation Fuels Turkish OPET Aviation Fuels, established in 2009, is a joint venture of Turkish Airlines and OPET Petrolcülük A.Ş., in which each holds a 50.0% stake. It provides jet fuel storage and supply services at Atatürk Airport and other airports in Turkey to both Turkish Airlines and other users of the airport. Turkish OPET Aviation Fuels commenced operations on 1 July 2010 and as of 31 December 2014, had the largest jet fuel integrated facility in Turkey, providing jet fuel to all airports in Turkey. In addition to aviation fuels of every kind, it also engages in the domestic and international sale, importation, exportation, distribution and transport of chemicals, lubricants and paints. Turkish OPET Aviation Fuels earned revenue of U.S.$2.743 million in 2014.
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Turkish Ground Services Turkish Ground Services provides ground handling services at Atatürk Airport and 7 other airports in Turkey. Established in 2009 as a joint venture of Turkish Airlines and HAVAŞ Havaalanları Yer Hizmetleri A.Ş., in which each holds a 50.0% stake, Turkish Ground Services has been in operation since the beginning of 2010. Turkish Ground Services serves both domestic and international airlines in addition to Turkish Airlines and SunExpress at Atatürk Airport, Sabiha Gökçen Airport, Ankara Esenboğa Airport, İzmir Adnan Menderes Airport, Antalya Airport, Adana Airport, Bodrum Airport and Dalaman Airport. At 31 December 2014, Turkish Ground Services, employing 8,541 personnel, had provided ground services to more than 500 thousand flights and 70 million passengers. Turkish Ground Services earned revenue of U.S.$270 million in 2014. Turkish Do&Co Turkish Do&Co provides catering services to Turkish Airlines, and, as of 31 December 2014, to more than 60 other domestic and international airlines. Commencing operations in 2007, Turkish Do&Co is a joint venture of Turkish Airlines and Do&Co Restaurants & Catering AG, in which each holds a 50.0% stake. Headquartered at Atatürk Airport, it provides catering services to domestic and international airlines out of kitchens operating at, as of 31 December 2014, nine locations within Turkey. These kitchens turn out approximately 170,000 meals per day, each of which is carefully prepared by Turkish Do&Co’s culinary staff. Turkish Do&Co has been responsible for substantial improvements in catering service quality aboard Turkish Airlines’ aircraft and has received, and continues to receive, many international awards for its performance. Turkish Airlines won the “Best Business Class Catering” in the World by Skytrax in 2013 and 2014 and the “Best Airline for in-flight food” by Skyscanner in 2012. Turkish Do&Co’s service in economy classes is equally well-received by customers—ranking best in the world in a survey conducted in 2011 by Skytrax. As part of Turkish Do&Co’s service on-board Turkish Airlines flights, the concept of a “flying chef” was introduced in 2010. As of 31 December 2014, 782 flying chefs operate in premium class on-board Turkish Airlines’ long haul flights and certain short haul flights. Turkish Do&Co also exhibits its catering prowess in the Lounge Istanbul at Atatürk Airport which had, as of 31 December 2014, served more than 1.8 million passengers. A similar lounge was opened at Moscow’s Domodedovo International Airport in 2014. Turkish Airlines’ lounges are another example of the high quality distinctive service that Turkish Airlines provides to customers. The Istanbul Lounge, for example, was specifically designed to provide customers with a comfortable space where they would feel at home while waiting for their flights. The design has paid-off for Turkish Airlines given that the lounge was nominated to the list of the international top ten premium airport lounges. Turkish Do&Co earned revenue of U.S.$371 million in 2014.
Maintenance, Repair and Overhaul Services
THY (Turkish) Technic Turkish Technic offers maintenance, repair and technical support to Turkish Airlines, as well as to more than 100 domestic and international airlines. Established in 2006, Turkish Technic is a wholly-owned subsidiary of Turkish Airlines. With its subsidiary operations and 4,420 employees as of 31 January 2015, Turkish Technic conducts its activities with the goal of becoming an important regional air transport technical maintenance base by supplying the full range of maintenance, repair, and technical and infrastructure support the aviation industry requires. Turkish Technic earned revenue of U.S.$701 million for the year ended 31 December 2014. 81
Turkish HABOM HABOM A.Ș., operating out of Sabiha Gӧkҫen Airport (established in 2011 as a wholly-owned subsidiary of Turkish Airlines), and MNG Teknik A.Ș., operating out of Atatürk Airport (acquired by Turkish Airlines in May 2013), merged in September 2013. The Turkish HABOM Aviation Maintenance, Repair and Modification Center aims to become the largest maintenance, repair and overhaul center in the region and its principal business activities consist of buying, selling, renting, leasing, maintaining, repairing and modifying any and all manner of aircraft and aircraft equipment, and a full range of aviation related equipment, instruments and engines. This center also provides a comprehensive spectrum of training activities related to such undertakings including, but not limited to, seminars and courses. Turkish HABOM earned revenue of U.S.$105 million in 2014. Turkish Engine Center The Turkish Engine Center, established in 2008, provides aircraft engine maintenance, repair and overhaul services to customers in Turkey and its hinterland. A joint venture of Turkish Airlines and United Technologies, the Turkish Engine Center is a subsidiary of Pratt&Whitney, which holds a 51.0% stake, and Turkish Airlines, which holds a 49.0% stake. Operating out of a high-tech, environmentally-friendly maintenance center with an area of around 25,000 square meters at Sabiha Gökçen Airport, as of 31 December 2014, the Turkish Engine Center had the capacity to perform maintenance on more than 200 aircraft engines a year. The Turkish Engine Center earned revenue of U.S.$195 million in 2014. Goodrich Turkish Airlines Technical Service Center The Goodrich Turkish Airlines Technical Service Center operates out of facilities in Gebze and provides high quality services for maintenance and repair of nacelles, thrust reversers, related parts and rotable support. Established in 2010, the Goodrich Turkish Airlines Technical Service Center is a joint venture of Turkish Technic (40.0%) and TSA-Rina Holdings (60.0%), the latter a subsidiary of the Goodrich Corporation. The Goodrich Turkish Airlines Technical Service Center aims to be an important player in the industry by providing maintenance and repair services meeting international standards to Turkish Airlines and other international airline companies. The Goodrich Turkish Airlines Technical Service Center earned revenue of U.S.$8 million in 2014. TURKBINE Technical Gas Turbines Maintenance & Repair Inc. TURKBINE Technical Gas Turbines Maintenance & Repair Inc. is a joint venture of Turkish Technic and Zorlu O&M Enerji Tesisleri İşletme ve Bakım Hizmetleri A.Ş. (each of which holds a 50.0% stake) formed in 2011. It is intended that this entity will provide maintenance, repair and overhaul services for a variety of aircraft engines that are beyond the activity scope of Turkish Airlines’ existing subsidiaries as well as for industrial gas turbines used at power plants.
Cabin Interior Services
Turkish Cabin Interior Systems Industries Inc. Turkish Cabin Interior Systems Industries Inc. (“TCI”) was formed in 2011 and, as of 31 December 2014, stakes of 30.0%, 20.0%, and 50.0% were held by Turkish Airlines, Turkish Technic and Türk Havacılık ve Uzay Sanayi A.Ş. (TUSAŞ -TAI), respectively. TCI’s objective is to undertake the design, manufacture, logistical support, modification and marketing of aircraft cabin interior systems and components, and to win a share of international markets with the goods and services that it produces. In 2013, TCI became an approved Boeing vendor.
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TSI Aviation Seats A joint venture with the Assan Hanil Group, a leading car seat manufacturer in Turkey, TSI Aviation Seats was formed to design and manufacture airline seats and to make, modify, market and sell spare parts to Turkish Airlines and other international airline companies. Formed in 2011, Assan Hanil Group, Turkish Airlines and Turkish Technic hold stakes of 50.0%, 45.0%, and 5.0%, respectively. Production at TSI Aviation Seats began in 2013 and the first set of passenger seats for Turkish Airlines aircraft were assembled in 2014. TSI Aviation Seats aims to provide its services to international airlines in the future.
Other Subsidiaries
THY Aydin Çıldır Airport Management Inc. THY Aydin Çıldır Airport Management Inc. was established in 2012 as a wholly-owned subsidiary of Turkish Airlines to operate Aydin Çıldır Airport, which is intended primarily for aviation training activities within the Turkish Airlines Flight Training Academy, to organize sports-training flights and to conduct activities related to the transportation of passengers with aircraft types appropriate to prevailing runway length. Vergi İade Aracılık A.Ş. Vergi İade Aracılık A.Ş. is a joint venture of VK Holding, Maslak Otomotiv and Turkish Airlines holding stakes of 25.0%, 45.0% and 30.0%, respectively. Vergi İade Aracılık A.Ş. was formed in 2014 in order to carry out brokerage operations of value added tax return regarding the goods bought in Turkey by nonresidents. Governmental, Legal and Regulatory Matters Overview The air transportation industry has historically been, and continues to be, subject to significant governmental regulation both internationally and domestically. As an airline licensed by Turkey, Turkish Airlines is subject to the regulatory framework in Turkey along with international regulations to which Turkey is a party including, to a certain extent, U.S. and EU regulations. The regulatory system for international air transportation is based upon the general principle that every state has sovereignty over its air space. As a consequence, international air transport rights are based primarily on traffic rights granted by individual states to other states in bilateral and multilateral air traffic agreements. Turkey is party to a number of multilateral treaties, including the Chicago Convention of 1944 (Convention on International Civil Aviation), as amended (the “Chicago Convention”), the Rome Protocol of 1952, the New York Protocol of 1971 and the Vienna Protocol of 1971, the Paris Agreement of 1956 (the Multilateral Agreement on Commercial Rights of Non-Scheduled Services in Europe), the Eurocontrol Convention of 1960 (Eurocontrol International Convention relating to Cooperation for the Safety of Air Navigation), the Tokyo Convention of 1963 (Convention on Offences and Certain Other Acts Committed on Board Aircraft), the Hague Convention of 1970 (Convention for Suppression of Unlawful Seizure of Aircraft) including additional protocols thereto, the Montreal Convention of 1971 (Convention for the Suppression of Unlawful Acts against Safety of Civil Aviation) and the Warsaw Convention of 1929 (Convention for the Unification of Certain Rules Relating to the International Carriage by Air), as amended by the Hague Protocol of 1955 and the Montreal Protocol No. 4 of 1975. More recently, Turkey became a signatory to the Montreal Convention of 1999 (Convention for the Unification of Certain Rules for International Carriage by Air), the ratification of which became effective on 26 March 2011.
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Turkey is also the founding member of the International Civil Aviation Organisation (“ICAO”), an agency of the United Nations, and a member of most of the other main international aviation organizations that are responsible for setting industry standards, including the European Civil Aviation Conference and its associated body the Joint Aviation Authorities Training Organisation, and Eurocontrol, which is an autonomous European organization responsible for, among other things, the safety of air navigation and the collection of route charges for en route air navigation facilities and services throughout Europe. The Civil Aviation Authority further cooperates with EASA, the agency of the EU which has been given specific regulatory and executive tasks in the field of civilian aviation safety, based on the working agreement dated 14 December 2006, on the collection and exchange of information on the safety of aircraft using European Community airports and airports of Turkey. EASA has taken over many of their functions in the interest of aviation standardisation across the EU, which is also applied to non-EU aircraft used in the EU. Turkey has also ratified the Cape Town Treaty, which came into force in Turkey on 1 December 2011, and, effective as 20 October 2014, Turkey has been added to the OECD List of Countries whose airlines are eligible for the Cape Town Treaty discount. As of the date of this offering memorandum, Turkey has signed bilateral air traffic agreements with 160 countries. The single-designated agreements authorize only one airline from each state-party to use the other party’s aviation gateways and operate on the designated route, while multiple-designated agreements allow for more than one airline from each state-party to benefit from the traffic rights being made available. All bilateral air traffic agreements carry their own particular conditions such as capacity and frequency limitations, providing permission for traffic rights only to and from specified airports or cities. Turkey has an “open skies” agreement with the United States. “Open skies” is an international movement aimed at liberalising rules and regulations applicable to the international commercial aviation industry, aiming for a competition-based international aviation system with minimum governmental interference. This air transport agreement between Turkey and the United States entered into effect in 2000 and provides for, among other things, the fair and equal treatment of air carriers from the respective state-party to compete in providing international commercial aviation services, right to fly across territory without frequency or designated air carrier restrictions, limitation on governmental interference on pricing, ability for the air carriers to provide their own ground-handling services or their own offices and direct sales mechanisms within the territory of the respective state-party, and non-discriminatory payment obligations such as user charges. Finally, Turkish Airlines has been a member of IATA since 1956. IATA membership, although not required for air carriers to operate, is open to both scheduled and non-scheduled air carriers. IATA is the prime vehicle for inter-airline cooperation in promoting safe, secure and economical air transportation services for the benefit of consumers and travellers. IATA also identifies and develops operational solutions for all areas affecting aircraft and airlines, either aloft or aground. Domestic and International Aviation Regulations The Turkish aviation sector is principally regulated by the Civil Aviation Authority, an independent administrative authority with its own budget operating under the supervision of the Ministry of Transportation. The principal laws regulating the Turkish aviation industry are the Civil Aviation Law (No. 2920) of 1983, Decree on the Organisation and Duties of the Ministry of Transportation, Maritime Affairs and Communication (No. 665) of 2011 and Law on the Organisation and Duties of the Civil Aviation Authority (No. 5431) of 2005. In addition, the Civil Aviation Authority promulgates rules, regulations, instructions and directives that regulate the civil aviation sector under the authority granted by this primary legislation. The DHMI, which was established as a commercial public enterprise under the auspices of the Ministry of Transportation based on the provisions of the Decree Law on Public Commercial Entities (Decree Law No. 233), is the other main entity in Turkey that is actively involved in the regulation of air traffic and several other aviation related services. According to its founding charter, DHMI is vested with the duty and the authority of operating airports as well as regulating and controlling air traffic within the borders of Turkey.
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The main responsibility of the Civil Aviation Authority is to implement policies that are established by the Ministry of Transportation and the standards that are set by the international aviation organizations by determining principles, rules and standards to regulate the operations of Turkish air carriers, especially on matters relating to air safety, aircraft certification, personnel licensing and training, maintenance, manufacture, repair, airworthiness, operation of aircraft and ground services. The Civil Aviation Authority also has a supervisory role over the operations of Turkish air carriers. Airports in Turkey that are open to international commercial flights are operated by the DHMI (or jointly operated together with the Turkish military), with certain exceptions, including Sabiha Gökçen Airport in Istanbul, which is owned by Turkish Undersecretariat of Defence Industries, administered by Havaalani İşletme Ve Havacilik Endüstrileri A.Ş. (“HEAS”) and operated by İstanbul Sabiha Gökçen Havalimanı Yapım Yatırım ve İşletim A.Ş (“IGS”), a private company, in accordance with a build operate transfer agreement executed between HEAS and IGS. As of 28 February 2015, according to the Civil Aviation Authority, a total of 13 air carriers are licensed by the Civil Aviation Authority to operate in Turkey, ten of which are licensed for scheduled and unscheduled passenger and cargo flights, while three air carriers are licensed for cargo flights only. Regulation of Turkish Air Carriers To operate in Turkey air carriers are required to hold an air operator certificate attesting to their operational and technical competence to conduct airline services with specified types of aircraft. The duties of and the minimum compliance requirements applicable to Turkish air carriers, as well as the conditions for obtaining and maintaining the air operator certificate, are mainly regulated by the Civil Aviation Law and the Regulation on Commercial Air Transport Operators (“SHY-6A”). Turkish air carriers are subject to a number of organizational and operational requirements imposed by the SHY-6A. More than half of the capital of an air carrier entity must be owned by Turkish shareholders, while Turkish citizens must also make-up the majority of the members of the board of directors of such an entity. A majority of the publicly traded companies’ non-public shares must also be owned by Turkish shareholders, if the company in question is publicly traded. Turkish air carriers that maintain aircraft with seats of 100 or more have to maintain a minimum number of aircraft registered with the Turkish aircraft registry in their fleet and also to comply with the minimum paid-in capital requirements stipulated by the SHY-6A. The Civil Aviation Authority has been vested with a broad authority to amend, temporarily suspend or cancel an air operator certificate or to ground flight operations with respect to an air carrier entity in the event of violation of a number of obligations set forth in SHY-6A. There has been no such amendment, suspension or cancellation of the air operator certificate or flight operations of Turkish Airlines as of the date of this offering memorandum. Ownership and Registration of Aircraft The Turkish aircraft registry is established and maintained by the Civil Aviation Authority, pursuant to the provisions of the Civil Aviation Law. The registry holds information on the aircraft manufacturer and model, the owner, operator of the aircraft and the Turkish registration mark assigned to the aircraft. Registration of ownership, other rights in rem including mortgage and lease agreements relating to an aircraft are necessary for the effect of such title or right to be binding on third parties. Only Turkish civil aircraft can be registered with the Turkish aircraft registry, provided that the aircraft is not registered in another country and maintains a valid airworthiness certificate issued by the Turkish authorities. The registration of any aircraft may be cancelled if it is determined that the aircraft is not in compliance with the requirements for registration and, in particular, if the aircraft fails to qualify as a Turkish civil aircraft with respect to the applicable ownership requirements of the Civil Aviation Law. 85
Additionally, an “International Registry” system is introduced by the Cape Town Convention where international interests on aircraft such as mortgages or liens are registered. Turkish Airlines is a transactional user entity under Cape Town Convention which authorizes a professional user entity in order to register such international interests to the International Registry. Traffic Rights Domestic traffic rights are regulated by the Civil Aviation Authority in accordance with the Civil Aviation Law, while international traffic rights are regulated in compliance with the Chicago Convention in addition to two and five freedom acts and bilateral air traffic agreement between the countries. Slot Allocation In Turkey, domestic aircraft slot allocation policies are regulated by the Civil Aviation Law and the DHMI Slot Instruction (the “Slot Instruction”). The Slot Instruction takes the EU Slot Regulation 95/93 (as amended from time to time) and the IATA rules and standards as reference and authorizes DHMI as the slot coordinator. Principles set out by IATA, ICAO and EU regulations govern international and EU slot allocation. Airport Charges and Other Regulatory Charges At state-owned airports in Turkey, overflight charges, landing, parking and similar fees are determined in Turkey by DHMI. Pursuant to the Civil Aviation Law, airport terminal charges are charged to customers in return for services rendered at the airport and the use of the airport facilities are determined in tariffs to be approved by the Ministry of Transportation, which must be in compliance with the provisions of the Chicago Convention. All other charges, such as licensing and certification, are determined by the Civil Aviation Authority. Air carriers have the right to determine their airfares without prior regulatory approval. Charges related to international overflights generally within the European continent are governed by Eurocontrol rules. Air carriers are primarily responsible for the payment to Eurocontrol of charges incurred in relation to their aircraft. Environmental Compliance Air carriers are subject to various laws and regulations relating to the protection of the environment, including the disposal of materials, chemical substances and aircraft noise. These laws and regulations are enforced by various governmental authorities, each of which may impose administrative sanctions in case of violation, in addition to any eventual criminal or civil liabilities. The Turkish aviation sector was included in the scope of EU Emission Trading System beginning in 2012. However, in November 2012, the European Commission submitted a proposal deferring application of the scheme to flights operated to and from countries outside the EU Emission Trading System until after the ICAO General Assembly in the fall of 2013 with the goal of allowing more time for a global agreement addressing aviation emissions to be reached. The scheme continues to apply to all flights within and between the 31 European countries where the EU Emission Trading System is currently being operated. The EU Emission Trading System, which applies mainly to energy producers, is a cap-and-trade system for carbon-monoxide (“CO”) emissions to encourage industries to improve their CO efficiency. Under the legislation, airlines are granted initial CO allowances based on historical “revenue ton kilometers” and a CO efficiency benchmark. Any shortage of allowances has to be purchased in the open market or at government auctions. As of the date of this offering memorandum, the EU Emission Trading System is not operated in Turkey.
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Safety and Security Safety and security issues such as licensing, approved maintenance training and reporting are regulated under the Civil Aviation Law and through a number of regulations such as the SHY-6A and the Regulation on Reporting and Assessment of Air Traffic Management Related Safety Occurrence. On the international and EU level, principles set out in ICAO, EASA and IATA Operational Safety Unit (“IOSA”) regulations govern safety matters. Liability of Airlines Pursuant to the Civil Aviation Law, air carriers must procure and maintain legal liability insurance to cover risks associated with domestic and international passenger and cargo carriage, and third-party liability insurance to cover risks associated with damages which may be incurred by third parties due to the operations of the air carrier. The minimum risk coverage and applicable limits are set forth in detail under the relevant regulations published by the Ministry of Transportation. In addition, the Regulation on Passengers’ Rights published on 3 December 2011 sets forth common rules on compensation and assistance to passengers in the event of denied boarding and of cancellation or long delay of flights in line with the Regulation (EC) No 261/2004 of the European Parliament and of the Council of 11 February 2004. Legal and Arbitration Proceedings Turkish Airlines is currently not involved in any litigation, arbitration or other administrative proceedings which, if decided against it, would individually or in the aggregate have a material adverse effect on its business, results of operations or financial condition.
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INDUSTRY OVERVIEW Introduction The airline industry in Europe is predominantly comprised of network carriers and point-to-point carriers. Point-to-point carriers typically offer direct services between short haul destinations within Europe and surrounding countries with one class of cabin service. Point-to-point carriers have grown rapidly following deregulation in the 1990’s, which removed national regulatory requirements and created a “single market” for airlines within Europe. The business models of many point-to-point carriers use some of the “low-cost” principles of airlines such as Southwest Airlines in the U.S. In Turkey, an example of this operational business model is Pegasus Airlines. Network carriers channel traffic through a single hub or a small number of hubs which provide the maximum number of opportunities for passengers to make connections between both short haul and long haul intercontinental destinations. By consolidating traffic flows, network carriers are able to offer passengers more destinations (long haul destinations in particular) than would be economically feasible on a purely point-to-point basis. The business models employed by point-to-point carriers are less applicable to long haul markets given various operational and consumer differences. Turkish Airlines, Emirates, Iberia, Lufthansa, American Airways and United are all examples of network carriers. Center of global aviation is shifting towards Turkey The center of global aviation—defined as the gravitational center of world airports and calculated by weighting each airport according to the number of passengers who fly through such airport—has been moving from west to east as the demand for air travel has grown faster in Asia, the Middle East and Africa compared to the West over the last decade. According to most industry studies (including Boeing Current Market Outlook, Airbus Global Market Forecast and IATA Passenger Forecast), the growth in these markets will continue to be higher than the world average for the next twenty years, which should continue to move the center of aviation towards Istanbul. Currently more than 80.0% of global international passengers are carried by European, Asian and Middle Eastern airlines and Turkish Airlines is well positioned both geographically and through its extensive flight network to capture this shift in traffic and to increase its global market share. Turkish Airlines has established itself as a formidable competitor in a geographic region that boasts many of the world’s leading airlines with the world’s largest flight network served from a single hub, Atatürk Airport, with 219 international destinations as of 28 February 2015. See “Business—Turkish Airlines’ Competitive Strengths”. The following graphic illustrates the shift in the global “center” of aviation over the last 40 years, as well as the anticipated continuation of that shift over the next 15 years.
2014 World Aviation Market Size: 751 Billion USD Europe 48.9% Asia 23.7% N.America 9.4%
M.East 10.1% S.America 4.4%
Africa 3.6%
Turkish Airlines’ Transfer Revenue: 4.7 Billion USD Percentage of international scheduled passengers carried by airlines domiciled in these regions, IATA WATS 58th Edition (2014). Source: Airbus Global Market Forecast (2014-2033), Boeing Current Market Outlook (2014-2033), IATA Airline Industry Economic Performance (December 2014), Turkish Airlines data. 88
Turkish aviation market growth to continue Turkey has seen strong passenger growth in both domestic and international markets over the past six years and remains an underpenetrated aviation market compared to most European countries with only 1.6 passengers/population, compared to the European average of 2.6 passengers/population. Turkish Airlines 2014 Market Share in Turkey Domestic: 53%
International: 40%
Total: 44%
165 152 139 123 111
106
98
98
88
90
77
80 73
65
44
52
59
66
21
25
29
32
2009
2010
2011
2012
38 2013 Domestic
43
49
54
59
2014
2015E
2016E
2017E
International
Source: State Airports Authority Website (DHMI) (DHMI double counts domestic passenger numbers and the above numbers have been adjusted for that).
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Turkey and Istanbul’s potential Turkey, and particularly Istanbul, is fast becoming one of the most visited destinations in the world and will continue to grow given its strategic central location in the heart of Europe. In 2014, Turkey was sixth on the list of the top ten tourism destinations in the world and seventh on the list of the top ten destination cities by international overnight visitors. Furthermore, Istanbul ranked first for air travel connectivity changes from 2009 to 2014, ahead of Hong Kong and Dubai. Top 10 Air Travel Cities in Europe
Global Top 10 Destination Cities by International Overnight Visitors
2014 Visitors (mn)
Air Travel Connectivity Changes 2009-2014 Increase in Index Value of Air Travel
Countries
2014 Visitors (mn)
1. London
147
1. London
18.7
1. Istanbul
24.5
2. Paris
97
2. Bangkok
16.4
2. Hong Kong
19.2
3. Istanbul
80
3. Paris
15.6
3. Dubai
15.7
4. Moscow
77
4. Singapore
12.5
4. Moscow
14.4
5. Frankfurt
60
5. Dubai
12.0
5. Singapore
14.3
6. Amsterdam
55
6. New York
11.8
6. Kuala Lumpur
13.2
7. Rome
43
7. Istanbul
11.6
7. Bangkok
12.8
8. Madrid
42
8. Kuala Lumpur
10.8
8. Seoul
11.1
9. Munich
40
9. Hong Kong
8.8
9. Shanghai
10.9
10. Barcelona
38
10. Seoul
8.6
10. Abu Dhabi
8.7
Cities
Cities
Source: European Airport Traffic Trends (anna.aero), Master Card Global Destination Cities Index (2014).
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From 2003 to 2014, Istanbul showed the fastest growth of any air travel city in Europe—above that of London, Paris, Moscow, and Dubai—a trend that should continue with the addition of Istanbul’s new third airport. In 2014, Istanbul ranked as the third largest air travel city in Europe driven largely by passenger growth at Atatürk Airport. Atatürk Airport is on the European side of the city, and was the fastest growing major airport in 2012 and the fourth largest airport in Europe in 2013 and 2014. Ataturk Airport was the 4th largest airport in Europe in 2014 (Passenger Traffic in PAX mn)
European and Middle Eastern Airport Expansion Plans (Passenger Traffic in PAX mn)
London Heathrow
73.4
Paris CDG
73.4
London Heathrow
98.0 70.5
Dubai International
63.8
90.0 57.0
Istanbul International Frankfurt Main
90.0
59.6 63.8
Paris CDG Istanbul Ataturk
82.0
57.0 59.6
Frankfurt Main Amsterdam
78.0
55.0 41.8
Madrid Barajas Madrid Barajas
70.0
41.8 55.0
Amsterdam Schiphol Munich
65.0
39.7
37.6
Barcelona El Prat Rome Fiumicino
55.0
38.5
33.0
Moscow Domodedovo
London Gatwick
Barcelona El Prat
38.1
Doha International*
37.6
Munich
Source: Airport annual reports, European Airport Traffic Trends.
55.0 23.3 50.0
2014 PAX (m) 2021 Planned Terminal Capacity (m)
39.7 50.0
*2013 Results: Other airports’ 2014 traffic results. Source: Airport annual reports, European Airport Traffic Trends, Citi Equity Research Reports.
Airport expansion in the Middle East and Europe Upon the completion of the new Istanbul Airport, the first phase of which is expected to be completed by the end of 2017, Istanbul is expected to continue gaining market share from the major European hubs and Middle Eastern airports and to become one of the leading geographical aviation hubs. The new airport is envisioned to be the largest in the world, occupying an area of 77km2 and handling up to 150 million passengers per year with six runways.
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DIRECTORS Turkish Airlines’ Board of Directors generally consists of nine members, three of whom are independent board members. On 10 February 2014, one of the board members, Naci Ağbal, resigned from his post and has not yet been replaced. Consequently, since that date, the Turkish Airlines’ Board of Directors has been comprised of eight board members. The name and principal occupation of each member of Turkish Airlines’ Board of Directors are as set forth below. Such individuals have served as its directors since the dates set forth opposite their respective names. The address of each member of Turkish Airlines’ Board of Directors is at the registered office of Turkish Airlines. To the best of their knowledge, there are no potential conflicts of interest between any duties of any member of Turkish Airlines’ Board of Directors to Turkish Airlines with respect to this transaction and their private interests and/or other duties. Name and Title
Principal Occupation
Director Since
Hamdi Topçu Chairman of the Board and Chairman of the Executive Committee
Financial Adviser
1 April 2003
Mecit Eş, Prof. Deputy Chairman of the Board, Member of the Executive Committee
Finance Professor
29 March 2013
Aeronautics Engineer
26 April 2005
İsmail Gerçek
Economist
8 April 2011
Muzaffer Akpinar
Economist
24 April 2007
Mehmet Büyükekşi
Architect
1 April 2003
Ilker Aycı
Economist
4 April 2014
Lawyer
4 April 2014
Temel Kotil, Assoc. Prof. Chief Executive Officer, Board Member and Member of the Executive Committee
Arzu Akalın
Each director has a business address at: Türk Hava Yolları A.O., Turkish Airlines General Management Building, Atatürk Hava Limanı Yeşilköy 34149, Istanbul, Turkey. A short biography of each member of Turkish Airlines’ Board of Directors is set out below, including their principal appointments outside Turkish Airlines. Hamdi Topçu, Chairman of the Board and Chairman of the Executive Committee Mr. Topçu was born in Çayeli, Rize in 1964. In 1986, he graduated from Marmara University, receiving a degree in Economics and Administrative Sciences. He is a certified financial advisor. Mr. Topçu retains his positions on the Turkish Football Federation Auditing Committee and as Chairman of the Board of Directors of Turkish Airlines’ following subsidiaries: THY Turkish Technic, THY Do&Co Catering Services, TGS Ground Services, THY Opet Aviation Fuels and HABOM Aviation Maintenance Repair and Modification Centre, THY Aydın Çıldır Airport Management and Vergi İade Aracılık A.Ş. 92
Mecit Eş, Prof., Deputy Chairman of the Board Prof. Dr Eş was born in 1953 in Samsun and received his degree from the Istanbul University School of Economics in 1974. Having held several offices, he commenced his academic projects and received his Doctorate from Anadolu University in 1985. He became an Associate Professor in 1990 and a Professor in 1986. From 1992 to 2012, Prof. Dr Eş worked at Dumlupınar University and he now continues his academic studies as a Professor of the Academy of Commercial Sciences at Istanbul Commerce University. Mr. Eş has published many books and articles. Temel Kotil, Assoc. Prof., General Manager, Board Member and Member of the Executive Committee Mr. Kotil was born in Rize in 1959. In 1983 he graduated from the Aeronautical Engineering Department at İstanbul Technical University (“ITU”). In 1986 he received his first Master’s degree in the United States from the Aircraft Engineering Department of Michigan University in Ann Arbor, Michigan, followed, in 1987, by his second Master’s degree in Mechanical Engineering and, in 1991, by his Doctorate in Mechanical Engineering. From 1991 to 1993 Mr. Kotil established and managed the Aviation and Advanced Composite Laboratories of ITU’s Faculty of Aeronautics and Astronautics, where he also served as Assistant Professor and Associate Professor. From 1993 to 1994 he served as Department Faculty Vice President and as Faculty Assistant Dean. Mr. Kotil also served as Head of the Research, Planning and Coordination Department of the Istanbul Metropolitan Municipality. He then served as a guest professor at Illinois University, and then as Department Head at the Research and Engineering Department of AIT Inc. New York. In 2003 he began his career with Turkish Airlines as Vice President of the Technical Department and, in 2005, Mr. Kotil was appointed General Manager of Turkish Airlines. In 2006, he was elected as a member of the IATA Board of Directors and, in 2010, he was appointed as a Board Member of the Association of European Airlines and, in 2012, as Vice President. In 2014, Mr. Kotil was appointed as Chairman of the Association of European Airlines. In addition, Mr. Kotil has authored many articles and publications throughout his academic and professional career. İsmail Gerçek, Member of the Board Born in Çan, Çanakkale in 1963, Mr. Gerçek graduated from the Public Administration Department of the Ankara University Faculty of Political Sciences in 1985. He received his Master’s degree in Economics in the United States from Northeastern University in 1994. His career began in the position of assistant inspector at the Ministry of Finance Review Committee in the same year. Until 1998 Mr. Gerçek worked as a finance inspector and finance inspector general and, from 1995 to 1997, he was deputy assistant District Treasurer in Istanbul and has pursued his career as a chartered accountant since 1998. He is an independent Board Member at Turkish Airlines and a Member of the Audit Committee at Joint Funds Bank Inc., a Member of the Board of Trustees at Fatih Sultan Mehmet Foundation University and an Auditor at the Participation Banks Association of Turkey. Muzaffer Akpinar, Independent Member of the Board Born in 1962, Mr. Akpinar graduated from Saint-Michel French High School and the Bosphorus University Department of Management Science. His professional career commenced in 1986 when he became the founding shareholder of Penta Textile. In 1993 he was appointed CEO of KVK Mobil Telefon Hizmetleri A.Ş. Subsequently, Mr. Akpınar served as the CEO of MV Holding A.Ş. and played an active role in the creation of Fintur Holding BV. Between the years of 2002 and 2006 Mr. Akpınar served as the CEO of Turkcell. He is an independent Board Member of Turkish Airlines and serves as Chairman of the Board at Dost Energy, as Vice Chairman of the Board of MV Holding, as Chairman of the Board at Portmobil and as a Member of the Board of Kimya Teknik. He remains an entrepreneur and investor in the fields of renewable energy, technology, chemicals and construction.
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Mehmet Büyükekşi, Member of the Board Born in Gaziantep in 1961, Mr. Büyükekşi graduated from the Faculty of Architecture at Yıldız Technical University in 1984. He attended Business Administration courses at the Marmara University and Business Administration and English courses in the UK. In addition to being a Board Member of Turkish Airlines, Mr. Büyükekşi is the President of the Turkish Exporters’ Assembly, a member of the Board of Directors of Türk Eximbank, the İstanbul Chamber of Industry, the İstanbul Development Agency, the İstanbul Leather and Leather Products Exporters’ Association (“İDMİB”) and the Energy Efficiency Association, and is the General Coordinator of Ziylan Group. Mr. Büyükekşi has been a board member at the Turkish Leather Foundation, Organized Industrial Zones and Technology Development Regions, International Commerce Center Inc. and Turkish Do&Co. He was the president of the Turkish Association of Footwear Manufacturers, Chairman of İDMİB, as well as the Founding Chairman of the Turkish Footwear Industry Research Development and Education Foundation from 1997 to 2008. Ilker Aycı, Independent Member of the Board Born in Istanbul in 1971, Mr. Aycı graduated from the Department of Political Science and Public Administration at Bilkent University. He served as a researcher in the Department of Political Sciences at Leeds University and in 1997 Mr. Aycı received his masters degree in International Relations (English) at Marmara University. Starting his career in 1994, he was assigned several positions in Kurtsan İlaçlar A.Ş., İstanbul Metropolitan Municipality, Universal Dış Ticaret A.Ş., respectively, and then he served as a general manager in Başak Sigorta A.Ş. between 2005-2006 and in Güneş Sigorta A.Ş. between 2006-2011. In January 2011, Mr. Aycı began to serve as the Chairman of The Republic of Turkey Investment Support and Promotion Agency. In February 2013 he was appointed as the Vice President of World Association of Investment Promotion Agencies (WAIPA) and in January 2014, the Chairman of WAIPA. Mr. Aycı also serves as a board member and the Chairman of Insurance Association of Turkey, a board member of the Foreign Economic Relations Board - Turkey China Business Council, a board member of the Vakıf Emeklilik A.Ş. and VakıfBank Güneş Sigorta Sports Club (Champion of 2008 Europe Challange Cup). Arzu Akalın, Independent Member of the Board Ms. Arzu Akalın was born in Germany in 1973. Completing part of her education in Germany, she graduated from İstanbul University Faculty of Law in 1995. She is specialized in patent rights in commercial law. After working in the field of brand and patent law in a private company for 11 years, she set up her own law office in 2010. She is a trademark/patent attorney and also has native fluency in German. She is currently studying for a PhD degree in law in Germany. Corporate Governance Turkish Airlines complies with the Corporate Governance Communique and is committed to performing its business with the full embracement of the corporate governance principles of transparency, justice, responsibility and accountability. A Corporate Governance Compliance Report is prepared annually and published on its investor relations website and is also included in its Annual Reports. Turkish Airlines’ Board of Directors consists of eight individuals, three of which are independent board members. There are three committees formed within the structure of the Board, namely the Financial Audit Committee, Corporate Management Committee and Early Identification of Risks Committee, all of which are chaired by independent Board members. A Public Disclosure Policy (also available on its investor relations website: investor.turkishairlines.com) has been established by the Board of Directors with the aim of providing all stakeholders including shareholders, investors, analysts, employees and customers with punctual, accurate, complete, comprehensible and easily accessible information. A risk management strategy is implemented to control potential risks inherent in the airline industry, which is prone to fierce competition and to ensure sustainable growth. As of 2013, along with all listed BIST companies, Turkish Airlines started using the e-General Assembly (e-GEM) system which allows shareholders, delegates, intermediary institutions and all stakeholders to attend the General Meeting online via a video webcast using their own personal electronic signatures, send their comments and overall be informed of all processes instantly. 94
Turkish Airlines was awarded the “Best Corporate Governance-Airlines-Europe-2015” award by Ethical Boardroom. The award recognizes the outstanding leadership from boards of public companies who have raised the bar to ensure that strong corporate governance plays an essential part in protecting and enhancing long-term value for all stakeholders. A short description of each committee of Turkish Airlines’ is set out below: Executive Committee The Executive Committee reports directly to the Board of Directors. All executive decisions within Turkish Airlines, both strategic and operational, are made at the Executive Committee level and then presented to the Board of Directors for approval. Corporate Management Committee The Corporate Management Committee reports directly to the Board of Directors. It supports and helps the Board of Directors with practices in the following areas: Turkish Airlines’ compliance with internationally approved corporate management principles, determining members of the Board of Directors and senior managers, evaluation of wages, awards and performance, and career planning, as well as investor relations and public disclosure matters. The Corporate Management Committee reviews the systems and processes that have been formed and those that will be formed for performance increasing management practices, evaluates those systems and processes and then makes recommendations to the Board of Directors. Financial Audit Committee The Financial Audit Committee reports directly to the Board of Directors. It supports and assists the Board of Directors in the following areas: The compliance of Turkish Airlines’ practices with national and international codes and legislation, improving work processes through audit and coordinating work on information transparency. The Financial Audit Committee is responsible for taking all precautions necessary for any kind of internal and external audit to be executed in a sufficient and transparent manner and to carry out the duties, subject to Capital Markets Board legislation. Financial Audit Committee members are selected from among the independent board members. Early Identification of Risks Committee The Early Identification of Risks Committee reports directly to the Board of Directors in the following areas: identification of strategic, operational, financial and other potential risks. The committee is responsible for calculating the likelihood of occurrence of any kind of risks and their possible effects on Turkish Airlines. Additionally, the Early Identification of Risks Committee ensures that Turkish Airlines is taking all precautions necessary to prevent risks, and provides recommendations and suggestions to the Board of Directors.
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MANAGEMENT Turkish Airlines’ Board of Directors may from time to time appoint one or more of Turkish Airlines’ officers. The name and position held with Turkish Airlines of each of the officers involved in the management of Turkish Airlines are, as of the date hereof, as set forth below. Name
Position with Turkish Airlines
Executive Officer Since
Temel Kotil, Assoc. Prof.
Chief Executive Officer
27 April 2005
Coşkun Kılıç
Chief Financial Officer
8 March 2006
Ahmet Olmuştur
Chief Marketing Officer
28 May 2014
Asaf Ahmed Bora
Chief Flight Operations Officer
4 May 2009
Ahmet Bolat, Ph.D.
Chief Investment Officer
23 January 2012
Mehmet Akif Konar
Chief Commercial Officer
16 April 2013
Ömer Faruk Öztürk
Chief Human Resources Officer
22 July 2013
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RELATED PARTY TRANSACTIONS In the ordinary course of Turkish Airlines’ business, it has engaged, and will continue to engage, in transactions with related parties. Related parties include companies where Turkish Airlines’ controlling shareholder has significant influence (but not necessarily control) or control. In addition, related parties include members of Turkish Airlines’ Board of Directors and executive team and companies that are under common control, jointly owned or significantly influenced by a member of the Board of Directors. Turkish Airlines did not engage in any transaction with members of its Board of Directors or members of its executive team during any of the years ended 31 December 2014, 2013 or 2012. The following is a description of certain material transactions between Turkish Airlines and related parties for the year ended 31 December 2014, 2013 and 2012. See also the notes to Turkish Airlines’ 2014 Financial Statements. Years ended 31 December U.S. Dollar millions
2014
Sales
2013
2012
102
75
39
Purchases
3,312
2,879
1,200
Total
3,414
2,954
1,239
Amounts owed to Turkish Airlines
3
2
11
Amounts owed by Turkish Airlines
148
176
121
Transactions with subsidiaries are carried out on an arm’s length basis. Outstanding balances that relate to trading balances are placed on intercompany accounts with no specified credit period. For information on Turkish Airline’s subsidiaries, see “Business—Subsidiaries”. For information on assets relating to commercial transactions with related parties, see the notes to Turkish Airlines’ 2014 Financial Statements.
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DESCRIPTION OF THE CERTIFICATES The following summary describes the material terms of the Certificates. The summary does not purport to be complete and makes use of terms defined in, and is qualified in its entirety by reference to, all of the provisions of the Basic Agreement, the Certificates, the Trust Supplement, the Deposit Agreement, the Escrow Agreement, the Intercreditor Agreement and the trust supplement applicable to the Successor Trust. Except as otherwise indicated, the following summary relates to the Trust and the Certificates issued by the Trust. General Each Class A Pass Through Certificate (collectively, the “Class A Certificates” or the “Certificates”) will represent a fractional undivided interest in the Bosphorus Pass Through Trust 2015-1A (the “Class A Trust” or the “Trust”). The Trust was formed pursuant to the pass through trust agreement on 26 March 2015 between the Issuer and Wilmington Trust Company, as trustee (the “Class A Trustee” or the “Trustee”) (the “Basic Agreement”), and a separate supplement thereto dated 26 March 2015 (the “Trust Supplement” and, together with the Basic Agreement, collectively, the “Pass Through Trust Agreement”) between the Issuer and the Trustee. The Trust is a special purpose vehicle established prior to the closing of this offering. As of the date of this offering memorandum and since the establishment of the Trust, the Trust has not commenced operations. Accordingly, no financial statements have been prepared by the Trust as of the date of this offering memorandum. In addition, there are no governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Trust is aware) since the date of its establishment which may have, or have had in the recent past, significant effects upon the Trust’s financial position or profitability. Each Certificate will represent a fractional undivided interest in the Trust created by the Basic Agreement and the Trust Supplement pursuant to which such Certificate is issued. The Trust Property of the Trust (the “Trust Property”) consists of: 1.
Subject to the Intercreditor Agreement, Equipment Notes acquired under the Note Purchase Agreement and issued by the Issuer in a separate secured loan transaction in connection with the financing of each Aircraft during the Delivery Period and all monies paid on such Equipment Notes and any proceeds from any sale of such Equipment Notes held in the Trust. Equipment Notes held in the Trust will be registered in the name of the Subordination Agent on behalf of the Trust for purposes of giving effect to the provisions of the Intercreditor Agreement.
2.
The rights of the Trust to acquire Equipment Notes under the Note Purchase Agreement.
3.
The rights of the Trust under the Escrow Agreement to request the Escrow Agent to withdraw from the Depositary funds sufficient to enable the Trust to purchase Equipment Notes after the initial issuance date of the Certificates (the “Issuance Date”) during the Delivery Period.
4.
The rights of the Trust under the Intercreditor Agreement (including all monies receivable in respect of such rights).
5.
All monies receivable under the Liquidity Facility.
6.
Funds from time to time deposited with the Trustee in accounts (such as interest and principal payments on the Equipment Notes).
The Certificates will be issued in fully registered form only and will be subject to the provisions described below under “—Book-Entry; Delivery and Form” and “Transfer Restrictions”. The Certificates will be issued only in minimum denominations of U.S.$2,000 or integral multiples of U.S.$1,000 in excess thereof, except that one Certificate may be issued in a different denomination. The Certificates issued by the Original Trust will be governed by Delaware law and the Certificates issued by the Successor Trust will be governed by New York law. 98
The Certificates represent interests in the Trust, and all payments and distributions thereon will be made only from the Trust Property. The Certificates do not represent an interest in or obligation of the Issuer, Turkish Airlines, the Trustee, any Loan Trustee, the Liquidity Provider or any affiliate of any of the foregoing. Pursuant to the Escrow Agreement, the Certificateholders as holders of the Escrow Receipts affixed to each Certificate are entitled to certain rights with respect to the Deposits. Accordingly, any transfer of a Certificate will have the effect of transferring the corresponding rights with respect to the Deposits, and rights with respect to the Deposits may not be separately transferred by holders of the Certificates (the “Certificateholders”). Rights with respect to the Deposits and the Escrow Agreement, except for the right to request withdrawals for the purchase of Equipment Notes, will not constitute Trust Property. Payments and Distributions Payments of interest on the Deposits and payments of principal, premium (if any) and interest on the Equipment Notes or with respect to other Trust Property held in the Trust will be distributed by the Paying Agent (in the case of the Deposits) or by the Trustee (in the case of Trust Property) to Certificateholders on the date receipt of such payment is confirmed, except in the case of certain types of Special Payments. Interest The Deposits and the Equipment Notes will accrue interest at the rate per annum set forth on the cover page of this offering memorandum, payable semi-annually on 15 March and 15 September of each year, commencing on 15 September 2015. Such interest payments will be distributed to Certificateholders on each such date until the final Regular Distribution Date, subject in the case of payments on the Equipment Notes to the Intercreditor Agreement. Interest is calculated on the basis of a 360-day year consisting of twelve 30-day months. Payments of interest applicable to the Certificates will be supported by a Liquidity Facility to be provided by the Liquidity Provider for the benefit of the holders of the Certificates in an aggregate amount sufficient to pay interest thereon at the Stated Interest Rate on up to three successive Regular Distribution Dates (without regard to any future payments of principal on such Certificates), except that the Liquidity Facility will not cover interest payable by the Depositary on the Deposits. The Liquidity Facility does not provide for drawings or payments thereunder to pay for principal of or premium, if any, on the Class A Certificates, any interest on the Class A Certificates in excess of the Stated Interest Rate for the Certificates, or, notwithstanding the subordination provisions of the Intercreditor Agreement, principal of or interest or premium, if any, on the Additional Certificates, if issued. Therefore, only the holders of the Class A Certificates will be entitled to receive and retain the proceeds of drawings under the Liquidity Facility. See “Description of the Liquidity Facility”. The Additional Certificates, if any, will not have the benefit of a liquidity facility. Principal Payments of principal of the Equipment Notes are scheduled to be received semi-annually by the Trustee on 15 March and 15 September in certain years depending upon the terms of the Equipment Notes held in the Trust. Scheduled payments of interest on the Deposits and of interest or principal on the Equipment Notes are herein referred to as “Scheduled Payments”, and 15 March and 15 September of each year, commencing on 15 September 2015 with respect to payments of interest and payments of principal, until the final expected Regular Distribution Date, are herein referred to as “Regular Distribution Dates”. See “Description of the Equipment Notes—Principal and Interest Payments”. The “Final Maturity Date” for the Class A Certificates is 15 September 2028. The Regular Distribution Dates on which scheduled payments of principal and interest on any Additional Certificates, if issued, will commence will be set forth in such Additional Certificates.
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Distributions The Paying Agent, under the Escrow Agreement, will distribute on each Regular Distribution Date to the Certificateholders all Scheduled Payments received in respect of the related Deposits, the receipt of which is confirmed by such Paying Agent on such Regular Distribution Date. The Trustee will distribute, subject to the Intercreditor Agreement, on each Regular Distribution Date to the Certificateholders all Scheduled Payments received in respect of Equipment Notes held on behalf of the Trust, the receipt of which is confirmed by the Trustee on such Regular Distribution Date. Each Certificateholder will be entitled to receive its proportionate share, based upon its fractional interest in the Trust, of any distribution in respect of Scheduled Payments of interest on the Deposits and, subject to the Intercreditor Agreement, of principal or interest on Equipment Notes held on behalf of the Trust. Each such distribution of Scheduled Payments will be made by the Paying Agent or Trustee to the Certificateholders of record on the record date applicable to such Scheduled Payment subject to certain exceptions. If a Scheduled Payment is not received by the Paying Agent or Trustee on a Regular Distribution Date but is received within five days thereafter, it will be distributed on the date received to such holders of record. If it is received after such five-day period, it will be treated as a Special Payment and distributed as described below. Any payment in respect of, or any proceeds of, any Equipment Note or Collateral (as defined in the related Indenture) under any Indenture other than a Scheduled Payment (each, a “Special Payment”) will be distributed on, in the case of an early redemption or a purchase of any Equipment Note, the date of such early redemption or purchase (which shall be a Business Day), and otherwise on the Business Day specified for distribution of such Special Payment pursuant to a notice delivered by the Trustee as soon as practicable after the Trustee has received funds for such Special Payment (each, a “Special Distribution Date”). Any such distribution will be subject to the Intercreditor Agreement. Any unused Deposits to be distributed after the Delivery Period Termination Date or the occurrence of a Triggering Event, together with accrued and unpaid interest thereon (each, also a “Special Payment”), will be distributed on a date 15 days after the Paying Agent has received notice of the event requiring such distribution (also, a “Special Distribution Date”). However, if such date is within 15 days before or after a Regular Distribution Date, such Special Payment shall be made on such Regular Distribution Date. “Triggering Event” means (x) the occurrence of an Indenture Event of Default under all Indentures resulting in a PTC Event of Default, (y) the acceleration of all of the outstanding Equipment Notes or (z) certain bankruptcy or insolvency events involving Turkish Airlines. The Paying Agent, in the case of the Deposits, and the Trustee, in the case of Trust Property, will mail a notice to the Certificateholders stating the scheduled Special Distribution Date, the related record date, the amount of the Special Payment and the reason for the Special Payment. In the case of a redemption or purchase of the Equipment Notes held in the Trust or any distribution of unused Deposits after the Delivery Period Termination Date or the occurrence of a Triggering Event, such notice will be mailed not less than 15 days prior to the date such Special Payment is scheduled to be distributed, and in the case of any other Special Payment, such notice will be mailed as soon as practicable after the Trustee has confirmed that it has received funds for such Special Payment. Each distribution of a Special Payment, other than a final distribution, on a Special Distribution Date will be made by the Paying Agent or Trustee, as the case may be, to the Certificateholders of record on the record date applicable to such Special Payment. See “Description of the Certificates—Indenture Events of Default and Certain Rights Upon an Indenture Event of Default” and “Description of the Equipment Notes—Redemption”. The Pass Through Trust Agreement requires that the Trustee establish and maintain, for the benefit of the Certificateholders, one or more non-interest bearing accounts (the “Certificate Account”) for the deposit of payments representing Scheduled Payments received by the Trustee. The Pass Through Trust Agreement also requires that the Trustee establish and maintain, for the benefit of the Certificateholders, one or more accounts (the “Special Payments Account”) for the deposit of payments representing Special Payments received by the Trustee, which shall be non-interest bearing except in certain circumstances where the Trustee may invest amounts in such account in certain permitted investments. Pursuant to the terms of the Pass Through Trust Agreement, the Trustee is required to deposit any Scheduled Payments received by it in 100
the Certificate Account and to deposit any Special Payments so received by it in the Special Payments Account. All amounts so deposited will be distributed by the Trustee on a Regular Distribution Date or a Special Distribution Date, as appropriate. The Escrow Agreement requires that the Paying Agent establish and maintain, for the benefit of the Receiptholders, one or more accounts (the “Paying Agent Account”), which shall be non-interest bearing. Pursuant to the terms of the Escrow Agreement, the Paying Agent is required to deposit interest on Deposits and any unused Deposits withdrawn by the Escrow Agent in the Paying Agent Account. All amounts so deposited will be distributed by the Paying Agent on a Regular Distribution Date or Special Distribution Date, as appropriate. The final distribution for the Trust will be made only upon presentation and surrender of the Certificates at the office or agency of the Trustee specified in the notice given by the Trustee of such final distribution. The Trustee will mail such notice of the final distribution to the Certificateholders, specifying the date set for such final distribution and the amount of such distribution. See “—Termination of the Trust” below. Distributions in respect of Certificates issued in global form will be made as described in “—Book-Entry; Delivery and Form” below. If any Distribution Date is a Saturday, a Sunday or a day on which commercial banks are required or authorized to close in Istanbul, Turkey, London, England, New York, New York, or, so long as any Class A Certificates are outstanding, the city and state in which the Trustee, the Subordination Agent or any Loan Trustee maintains its Corporate Trust Office or receives and disburses funds (any other day being a “Business Day”), distributions scheduled to be made on such Regular Distribution Date or Special Distribution Date will be made on the next succeeding Business Day without additional interest. Pool Factors The “Pool Balance” for the Trust or for the Certificates issued by the Trust indicates, as of any date, the original aggregate face amount of the Certificates less the aggregate amount of all payments as of such date made in respect of the Certificates or in respect of Deposits other than payments made in respect of interest or premium or reimbursement of any costs or expenses incurred in connection therewith. The Pool Balance for the Trust or for the Certificates issued by the Trust as of any Distribution Date shall be computed after giving effect to any special distribution with respect to unused Deposits, if any, payment of principal of the Equipment Notes or payment with respect to other Trust Property held in the Trust and the distribution thereof to be made on that date. The “Pool Factor” as of any Distribution Date is the quotient (rounded to the seventh decimal place) computed by dividing (i) the Pool Balance by (ii) the original aggregate face amount of the Certificates. The Pool Factor as of any Distribution Date shall be computed after giving effect to any special distribution with respect to unused Deposits, payment of principal of the Equipment Notes or payments with respect to other Trust Property and the distribution thereof to be made on that date. The Pool Factor will be 1.0000000 on the Issuance Date; thereafter, the Pool Factor will decline as described herein to reflect reductions in the Pool Balance. The amount of a Certificateholder’s pro rata share of the Pool Balance can be determined by multiplying the face amount of the holder’s Certificate by the Pool Factor as of the applicable Distribution Date. Notice of the Pool Factor and the Pool Balance will be mailed to Certificateholders on each Distribution Date. The following table sets forth the expected aggregate principal amortization schedule for the Equipment Notes (the “Assumed Amortization Schedule”) and the resulting Pool Factors. The scheduled distribution of principal payments for the Trust would be affected if Equipment Notes with respect to any Aircraft are not acquired by the Trust, if the original principal amount of any Equipment Notes is less than the assumed original principal amount, if any Equipment Notes are redeemed or purchased or if a default in payment on such Equipment Notes occurs. Accordingly, the aggregate principal amortization schedule and the resulting Pool Factors may differ from those set forth in the following table. 101
Regular Distribution Date At Issuance 15 September 2015 15 March 2016 15 September 2016 15 March 2017 15 September 2017 15 March 2018 15 September 2018 15 March 2019 15 September 2019 15 March 2020 15 September 2020 15 March 2021 15 September 2021 15 March 2022 15 September 2022 15 March 2023 15 September 2023 15 March 2024 15 September 2024 15 March 2025 15 September 2025 15 March 2026 15 September 2026 15 March 2027
Scheduled Principal Payments (U.S. Dollars)
Expected Pool Factor
0.00 7,494,571.26 11,704,049.40 11,842,543.38 11,287,188.18 11,394,326.40 11,659,386.54 9,000,000.00 9,000,000.00 9,000,000.00 9,000,000.00 9,000,000.00 9,000,000.00 9,000,000.00 9,000,000.00 9,000,000.00 18,000,000.00 18,000,000.00 18,000,000.00 18,000,000.00 21,000,000.00 21,000,000.00 21,000,000.00 21,000,000.00 25,891,934.84
1.0000000 0.9771698 0.9415165 0.9054413 0.8710579 0.8363481 0.8008308 0.7734147 0.7459986 0.7185824 0.6911663 0.6637502 0.6363341 0.6089180 0.5815018 0.5540857 0.4992535 0.4444212 0.3895890 0.3347567 0.2707858 0.2068148 0.1428439 0.0788729 0.0000000
The Pool Factor and Pool Balance will be recomputed if there has been an early redemption, purchase, or default in the payment of principal or interest in respect of one or more of the Equipment Notes, as described in “—Indenture Events of Default and Certain Rights Upon an Indenture Event of Default” and “Description of the Equipment Notes—Redemption”, the original principal amount of any Equipment Notes is less than the assumed original principal amount or a special distribution has been made attributable to unused Deposits after the Delivery Period Termination Date or the occurrence of a Triggering Event, as described in “Description of the Deposit Agreement”. If the principal payments scheduled for a Regular Distribution Date prior to the Delivery Period Termination Date are changed, notice thereof will be mailed by the Trustee to the Certificateholders by no later than the 15th day prior to such Regular Distribution Date. In the event of (i) any other change in the scheduled repayments from the Assumed Amortization Schedule or (ii) any such redemption, purchase, default or special distribution, the Pool Factor and the Pool Balance will be recomputed after giving effect thereto and notice thereof will be mailed by the Trustee to the Certificateholders promptly after the Delivery Period Termination Date in the case of clause (i) and promptly after the occurrence of any event described in clause (ii). Reports to Certificateholders On each Distribution Date, the Paying Agent and Trustee will include with each distribution by it of a Scheduled Payment or Special Payment to Certificateholders a statement setting forth the following information (per U.S.$1,000 face amount of Certificates, except as to the amounts described in items (a) and (f) below): (a)
The aggregate amount of funds distributed on such Distribution Date under the Pass Through Trust Agreement and under the Escrow Agreement, indicating the amount allocable to each source, including any portion thereof paid by the Liquidity Provider.
(b)
The amount of such distribution under the Pass Through Trust Agreement allocable to principal and the amount allocable to premium (including Make-Whole Amount), if any.
(c)
The amount of such distribution under the Pass Through Trust Agreement allocable to interest.
(d)
The amount of such distribution under the Escrow Agreement allocable to interest. 102
(e)
The amount of such distribution under the Escrow Agreement allocable to unused Deposits, if any.
(f)
The Pool Balance and the Pool Factor for the Trust.
So long as the Certificates are registered in the name of The Depository Trust Company (“DTC”) or its nominee, on the record date prior to each Distribution Date, the Trustee will request that DTC post on its Internet bulletin board a securities position listing setting forth the names of all of its participants (“DTC Participants”) reflected on DTC’s books as holding interests in the Certificates on such record date. On each Distribution Date, the Paying Agent and Trustee will mail to each such DTC Participant the statement described above and will make available additional copies as requested by such DTC Participant for forwarding to Certificateholders. In addition, after the end of each calendar year, the Trustee and Paying Agent will furnish to each Certificateholder at any time during the preceding calendar year a statement containing the sum of the amounts determined pursuant to clauses (a), (b), (c), (d) and (e) above for such calendar year or, in the event such person was a Certificateholder during only a portion of such calendar year, for the applicable portion of such calendar year, and such other items as are readily available to the Trustee and which a Certificateholder shall reasonably request as necessary for the purpose of such Certificateholder’s preparation of its U.S. federal income tax returns. Such statement and such other items shall be prepared on the basis of information supplied to the Trustee by the DTC Participants and shall be delivered by the Trustee to such DTC Participants to be available for forwarding by such DTC Participants to Certificateholders in the manner described above. At such time, if any, as the Certificates are issued in the form of definitive certificates, the Paying Agent and Trustee will prepare and deliver the information described above to each Certificateholder of record as the name and period of ownership of such Certificateholder appears on the records of the registrar of the Certificates. The Trustee is required to provide promptly to Certificateholders all material non-confidential information received by the Trustee from the Issuer or Turkish Airlines, including financial statements of Turkish Airlines. Indenture Events of Default and Certain Rights Upon an Indenture Event of Default Upon the occurrence and continuation of an Indenture Event of Default, the Controlling Party may direct the Subordination Agent, as the holder of Equipment Notes issued under such Indenture, which in turn will direct the Loan Trustee under such Indenture in the exercise of remedies thereunder and may accelerate and sell all (but not less than all) of the Equipment Notes issued under such Indenture or sell the Collateral under such Indenture to any person, subject to certain limitations. See “Description of the Intercreditor Agreement—Intercreditor Rights—Limitation on Exercise of Remedies”. The proceeds of any such sale will be distributed pursuant to the provisions of the Intercreditor Agreement. Any such proceeds so distributed to the Trustee upon any such sale shall be deposited in the applicable Special Payments Account and shall be distributed to the Certificateholders on a Special Distribution Date. The market for Equipment Notes at the time of the existence of an Indenture Event of Default may be very limited and there can be no assurance as to the price at which they could be sold. If any such Equipment Notes are sold for less than their outstanding principal amount, certain Certificateholders will receive a smaller amount of principal distributions under the relevant Indenture than anticipated and will not have any claim for the shortfall against the Issuer, Turkish Airlines, the Liquidity Provider or the Trustee. Any amount, other than Scheduled Payments received on a Regular Distribution Date or within five days thereafter, distributed to the Trustee by the Subordination Agent on account of any Equipment Note or Collateral under any Indenture held in the Trust following an Indenture Event of Default will be deposited in the Special Payments Account and will be distributed to the Certificateholders on a Special Distribution Date. Any funds representing payments received with respect to any defaulted Equipment Notes, or the proceeds from the sale of any Equipment Notes, held by the Trustee in the Special Payments Account will, to the extent practicable, be invested by the Trustee in certain permitted investments pending the distribution of such funds on a Special Distribution Date.
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The Pass Through Trust Agreement provides that the Trustee will, within 90 days after the occurrence of any default known to the Trustee, give to the Certificateholders notice, transmitted by mail, of such uncured or unwaived default with respect to the Trust known to it, provided that, except in the case of default in a payment of principal, premium, if any, or interest on any of the Equipment Notes held in the Trust, the Trustee will be protected in withholding such notice if it in good faith determines that the withholding of such notice is in the interests of such Certificateholders. The term “default” as used in this paragraph only with respect to the Trust means the occurrence of an Indenture Event of Default under any Indenture pursuant to which Equipment Notes held by the Trust were issued, as described above, except that in determining whether any such Indenture Event of Default has occurred, any grace period or notice in connection therewith will be disregarded. The Pass Through Trust Agreement contains a provision entitling the Trustee, subject to the duty of the Trustee during a default to act with the required standard of care, to be offered reasonable security or indemnity by the holders of the Certificates before proceeding to exercise any right or power under the Pass Through Trust Agreement or the Intercreditor Agreement at the request of such Certificateholders. Subject to certain qualifications set forth in the Pass Through Trust Agreement and to the Intercreditor Agreement, the Certificateholders holding Certificates evidencing fractional undivided interests aggregating not less than a majority in interest in the Trust shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or pursuant to the terms of the Intercreditor Agreement, or exercising any trust or power conferred on the Trustee under the Pass Through Trust Agreement or the Intercreditor Agreement, including any right of the Trustee as Controlling Party under the Intercreditor Agreement or as holder of the Equipment Notes. In certain cases, the holders of the Certificates evidencing fractional undivided interests aggregating not less than a majority in interest of the Trust may on behalf of the holders of all the Certificates waive any past “event of default” under the Trust (i.e., an Indenture Event of Default under any Indenture pursuant to which Equipment Notes held by the Trust were issued) and its consequences or, if the Trustee is the Controlling Party, may direct the Trustee to instruct the applicable Loan Trustee to waive any past Indenture Event of Default and its consequences, except (i) a default in the deposit of any Scheduled Payment or Special Payment or in the distribution thereof, (ii) a default in payment of the principal, premium, if any, or interest with respect to any of the Equipment Notes and (iii) a default in respect of any covenant or provision of the Pass Through Trust Agreement that cannot be modified or amended without the consent of each Certificateholder affected thereby. Each Indenture will provide that, with certain exceptions, the holders of the majority in aggregate unpaid principal amount of the Equipment Notes issued thereunder may on behalf of all such holders waive any past default or Indenture Event of Default thereunder. Notwithstanding such provisions of the Indentures, pursuant to the Intercreditor Agreement after the occurrence and during the continuance of an Indenture Event of Default only the Controlling Party will be entitled to waive any such past default or Indenture Event of Default. See “Description of the Intercreditor Agreement—Intercreditor Rights—Controlling Party”. Purchase Rights of Certificateholders If any Additional Certificates have been issued, upon the occurrence and during the continuation of a Certificate Buyout Event, with 15 days’ written notice to the Trustee and each Additional Certificateholder, the holders of any Additional Certificates, if issued, (other than Turkish Airlines, the Issuer or any of their respective affiliates) will have the right to purchase all but not less than all of the Class A Certificates. See “Possible Issuance of Additional Certificates.” The purchase price will be equal to the Pool Balance of the Class A Certificates plus accrued and unpaid interest thereon to the date of purchase, without premium, but including any other amounts then due and payable to the Certificateholders. Such purchase right may be exercised by any holder of Additional Certificates. If prior to the end of the 15-day notice period, any other holder of Additional Certificates notifies the purchasing Certificateholder that the other Certificateholder wants to participate in such purchase, then such other Certificateholder may join with the purchasing Certificateholder to purchase the Certificates pro rata based on the fractional undivided interest in the Trust held by each Certificateholder. 104
If Turkish Airlines or any of its affiliates is a Certificateholder or holder of Additional Certificates, it will not have the purchase rights described above. A “Certificate Buyout Event” means that both a Turkish Airlines Bankruptcy Event has occurred and is continuing and a Lease Event of Default has occurred and is continuing attributable to the non-payment of amounts due, or breach of undertakings, under any Lease. PTC Event of Default A Pass Through Certificate Event of Default (a “PTC Event of Default”) under the Pass Through Trust Agreement means the failure to pay: 1.
The outstanding Pool Balance of the Certificates within ten Business Days of the Final Maturity Date.
2.
Interest due on the Certificates within ten Business Days of any Distribution Date (unless the Subordination Agent shall have made Interest Drawings, or withdrawals from the Cash Collateral Account, with respect thereto in an aggregate amount sufficient to pay such interest and shall have distributed such amount to the Trustee entitled thereto).
Any failure to make expected principal distributions on any Regular Distribution Date (other than the Final Maturity Date) will not constitute a PTC Event of Default. Merger, Consolidation and Transfer of Assets The Issuer will be prohibited from consolidating with or merging into any other person or conveying, transferring or leasing in one or more transactions, all or substantially all of its assets as an entirety to any other person. The Basic Agreement, the Trust Supplement, the Note Purchase Agreement, the Indentures and the Leases will not contain any covenants or provisions that may afford the Trustee or any Certificateholder protection in the event of a highly leveraged transaction, including transactions effected by management or affiliates, which may or may not result in a change in control of Turkish Airlines. Modifications of the Pass Through Trust Agreement and Certain Other Agreements The Pass Through Trust Agreement contains provisions permitting, at Turkish Airlines’ request, the execution of amendments or supplements to the Pass Through Trust Agreement or, if applicable, to the Deposit Agreement, the Escrow Agreement, the Intercreditor Agreement, the Note Purchase Agreement or the Liquidity Facility, without the consent of the holders of any of the Certificates:
To add to Turkish Airlines’ covenants for the benefit of holders of the Certificates or to surrender any right or power conferred upon Turkish Airlines in the Pass Through Trust Agreement, the Intercreditor Agreement, the Note Purchase Agreement or the Liquidity Facility.
To correct or supplement any provision of the Pass Through Trust Agreement, the Deposit Agreement, the Escrow Agreement, the Intercreditor Agreement, the Note Purchase Agreement or the Liquidity Facility which may be defective or inconsistent with any other provision in the Pass Through Trust Agreement, the Deposit Agreement, the Escrow Agreement, the Intercreditor Agreement, the Note Purchase Agreement or the Liquidity Facility, as applicable, or to cure any ambiguity or to modify any other provision with respect to matters or questions arising under the Pass Through Trust Agreement, the Deposit Agreement, the Escrow Agreement, the Intercreditor Agreement, the Note Purchase Agreement or the Liquidity Facility, provided that such action shall not materially adversely affect the interests of the holders of such Certificates; to correct any mistake in the Pass Through Trust Agreement, the Deposit Agreement, the Escrow Agreement, the 105
Intercreditor Agreement, the Note Purchase Agreement or the Liquidity Facility; or, as provided in the Intercreditor Agreement, to give effect to or provide for a Replacement Facility.
To comply with any applicable law, rules or regulations of any exchange or quotation system on which the Certificates are listed, or any regulatory body.
To modify, eliminate or add to the provisions of the Pass Through Trust Agreement, the Deposit Agreement, the Escrow Agreement, the Intercreditor Agreement, the Note Purchase Agreement or the Liquidity Facility to such extent as shall be necessary to continue the qualification of the Pass Through Trust Agreement (including any supplemental agreement) under the United States Trust Indenture Act of 1939, as amended (the “Trust Indenture Act”), or any similar federal statute enacted after the execution of the Pass Through Trust Agreement, and to add to the Pass Through Trust Agreement, the Deposit Agreement, the Escrow Agreement, the Intercreditor Agreement, the Note Purchase Agreement or the Liquidity Facility such other provisions as may be expressly permitted by the Trust Indenture Act.
To evidence and provide for the acceptance of appointment under the Pass Through Trust Agreement, the Deposit Agreement, the Escrow Agreement, the Intercreditor Agreement, the Note Purchase Agreement or the Liquidity Facility by a successor Trustee and to add to or change any of the provisions of the Pass Through Trust Agreement, the Deposit Agreement, the Escrow Agreement, the Intercreditor Agreement, the Note Purchase Agreement or the Liquidity Facility as shall be necessary to provide for or facilitate the administration of the Trust under the Basic Agreement by more than one Trustee.
To provide for the issuance of Additional Certificates on or after the Issuance Date subject to certain terms and conditions. See “Possible Issuance of Additional Certificates”.
In each case, such modification or supplement may not adversely affect the status of the Trust as a grantor trust under Subpart E, Part I of Subchapter J of Chapter 1 of Subtitle A of the Code, for U.S. federal income tax purposes. The Pass Through Trust Agreement also contains provisions permitting the execution, with the consent of the holders of the Certificates evidencing fractional undivided interests aggregating not less than a majority in interest of the Trust, of amendments or supplements adding any provisions to or changing or eliminating any of the provisions of the Pass Through Trust Agreement, the Deposit Agreement, the Escrow Agreement, the Intercreditor Agreement, the Note Purchase Agreement or the Liquidity Facility to the extent applicable to such Certificateholders or of modifying the rights and obligations of such Certificateholders under the Pass Through Trust Agreement, the Deposit Agreement, the Escrow Agreement, the Intercreditor Agreement, the Note Purchase Agreement or the Liquidity Facility. No such amendment or supplement may, without the consent of the holder of each outstanding Certificate so affected thereby:
Reduce in any manner the amount of, or delay the timing of, any receipt by the Trustee (or, with respect to the Deposits, the Receiptholders) of payments with respect to the Equipment Notes or distributions in respect of any Certificate (or, with respect to the Deposits, payments upon the Deposits), or change the date or place of any payment in respect of any Certificate, or make distributions payable in coin or currency other than that provided for in such Certificates, or impair the right of any Certificateholder to institute suit for the enforcement of any such payment when due.
Permit the disposition of any Equipment Note, except as provided in the Pass Through Trust Agreement, or otherwise deprive such Certificateholder of the benefit of the ownership of the applicable Equipment Notes.
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Alter the priority of distributions specified in the Intercreditor Agreement in a manner materially adverse to such Certificateholders.
Reduce the percentage of the aggregate fractional undivided interests of the Trust provided for in the Pass Through Trust Agreement, the consent of the holders of which is required for any such supplemental agreement or for any waiver provided for in the Pass Through Trust Agreement.
Modify any of the provisions relating to the rights of the Certificateholders to consent to the amendments or supplements referred to in this paragraph or in respect of certain waivers of Indenture Events of Default, except to increase any such percentage or to provide that certain other provisions of the Pass Through Trust Agreement cannot be modified or waived without the consent of each Certificateholder affected thereby.
Adversely affect the status of the Trust as a grantor trust under Subpart E, Part I of Subchapter J of Chapter 1 of Subtitle A of the Code for U.S. federal income tax purposes.
In the event that the Trustee, as holder (or beneficial owner through the Subordination Agent) of any Equipment Note in trust for the benefit of the Certificateholders or as Controlling Party under the Intercreditor Agreement, receives (directly or indirectly through the Subordination Agent) a request for a consent to any amendment, modification, waiver or supplement under any Indenture, any Lease, any Equipment Note or any other related document, the Trustee shall forthwith send a notice of such proposed amendment, modification, waiver or supplement to each Certificateholder as of the date of such notice. The Trustee shall request from the Certificateholders a direction as to:
Whether or not to take or refrain from taking (or direct the Subordination Agent to take or refrain from taking) any action which a holder of such Equipment Note or the Controlling Party has the option to direct.
Whether or not to give or execute (or direct the Subordination Agent to give or execute) any waivers, consents, amendments, modifications or supplements as a holder of such Equipment Note or as Controlling Party.
How to vote (or direct the Subordination Agent to vote) any Equipment Note if a vote has been called for with respect thereto.
Provided such a request for Certificateholder direction shall have been made, in directing any action or casting any vote or giving any consent as the holder of any Equipment Note (or in directing the Subordination Agent in any of the foregoing):
Other than as Controlling Party, the Trustee shall vote for or give consent to any such action with respect to such Equipment Note in the same proportion as that of (x) the aggregate face amount of all Certificates actually voted in favor of or for giving consent to such action by such direction of Certificateholders to (y) the aggregate face amount of all outstanding Certificates.
As the Controlling Party, the Trustee shall vote as directed in such Certificateholder direction by the Certificateholders evidencing fractional undivided interests aggregating not less than a majority in interest in the Trust.
For purposes of the immediately preceding paragraph, a Certificate shall have been “actually voted” if the Certificateholder has delivered to the Trustee an instrument evidencing such Certificateholder’s consent to such direction prior to one Business Day before the Trustee directs such action or casts such vote or gives such consent. Notwithstanding the foregoing, but subject to certain rights of the Certificateholders under the Pass Through Trust Agreement and subject to the Intercreditor Agreement, the Trustee may, in its own discretion and at its own direction, consent and notify the applicable Loan Trustee of such consent (or direct the Subordination Agent to consent and notify the applicable Loan Trustee of such consent) to any 107
amendment, modification, waiver or supplement under the relevant Indenture or the relevant Lease, any relevant Equipment Note or any other related document, if an Indenture Event of Default under any Indenture shall have occurred and be continuing, or if such amendment, modification, waiver or supplement will not materially adversely affect the interests of the Certificateholders. In determining whether the Certificateholders of the requisite fractional undivided interests of Certificates have given any direction under the Pass Through Trust Agreement, Certificates owned by Turkish Airlines, the Issuer or any of their respective affiliates will be disregarded and deemed not to be outstanding for purposes of any such determination. Notwithstanding the foregoing, (i) if any such person owns 100% of the Certificates, such Certificates shall not be so disregarded, and (ii) if any amount of Certificates so owned by any such person have been pledged in good faith, such Certificates shall not be disregarded if the pledgee establishes to the satisfaction of the Trustee the pledgee’s right so to act with respect to such Certificates and that the pledgee is not Turkish Airlines, the Issuer or any of their respective affiliates. Obligation to Purchase Equipment Notes The Trustee will be obligated to purchase the Equipment Notes issued with respect to the Aircraft during the Delivery Period, subject to the terms and conditions of a note purchase agreement (the “Note Purchase Agreement”), including compliance with the Required Terms described below and the satisfaction of certain other conditions, including the delivery of specified legal opinions by counsel to Turkish Airlines and the Issuer. The Note Purchase Agreement provides for the relevant parties to enter into a secured debt instrument relating to the financing and leasing of each Aircraft. The description of such financing agreements in this offering memorandum is based on the forms of such agreements attached to the Note Purchase Agreement. However, the terms of the financing agreements actually entered into may differ from the forms of such agreements and, consequently, may differ from the description of such agreements contained in this offering memorandum. See “Description of the Equipment Notes”. Although such changes are permitted, under the Note Purchase Agreement the terms of such agreements must not vary the Required Terms. In addition, Turkish Airlines is obligated to certify to the Trustee that any substantive modifications do not materially and adversely affect the Certificateholders. Turkish Airlines must also obtain written confirmation from each Rating Agency that the use of financing agreements modified in any material respect from the forms attached to the Note Purchase Agreement will not result in a withdrawal, suspension or downgrading of the rating of the Class A Certificates. Further, under the Note Purchase Agreement, it is a condition precedent to the obligation of the Trustee to purchase the Equipment Notes related to the financing of an Aircraft that no Triggering Event shall have occurred. The Trustee will have no right or obligation to purchase Equipment Notes after the Delivery Period Termination Date. The “Required Terms”, as defined in the Note Purchase Agreement, mandate that: 1.
The initial principal amount and principal amortization schedule for each of the Equipment Notes issued with respect to each Aircraft shall be as set forth in the applicable table below for that Aircraft (provided that if an Equipment Note is issued on or after any date scheduled for a principal payment in the applicable amortization schedule below, the initial principal amount of such Equipment Note will be reduced by the aggregate principal amount scheduled for payment on or prior to such issuance date (which amount shall have been distributed under the Escrow Agreement) and the principal amortization schedule for such Equipment Note shall commence on the first scheduled principal payment date in such schedule occurring after the issuance of such Equipment Note).
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Boeing 777-300ER Regular Distribution Date At Issuance 15 September 2015 15 March 2016 15 September 2016 15 March 2017 15 September 2017 15 March 2018 15 September 2018 15 March 2019 15 September 2019 15 March 2020 15 September 2020 15 March 2021 15 September 2021 15 March 2022 15 September 2022 15 March 2023 15 September 2023 15 March 2024 15 September 2024 15 March 2025 15 September 2025 15 March 2026 15 September 2026 15 March 2027
TC-JJV Equipment Note Ending Balance (U.S.$) 109,341,000.00 106,842,809.58 102,941,459.78 98,993,945.32 95,231,549.26 91,433,440.46 87,546,978.28 84,546,978.28 81,546,978.28 78,546,978.28 75,546,978.28 72,546,978.28 69,546,978.28 66,546,978.28 63,546,978.28 60,546,978.28 54,546,978.28 48,546,978.28 42,546,978.28 36,546,978.28 29,546,978.28 22,546,978.28 15,546,978.28 8,546,978.28 0.00
Boeing 777-300ER Regular Distribution Date At Issuance 15 September 2015 15 March 2016 15 September 2016 15 March 2017 15 September 2017 15 March 2018 15 September 2018 15 March 2019 15 September 2019 15 March 2020 15 September 2020 15 March 2021 15 September 2021 15 March 2022 15 September 2022 15 March 2023 15 September 2023 15 March 2024 15 September 2024 15 March 2025 15 September 2025 15 March 2026 15 September 2026 15 March 2027
Scheduled Payments of Principal (U.S.$) 0.00 2,498,190.42 3,901,349.80 3,947,514.46 3,762,396.06 3,798,108.80 3,886,462.18 3,000,000.00 3,000,000.00 3,000,000.00 3,000,000.00 3,000,000.00 3,000,000.00 3,000,000.00 3,000,000.00 3,000,000.00 6,000,000.00 6,000,000.00 6,000,000.00 6,000,000.00 7,000,000.00 7,000,000.00 7,000,000.00 7,000,000.00 8,546,978.28
TC-JJY Equipment Note Ending Balance (U.S.$) U.S.$109,341,000.00 106,842,809.58 102,941,459.78 98,993,945.32 95,231,549.26 91,433,440.46 87,546,978.28 84,546,978.28 81,546,978.28 78,546,978.28 75,546,978.28 72,546,978.28 69,546,978.28 66,546,978.28 63,546,978.28 60,546,978.28 54,546,978.28 48,546,978.28 42,546,978.28 36,546,978.28 29,546,978.28 22,546,978.28 15,546,978.28 8,546,978.28 0.00
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Scheduled Payments of Principal (U.S.$) U.S.$0.00 2,498,190.42 3,901,349.80 3,947,514.46 3,762,396.06 3,798,108.80 3,886,462.18 3,000,000.00 3,000,000.00 3,000,000.00 3,000,000.00 3,000,000.00 3,000,000.00 3,000,000.00 3,000,000.00 3,000,000.00 6,000,000.00 6,000,000.00 6,000,000.00 6,000,000.00 7,000,000.00 7,000,000.00 7,000,000.00 7,000,000.00 8,546,978.28
Boeing 777-300ER Regular Distribution Date At Issuance 15 September 2015 15 March 2016 15 September 2016 15 March 2017 15 September 2017 15 March 2018 15 September 2018 15 March 2019 15 September 2019 15 March 2020 15 September 2020 15 March 2021 15 September 2021 15 March 2022 15 September 2022 15 March 2023 15 September 2023 15 March 2024 15 September 2024 15 March 2025 15 September 2025 15 March 2026 15 September 2026 15 March 2027
TC-JJZ Equipment Note Ending Balance (U.S.$) U.S.$109,592,000.00 107,093,809.58 103,192,459.78 99,244,945.32 95,482,549.26 91,684,440.46 87,797,978.28 84,797,978.28 81,797,978.28 78,797,978.28 75,797,978.28 72,797,978.28 69,797,978.28 66,797,978.28 63,797,978.28 60,797,978.28 54,797,978.28 48,797,978.28 42,797,978.28 36,797,978.28 29,797,978.28 22,797,978.28 15,797,978.28 8,797,978.28 0.00
Scheduled Payments of Principal (U.S.$) U.S.$0.00 2,498,190.42 3,901,349.80 3,947,514.46 3,762,396.06 3,798,108.80 3,886,462.18 3,000,000.00 3,000,000.00 3,000,000.00 3,000,000.00 3,000,000.00 3,000,000.00 3,000,000.00 3,000,000.00 3,000,000.00 6,000,000.00 6,000,000.00 6,000,000.00 6,000,000.00 7,000,000.00 7,000,000.00 7,000,000.00 7,000,000.00 8,797,978.28
The interest rate applicable to the Equipment Notes must be equal to the rate applicable to the Certificates. 2.
The principal payment dates for the Equipment Notes must be 15 March and 15 September commencing on 15 September 2015.
3.
The amounts payable under the all-risk aircraft hull insurance maintained with respect to each Aircraft must be sufficient to pay the unpaid principal amount of the related Equipment Notes together with accrued and unpaid interest thereon.
4.
(a) The past due rate in the Indentures, (b) the Make-Whole Amount payable under the Indentures, (c) the provisions relating to the redemption of Equipment Notes in the Indentures and (d) the indemnification of the relevant Loan Trustee, Subordination Agent, Liquidity Provider, Trustee, Escrow Agent and registered holders of the Equipment Notes (in such capacity, the “Note Holders”) with respect to certain taxes and expenses, in each case shall be provided as set forth in the Note Purchase Agreement and the forms of Lease and Indenture attached as exhibits to the Note Purchase Agreement.
5.
In the case of the Indentures, modifications are prohibited in any material adverse respect (i) to the Granting Clause of the Indentures so as to deprive the Note Holders under all of the Indentures of the security interests granted thereby or to eliminate the obligations intended to be secured thereby, (ii) to certain provisions relating to the issuance, redemption, payments, and ranking of the Equipment Notes (including the obligation to pay the Make-Whole Amount in certain circumstances), (iii) to certain provisions regarding Indenture Events of Default (including the relevant cross-defaults among Indentures) and remedies relating thereto, (iv) to certain provisions relating to any replaced airframe or engines with respect to an Aircraft and (v) to the provision that New York law will govern the Indentures.
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6.
In the case of the Leases, modifications are prohibited to certain provisions regarding Turkish Airlines’ obligations (i) to pay basic rent payable in U.S. Dollars and amounts payable on early termination of the Leases, (ii) to preserve the interests of the relevant Loan Trustee with respect to re-registration of the Aircraft in a jurisdiction other than Turkey and (iii) to consent to the assignment of the Lease by the Issuer, as collateral, as well as modifications which would either alter the provision that English Law will govern the Lease or would deprive the relevant Loan Trustee of rights expressly granted to it under the Leases.
7.
In the case of all of the Indentures, modifications are prohibited in any material adverse respect as regards the interest of the Note Holders, the Subordination Agent, the Liquidity Provider or the relevant Loan Trustee in the definition of “Make-Whole Amount”.
Notwithstanding the foregoing, any such forms of financing agreements may be modified to correct or supplement any such provision which may be defective or to cure any ambiguity or correct any mistake, provided that any such action shall not materially adversely affect the interests of the Note Holders, the Subordination Agent, the Liquidity Provider, the relevant Loan Trustee, the Issuer or the Certificateholders. Liquidation of Original Trust On the earlier of (i) the first Business Day after 30 June 2015 or, if later, the fifth Business Day after the Delivery Period Termination Date and (ii) the fifth Business Day after the occurrence of a Triggering Event, the Trust established on the Issuance Date (the “Original Trust”) will transfer and assign all of its assets and rights to a newly created successor trust (the “Successor Trust”) with substantially identical terms, except that (i) the Successor Trust will not have the right to purchase new Equipment Notes and (ii) Delaware law will govern the Original Trust and New York law will govern the Successor Trust. The institution acting as Trustee of the Original Trust (the “Original Trustee”) will also act as Trustee of the Successor Trust (the “New Trustee”). The New Trustee will assume the obligations of the Original Trustee under each transaction document to which the Original Trustee was a party. Upon the effectiveness of such transfer, assignment and assumption, the Original Trust will be liquidated and each of the Certificates will represent the same percentage interest in the Successor Trust as it represented in the Original Trust immediately prior to such transfer, assignment and assumption. Unless the context otherwise requires, all references in this offering memorandum to the Trust, the Trustee, the Pass Through Trust Agreement and similar terms shall apply to the Original Trust until the effectiveness of such transfer, assignment and assumption, and thereafter shall be applicable with respect to the Successor Trust. If for any reason such transfer, assignment and assumption cannot be effected to the Successor Trust, the Original Trust will continue in existence until it is effected. The Original Trust may be treated as a partnership for U.S. federal income tax purposes. The Successor Trust will be treated as a grantor trust. See “Certain U.S. Federal Income Tax Considerations”. Termination of the Trust The obligations of the Issuer and the Trustee will terminate upon the distribution to Certificateholders of all amounts required to be distributed to them pursuant to the Pass Through Trust Agreement and the disposition of all property held in the Trust. The Trustee will send to each Certificateholder notice of the termination of the Trust, the amount of the proposed final payment and the proposed date for the distribution of such final payment for the Trust. The final distribution to any Certificateholder will be made only upon surrender of such Certificateholder’s Certificates at the office or agency of the Trustee specified in such notice of termination. The Trustee The Trustee will be Wilmington Trust Company. The Trustee’s address is 1100 North Market Street, Wilmington, Delaware 19890-1605, Attention: Corporate Trust Administration, telephone (302) 636-6000.
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Book-Entry; Delivery and Form Upon issuance, the Certificates will be represented by one or more fully registered global certificates. Each global certificate will be deposited with, or on behalf of, DTC and registered in the name of Cede & Co., the nominee of DTC. DTC was created to hold securities for DTC Participants and facilitate the clearance and settlement of securities transactions between DTC Participants through electronic book-entry changes in accounts of the DTC Participants, thereby eliminating the need for physical movement of certificates. DTC Participants include securities brokers and dealers, banks, trust companies and clearing corporations and certain other organizations. Indirect access to the DTC system is available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly. Certificates sold in reliance on Rule 144A will initially be represented by permanent global certificates in fully registered form without interest coupons (each a “Restricted Global Certificate”) and will be deposited with the Trustee as a custodian for DTC and registered in the name of a nominee of Cede & Co. Certificates sold in offshore transactions in reliance on Regulation S under the Securities Act will initially be represented by temporary global certificates in fully registered form without interest coupons (each a “Temporary Regulation S Global Certificate”) and will be deposited with the Trustee as custodian for DTC and registered in the name of Cede & Co. Each Temporary Regulation S Global Certificate will be exchangeable for a single permanent global certificate (each a “Regulation S Global Certificate”) after the expiration of the “distribution compliance period” (as defined in Regulation S) and the certification required by Regulation S. Prior to such time, a beneficial interest in the Temporary Regulation S Global Certificate may be transferred to a person who takes delivery in the form of an interest in the Restricted Global Certificate only upon receipt by the Trustee of written certification from the transferor to the effect that such transfer is being made to a person whom the transferor reasonably believes is a QIB in a transaction meeting the requirements of Rule 144A. Beneficial interests in a Restricted Global Certificate may be transferred to a person who takes delivery in the form of an interest in a Regulation S Global Certificate whether before, on or after such time, only upon receipt by the Trustee of a written certification to the effect that such transfer is being made in accordance with Regulation S. Any beneficial interest in a Regulation S Global Certificate or a Restricted Global Certificate (each a “Global Certificate”) that is transferred to a person who takes delivery in the form of an interest in a Restricted Global Certificate or a Regulation S Global Certificate, respectively, will, upon transfer, cease to be an interest in the type of Global Certificate previously held and become an interest in the other type of Global Certificate and, accordingly, will thereafter be subject to all transfer restrictions, if any, and other procedures applicable to beneficial interests in such other type of Global Certificate for as long as it remains such an interest. The Global Certificates (and any Certificates issued in exchange therefor) will be subject to certain restrictions on transfer set forth therein and in the Pass Through Trust Agreement and will bear the legend regarding such restrictions set forth under the heading “Transfer Restrictions” herein. Subject to such restrictions, QIBs or non-U.S. purchasers may elect to take physical delivery of their certificates (each a “Certificated Security”) instead of holding their interests through the Global Certificates (and which are then ineligible to trade through DTC) (collectively referred to herein as the “Non-Global Purchasers”). Upon the transfer to a QIB of any Certificated Security initially issued to a Non-Global Purchaser, such Certificated Security will, unless the transferee requests otherwise or the Global Certificates have previously been exchanged in whole for Certificated Securities, be exchanged for an interest in the Global Certificates. For a description of the restrictions on transfer of Certificated Securities and any interest in the Global Certificates, see “Transfer Restrictions” and “Plan of Distribution”. The Global Certificates Turkish Airlines expects that pursuant to procedures established by DTC (i) upon the issuance of the Global Certificates, DTC or its custodian will credit, on its internal system, the principal amount at maturity of the individual beneficial interests represented by such Global Certificates to the respective accounts of persons who have accounts with such depositary and (ii) ownership of beneficial interests in the Global 112
Certificates will be shown on, and the transfer of such ownership will be effected only through, records maintained by DTC or its nominee (with respect to interests of participants) and the records of participants (with respect to interests of persons other than participants). Such accounts initially will be designated by or on behalf of Turkish Airlines and ownership of beneficial interests in the Global Certificates will be limited to persons who have accounts with DTC (“participants”) or persons who hold interests through participants. Holders may hold their interests in the Global Certificates directly through DTC if they are participants in such system, or indirectly through organizations which are participants in such system. So long as DTC, or its nominee, is the registered owner or holder of the Certificates, DTC or such nominee, as the case may be, will be considered the sole owner or holder of the Certificates represented by such Global Certificates for all purposes under the Pass Through Trust Agreement. No beneficial owner of an interest in the Global Certificates will be able to transfer that interest except in accordance with DTC’s procedures, in addition to those provided for under the Pass Through Trust Agreement. Unless and until definitive Certificates are issued under the limited circumstances described below under “—Physical Certificates”, all references to actions by Certificateholders shall refer to actions taken by DTC upon instructions from DTC Participants, and all references herein to distributions, notices, reports and statements to Certificateholders shall refer, as the case may be, to distributions, notices, reports and statements to DTC or Cede & Co., as the registered holder of such Certificates, or to DTC Participants for distribution to Certificateholders in accordance with DTC procedures. Payments of the principal of, premium, if any, and interest on the Global Certificates will be made to DTC or its nominee, as the case may be, as the registered owner thereof. None of Turkish Airlines, the Trustee or the Paying Agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in the Global Certificates or for maintaining, supervising or reviewing any records relating to such beneficial ownership interest. Turkish Airlines expects that DTC or its nominee, upon receipt of any payment of principal, premium, if any, or interest on the Global Certificates, will credit participants’ accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of the Global Certificates as shown on the records of DTC or its nominee. Turkish Airlines also expects that payments by participants to owners of beneficial interests in the Global Certificates held through such participants will be governed by standing instructions and customary practice, as is now the case with securities held for the accounts of customers registered in the names of nominees for such customers. Such payments will be the responsibility of such participants. Transfers between participants in DTC will be effected in the ordinary way through DTC’s same-day funds system in accordance with DTC rules and will be settled in same day funds. If a holder requires physical delivery of a Certificated Security for any reason, such holder must transfer its interest in a Global Certificate, in accordance with the normal procedures of DTC and with the procedures set forth in the Pass Through Trust Agreement. DTC has advised Turkish Airlines that it will take any action permitted to be taken by a holder of Certificates (including the presentation of Certificates for exchange as described below) only at the direction of one or more participants to whose account the DTC interests in the Global Certificates are credited and only in respect of such portion of the aggregate principal amount of Certificates as to which such participant or participants has or have given such direction. DTC has advised Turkish Airlines as follows: DTC is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the Uniform Commercial Code and a “clearing agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for its participants and facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates. Participants include securities brokers and dealers, banks, trust companies and clearing corporations and certain other organizations. Indirect access to the DTC system is available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly (“indirect participants”). 113
Although DTC has agreed to the foregoing procedures in order to facilitate transfers of interests in the Global Certificates among participants of DTC, it is under no obligation to perform such procedures, and such procedures may be discontinued at any time. Neither Turkish Airlines nor the Trustee will have any responsibility or liability for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations. Physical Certificates Physical Certificates will be issued in paper form to Certificateholders or their nominees, rather than to DTC or its nominee, only if:
the Issuer advises the Trustee in writing that DTC is no longer willing or able to discharge properly its responsibilities as depository with respect to the Certificates and Turkish Airlines is unable to locate a qualified successor;
the Issuer elects to terminate the book-entry system through DTC; or
after the occurrence of an Indenture Event of Default under any Indenture pursuant to which Equipment Notes held by the Trust were issued, Certificateholders owning at least a majority in fractional undivided interests in the Trust advise the Trustee, the Issuer and DTC through DTC Participants that the continuation of a book-entry system through DTC or a successor to DTC is no longer in the Certificateholders’ best interest.
Upon the occurrence of any of the events described in the three subparagraphs above, the Trustee will notify all Certificateholders through DTC Participants of the occurrence of such event and the availability of physical Certificates. Upon surrender by DTC of the global Certificates and receipt of instructions for re-registration, the Trustee will reissue the Certificates as physical Certificates to the applicable Certificateholders. In the case of the physical Certificates that are issued, the Trustee or the Paying Agent will make distributions with respect to such Certificates directly to holders in whose names the physical Certificates were registered at the close of business on the applicable record date. Except for the final payment to be made with respect to a Certificate, the Trustee or the Paying Agent will make distributions by check mailed to the addresses of the registered holders as they appear on the register maintained by the Trustee. The Trustee or the Paying Agent will make the final payment with respect to any Certificate only upon presentation and surrender of the applicable Certificate at the office or agency specified in the notice of final distribution to Certificateholders. Physical Certificates will be freely transferable and exchangeable at the office of the Trustee upon compliance with the requirements set forth in the Pass Through Trust Agreement. Neither the Trustee nor any transfer or exchange agent will impose a service charge for any registration of transfer or exchange. However, the Trustee or transfer or exchange agent will require payment of a sum sufficient to cover any tax or other governmental charge attributable to a transfer or exchange.
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DESCRIPTION OF THE DEPOSIT AGREEMENT The following summary describes the material terms of the Deposit Agreement. The summary does not purport to be complete and is qualified in its entirety by reference to all of the provisions of the Deposit Agreement. General Under the Escrow Agreement, the Escrow Agent will enter into a Deposit Agreement with the Depositary (the “Deposit Agreement”). Pursuant to the Escrow Agreement, the Depositary will establish three separate accounts into which the proceeds of the offering attributable to Certificates, to the extent not used in connection with the acquisition by the Issuer of the Initial Aircraft on the Issuance Date as described in “Use of Proceeds”, will be deposited (each, a “Deposit”) on behalf of the Escrow Agent. Pursuant to the Deposit Agreement, on the first Regular Distribution Date the Depositary will pay to the Paying Agent on behalf of the Escrow Agent, for distribution to the Certificateholders, an amount equal to interest accrued on the Deposits during the first interest period at a rate per annum equal to the interest rate applicable to the Certificates issued by the Trust. After the Issuance Date, upon each financing of an Aircraft during the Delivery Period, the Trustee will request that the Escrow Agent withdraw from the Deposits funds sufficient to enable the Trustee to purchase the Equipment Note issued with respect to such Aircraft. Accrued but unpaid interest on all such Deposits withdrawn will be paid on the first Regular Distribution Date. Any portion of any Deposit withdrawn that is not used to purchase such Equipment Note will be redeposited by the Trustee into an account relating to the Trust. The Deposits and interest paid thereon will not be subject to the subordination provisions of the Intercreditor Agreement and will not be available to pay any other amount in respect of the Certificates. Unused Deposits The Trustee’s obligations to purchase the Equipment Notes issued with respect to each Aircraft are subject to satisfaction of certain conditions at the time of financing, as set forth in the Note Purchase Agreement. See “Description of the Certificates—Obligation to Purchase Equipment Notes”. Since the Aircraft are expected to be financed from time to time during the Delivery Period, no assurance can be given that all such conditions will be satisfied at the time of financing for each such Aircraft. Moreover, delivery of the Aircraft is subject to delays in the manufacturing process and to the Aircraft manufacturer’s right to postpone deliveries under its agreement with Turkish Airlines. See “Description of the Aircraft and the Appraisals—Timing of Financing the Aircraft”. If any funds remain as Deposits at the end of the Delivery Period or, if earlier, upon the acquisition by the Trust of the Equipment Notes with respect to all of the Aircraft (the “Delivery Period Termination Date”), such funds will be withdrawn by the Escrow Agent and distributed, with accrued and unpaid interest thereon but without premium, to the Certificateholders after at least 15 days’ prior written notice. Distribution Upon Occurrence of Triggering Event If a Triggering Event shall occur prior to the Delivery Period Termination Date, the Escrow Agent will withdraw any funds then held as Deposits and cause such funds, with accrued and unpaid interest thereon but without any premium, to be distributed to the Certificateholders by the Paying Agent on behalf of the Escrow Agent, after at least three days’ prior written notice. Accordingly, if a Triggering Event occurs prior to the Delivery Period Termination Date, the Trust will not acquire Equipment Notes issued with respect to Aircraft available to be financed after the occurrence of such Triggering Event. Replacement of Depositary If the Depositary’s short-term unsecured debt rating by Moody’s or S&P falls below the Depositary Threshold Rating or if any such rating has been withdrawn or suspended, then Turkish Airlines must, 31 days after such event occurring, replace the Depositary with a new depositary bank that has a short-term 115
unsecured debt rating by Moody’s and S&P equal to or higher than the applicable Depositary Threshold Rating, subject to receipt of written confirmation from each Rating Agency that such replacement will not result in a withdrawal, suspension or downgrading of the ratings for the Class A Certificates then rated by such Rating Agency without regard to any downgrading of any rating of the Depositary being replaced. At any time during the Delivery Period, Turkish Airlines may replace the Depositary, or the Depositary may replace itself, with a new depositary bank that has a short-term unsecured debt rating by Moody’s and S&P equal to or higher than the applicable Depositary Threshold Rating, subject to receipt of written confirmation from each Rating Agency that such replacement will not result in a withdrawal, suspension or downgrading of the ratings for the Class A Certificates then rated by such Rating Agency. “Depositary Threshold Rating” means the short-term unsecured debt rating of “P-1” by Moody’s and the short-term issuer credit rating of “A-2” by S&P. Depositary BNP Paribas (“BNP Paribas”), acting through its New York Branch (the “BNPP New York Branch”), will act as depositary (the “Depositary”). BNP Paribas is a provider of banking and financial services, has four domestic retail banking markets in Europe, namely in Belgium, France, Italy and Luxembourg. It is present in 75 countries and has almost 188,000 employees, including over 147,000 in Europe. BNP Paribas holds key positions in its three activities: retail banking, investment solutions and corporate and investment Banking (CIB). At 31 December 2014, BNP Paribas had consolidated assets of €2,077.8 billion, consolidated loans and receivables due from customers of €657.4 billion, consolidated items due to customers of €641.5 billion and shareholders’ equity (Group share) of €89.4 billion. BNP Paribas currently has long-term senior debt ratings of “A+” with negative outlook from S&P and “A1” with negative outlook from Moody’s. BNP Paribas is a “société anonyme” organized under the laws of France. The main shareholders of BNP Paribas are Société Fédérale de Participations et d’Investissement (“SFPI”), a public-interest société anonyme acting on behalf of the Belgian government, and Grand Duchy of Luxembourg. As at 31 December 2013, SFPI was holding 10.3% and Grand Duchy of Luxembourg was holding 1.0% of the share capital of BNP Paribas. BNP Paribas’ head office is located at 16, boulevard des Italiens, 75009 Paris, France. BNP Paribas’ most recent Registration Document and Annual Financial Report, including its most recent audited annual consolidated financial statements, is available on the following website: http://www.invest.bnpparibas.com. The information and financial statements contained on this website are not part of this offering memorandum and are not incorporated herein by reference. BNP Paribas operates the BNPP New York Branch pursuant to a license issued by the New York Superintendent of Financial Services in 1976. The BNPP New York Branch conducts an extensive banking business serving U.S. and non-U.S. customers, including French clients of BNP Paribas and their U.S. subsidiaries. The Depositary meets the Depositary Threshold Rating.
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DESCRIPTION OF THE ESCROW AGREEMENT The following summary describes the material terms of the escrow and paying agent agreement (the “Escrow Agreement”). The summary does not purport to be complete and is qualified in its entirety by reference to all of the provisions of the Escrow Agreement. Wilmington Trust, National Association, as escrow agent in respect of the Trust (the “Escrow Agent”), Wilmington Trust Company, as paying agent on behalf of the Escrow Agent (the “Paying Agent”), the Trustee and the Initial Purchasers will enter into an Escrow Agreement for the benefit of the Certificateholders as holders of the Escrow Receipts affixed thereto (in such capacity, a “Receiptholder”). The cash proceeds of the offering of Certificates, to the extent not used in connection with the acquisition by the Issuer of the Initial Aircraft on the Issuance Date as described in “Use of Proceeds”, will be deposited on behalf of the Escrow Agent (for the benefit of Receiptholders) with the Depositary as Deposits. The Escrow Agent shall permit the Trustee to cause funds to be withdrawn from such Deposits on or prior to the Delivery Period Termination Date to allow the Trustee to purchase the related Equipment Notes pursuant to the Note Purchase Agreement. In addition, the Escrow Agent shall direct the Depositary to pay interest on the Deposits accrued in accordance with the Deposit Agreement to the Paying Agent for distribution to the Receiptholders. The Escrow Agreement requires that the Paying Agent establish and maintain, for the benefit of the related Receiptholders, one or more Paying Agent Account(s), which shall be non-interest-bearing. The Paying Agent shall deposit interest on Deposits and any unused Deposits withdrawn by the Escrow Agent in the Paying Agent Account. The Paying Agent shall distribute these amounts on the first Regular Distribution Date or a Special Distribution Date, as appropriate. Upon receipt by the Depositary of cash proceeds from this offering, the Escrow Agent will issue one or more escrow receipts (“Escrow Receipts”) which will be affixed by the Trustee to each Certificate. Each Escrow Receipt evidences the related Receiptholder’s interest in amounts from time to time deposited into the Paying Agent Account and is limited in recourse to amounts deposited into such account. An Escrow Receipt may not be assigned or transferred except in connection with the assignment or transfer of the Certificate to which it is affixed. Each Escrow Receipt will be registered by the Escrow Agent in the same name and manner as the Certificate to which it is affixed. Each Receiptholder shall have the right (individually and without the need for any other action of any person, including the Escrow Agent or any other Receiptholder), upon any default in the payment of interest on the Deposits when due by the Depositary in accordance with the applicable Deposit Agreement, or upon any default in the payment of the final withdrawal when due by the Depositary in accordance with the terms of the applicable Deposit Agreement and the Escrow Agreement, to proceed directly against the Depositary. The Escrow Agent will notify Receiptholders in the event of a default in any such payment and will promptly forward to Receiptholders upon receipt copies of all written communications relating to any payments due to the Receiptholders in respect of the Deposits.
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DESCRIPTION OF THE LIQUIDITY FACILITY The following summary describes the material terms of the Liquidity Facility and certain provisions of the Intercreditor Agreement relating to the Liquidity Facility. The summary does not purport to be complete and is qualified in its entirety by reference to all of the provisions of the Liquidity Facility and the Intercreditor Agreement. General BNP Paribas, acting through its Paris head office, (the “Liquidity Provider”) will enter into a revolving credit agreement (the “Liquidity Facility”) with the Subordination Agent. On any Regular Distribution Date, if, after giving effect to the subordination provisions of the Intercreditor Agreement, the Subordination Agent does not have sufficient funds for the payment of interest on the Certificates, the Liquidity Provider under the Liquidity Facility will make an advance (an “Interest Drawing”) in the amount needed to fund such interest shortfall up to the Maximum Available Commitment. The maximum amount of Interest Drawings available under the Liquidity Facility is expected to provide an amount sufficient to pay interest on the Certificates on up to three consecutive semi-annual Regular Distribution Dates (without regard to any expected future payments of principal on such Certificates) at the respective interest rates shown on the cover page of this offering memorandum (the “Stated Interest Rates”). If interest payment defaults occur which exceed the amount covered by and available under the Liquidity Facility, the Certificateholders will bear their allocable share of the deficiencies to the extent that there are no other sources of funds. The Liquidity Provider may be replaced by one or more other entities under certain circumstances. The Additional Certificates, if issued, will not have the benefit of a liquidity facility. Drawings The aggregate amount available under the Liquidity Facility at 15 September 2015, the first Regular Distribution Date after all Aircraft are expected to have been financed pursuant to this offering, assuming that such Aircraft are so financed and that all interest and principal due on or prior to 15 September 2015, is paid, will be U.S.$20,209,105. Except as otherwise provided below, the Liquidity Facility will enable the Subordination Agent to make Interest Drawings thereunder promptly on or after any Regular Distribution Date if, after giving effect to the subordination provisions of the Intercreditor Agreement, there are insufficient funds available to the Subordination Agent to pay interest on the Certificates at the Stated Interest Rate; provided, however, that the maximum amount available to be drawn under the Liquidity Facility on any Regular Distribution Date to fund any shortfall of interest on Certificates will not exceed the then Maximum Available Commitment under the Liquidity Facility. The “Maximum Available Commitment” at any time under the Liquidity Facility is an amount equal to the then Maximum Commitment of the Liquidity Facility less the aggregate amount of each Interest Drawing outstanding under the Liquidity Facility at such time, provided that following a Downgrade Drawing, a Special Termination Drawing, a Final Drawing or a Non-Extension Drawing under the Liquidity Facility, the Maximum Available Commitment under the Liquidity Facility shall be zero. “Maximum Commitment” for the Liquidity Facility means initially U.S.$20,681,262, as the same may be reduced from time to time as described below. “Required Amount” means, in relation to the Liquidity Facility for any day, the sum of the aggregate amount of interest, calculated at the rate per annum equal to the Stated Interest Rate, that would be payable on the Certificates on each of the three successive Regular Distribution Dates immediately following such day or, if such day is a Regular Distribution Date, on such day and the succeeding two Regular Distribution Dates, in each case calculated on the basis of the Pool Balance of the Certificates on such day and without regard to expected future payments of principal on the Certificates.
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The Liquidity Facility does not provide for drawings thereunder to pay for principal of or premium on the Certificates or any interest on the Certificates in excess of the Stated Interest Rate or more than three semiannual installments of interest thereon. In addition, the Liquidity Facility does not provide for drawings thereunder to pay any amounts payable with respect to the Deposits. Each payment by the Liquidity Provider reduces by the same amount the Maximum Available Commitment under the Liquidity Facility, subject to reinstatement as described below. With respect to any Interest Drawing, upon reimbursement of the Liquidity Provider in full or in part for the amount of such Interest Drawings plus interest thereon, the Maximum Available Commitment under the Liquidity Facility will be reinstated by an amount equal to the amount of such Interest Drawing so reimbursed to an amount not to exceed the Maximum Commitment under the Liquidity Facility. However, the Maximum Available Commitment under the Liquidity Facility will not be so reinstated at any time if (i) a Liquidity Event of Default shall have occurred and be continuing and less than 65% of the then aggregate outstanding principal amount of all Equipment Notes are Performing Equipment Notes or (ii) a Final Drawing, Downgrade Drawing, Special Termination Drawing or Non-Extension Drawing shall have been made or an Interest Drawing shall have been converted into a Final Advance. The Maximum Available Commitment under the Liquidity Facility will not be reinstated after a Final Drawing, Downgrade Drawing, Special Termination Drawing or Non-Extension Drawing thereunder. On the first Regular Distribution Date and on each date on which the Pool Balance shall have been reduced by payments made to the Certificateholders pursuant to the Intercreditor Agreement, the Maximum Commitment of the Liquidity Facility will be automatically reduced from time to time to an amount equal to the then Required Amount. “Performing Equipment Note” means an Equipment Note with respect to which no payment default has occurred and is continuing (without giving effect to any acceleration); provided that in the event of an insolvency proceeding under the laws of Turkey in which the Lessee is a debtor, any payment default existing during the 60 Day Period shall not be taken into consideration until the expiration of such period. If at any time the Liquidity Provider is downgraded, or any rating of the Liquidity Provider is suspended or withdrawn, by any Rating Agency such that after such downgrading, suspension or withdrawal the Liquidity Provider does not have a Long-Term Rating from such Rating Agency of the applicable Liquidity Threshold Rating or higher (any such downgrading, suspension or withdrawal, a “Downgrade Event”), and the Liquidity Facility is not replaced with a Replacement Facility within 35 days after the occurrence of such Downgrade Event (or, if earlier, the expiration date of the Liquidity Facility), the Liquidity Facility will be drawn up to the then Maximum Available Commitment under the Liquidity Facility (the “Downgrade Drawing”), unless, within 35 days after the occurrence of such Downgrade Event (or, if earlier, the expiration date of the Liquidity Facility), the Rating Agency whose downgrading, suspension or withdrawal of the Liquidity Provider resulted in the occurrence of such Downgrade Event provides a written confirmation to the effect that such downgrading, suspension or withdrawal with respect to the Liquidity Provider will not result in a downgrading, withdrawal or suspension of the ratings by such Rating Agency for the Class A Certificates. The proceeds of a Downgrade Drawing will be deposited into a cash collateral account (the “Cash Collateral Account”) for the Certificates and used for the same purposes and under the same circumstances and subject to the same conditions as cash payments of Interest Drawings under the Liquidity Facility would be used. For the avoidance of doubt, the foregoing requirements shall apply to each occurrence of a Downgrade Event with respect to the Liquidity Provider, regardless of whether or not one or more Downgrade Events have occurred prior thereto and whether or not any confirmation by a Rating Agency specified in the foregoing requirements has been obtained with respect to any prior occurrence of a Downgrade Event. If a qualified Replacement Facility is subsequently provided, the balance of the Cash Collateral Account will be repaid to the replaced Liquidity Provider. “Liquidity Threshold Rating” means: (a) in the case of Moody’s, a Long-Term Rating of “Baa2” and (b) in the case of S&P, a Long-Term Rating of “BBB”. “Long-Term Rating” means, for any entity: (a) in the case of Moody’s, the long-term senior unsecured debt rating of such entity and (b) in the case of S&P, the long-term issuer credit rating of such entity.
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If at any time during the 18-month period prior to the final expected Regular Distribution Date, the Pool Balance is greater than the aggregate outstanding principal amount of Equipment Notes (other than any Equipment Notes previously sold or with respect to which the collateral securing such Equipment Notes has been disposed of), the Liquidity Provider may, in its discretion, give notice of special termination under the Liquidity Facility (a “Special Termination Notice”). The effect of the delivery of such Special Termination Notice will be to cause (i) the Liquidity Facility to expire on the fifth Business Day after the date on which such Special Termination Notice is received by the Subordination Agent and Turkish Airlines, (ii) the Subordination Agent to promptly request, and the Liquidity Provider to promptly make, a special termination drawing (a “Special Termination Drawing”) in an amount equal to the Maximum Available Commitment thereunder and (iii) all amounts owing to the Liquidity Provider automatically to become accelerated. The proceeds of a Special Termination Drawing will be deposited into the Cash Collateral Account and used for the same purposes under the same circumstances and subject to the same conditions as cash payments of Interest Drawings under the Liquidity Facility would be used. The Liquidity Facility provides that the Liquidity Provider’s obligations thereunder will expire on the earliest of: 1.
The anniversary date of the Issuance Date immediately following the date on which the Liquidity Provider provides written notice to the Subordination Agent that its obligations thereunder shall not be extended beyond such anniversary date.
2.
The date on which the Subordination Agent delivers to the Liquidity Provider a certification that all of the Certificates have been paid in full.
3.
The date on which the Subordination Agent delivers to the Liquidity Provider a certification that a Replacement Facility has been substituted for the Liquidity Facility.
4.
The fifth Business Day following receipt by the Subordination Agent of a Termination Notice from the Liquidity Provider (see “Description of the Liquidity Facility—Liquidity Events of Default”).
5.
The fifth Business Day following receipt by the Subordination Agent and Turkish Airlines of a Special Termination Notice from the Liquidity Provider.
6.
The date on which no amount is or may (including by reason of reinstatement) become available for drawing under the Liquidity Facility.
The Liquidity Facility provides that it will be extended automatically for additional one-year periods unless the Liquidity Provider advises the Subordination Agent 25 days prior to the Liquidity Facility’s thenscheduled expiration date that the expiration date will not be extended. The Intercreditor Agreement will provide that the Liquidity Facility may be replaced if it is scheduled to expire earlier than 15 days after the Final Maturity Date for the Certificates and the expiration date of the Liquidity Facility is not extended by the 25th day prior to its then-scheduled expiration date. If the Liquidity Facility is not so extended or replaced by the 25th day prior to its then-scheduled expiration date, the Liquidity Facility will be drawn in full up to the then Maximum Available Commitment under the Liquidity Facility (the “Non-Extension Drawing”). The proceeds of the Non-Extension Drawing under the Liquidity Facility will be deposited in the Cash Collateral Account to be used for the same purposes and under the same circumstances, and subject to the same conditions, as cash payments of Interest Drawings under the Liquidity Facility would be used. Upon receipt by the Subordination Agent of a Termination Notice with respect to the Liquidity Facility from the Liquidity Provider, the Subordination Agent shall request a final drawing (a “Final Drawing”) under the Liquidity Facility, in an amount equal to the then Maximum Available Commitment thereunder. The Subordination Agent will hold the proceeds of the Final Drawing in the Cash Collateral Account as cash collateral to be used for the same purposes and under the same circumstances, and subject to the same conditions, as cash payments of Interest Drawings under the Liquidity Facility would be used. 120
Drawings under the Liquidity Facility will be made by delivery by the Subordination Agent of a certificate in the form required by the Liquidity Facility. Upon receipt of such a certificate, the Liquidity Provider is obligated to make payment of the drawing requested thereby in immediately available funds. Upon payment by the Liquidity Provider of the amount specified in any drawing under the Liquidity Facility, the Liquidity Provider will be fully discharged of its obligations under the Liquidity Facility with respect to such drawing and will not thereafter be obligated to make any further payments under the Liquidity Facility in respect of such drawing to the Subordination Agent or any other person. Replacement Liquidity Facility A “Replacement Facility” for the Liquidity Facility will mean an irrevocable liquidity facility (or liquidity facilities) in substantially the form of the replaced Liquidity Facility, including reinstatement provisions, or in such other form (which may include a letter of credit) as shall permit the Rating Agencies to confirm in writing their respective ratings then in effect for the Certificates (before downgrading of such ratings, if any, as a result of the downgrading of the replaced Liquidity Provider), in a face amount (or in an aggregate face amount) equal to the then Required Amount for the replaced Liquidity Facility and issued by a person (or persons) having a long term senior unsecured debt rating or long term issuer credit rating, as the case may be, issued by each Rating Agency which is equal to or higher than the applicable Liquidity Threshold Rating. The provider of any Replacement Facility will have the same rights (including, without limitation, priority distribution rights and rights as Controlling Party) under the Intercreditor Agreement as the Liquidity Provider being replaced. The transaction documents provide that the Liquidity Facility (including without limitation any Replacement Facility described in the following sentence) may be replaced in certain circumstances. In addition, if the Liquidity Provider shall determine not to extend the Liquidity Facility or any Replacement Facility, as applicable, then the Liquidity Provider may, at its option, arrange for another Replacement Facility to replace the Liquidity Facility or Replacement Facility, as applicable, (i) during the period no earlier than 40 days and no later than 25 days prior to the scheduled expiration date of the Liquidity Facility or Replacement Facility, as applicable, and (ii) at any time after a Non-Extension Drawing has been made. The Liquidity Provider may also arrange for a Replacement Facility to replace the Liquidity Facility at any time after a Downgrade Drawing. If any Replacement Facility is provided at any time after a Downgrade Drawing, a Special Termination Drawing or a Non-Extension Drawing under the Liquidity Facility, the funds with respect to the Liquidity Facility on deposit in the Cash Collateral Account will be returned to the Liquidity Provider being replaced. Reimbursement of Drawings The Subordination Agent must reimburse amounts drawn under the Liquidity Facility by reason of an Interest Drawing, Final Drawing, Downgrade Drawing, Special Termination Drawing or Non-Extension Drawing and interest thereon, but only to the extent that the Subordination Agent has funds available therefor. See “Description of the Intercreditor Agreement—Priority of Distributions”. Interest Drawings, Special Termination Drawing and Final Drawing Amounts drawn by reason of an Interest Drawing, Special Termination Drawing or Final Drawing will be due and payable on the next Regular Distribution Date or Special Distribution date, as applicable, together with interest on the amount of such drawing. From the date of the drawing to (but excluding) the third LIBOR (as defined herein) business day following the Liquidity Provider’s receipt of the notice of such Interest Drawing or Final Drawing, interest will accrue at the Base Rate plus a specified margin per annum. Thereafter, interest will accrue at LIBOR for the applicable interest period (or, as described in the fourth paragraph under “—Reimbursement of Drawings—Interest Drawings, Special Termination Drawing and Final Drawing”, the Market Disruption Base Rate) plus a specified margin per annum. Any Special Termination Drawing under the Liquidity Facility, other than any portion thereof applied to the payment of interest on the Certificates, will bear interest at the Base Rate for the applicable interest period plus a specified margin per annum from the date of the drawing to (but excluding) the third Business Day following the Liquidity Provider’s receipt of the notice of such Special Termination Drawing. Thereafter, 121
interest will accrue at LIBOR for the applicable interest period (or, as described in the fourth paragraph under “—Reimbursement of Drawings—Interest Drawings, Special Termination Drawing and Final Drawing”, the Market Disruption Base Rate) plus a specified margin per annum. “Base Rate” means, for any given day, a fluctuating interest rate per annum in effect from time to time, which rate per annum shall at all times be equal to (a) the rate opposite the caption “Federal Funds (Effective)” for such day, as published for such day in Federal Reserve Publication H.15(519), under column EFF on Bloomberg page “FEDL01”, and for each other day, such rate on the next preceding Business Day (the “Federal Funds Rate”), plus (b) one-quarter of one per cent (1/4 of 1%). “LIBOR” means, with respect to any interest period, (i) the rate per annum appearing on Reuters Screen LIBOR01 Page (or any successor or substitute therefor) at approximately 11:00 a.m. (London time) two LIBOR business days before the first day of such interest period, as the rate for dollar deposits with a maturity comparable to such interest period, or (ii) if the rate calculated pursuant to clause (i) above is not available, the average (rounded upwards, if necessary, to the next 1/16 of 1%) of the rates per annum at which deposits in U.S. Dollars are offered for the relevant interest period by the Reference Banks in the London interbank market at approximately 11:00 a.m. (London time) two LIBOR business days before the first day of such interest period in an amount approximately equal to the principal amount of the drawing to which such interest period is to apply and for a period comparable to such interest period. “Market Disruption Base Rate” means, with respect to any interest period, a fluctuating rate per annum equal to the Liquidity Provider’s cost of funds. “Reference Banks” means the principal London office of JPMorgan Chase Bank, Barclays Bank, Rabobank and Deutsche Bank or such other bank (or banks) as may from time to time be appointed for the Liquidity Provider in consultation with Turkish Airlines; provided that Turkish Airlines shall not unreasonably object to any such appointment. If at any time, the Liquidity Provider shall have determined (which determination shall be conclusive and binding upon the Subordination Agent, absent manifest error) that due to matters affecting the market generally LIBOR determined or to be determined for the current or the immediately succeeding interest period will not adequately and fairly reflect the cost to the Liquidity Provider (as conclusively certified by the Liquidity Provider, absent manifest error) of obtaining and/or holding matching deposits in the relevant interbank market, the Liquidity Provider shall give notice thereof (a “Rate Determination Notice”) to the Subordination Agent. If such notice is given, then the outstanding principal amount of the LIBOR advances under the Liquidity Facility shall bear interest at the Market Disruption Base Rate from the date of the Rate Determination Notice until the interest period that immediately follows the withdrawal of such Rate Determination Notice. The Liquidity Provider shall withdraw a Rate Determination Notice given under the Liquidity Facility when the Liquidity Provider determines that the circumstances giving rise to such Rate Determination Notice no longer apply to the Liquidity Provider. Each change in the Base Rate or Federal Funds Rate shall become effective immediately. Downgrade Drawings and Non-Extension Drawings The amount drawn under the Liquidity Facility by reason of a Downgrade Drawing or a Non-Extension Drawing will be treated as follows: 1.
Such amount will be released on any Distribution Date to the Liquidity Provider to the extent that such amount exceeds the Required Amount.
2.
Any portion of such amount withdrawn from the Cash Collateral Account to pay interest on the Certificates will be treated in the same way as Interest Drawings.
3.
The balance of such amount will be invested in certain specified eligible investments.
Any Downgrade Drawing under the Liquidity Facility, other than any portion thereof applied to the payment of interest on the Certificates, will bear interest (x) subject to clause (y) below, from the date of 122
the drawing to (but excluding) the third Business Day following the Liquidity Provider’s receipt of the notice of such Downgrade Drawing, at a rate equal to the Base Rate plus a specified margin per annum, and thereafter, at a rate equal to LIBOR for the applicable interest period (or, as described in the fourth paragraph under “—Reimbursement of Drawings—Interest Drawings, Special Termination Drawing and Final Drawing”, the Market Disruption Base Rate) plus a specified margin per annum on the outstanding amount from time to time of such Downgrade Drawing and (y) from and after the date, if any, on which it is converted into a Final Drawing as described below under “—Liquidity Events of Default”, at a rate equal to LIBOR for the applicable interest period (or, as described in the fourth paragraph under “—Interest Drawings, Special Termination Drawing and Final Drawing”, the Market Disruption Base Rate) plus 2.0% per annum. Any Non-Extension Drawing under the Liquidity Facility, other than any portion thereof applied to the payment of interest on the Certificates, will bear interest (x) subject to clause (y) below, in an amount equal to the investment earnings on amounts deposited in the Cash Collateral Account plus a specified rate per annum on the outstanding amount from time to time of such Non-Extension Drawing and (y) from and after the date, if any, on which it is converted into a Final Drawing as described below under “—Liquidity Events of Default”, at a rate equal to LIBOR for the applicable interest period (or, as described in the fourth paragraph under “—Interest Drawings, Special Termination Drawing and Final Drawing”, the Market Disruption Base Rate) plus 2.0% per annum. Liquidity Events of Default Events of default under the Liquidity Facility (each, a “Liquidity Event of Default”) will consist of: 1.
The acceleration of all of the Equipment Notes; or
2.
Certain bankruptcy or similar events involving Turkish Airlines.
If (i) any Liquidity Event of Default under the Liquidity Facility has occurred and is continuing and (ii) less than 65% of the aggregate outstanding principal amount of all Equipment Notes are Performing Equipment Notes, the Liquidity Provider may, in its discretion, give a notice of termination of the Liquidity Facility to the Subordination Agent (a “Termination Notice”). The Termination Notice will have the following consequences: 1.
The Liquidity Facility will expire at the close of business on the fifth Business Day after the date on which the Termination Notice is received by the Subordination Agent.
2.
The Subordination Agent will promptly request, and the Liquidity Provider will make, a Final Drawing thereunder in an amount equal to the then Maximum Available Commitment thereunder.
3.
Any drawing remaining unreimbursed as of the date of termination will be automatically converted into a Final Drawing under the Liquidity Facility.
4.
All amounts owing to the Liquidity Provider automatically will be accelerated.
Notwithstanding the foregoing, the Subordination Agent will be obligated to pay amounts owing to the Liquidity Provider only to the extent of funds available therefor after giving effect to the payments in accordance with the provisions set forth under “Description of the Intercreditor Agreement—Priority of Distributions”. Upon the circumstances described below under “Description of the Intercreditor Agreement—Intercreditor Rights”, the Liquidity Provider may become the Controlling Party with respect to the exercise of remedies under the Indentures. Liquidity Provider The initial Liquidity Provider for the Liquidity Facility will be BNP Paribas, acting through its Paris head office. The Liquidity Provider meets the Liquidity Threshold Rating. See “Description of the Deposit Agreement—Depositary” for more information on BNP Paribas.
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DESCRIPTION OF THE INTERCREDITOR AGREEMENT The following summary describes the material provisions of the Intercreditor Agreement (the “Intercreditor Agreement”) among the Trustee, the Liquidity Provider and Wilmington Trust Company, as subordination agent (the “Subordination Agent”). The summary does not purport to be complete and is qualified in its entirety by reference to all of the provisions of the Intercreditor Agreement. Intercreditor Rights Controlling Party Each Loan Trustee will be directed in taking, or refraining from taking, any action under an Indenture or with respect to the Equipment Notes issued under such Indenture, by the holders of at least a majority of the outstanding principal amount of the Equipment Notes issued under such Indenture, and the Subordination Agent will be directed in taking, or refraining from taking, any action under the Membership Interest Pledge Agreement, by the holders of at least a majority of the outstanding principal amount of all Equipment Notes, in each case, so long as no Indenture Event of Default shall have occurred and be continuing thereunder. For so long as the Subordination Agent is the registered holder of the Equipment Notes, the Subordination Agent will act with respect to the preceding sentence in accordance with the directions of the Trustee, to the extent constituting, in the aggregate, directions with respect to the required principal amount of Equipment Notes. After the occurrence and during the continuance of an Indenture Event of Default, each Loan Trustee will be directed in taking, or refraining from taking, any action thereunder or with respect to the Equipment Notes issued under such Indenture, and the Subordination Agent will be directed in taking, or refraining from taking, any action under the Membership Interest Pledge Agreement, including acceleration of such Equipment Notes or foreclosing the lien on the related Aircraft, by the Controlling Party, subject to the limitations described below. See “Description of the Certificates—Indenture Events of Default and Certain Rights Upon an Indenture Event of Default” for a description of the rights of the Certificateholders to direct the Trustee. The Controlling Party will be: 1.
The Class A Trustee.
2.
If any Additional Certificates have been issued, upon payment of Final Distributions to the holders of Class A Certificates, the trustee for such Additional Certificates.
3.
Under certain circumstances, and notwithstanding the foregoing, the Liquidity Provider, as discussed in the next paragraph.
At any time after 18 months from the earliest to occur of (x) the date on which the entire available amount under the Liquidity Facility shall have been drawn (for any reason other than a Downgrade Drawing, Special Termination Drawing or Non-Extension Drawing that has not been converted into a Final Drawing) and shall remain unreimbursed, (y) the date on which the entire amount of any Downgrade Drawing, Special Termination Drawing or Non-Extension Drawing shall have been withdrawn from the relevant Cash Collateral Account to pay interest on the relevant Class of Certificates and shall remain unreimbursed and (z) the date on which all Equipment Notes shall have been accelerated (provided that in the event of an insolvency proceeding under the laws of Turkey in which Turkish Airlines is a debtor, any amounts payable in respect of Equipment Notes which have become immediately due and payable by declaration or otherwise shall not be considered accelerated for this clause (z) until the expiration of the 60-Day Period), the Liquidity Provider (so long as the Liquidity Provider has not defaulted in its obligation to make any drawing under the Liquidity Facility) shall have the right to become the Controlling Party.
124
For purposes of giving effect to the rights of the Controlling Party, the Trustee (to the extent not the Controlling Party) shall irrevocably agree, and the Certificateholders (other than the Certificateholders represented by the Controlling Party) will be deemed to agree by virtue of their purchase of Certificates, that the Subordination Agent, as record holder of the Equipment Notes, shall exercise its voting rights in respect of the Equipment Notes as directed by the Controlling Party. For a description of certain limitations on the Controlling Party’s rights to exercise remedies, see “Description of the Equipment Notes— Remedies”. “Final Distributions” means, with respect to the Certificates on any Distribution Date, the sum of (x) the aggregate amount of all accrued and unpaid interest on the Certificates (excluding interest payable on the Deposits) and (y) the Pool Balance of the Certificates as of the immediately preceding Distribution Date (less the amount of the Deposits as of such preceding Distribution Date other than any portion of the Deposits thereafter used to acquire Equipment Notes pursuant to the Note Purchase Agreement). For purposes of calculating Final Distributions with respect to the Certificates, any premium paid on the Equipment Notes which has not been distributed to the Certificateholders (other than such premium or a portion thereof applied to the payment of interest on the Certificates or the reduction of the Pool Balance) shall be added to the amount of such Final Distributions. Limitation on Exercise of Remedies So long as any Certificates are outstanding, during nine months after the earlier of (x) the acceleration of the Equipment Notes under any Indenture and (y) Turkish Airlines’ bankruptcy or insolvency, without the consent of the Trustee, (i) no Aircraft subject to the lien of such Indenture or such Equipment Notes may be sold in the exercise of remedies under such Indenture, if the net proceeds from such sale would be less than the Minimum Sale Price for such Aircraft or such Equipment Notes, (ii) the amount and payment dates of rentals payable by Turkish Airlines under the related Lease may not be adjusted, if, as a result of such adjustment, the discounted present value of all such rentals would be less than 75% of the discounted present value of such rentals payable by Turkish Airlines under such Lease before giving effect to such adjustment, in each case using the weighted average interest rate of the Equipment Notes issued pursuant to the related Indenture as the discount rate and (iii) the collateral under the Membership Interest Pledge Agreement may not be sold in the exercise of remedies if the net proceeds of such sale would be less than the Minimum Sale Price for such collateral. “Minimum Sale Price” means, with respect to (i) any Aircraft or the Equipment Notes issued in respect of such Aircraft, at any time, in the case of the sale of an Aircraft, 75%, or in the case of the sale of related Equipment Notes, 85%, of the Appraised Current Market Value of such Aircraft and (ii) the collateral subject to the Membership Interest Pledge Agreement, 75% of the sum of the Appraised Current Market Value of the Aircraft for which the related Equipment Notes are then held by the Subordination Agent. Following the occurrence and during the continuation of an Indenture Event of Default under any Indenture, in the exercise of remedies pursuant to the Indenture, the Loan Trustee under such Indenture may be directed to lease the Aircraft to any person (including Turkish Airlines) so long as the relevant Loan Trustee in doing so acts in a “commercially reasonable” manner within the meaning of Article 9 of the Uniform Commercial Code as in effect in any applicable jurisdiction (including Sections 9-610 and 9-627 thereof). If following certain events of bankruptcy, reorganization or insolvency with respect to Turkish Airlines described in the Intercreditor Agreement (a “Turkish Airlines Bankruptcy Event”) and during the pendency thereof, the Controlling Party receives a proposal from or on behalf of the Issuer or Turkish Airlines to restructure the financing of any one or more of the Aircraft, the Controlling Party will promptly thereafter give the Subordination Agent and the Trustee notice of the material economic terms and conditions of such restructuring proposal whereupon the Subordination Agent acting on behalf of the Trustee will endeavor using reasonable commercial efforts to make such terms and conditions of such restructuring proposal available to all Certificateholders (whether by posting on DTC’s Internet board or otherwise) and to the Liquidity Provider provided that it has not made a Final Drawing. Thereafter, neither the Subordination Agent nor the Trustee, whether acting on instructions of the Controlling Party or 125
otherwise, may, without the consent of the Trustee, enter into any term sheet, stipulation or other agreement (whether in the form of an adequate protection stipulation, if applicable, or otherwise) to effect any such restructuring proposal with or on behalf of the Issuer or Turkish Airlines unless and until the material economic terms and conditions of such restructuring proposal shall have been made available to all Certificateholders and to the Liquidity Provider provided that it has not made a Final Drawing for a period of not less than 15 calendar days (except that such requirement shall not apply to any such term sheet, stipulation or other agreement that is entered into on or prior to the expiry of the 60-Day Period and that is effective for a period not longer than the 60-Day Period). In the event that any holder of Additional Certificates, if issued, gives irrevocable notice of the exercise of its right to purchase all (but not less than all) of the Class of Certificates represented by the then Controlling Party (as described in “Description of the Certificates—Purchase Rights of Certificateholders”), prior to the expiry of the 15-day notice period specified above, such Controlling Party may not direct the Subordination Agent or the Trustee to enter into any such restructuring proposal with respect to any of the Aircraft, unless and until such holder fails to purchase such Class of Certificates on the date that it is required to make such purchase. Post Default Appraisals Upon the occurrence and continuation of an Indenture Event of Default under any Indenture, the Subordination Agent will be required to obtain three desktop appraisals from the appraisers selected by the Controlling Party setting forth the current market value, current lease rate and distressed value (in each case, as defined by the International Society of Transport Aircraft Trading) of the Aircraft subject to such Indenture (each such appraisal, an “Appraisal” and the current market value appraisals being referred to herein as the “Post Default Appraisals”). For so long as any Indenture Event of Default shall be continuing under any Indenture, and without limiting the right of the Controlling Party to request more frequent Appraisals, the Subordination Agent will be required to obtain additional Appraisals on the date that is 364 days from the date of the most recent Appraisal or if a Turkish Airlines Bankruptcy Event shall have occurred and is continuing, on the date that is 180 days from the date of the most recent Appraisal. “Appraised Current Market Value” of any Aircraft means the lower of the average and the median of the three most recent Post Default Appraisals of such Aircraft. Priority of Distributions All payments in respect of the Equipment Notes and certain other payments received on each Regular Distribution Date or Special Distribution Date (each, a “Distribution Date”) will be promptly distributed by the Subordination Agent on such Distribution Date in the following order of priority: 1.
To the Subordination Agent, the Trustee, any Certificateholder and the Liquidity Provider to the extent required to pay certain out-of-pocket costs and expenses actually incurred by the Subordination Agent (or reasonably expected to be incurred by the Subordination Agent for the period ending on the next succeeding Regular Distribution Date, which shall not exceed U.S.$150,000 unless approved in writing by the Controlling Party) or the Trustee or Liquidity Provider to reimburse any Certificateholder or the Liquidity Provider in respect of payments made to the Subordination Agent or the Trustee in connection with the protection or realization of the value of the Equipment Notes held by the Subordination Agent or any Collateral under (and as defined in) any Indenture (collectively, the “Administration Expenses”).
2.
To the Liquidity Provider (a) to the extent required to pay the Liquidity Expenses or (b) in the case of a Special Payment on account of the redemption, purchase or prepayment of all of the Equipment Notes issued pursuant to an Indenture (an “Equipment Note Special Payment”), so long as no Indenture Event of Default has occurred and is continuing under any Indenture, the amount of accrued and unpaid Liquidity Expenses that are not yet due, multiplied by the Section 2.4 Fraction or, if an Indenture Event of Default has occurred and is continuing, clause (a) will apply. 126
3.
To the Liquidity Provider (a) to the extent required to pay interest accrued on the Liquidity Obligations and if a Special Termination Drawing has been made and has not been converted into a Final Drawing, to pay the outstanding amount of such Special Termination Drawing or (b) in the case of an Equipment Note Special Payment, so long as no Indenture Event of Default has occurred and is continuing under any Indenture, to the extent required to pay accrued and unpaid interest then in arrears on the Liquidity Obligations plus an amount equal to the amount of accrued and unpaid interest on the Liquidity Obligations not in arrears, multiplied by the Section 2.4 Fraction and if a Special Termination Drawing has been made and has not been converted into a Final Drawing, the outstanding amount of such Special Termination Drawing or, if an Indenture Event of Default has occurred and is continuing, clause (a) will apply.
4.
To (i) the Liquidity Provider to the extent required to pay the outstanding amount of all Liquidity Obligations and (ii) if applicable, with respect to the Liquidity Facility, unless (in the case of this clause (ii) only) (x) less than 65% of the aggregate outstanding principal amount of all Equipment Notes are Performing Equipment Notes and a Liquidity Event of Default shall have occurred and is continuing under the Liquidity Facility or (y) a Final Drawing shall have occurred under the Liquidity Facility or an Interest Drawing for the Liquidity Facility shall have been converted into a Final Drawing, the Subordination Agent to replenish the Cash Collateral Account with respect to the Liquidity Facility up to the Required Amount.
5.
To the Subordination Agent, the Trustee or any Certificateholder to the extent required to pay certain fees, taxes, charges and other amounts payable.
6.
To the Class A Trustee (a) to the extent required to pay accrued and unpaid interest at the Stated Interest Rate on the Pool Balance of the Class A Certificates (excluding interest, if any, payable with respect to the Deposits relating to such Class of Certificates) or (b) in the case of an Equipment Note Special Payment, so long as no Indenture Event of Default has occurred and is continuing under any Indenture, to the extent required to pay any such interest that is then due (excluding interest, if any, payable with respect to the Deposits) together with (without duplication) accrued and unpaid interest at the Stated Interest Rate on the outstanding principal amount of the Equipment Notes held in the Class A Trust being redeemed, purchased or prepaid or, if an Indenture Event of Default has occurred and is continuing, clause (a) will apply.
7.
If any Additional Certificates have been issued, to the trustee for such Additional Certificates (a) to the extent required to pay accrued and unpaid Additional Adjusted Interest on the Additional Certificates (excluding interest, if any, payable with respect to the Deposits relating to such Class of Certificates) or (b) in the case of an Equipment Note Special Payment, so long as no Indenture Default has occurred and is continuing under any Indenture, to the extent required to pay any such Additional Adjusted Interest that is then due (excluding interest, if any, payable with respect to the Deposits relating to such Class of Certificates) or, if an Indenture Default has occurred and is continuing, clause (a) will apply.
8.
To the Class A Trustee to the extent required to pay Expected Distributions on the Class A Certificates.
9.
If any Additional Certificates have been issued, to the trustee of the Additional Certificates (a) to the extent required to pay accrued and unpaid interest at the Stated Interest Rate on the Pool Balance of the Additional Certificates (other than Additional Adjusted Interest paid above and interest, if any, payable with respect to the Deposits relating to the Additional Certificates) or (b) in the case of an Equipment Note Special Payment, so long as no Indenture Default has occurred and is continuing under any Indenture, to the extent required to pay any such interest that is then due (other than Additional Adjusted Interest paid above) together with (without duplication) accrued and unpaid interest at the Stated Interest Rate on the outstanding principal amount of the Additional Equipment Notes, if any, held in the trust of the Additional Certificates and being redeemed, purchased or prepaid (excluding interest, if any, payable with respect to the Deposits relating to such Class of Certificates) or, if an Indenture Default has occurred and is continuing, clause (a) will apply. 127
10.
If any Additional Certificates have been issued, to the trustee of the Additional Certificates to the extent required to pay Expected Distributions on the Additional Certificates.
“Section 2.4 Fraction” means, with respect to any Special Distribution Date, a fraction, the numerator of which shall be the amount of principal of the applicable Equipment Notes being redeemed, purchased or prepaid on such Special Distribution Date, and the denominator of which shall be the aggregate unpaid principal amount of all Equipment Notes outstanding as of such Special Distribution Date. “Liquidity Obligations” means the obligations of the Subordination Agent to reimburse or to pay the Liquidity Provider all principal, interest, fees and other amounts owing to the Liquidity Provider under the Liquidity Facility or certain other agreements. “Liquidity Expenses” means the Liquidity Obligations other than any interest accrued thereon or the principal amount of any drawing under the Liquidity Facility. “Expected Distributions” means, with respect to the Certificates on any Distribution Date (the “Current Distribution Date”), the difference between: (A)
the Pool Balance of such Certificates as of the immediately preceding Distribution Date (or, if the Current Distribution Date is the first Distribution Date, the original aggregate face amount of the Certificates), and
(B)
the Pool Balance of such Certificates as of the Current Distribution Date calculated on the basis that (i) the principal of the Equipment Notes other than Performing Equipment Notes has been paid in full and such payments have been distributed to the holders of such Certificates, (ii) the principal of the Performing Equipment Notes has been paid when due (but without giving effect to any acceleration of Performing Equipment Notes) and such payments have been distributed to the holders of such Certificates and (iii) the principal of any Equipment Notes formerly held in the Trust that have been sold pursuant to the Intercreditor Agreement has been paid in full and such payments have been distributed to the holders of such Certificates, but without giving effect to any reduction in the Pool Balance as a result of any distribution attributable to Deposits occurring after the immediately preceding Distribution Date (or, if the Current Distribution Date is the first Distribution Date, occurring after the initial issuance of the Certificates).
For purposes of calculating Expected Distributions with respect to the Certificates, any premium paid on the Equipment Notes that has not been distributed to the Certificateholders (other than such premium or a portion thereof applied to the payment of interest on the Certificates or the reduction of the Pool Balance) shall be added to the amount of Expected Distributions. “Additional Certificate Adjusted Interest” means, if any Additional Certificates have been issued, as of any Current Distribution Date, (I) any interest described in clause (II) of this definition accruing prior to the immediately preceding Distribution Date which remains unpaid and (II) interest at the Stated Interest Rate for the Additional Certificates (x) for the number of days during the period commencing on, and including, the immediately preceding Distribution Date (or, if the Current Distribution Date is the first Distribution Date, the Issuance Date) and ending on, but excluding, the Current Distribution Date, on the Preferred Additional Certificate Pool Balance on such Current Distribution Date and (y) on the principal amount calculated pursuant to clauses (B)(i), (ii), (iii) and (iv) of the definition of Preferred Additional Certificate Pool Balance subject to the proviso at the end of the definition of Preferred Additional Certificate Pool Balance for each Additional Equipment Note with respect to which a disposition, distribution, sale or Deemed Disposition Event has occurred since the immediately preceding Distribution Date (but only if no such event has previously occurred with respect to such Additional Equipment Note), for each day during the period, for each such Additional Equipment Note, commencing on, and including, the immediately preceding Distribution Date (or, if the Current Distribution Date is the first Distribution Date, the Issuance Date) and ending on, but excluding the date of disposition, distribution, sale or Deemed Disposition Event with respect to such Additional Equipment Note, Aircraft or Collateral under (and as defined in) the related Indenture, as the case may be. 128
“Preferred Additional Certificate Pool Balance” means, if any Additional Certificates have been issued, as of any date, the excess of (A) the Pool Balance of the Additional Certificates as of the immediately preceding Distribution Date (or, if such date is on or before the first Distribution Date, the original aggregate face amount of the Additional Certificates) (after giving effect to payments made on such date) over (B) the sum of (i) the outstanding principal amount of each Additional Equipment Note that remains unpaid as of such date subsequent to the disposition of the Collateral under (and as defined in) the related Indenture and after giving effect to any distributions of the proceeds of such disposition applied under such Indenture to the payment of each such Additional Equipment Note, (ii) the outstanding principal amount of each Additional Equipment Note that remains unpaid as of such date subsequent to the scheduled date of mandatory redemption of such Additional Equipment Note following an Event of Loss with respect to the Aircraft which secured such Additional Equipment Note and after giving effect to the distributions of any proceeds in respect of such Event of Loss applied under such Indenture to the payment of each such Additional Equipment Note, (iii) the excess, if any, of (x) the outstanding amount of principal and interest as of the date of sale of each Additional Equipment Note previously sold over (y) the purchase price received with respect to the sale of such Additional Equipment Note (net of any applicable costs and expenses of sale) and (iv) the outstanding principal amount of any Additional Equipment Note with respect to which a Deemed Disposition Event has occurred; provided, however, that if more than one of the clauses (i), (ii), (iii) and (iv) is applicable to any one Additional Equipment Note, only the amount determined pursuant to the clause that first became applicable shall be counted with respect to such Additional Equipment Note. “Deemed Disposition Event” means, in respect of any Equipment Note, the continuation of an Indenture Event of Default in respect of such Equipment Note without an Actual Disposition Event occurring in respect of such Equipment Note for a period of five years from the date of the occurrence of such Indenture Event of Default. “Actual Disposition Event” means, in respect of any Equipment Note, (i) the disposition of the Aircraft securing such Equipment Note, (ii) the occurrence of the mandatory redemption date for such Equipment Note following an event of loss, as defined in the applicable Indenture (“Event of Loss”) with respect to the Aircraft which secured such Equipment Note or (iii) the sale of such Equipment Note. Interest Drawings under the Liquidity Facility and withdrawals from the Cash Collateral Account in respect of interest on the Certificates will be distributed to the Trustee, notwithstanding the priority of distributions set forth in the Intercreditor Agreement and otherwise described herein. All amounts on deposit in the Cash Collateral Account that are in excess of the Required Amount will be paid to the Liquidity Provider. Voting of Equipment Notes In the event that the Subordination Agent, as the registered holder of any Equipment Note, receives a request for its consent to any amendment, supplement, modification, consent or waiver under such Equipment Note or the related Indenture (or, if applicable, the related Lease or other related document), (i) if no Indenture Event of Default shall have occurred and be continuing with respect to such Indenture, the Subordination Agent shall request directions from the Trustee and shall vote or consent in accordance with such directions and (ii) if any Indenture Event of Default shall have occurred and be continuing with respect to such Indenture, the Subordination Agent will exercise its voting rights as directed by the Controlling Party, subject to certain limitations; provided that no such amendment, modification, consent or waiver shall, without the consent of the Liquidity Provider and each affected Certificateholder, reduce the amount of principal or interest payable by the Issuer under any Equipment Note or change the time of payments or method of calculation of any amount under any Equipment Note or reduce, modify or amend the scope of the secured obligations under the Indenture or any other security documentation. List of Certificateholders Upon the occurrence of an Indenture Event of Default, the Subordination Agent shall instruct the Trustee to, and the Trustee shall, request that DTC post on its Internet bulletin board a securities position listing setting forth the names of all the parties reflected on DTC’s books as holding interests in the Certificates. 129
Reports Promptly after the occurrence of a Triggering Event or an Indenture Event of Default resulting from either (A) Turkish Airlines’ failure to make payments of rent under any Lease or (B) the failure of the Issuer to make payment on any Equipment Note and on every Regular Distribution Date while the Triggering Event or such Indenture Event of Default shall be continuing, the Subordination Agent will provide to the Trustee, the Liquidity Provider, the Rating Agencies, the Issuer and Turkish Airlines a statement setting forth the following information: 1.
After the occurrence of a Turkish Airlines Bankruptcy Event, with respect to each Aircraft, whether such Aircraft is subject to the 60-Day Period.
2.
To the best of the Subordination Agent’s knowledge, after requesting such information from the Issuer and Turkish Airlines, (i) whether the Issuer and/or any person acting on its behalf has commenced the exercise of any of the remedies available to it, (ii) whether the Aircraft are currently in service or parked in storage, (iii) the maintenance status of the Aircraft and (iv) location of the Engines (as defined in the Indentures). Turkish Airlines has agreed to provide such information upon request of the Issuer and the Subordination Agent, but no more frequently than every three months with respect to each Aircraft so long as it is subject to the lien of an Indenture.
3.
The current Pool Balance of the Certificates, the Preferred Additional Certificate Pool Balance (if any Additional Certificates have been issued) and outstanding principal amount of all Equipment Notes for all Aircraft.
4.
The expected amount of interest which will have accrued on the Equipment Notes and on the Certificates as of the next Regular Distribution Date.
5.
The amounts paid to each person on such Distribution Date pursuant to the Intercreditor Agreement.
6.
Details of the amounts paid on such Distribution Date identified by reference to the relevant provision of the Intercreditor Agreement and the source of payment (by Aircraft and party).
7.
If the Subordination Agent has made a Final Drawing under the Liquidity Facility.
8.
The amounts currently owed to the Liquidity Provider.
9.
The amounts drawn under the Liquidity Facility.
10.
After a Turkish Airlines Bankruptcy Event, any operational reports filed by Turkish Airlines with the bankruptcy court which are available to the Subordination Agent on a non-confidential basis.
The Agent Wilmington Trust Company will be the Subordination Agent under the Intercreditor Agreement. Turkish Airlines and its affiliates may from time to time enter into banking and trustee relationships with the Subordination Agent and its affiliates. The Subordination Agent’s address is 1100 North Market Square, Wilmington, Delaware 19890-1605. The Subordination Agent may resign at any time, in which event a successor Subordination Agent will be appointed as provided in the Intercreditor Agreement. The Controlling Party may remove the Subordination Agent for cause as provided in the Intercreditor Agreement. In such circumstances, a successor Subordination Agent will be appointed as provided in the Intercreditor Agreement. Any resignation or removal of the Subordination Agent and appointment of a successor Subordination Agent does not become effective until acceptance of the appointment by the successor Subordination Agent.
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DESCRIPTION OF THE AIRCRAFT AND THE APPRAISALS The Aircraft The Aircraft to be financed pursuant to this offering will consist of three new Boeing 777-300ER aircraft scheduled for delivery in March 2015 and April 2015. See “—The Appraisals” for a description of the Aircraft. At or before the time of delivery of each Aircraft the right to purchase such Aircraft will be assigned by Turkish Airlines to the Issuer. The Aircraft have been designed to be in compliance with Chapter 4 noise level standards, which are the most restrictive regulatory standards currently in effect in the United States for aircraft noise abatement. The Boeing 777-300ER aircraft is a long-range aircraft with a seating capacity of approximately 349 passengers. The engine type utilized on Turkish Airlines’ Boeing 777-300ER Aircraft is the GE90-115BL engine. The Appraisals The table below sets forth the appraised values of the Aircraft that may be financed with the proceeds of this offering, as determined by Aircraft Information Services, Inc. (“AISI”), BK Associates, Inc. (“BK”) and Morten Beyer & Agnew, Inc. (“mba”), independent aircraft appraisal and consulting firms (collectively, the “Appraisers”). Appraiser’s Valuations (U.S. Dollars) Aircraft Type(1) Boeing 777-300ER Boeing 777-300ER Boeing 777-300ER
Registration Number
Manufacturer’s Serial Number
Delivery Month
TC-JJV TC-JJY TC-JJZ
44119 44120 44122
March 2015 March 2015 April 2015
AISI 168,620,000 168,620,000 168,900,000
BK 170,350,000 170,350,000 171,100,000
mba 165,680,000 165,680,000 165,810,000
Appraised Value(2) (U.S. Dollars) 168,216,667 168,216,667 168,603,333
___________________ (1)
The indicated registration number, manufacturer’s serial number and delivery month for each Aircraft reflect Turkish Airlines’ current expectations, although these may differ for the actual Aircraft financed hereunder. The actual delivery date for any Aircraft may be subject to delay or acceleration. See “—Timing of Financing the Aircraft” below. Turkish Airlines has certain rights to substitute other aircraft if the scheduled delivery date of any Aircraft is delayed for more than 30 days after the month scheduled for delivery. See “—Substitute Aircraft”.
(2)
The appraised value of each Aircraft set forth above is the lesser of the average and median values of such Aircraft as appraised by the Appraisers.
For purposes of the foregoing chart, AISI, BK and mba were each asked to provide its opinion as to the appraised base value of each Aircraft, projected as of the scheduled delivery month of the applicable Aircraft. As part of this process, all three Appraisers performed “desk top” appraisals without any physical inspection of the Aircraft. The appraisals are based on various assumptions and methodologies, which vary among the appraisals. The Appraisers have delivered letters summarizing their respective appraisals, copies of which are annexed to this offering memorandum as Appendix II. For a discussion of the assumptions and methodologies used in each of the appraisals, reference is hereby made to such summaries. An appraisal is only an estimate of value. It is not indicative of the price at which an aircraft may be purchased from the manufacturer, nor should it be relied upon as a measure of realizable value. The proceeds realized upon a sale of any Aircraft may be less than its appraised value. The value of the Aircraft in the event of the exercise of remedies under the applicable Indenture will depend on market and economic conditions, the availability of buyers, the condition of the Aircraft and other similar factors. Accordingly, there can be no assurance that the proceeds realized upon any such exercise with respect to the Equipment Notes and the Aircraft pursuant to the applicable Indenture would equal the appraised value of such Aircraft or be sufficient to satisfy in full payments due on such Equipment Notes or the Certificates. See “Risk Factors—Risk Factors Relating to the Certificates and the Offering—The Appraisals are only estimates of Aircraft value”.
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Timing of Financing the Aircraft The Aircraft that may be financed with the proceeds of this offering are scheduled for delivery under Turkish Airlines’ purchase agreements with Boeing in March 2015 and April 2015. See the table above under “—The Appraisals” for the scheduled month of delivery of each such Aircraft. Under such purchase agreements, delivery of an Aircraft may be delayed for a variety of reasons. The Note Purchase Agreement provides that the period for financing the Aircraft under this offering (the “Delivery Period”) will expire on 30 June 2015. If the scheduled delivery date of any Aircraft that may be financed with the proceeds of this offering is delayed by more than 30 days after the month scheduled for delivery, Turkish Airlines has the right to replace such Aircraft with a Substitute Aircraft (as defined below), subject to certain conditions. See “— Substitute Aircraft”. If delivery of any such Aircraft is delayed beyond the Delivery Period Termination Date and Turkish Airlines does not exercise its right to replace such Aircraft with a Substitute Aircraft, unused Deposits will be distributed to Certificateholders together with accrued and unpaid interest thereon but without a premium. See “Description of the Deposit Agreement—Unused Deposits”. Substitute Aircraft If the scheduled delivery date for any Aircraft that may be financed with the proceeds of this offering is delayed by more than 30 days after the last day of the month scheduled for delivery, Turkish Airlines may identify for delivery a substitute aircraft (each, together with the substitute aircraft referred to below, a “Substitute Aircraft”) of the same model as the Aircraft being replaced. Turkish Airlines will be obligated to obtain written confirmation from each Rating Agency that substituting such Substitute Aircraft for the replaced Aircraft will not result in a withdrawal, suspension or downgrading of the ratings of the Class A Certificates.
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DESCRIPTION OF THE EQUIPMENT NOTES The following summary describes the material terms of the Equipment Notes. The summary makes use of terms defined in, and is qualified in its entirety by reference to all of the provisions of, the Equipment Notes, the Indentures, the Leases and the Note Purchase Agreement. Except as otherwise indicated, the following summaries relate to the Note Purchase Agreement, the Equipment Notes, the Indentures and the Lease that may be applicable to each Aircraft. Under the Note Purchase Agreement, the Issuer will enter into a secured debt financing with respect to each Aircraft. The description of such financing agreements in this offering memorandum is based on the forms of such agreements annexed to the Note Purchase Agreement. However, the terms of the financing agreements actually entered into may differ from the forms of such agreements and, consequently, may differ from the description of such agreements contained in this offering memorandum. Although such changes are permitted, under the Note Purchase Agreement the terms of such agreements must not vary the Required Terms. In addition, Turkish Airlines will be obligated to certify to the Trustee that any substantive modifications do not materially and adversely affect the Certificateholders. The Issuer must also obtain written confirmation from each Rating Agency that the use of financing agreements modified in any material respect from the forms attached to the Note Purchase Agreement would not result in a withdrawal, suspension or downgrading of the ratings of the Class A Certificates. See “Description of the Certificates—Obligation to Purchase Equipment Notes”. General Equipment Notes will be issued in one series with respect to each Aircraft (the “Series A Equipment Notes” or the “Equipment Notes”). The Equipment Notes with respect to each Aircraft will be issued under a separate Indenture (each, an “Indenture”) between the Issuer and Wilmington Trust Company, as indenture trustee thereunder (each, a “Loan Trustee”). Turkish Airlines may elect to issue a single additional junior series of Equipment Notes with respect to an Aircraft on the Issuance Date or at any time thereafter (the “Additional Equipment Notes”) which will be funded from sources other than this offering and will be subordinated in right of payment to the Equipment Notes. See “Possible Issuance of Additional Certificates”. Subordination Each Indenture provides that Series A Equipment Notes issued in respect of an Aircraft will rank senior in right of payment to the Additional Equipment Notes, if issued. See “Possible Issuance of Additional Certificates”. Principal and Interest Payments Subject to the provisions of the Intercreditor Agreement, interest paid on the Equipment Notes will be passed through to the Certificateholders on the dates and at the rate per annum set forth on the cover page of this offering memorandum until the final expected Regular Distribution Date. Subject to the provisions of the Intercreditor Agreement, principal paid on the Equipment Notes will be passed through to the Certificateholders in scheduled amounts on the dates set forth herein until the final expected Regular Distribution Date. Interest will be payable on the unpaid principal amount of each Equipment Note at the rate applicable to such Equipment Note on 15 March and 15 September of each year, commencing on the first such date to occur after initial issuance thereof. Such interest will be computed on the basis of a 360-day year of twelve 30-day months.
133
Scheduled principal payments on the Equipment Notes will be made on 15 March and 15 September in certain years, commencing on 15 September 2015. See “Description of the Certificates—Pool Factors” for a discussion of the scheduled payments of principal of the Equipment Notes and possible revisions thereto. If any date scheduled for a payment of principal, premium (if any) or interest with respect to the Equipment Notes is not a Business Day, such payment will be made on the next succeeding Business Day, without any additional interest. The Issuer is also required to pay under each Indenture such Indenture’s pro rata share of: 1.
the fees, the interest payable on drawings under the Liquidity Facility in excess of earnings on cash deposits from such drawings plus certain other amounts and certain other payments due to the Liquidity Provider, and
2.
compensation and certain expenses payable to the Pass Through Trustee and the Subordination Agent.
The date on which payments of scheduled interest and principal on any Additional Equipment Notes, if issued, will commence will be set forth in such Additional Equipment Notes. Redemption If an Event of Loss occurs with respect to an Aircraft, the Equipment Notes issued with respect to such Aircraft will be redeemed, in whole, in each case at a price equal to the aggregate unpaid principal amount thereof, together with accrued interest thereon to, but not including, the date of redemption, but without premium or Make-Whole Amount, on a Special Distribution Date. All of the Equipment Notes issued with respect to an Aircraft may be redeemed prior to maturity at any time, at Turkish Airlines’ option and with the consent of the Issuer, only if all outstanding Equipment Notes with respect to all other Aircraft are simultaneously redeemed. The redemption price for any optional redemption will be the unpaid principal amount of the relevant Equipment Notes, together with accrued and unpaid interest thereon to, but not including, the date of redemption, plus a Make-Whole Amount. The Make-Whole Amount will not be payable in connection with a prepayment arising as a result of an Illegality or the imposition of certain taxes or following the termination of the Lease following a Lease Event of Default or an Indenture Event of Default. “Make-Whole Amount” means, with respect to any Equipment Note, an amount (as determined by an independent investment bank of national standing) equal to the excess, if any, of (a) the present value of the remaining scheduled payments of principal and interest to maturity of such Equipment Note computed by discounting such payments on a semi-annual basis on each payment date under the applicable Indenture (assuming a 360-day year of twelve 30-day months) using a discount rate equal to the Treasury Yield plus the applicable Make-Whole Spread over (b) the outstanding principal amount of such Equipment Note plus accrued interest to the date of determination. The “Make-Whole Spread” applicable to the Equipment Notes is 0.50%. For purposes of determining the Make-Whole Amount, “Treasury Yield” means, at the date of determination with respect to any Equipment Note, the interest rate (expressed as a decimal and, in the case of United States Treasury bills, converted to a bond equivalent yield) determined to be the per annum rate equal to the semi-annual yield to maturity for United States Treasury securities maturing on the Average Life Date of such Equipment Note and trading in the public securities markets either as determined by interpolation between the most recent weekly average yield to maturity for two series of United States Treasury securities trading in the public securities markets, (A) one maturing as close as possible to, but earlier than, the Average Life Date of such Equipment Note and (B) the other maturing as close as possible to, but later than, the Average Life Date of such Equipment Note, in each case as published in the most recent H.15(519) or, if a weekly average yield to maturity for United States Treasury securities maturing on 134
the Average Life Date of such Equipment Note is reported in the most recent H.15(519), such weekly average yield to maturity as published in such H.15(519). “H.15(519)” means the weekly statistical release designated as such, or any successor publication, published by the Board of Governors of the Federal Reserve System. The date of determination of a Make-Whole Amount shall be the third Business Day prior to the applicable payment or redemption date and the “most recent H.15(519)” means the H.15(519) published prior to the close of business on the third Business Day prior to the applicable payment or redemption date. “Average Life Date” for any Equipment Note shall be the date which follows the time of determination by a period equal to the Remaining Weighted Average Life of such Equipment Note. “Remaining Weighted Average Life” on a given date with respect to any Equipment Note shall be the number of days equal to the quotient obtained by dividing (a) the sum of each of the products obtained by multiplying (i) the amount of each then remaining scheduled payment of principal of such Equipment Note by (ii) the number of days from and including such determination date to but excluding the date on which such payment of principal is scheduled to be made, by (b) the then outstanding principal amount of such Equipment Note. Security Aircraft The Equipment Notes issued with respect to each Aircraft will be secured by:
a New York law mortgage and a Turkish law mortgage on such Aircraft and each of the other Aircraft for which Equipment Notes are outstanding, which shall be granted by the Issuer to the relevant Loan Trustee;
all hull total loss insurance proceeds with respect to such Aircraft;
an assignment to the relevant Loan Trustee of all rights and interests in each Lease, as appropriate and, in respect of certain of Turkish Airlines’ rights under warranties with respect to each Aircraft, by arrangements with the relevant manufacturers; and
a pledge over the membership interests in the Issuer pursuant to the Membership Interest Pledge Agreement.
The “international interests” created by the mortgages and the Lease and the assignment of the Lease to the relevant Loan Trustee are required to be registered under the Cape Town Treaty. Since the Equipment Notes are cross-collateralized, any proceeds from the sale of an Aircraft securing Equipment Notes or other exercise of remedies under an Indenture with respect to such Aircraft will (subject to the provisions of relevant bankruptcy and insolvency legislation) be available for application to shortfalls with respect to obligations due under the other Equipment Notes at the time such proceeds are received. See Appendix III to this offering memorandum for tables setting forth the projected loan to value ratios for each of the Aircraft that may be financed pursuant to this offering. Cash Cash, if any, held from time to time by the relevant Loan Trustee with respect to any Aircraft, including funds held as the result of an Event of Loss to such Aircraft, will be invested and reinvested by such Loan Trustee, in investments described in the related Indenture.
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Limitation of Liability Except as otherwise provided in the Indentures, each Loan Trustee, in its individual capacity, will not be answerable or accountable under the Indentures or under the Equipment Notes under any circumstances except, among other things, for its own wilful misconduct or gross negligence. Events of Default, Notice and Waiver There will be cross-default provisions among the Indentures and the Leases. If an Indenture Event of Default occurs and is continuing under the Equipment Notes issued with respect to an Aircraft, an Indenture Event of Default will occur under the Equipment Notes issued with respect to the remaining Aircraft, and remedies will be exercisable with respect to all Aircraft at the Indenture level. In these circumstances, Events of Default (or mandatory prepayment events) will also arise under each corresponding Lease and remedies will be exercisable with respect to all Aircraft at each level in the structure. See also “Description of the Leases—General—Lease Events of Default”. More specifically, events of default under each Indenture (an “Indenture Event of Default”) will include: 1.
Any Lease Event of Default.
2.
The failure by the Issuer to pay any amount, when due, under such Indenture or under any Equipment Note issued thereunder that continues for more than ten Business Days, in the case of principal, interest or Make-Whole Amount, and, in all other cases, 15 Business Days after the Issuer receives written notice from the related Loan Trustee.
3.
The failure of the Issuer to remove any lien it is required to remove for a period of 30 days after the Issuer receives written notice from the relevant Loan Trustee or any Note Holder of such lien.
4.
Any representation or warranty made by the Issuer in such Indenture or certain related documents furnished to the relevant Loan Trustee or any holder of an Equipment Note pursuant thereto being false or incorrect in any material respect when made that continues to be material and adverse to the interests of the relevant Loan Trustee or Note Holders and remains unremedied after notice and specified cure periods.
5.
Failure by the Issuer to perform or observe any covenant or obligation for the benefit of the relevant Loan Trustee or holders of Equipment Notes under such Indenture or certain related documents that continues after notice and specified cure periods.
6.
The occurrence of an Indenture Event of Default under any other Indenture.
7.
The occurrence of certain events of bankruptcy, reorganization or insolvency of the Issuer.
The holders of a majority in principal amount of the outstanding Equipment Notes issued with respect to any Aircraft, by notice to the relevant Loan Trustee, may on behalf of all the holders waive any existing default and its consequences under the Indenture with respect to such Aircraft, except a default in the payment of the principal of, or premium or interest on, any such Equipment Notes or a default in respect of any covenant or provision of such Indenture that cannot be modified or amended without the consent of each holder of Equipment Notes. See “Description of the Intercreditor Agreement—Voting of Equipment Notes” regarding the persons entitled to direct the vote of Equipment Notes. An “Indenture Default” means any condition, circumstance, act or event that, with the giving of notice, the lapse of time or both, would constitute an Indenture Event of Default. 136
Remedies If an Indenture Event of Default (other than certain events of bankruptcy, reorganization or insolvency) occurs and is continuing under an Indenture, the related Loan Trustee or the holders of a majority in principal amount of the Equipment Notes outstanding under such Indenture may declare the principal of all such Equipment Notes issued thereunder immediately due and payable, together with all accrued but unpaid interest thereon. If (i) certain events of bankruptcy, reorganization or insolvency occur with respect to the Issuer, or (ii) certain events of bankruptcy, reorganization or insolvency occur with respect to Turkish Airlines coupled with Turkish Airlines also being under a Lease Event of Default in respect of its payment or performance obligations, such amounts shall be due and payable without any declaration or other act on the part of the related Loan Trustee or holders of Equipment Notes. The holders of a majority in principal amount of Equipment Notes outstanding under an Indenture may rescind any declaration of acceleration of such Equipment Notes at any time before the judgment or decree for the payment of the money so due shall be entered if (i) there has been paid to the related Loan Trustee an amount sufficient to pay all principal, interest and premium, if any, on any such Equipment Notes, to the extent such amounts have become due otherwise than by such declaration of acceleration and (ii) all other Indenture Events of Default and incipient Indenture Events of Default with respect to any covenant or provision of such Indenture have been cured. Each Indenture provides that if an Indenture Event of Default under such Indenture has occurred and is continuing, the related Loan Trustee may exercise certain rights or remedies available to it under such Indenture or under applicable law. If an Indenture Event of Default under any Indenture occurs and is continuing, any sums held or received by the related Loan Trustee may be applied to reimburse such Loan Trustee for any tax, expense or other loss incurred by it and to pay any other amounts due to such Loan Trustee prior to any payments to holders of the Equipment Notes issued under such Indenture. Modification of Indentures Without the consent of holders of a majority in principal amount of the Equipment Notes outstanding under any Indenture, the provisions of such Indenture and any related Lease may not be amended or modified, except to the extent indicated below. So long as no Lease Event of Default is continuing, an Indenture may not be amended without the consent of Turkish Airlines (not to be unreasonably withheld). If a Lease Event of Default is continuing, the Indenture may not be amended in a manner which increases Turkish Airlines’ obligations, or prejudices its rights, without its consent. Without the consent of the Liquidity Provider and the holder of each Equipment Note outstanding under any Indenture affected thereby, no amendment or modification of such Indenture may among other things (a) reduce the principal amount of, or premium, if any, or interest payable on, any Equipment Notes issued under such Indenture or change the date on which any principal, premium, if any, or interest is due and payable, (b) permit the creation of any security interest with respect to the property subject to the lien of such Indenture, except as provided in such Indenture, or deprive any holder of an Equipment Note issued under such Indenture of the benefit of the lien of such Indenture upon the property subject thereto or (c) modify the percentage of holders of Equipment Notes issued under such Indenture required to take or approve any action under such Indenture. Any Indenture may be amended without the consent of the holders of Equipment Notes to, among other things, cure any defect or inconsistency in such Indenture or the Equipment Notes issued thereunder (provided that such change does not adversely affect the interests of any such holder).
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DESCRIPTION OF THE LEASES AND OTHER AGREEMENTS The following summary describes the material terms of the Leases and certain other agreements entered into in connection with the transaction. The summary does not purport to be complete and is qualified in its entirety by reference to all of the provisions of the Leases. The provisions of each of the Leases are substantially identical. Turkish Airlines has entered into a purchase agreement dated 7 December 2012 incorporating the terms of the aircraft general terms agreement AGTA dated 15 December 1997 with Boeing, a Delaware corporation with its principal office in Seattle, Washington, U.S.A. (the “Airframe Manufacturer”) with respect to, among others, three new Boeing 777-300ER Aircraft. Turkish Airlines will assign its rights to take delivery of each Aircraft from Boeing to the Issuer under a purchase agreement assignment. Upon the financing of each Aircraft purchased by the Issuer, each such Aircraft will be leased by the Issuer to Turkish Airlines pursuant to a finance Lease. Each Aircraft will be leased separately to Turkish Airlines for an initial term commencing on the date on which the Aircraft is acquired by the Issuer. Each Lease will expire on the related Latest Equipment Note Maturity Date. In each case, the expiration of a Lease is subject to earlier termination in accordance with its terms, and Turkish Airlines has the right to purchase the related Aircraft prior to such expiration date. All basic Rent under each Lease is payable by Turkish Airlines in U.S. Dollars and shall be calculated to be sufficient to meet required payments of principal and interest on the Equipment Notes and will be paid into an account of the Issuer with Wilmington Trust Company and will be credited to the Trustee in payment of scheduled payments of principal and interest and other amounts due or expected to be due from the Issuer under the related Equipment Notes. The Leases will be governed by English law and will be subject to registration with the Association of Financial Leasing, Factoring and Financing Companies in Turkey. Furthermore, the Leases cannot be contrary to the Financial Lease, Factoring and Finance Companies Law No.6361 (the “Financial Lease Law”). The following summary contains a description of the general provisions common to all of the Leases. Capitalized terms used in this section but not otherwise defined shall have the meanings given thereto in the relevant Lease. General Net Lease Under the terms of each Lease, Turkish Airlines’ obligations in respect of the related Aircraft will be those of a lessee under a “net lease”. Accordingly, Turkish Airlines is obligated under each Lease, among other things and at Turkish Airlines’ expense, to keep the related Aircraft duly registered and insured, to pay costs of operating the related Aircraft, and to maintain service, overhaul and repair, so as to keep it in good operating condition, as set forth in more detail below. Lease Obligations Under the terms of each Lease, Turkish Airlines will be required, inter alios and at Turkish Airlines’ expense, to cause such Lease to be duly registered in Turkish Airlines’ name as lessee and operator and the Issuer’s name as owner (or, if applicable, in the relevant Permitted Sub-Lessee’s name) at the relevant Aviation Authority. The relevant Aviation Authority will be the Directorate General of Civil Aviation of Turkey, save in respect of any re-registration in connection with a Permitted Sub-Lease. If the related Aircraft is registered other than in Turkey, Turkish Airlines shall ensure that such Aircraft is registered with the relevant Aviation Authority in the name of the Issuer, or on a basis which reflects the interests of the Issuer and the Secured Parties to the extent permitted by applicable law.
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Turkish Airlines is also required, to the extent set forth in each Lease, to (a) (i) procure that the related Aircraft and all parts thereof and equipment thereon or therein are kept in as good operational repair and condition as similar aircraft operated by Turkish Airlines or any Permitted Sub-Lessee and are airworthy in all respects, and to that end procure that all necessary and appropriate maintenance, overhauls, replacements and repairs to the related Aircraft are carried out in accordance with Turkish Airlines’ or any Permitted Sub-Lessee’s, as the case may be, maintenance programs, schedules and standards which have been approved by the relevant Aviation Authority so as to preserve any warranty given by the related Airframe Manufacturer, the related Engine Manufacturer or, as the case may be, the supplier of any part of the related Aircraft or such parts and equipment; and (ii) comply or procure compliance with all airworthiness directives or similar mandatory requirements and any other similar requirements compliance with which is required under or as a condition of the Insurances affecting the related Aircraft or any such parts and equipment, and shall maintain the same in such condition so as to comply with all applicable laws of any country to, over or from which the related Aircraft and/or such parts and equipment may be flown or to whose jurisdiction such Aircraft becomes subject; and (b) maintain, service, repair and overhaul the related Aircraft (or cause such Aircraft to be maintained, serviced, repaired and over hauled) in accordance with Turkish Airlines’ (or, if applicable, the Permitted Sub-Lessee’s) maintenance programs for all aircraft of that type, and in any event to (i) keep the related Aircraft equipped with the related Engines, accessories, parts and components installed at delivery or with replacements made in accordance with the related Lease; (ii) comply, within such time as may be prescribed by the relevant Aviation Authority, with all mandatory modifications and airworthiness directives applicable to the related Aircraft; (iii) keep the Aircraft in the condition that enables its certificate of airworthiness to be maintained in good standing; (iv) comply with all recommendations of the related Airframe Manufacturer, the related Engine Manufacturer or any other manufacturer or supplier of any Part of the related Aircraft in respect of such Aircraft at the times when and to the extent that it complies with the same in relation to all other aircraft of the same type as the related Aircraft which are owned or operated by Turkish Airlines or such Permitted Sub-Lessee; and (v) comply with all applicable law, ordinances, rules, regulations, orders and requirements of Turkey or such other jurisdiction to which Turkish Airlines or any Permitted Sub-Lessee or operator of the related Aircraft may be subject (or any other country to, from, in or over which such Aircraft may be flown) regardless of the person upon whom such laws, ordinances, rules, regulations, orders and requirements are by their terms imposed. Turkish Airlines is further required under the terms of each Lease promptly to replace or procure the prompt replacement of any Engine or Part or other item of equipment installed in the related Aircraft which has become worn out, lost, destroyed, confiscated, unserviceable, time expired or otherwise unfit for use and in each case is not reasonably capable of repair with an item of the same or equivalent make and model or an improved or advanced version thereof, of at least equivalent utility and value. Each Lease requires that Turkish Airlines will procure that no modification to, or change or alteration in, the related Aircraft is made which will or will be reasonably likely to have the effect of reducing the fair market value of such Aircraft except as is (i) necessary for compliance with the provisions of the related Lease, (ii) required by the related Airframe Manufacturer or Engine Manufacturer or supplier or manufacturer of any part or (iii) required by the relevant Aviation Authority, provided that Turkish Airlines or a Permitted Sub-Lessee at Turkish Airlines’ or its own expense may carry out any modification or change or alteration to the related Aircraft as may be approved by the relevant Aviation Authority and which will not and will not be reasonably likely to materially and adversely affect the fair market value of the related Aircraft and which will not be likely to prevent such Aircraft being returned in compliance with the redelivery conditions specified in the related Lease. Under each Lease, Turkish Airlines is required to ensure that, save for the purpose of carrying out any mandatory modification, (i) in respect of an Engine, no substitution or replacement shall be made unless the replacement engine is of the same make and model or an improved version thereof and is of at least equivalent utility, condition and value to the replaced Engine, (ii) no other substitution, replacement or renewal shall be made in or to the related Aircraft unless it is of at least equivalent utility, condition and value to the item for which it is substituted or which it replaces and (iii) in all cases, save as described below, such substitution, replacement or renewal is the property of the Issuer or is such that on installation in the related Aircraft title thereto is capable of vesting in the Issuer free from security interests (other than Permitted Security Interests (as defined in the applicable Lease)). 139
Notwithstanding the foregoing, Turkish Airlines will be entitled under the terms of each Lease, provided no proceedings following a Lease Event of Default have been commenced, to install any engine or item of equipment on the related Aircraft by way of substitution, replacement, renewal or mandatory modification, notwithstanding that such installation is not in accordance with the Lease provisions described in the foregoing paragraphs, if (i) an engine or item of equipment complying with the foregoing is unavailable at the time place such engine or item was required to be installed, (ii) it would have resulted in an unreasonable disruption of the operation of the related Aircraft and/or Turkish Airlines’ business or the business of any Permitted Sub-Lessee as an airline to have grounded such Aircraft until such time as a Suitable Replacement becomes available for installation in such Aircraft, and (iii) as soon as practicable after installation of the same on the related Aircraft but no later than the expiry of the relevant Lease Period, Turkish Airlines shall ensure that any such engine or item of equipment not complying with the requirements of the foregoing is removed and replaced or substituted by a Suitable Replacement. Under each Lease, Turkish Airlines or a Permitted Sub-Lessee may install in or attach to the related Aircraft any additional item of equipment which is not in substitution or replacement of any item then installed or attached to such Aircraft and which does not adversely affect the performance or airworthiness of such Aircraft or the fair market value of such Aircraft and whose installation or attachment does not prejudice the relevant Insurances. Any such additional item shall not become the property of the Issuer and may be removed by Turkish Airlines or a Permitted Sub-Lessee at any time upon Turkish Airlines or such Permitted Sub-Lessee repairing any damage to the related Aircraft caused by the installation, attachment or removal of such additional item. Each Lease requires that any such additional items shall be removed on the expiry of the related Lease Period and, to the extent that the same are not so removed, title to such additional items shall vest in the Issuer. “Airframe” means:
(a)
the Aircraft described in the related Lease but excluding the related Engines or any engines from time to time installed thereon;
(b)
any and all appliances, spare parts, instruments, accessories, seats or other equipment or parts of whatever nature from time to time installed on or attached to such Aircraft title to which remains vested in the Issuer; and
(c)
insofar as the same belongs to the Issuer, all substitutions, replacements or renewals from time to time made in or to the said Aircraft or to the said items referred to in (a) and (b) above or to any part thereof in accordance with the related Lease.
“Engine” or “Engines” means:
(a)
either or both (as the context may require) of the two (2) General Electric GE90-115BL engines, described in the related Lease, originally installed on the related Airframe at delivery whether or not from time to time thereafter installed on the related Airframe or any other airframe;
(b)
any other engine which may from time to time be installed upon or attached to the related Airframe which becomes the property of the Issuer in accordance with the related Lease;
(c)
insofar as the same belong to the Issuer, any and all appliances, instruments or accessories or other equipment or parts of whatever nature from time to time relating to an engine referred to in (a) and (b) above, whether or not installed on or attached to such engine; and
(d)
insofar as the same belong to the Issuer, all substitutions, replacements or renewals from time to time made on or to any item referred to in (a), (b) and (c) above in accordance with the related Lease.
140
Subleasing and Possession Pursuant to each Lease and subject to applicable law, Turkish Airlines will be permitted to sublease the related Aircraft, subject to certain conditions including that (i) the rights of the Issuer and the Trustee, shall not be prejudiced or impaired by any change in registration occasioned thereby, (ii) any such sublease will provide for the termination of the sublease in the event that the related Lease Period terminates for any reason, (iii) any such sublease shall be subject and subordinate to the related Lease and shall not extend beyond the related Lease Period and (iv) any such sublease shall not be to a person resident or domiciled in, or that would result in the related Aircraft being registered in, any country which from time to time is subject to any relevant sanction or embargo from the United Nations, the European Union, the United States or Turkey. In addition, subject to certain limitations described in the relevant Lease, Turkish Airlines will be permitted to transfer possession of any Airframe or any Engine, other than by sublease, in connection with certain temporary interchange arrangements and in connection with maintenance activities or modifications. Security Interests and Liens Turkish Airlines does not have any power to sell, charge, lease or otherwise encumber or dispose of any Aircraft or any part thereof, nor to create or incur any lien over any Aircraft or any part thereof other than: (a)
the rights of the Issuer, as owner of the relevant Aircraft, and as provided in the Lease;
(b)
the security interests created pursuant to the Security Agreements, the Aircraft Mortgages, and any other rights existing pursuant to the Transaction Documents related thereto;
(c)
the rights of others in possession of the Aircraft in accordance with the terms of the relevant Lease;
(d)
certain other customary liens permitted under such documents, including liens for taxes either not yet assessed or, if assessed, not yet due and payable or, if due and payable, which are being disputed or contested in good faith by appropriate proceedings so long as the likely result thereof will not materially adversely affect the interest of the Issuer in the related Airframe or any Engine;
(e)
liens for the fees or charges of any airport or air navigation authority or any supplier’s, mechanic’s, workman’s, repairer’s, hangar keeper’s, employee’s or like lien arising in the ordinary course of business by statute or by operation of law, in each case for amounts: (i) the payment of which is not yet due and payable; (ii) which are not overdue for payment having regard to the custom of the relevant trade; (iii) which if due and payable and overdue for payment, are being disputed or contested in good faith by appropriate proceedings so long as the likely result thereof will not materially adversely affect the interest of the Issuer in the related Airframe or either Engine; or (iv) which Turkish Airlines or any Permitted Sub-Lessee is unable to pay because it is restrained from doing so by exchange control or other applicable regulations; and
(f)
judgment liens (other than for taxes) with respect to which there shall have been secured a stay of execution pending appeal.
Insurance Turkish Airlines is required, at its own expense, to maintain or cause to be maintained on each Aircraft, through brokers and with insurers of recognized responsibility and standing in the international aviation insurance market, comprehensive airline liability insurance, including third party, passenger and property damage liability insurance (including cargo, baggage and mail liability insurance), and all-risk (including war-risk), aircraft hull insurance, in accordance with each Lease and with all legal requirements as to the insurance of the related Aircraft which may from time to time be imposed by the laws of the Turkey or such other jurisdiction to which Turkish Airlines or the relevant Permitted Sub-Lessee may be subject or of any state to, from or over which such Aircraft shall be flown insofar as they affect or concern the operation of such Aircraft. 141
In respect of each Aircraft, Turkish Airlines is required to cause the Issuer, the Trustee, the Liquidity Facility Provider and certain other persons to be included as additional insureds under all insurance policies required by the terms of the related Lease with respect to such Aircraft. The Trustee will be named as “loss payee” under the insurance policies in respect of any Total Loss. Subject to certain customary exceptions, Turkish Airlines may not operate (or permit any sublessee to operate) any Aircraft in any area that is excluded from coverage by any insurance policy in effect with respect to such Aircraft and required by the related Lease. Total Loss If a Total Loss occurs with respect to any Aircraft, Turkish Airlines will be required to pay the applicable Agreed Value for such Aircraft not later than the 180th day after the date on which the Total Loss occurred. Upon the payment of the Agreed Value for such Aircraft together with all other amounts then due and unpaid with respect to such Aircraft, which must be at least sufficient to pay in full as of the date of payment the principal amount of the related Equipment Notes and all accrued and unpaid interest due thereon (together with all other amounts due with respect to such Equipment Notes), the security interests created by the relevant Security Agreement and the Lease relating to such Aircraft will terminate with respect to such Aircraft, Turkish Airlines’ obligation thereafter to make Rent payments with respect to such Lease will cease and the Issuer will transfer all of its right, title and interest in and to the related Aircraft to Turkish Airlines. “Total Loss” means, in relation to the Aircraft, the Airframe or an Engine, any of the following events: (a)
the actual, constructive, agreed or arranged total loss or destruction of the Aircraft, the Airframe or such Engine, or damage to the Aircraft, the Airframe or such Engine beyond economic repair, or the Aircraft, the Airframe or such Engine being rendered permanently unfit for normal use; or
(b)
requisition for title, requisition for hire, forfeiture or other compulsory acquisition (but in the case of requisition for hire only if the same results in an insurance settlement on the basis of a total loss) of the Aircraft, the Airframe or such Engine by the Government or by any other government or other competent authority (or by any person acting by or purporting to act by the authority of the same), whether de jure or de facto for more than 90 consecutive days; or
(c)
as a result of any law, rule, regulation, order, decree or other action by any governmental body having jurisdiction, the use of the Aircraft for the air transportation of persons is prohibited for more than 90 consecutive days; or
(d)
the theft, hijacking, arrest, expropriation, appropriation, restraint, confiscation, seizure, taking in execution, impounding, detention of the Aircraft, Airframe or such Engine or the taking from the possession of Turkish Airlines or a Permitted Sub-Lessee for another reason of the Aircraft, the Airframe or such Engine other than in the circumstances described in paragraph (b) above which in any such case shall have deprived Turkish Airlines or any Permitted Sub-Lessee of the possession thereof for more than 90 consecutive days (or such longer period as Turkish Airlines and the Issuer may agree in writing).
Lease Events of Default A “Lease Event of Default” includes: (i)
failure by Turkish Airlines to pay any amount of Rent, Termination Sum or Agreed Value within 10 Business Days after the due date;
(ii)
failure by Turkish Airlines to pay any other amount due within 15 Business Days after receipt by Turkish Airlines of written demand therefor; 142
(iii)
failure by Turkish Airlines to carry and maintain (or cause to be carried and maintained) insurance on or in respect of the relevant Aircraft in accordance with the provisions of such Lease (unless the Aircraft is at the time grounded and covered by ground insurance in an amount, in respect of hull insurance, of not less than the Agreed Value at such time, and otherwise on such terms as best industry practice dictates while grounded);
(iv)
Turkish Airlines’ default in the due performance or observance of any of its obligations or undertakings (other than those referred to in (i) to (iii) above) and, if such default is capable of remedy, Turkish Airlines fails to remedy such default within 365 days after receipt by it of notice from the Issuer, as the case may be, requiring the same to be remedied, and such default or failure materially adversely affects the rights of the Issuer, and the Secured Parties or any of them under the Lease or any other Transaction Document, except where any such default or failure arises as a result of certain circumstances arising by reason of any Change in Law after the date of the Lease;
(v)
any representation or warranty made or deemed to be made or repeated by Turkish Airlines in or pursuant to any Lessee Document is or proves to have been incorrect in any material respect when made or deemed made or repeated and, if such default is capable of remedy, Turkish Airlines fails to remedy such default within 30 days after receipt by Turkish Airlines of notice from the Issuer requiring the same to be remedied and, in the opinion of the Issuer (acting reasonably), the rights or interests of the Issuer, the Secured Parties or any of them under the Lease or any other Transaction Document are materially adversely affected, except where any such representation or warranty deemed to be made after the date of the Lease is or proves to be incorrect by reason of any Change in Law after the date of the Lease;
(vi)
the occurrence of certain events of bankruptcy, reorganization or insolvency with respect to Turkish Airlines;
(vii)
Turkish Airlines ceases to be a commercial air carrier operating on international scheduled routes;
(viii) Turkish Airlines disposes of all or substantially all of its operating assets, whether by one or a series of transactions, related or not, other than for the purposes of a reconstruction, merger or amalgamation while able to pay its debts as they fall due and other than for the purposes of reequipment programs or under one or more sale and leaseback transactions and such disposal, in the opinion of the Issuer or the Trustee (both acting reasonably), materially adversely affects the rights of the Issuer or the Secured Parties; and (ix)
an Event of Default occurs under any other Lease.
If a Lease Event of Default has occurred and is continuing, the remedies set forth in the Lease may be exercised, which include (i) the right to take court action to enforce performance by Turkish Airlines of its obligations and/or to recover damages for the breach, and (ii) the right to terminate the Lease Period and repossess the Aircraft, whereupon Turkish Airlines shall be obliged to pay the relevant Termination Sum and certain other amounts, and the Aircraft may be sold at public auction or private sale or otherwise. See also “Description of the Equipment Notes—Events of Default, Notice and Waiver”. Termination Events Under the terms of each Lease, Turkish Airlines will have the right to terminate the Lease upon the occurrence of certain events, including certain illegality events or circumstances arising following a Change in Law, a requirement arising on Turkish Airlines to make withholdings from and gross-up payments, and obligations arising to make payments under the tax indemnity. In addition, if certain events occur with respect to an Indenture resulting in an acceleration of the Equipment Notes, the Lease Period shall automatically terminate. Upon any such termination, Turkish Airlines shall make certain payments, including the relevant Termination Sum, which shall in all cases be sufficient to pay in full the aggregate unpaid principal amount of the Equipment Notes outstanding on the date of termination together with accrued and unpaid interest. 143
In a Lease Event of Default scenario resulting from a non-payment of rent by Turkish Airlines, the termination right of the Issuer may, under the Financial Lease Law, be subject to a 30 day grace period or, in the case of a lease entitling the lessee to acquire title to the leased asset at the end of the lease term, a 60 day grace period. Nevertheless, the Cape Town Treaty does not provide for a grace period for a lessor to exercise its remedies granted under the Cape Town Treaty upon the occurrence of an event of default in respect of the lessee. Ability to Repossess the Aircraft Turkish Airlines is incorporated under the laws of Turkey. Accordingly, any insolvency proceedings with respect to Turkish Airlines would be likely to proceed under, and be governed by, both Turkish insolvency laws, the Turkish Enforcement and Bankruptcy Law No. 2004 (the “EBL”), and the Financial Lease Law, which will apply to the Leases, and the Cape Town Treaty. The ability of a Loan Trustee to exercise its remedies under the Equipment Notes in the case of certain events of bankruptcy, restructuring or insolvency of Turkish Airlines, including its ability to obtain possession of the Aircraft under the applicable Indenture, will likely to be determined through a court process in Turkey if the relevant insolvency practitioner contests the repossession and enforcement proceeding. The following discussion of insolvency and enforcement law, although an overview, describes generally the applicable terms and principles. Under the EBL, an interest holder within the scope of Article 8 Sub-clause 1.(a) of the Cape Town Treaty and the conditional seller or lessor within the meaning of Article 10 Sub-clause 1.(a), can exercise the remedies provided in the Cape Town Treaty by applying to the authorised Ankara enforcement office with the registration certificate issued by the Turkish Civil Aviation Authority. A Loan Trustee can also enforce the de-registration and export request authorization certificate (“IDERA”), as indicated in Schedule 9 of the Lease Agreement (Form of IDERA), pertaining to Article 8 of the Protocol, provided that a document evidencing that the Lease Agreement has been terminated is submitted to the Turkish Civil Aviation Authority. If Turkish Airlines is subject to an insolvency procedure, the remedy available for repossession of the Aircraft will vary depending on the type of the insolvency procedure. Remedies under the Cape Town Treaty include the ability to obtain possession of the aircraft at the end of 60 calendar days after the commencement of an insolvency related event if Turkish Airlines has not cured all defaults under the Equipment Notes (other than a default caused by the commencement of such insolvency-related event), and agreed to perform all future obligations under the Equipment Notes. Additionally there are a number of alternative insolvency procedures under Turkish law including (i) bankruptcy (iflas); (ii) restructuring by way of reconciliation (uzlaşma yoluyla yeniden yapılandırma); (iii) postponement of bankruptcy (iflas ertelemesi); and (iv) concordat (konkordato), all of which fall within the definition of “insolvency related event” under the Cape Town Treaty. The remedies for repossession of the Aircraft are discussed below:
Repossession of the Aircraft is possible under the EBL during the bankruptcy procedure. In the event of bankruptcy, all assets and rights of Turkish Airlines that fall under the bankruptcy estate are determined by the bankruptcy office for formation of a bankruptcy estate and all assets held by the lessee are recorded to an official book maintained by the bankruptcy office for this purpose. If the bankruptcy office determines that the owner/lessor has title to the Aircraft, it must then separate the Aircraft from other assets of the bankruptcy estate. Assuming that the liquidation of the bankruptcy estate would be sufficient to satisfy the costs of the liquidation process, the liquidation of the bankruptcy estate will be made in accordance with the ordinary liquidation process. The ordinary liquidation procedure is commenced with an announcement of the bankruptcy office stating that creditors and persons who claim rights on the assets included in the bankruptcy estate must have their claims registered with the bankruptcy office within one month following the day of the announcement. Upon notification of the ownership claim, the bankruptcy administration has the authority to decide whether to accept or reject such third party ownership claim. If the bankruptcy administration rejects the proprietary claim, it grants a period of seven days to the claimant party in order to initiate a lawsuit before the competent execution court. If 144
such third party does not initiate the lawsuit within the required timeframe then it is deemed to waive its ownership right vis-à-vis the bankruptcy estate. This, does not, however, preclude such third party from initiating a lawsuit against Turkish Airlines if the bankruptcy proceeding against it is suspended.
If Turkish Airlines applies for the option to postpone bankruptcy provided under the EBL, the court may postpone the bankruptcy process, provided that the board of directors or the creditors propose credible alternatives (such as to increase the share capital or to decrease the interest rate on Turkish Airlines’ debts) to improve the financial status of Turkish Airlines. Pursuant to the EBL, the maximum period for a postponement is one year. However, this period may be extended for an additional four years taking into consideration the administrator’s report. Pursuant to Article 179/b of the EBL, once the court decides to postpone bankruptcy, all execution proceedings conducted against Turkish Airlines shall cease including any enforcement action for recovery of the possession of the Aircraft. Nevertheless, the Cape Town Treaty would apply notwithstanding Article 179/b of the EBL and, in the case of a postponement of the bankruptcy of Turkish Airlines, the Lessor or the relevant Loan Trustee would be able to take the possession of the Aircraft by way of (i) de-registration and export request authorization through IDERA, and (ii) exercising the remedies set out under Article XI of the Protocol. The latter option has yet to be implemented and there is no clear guidance as to whether it may be implemented in postponement of bankruptcy.
If Turkish Airlines exercises reconstruction by way of reconciliation, it will submit to the competent court a reconstruction project approved by a majority of the effected creditors. The court shall then decide whether to approve the project or suspend all pending procedures, claims and prohibit any future proceedings against Turkish Airlines until the hearing for the approval takes place. The creditors that are present at the approval hearing can appeal the approval decision within 10 days following the service of such decision. As per the EBL, the terms of an approved reconstruction project substitute all contractual obligations against the creditors. Agreement terms which set forth that Turkish Airlines’ would be in default or in breach of contract with its application for reconstruction will be deemed inapplicable. Nevertheless, as the Cape Town Treaty would apply notwithstanding this action, the Lessor or the relevant Loan Trustee would be able to repossess the Aircraft through the IDERA or remedies set out under the Protocol as explained above.
If the relevant court grants a grace period to Turkish Airlines for purposes of concordat, new enforcement and bankruptcy proceedings cannot be initiated against Turkish Airlines for 3 months. Such period can be extended to up to 5 months if necessary by the relevant court. Nevertheless creditors that hold an interest in Turkish Airlines’ assets can continue liquidation procedures but cannot finalize the actual liquidation of the Aircraft until the expiry of the grace period. However, the lessor or the relevant Loan Trustee would be able to repossess the Aircraft through IDERA or remedies set out under the Protocol as described above.
See “Risk Factors—Risk Factors Relating to the Certificates and the Offering—The Cape Town Treaty has not yet been interpreted in Turkey. A court might interpret the Cape Town Treaty in a manner that does not maximize the benefits of the Cape Town Treaty for the Certificateholders”. Taxation Pursuant to the Leases, Turkish Airlines will agree that all payments to be made by Turkish Airlines shall be made in full and free and clear of and without deduction or withholding for or on account of any taxes unless required by applicable law. If Turkish Airlines shall be required by applicable law of a jurisdiction to make any deduction or withholding from any payment under the Lease for or on account of any taxes Turkish Airlines shall on the due date of such payment pay such additional amounts as may be necessary to ensure that the relevant payee receives and retains free from any liability in respect of such deduction or withholding a net amount equal to the full amount which it would have received had payment not been 145
made subject to any such taxes. Turkish Airlines shall keep each relevant payee fully indemnified against liability of any kind which such payee may suffer or incur by reason of any delay or failure of Turkish Airlines to make any such deduction or withholding which Turkish Airlines is required to make as aforesaid or by reason of any such additional amount not being paid on the due date for such payment In addition, if withholding taxes are imposed under the Liquidity Facility, Turkish Airlines will pay amounts under the Lease equal to such amounts by way of supplemental rent or indemnity payments. Purchase Option The Leases will include a Purchase Option which Turkish Airlines may exercise (provided no Lease Event of Default is continuing) on giving to the Issuer not less than 45 days’ prior written notice (which notice shall be irrevocable) to purchase the Aircraft on the date specified in the purchase option notice. Turkish Airlines may only exercise the Purchase Option under a Lease if, simultaneously with such exercise, it exercises its Purchase Option under each other Lease. If Turkish Airlines elects to purchase the Aircraft, it shall be obliged to pay on the Purchase Option Date certain sums, including the relevant Termination Value which shall in all cases be sufficient to pay in full the aggregate unpaid principal amount of the relevant Equipment Notes outstanding on the Purchase Option Date together with accrued and unpaid interest and Make-Whole Amount. Exercise of Remedies In addition to the terms described above, the Issuer will agree to assign by way of security all of its rights under each Lease to the relevant Loan Trustee. The exercise of all remedies under each Lease will therefore be taken by such Loan Trustee. Other Agreements of Turkish Airlines Financial Statements Under the Note Purchase Agreement, Turkish Airlines has agreed to deliver to the Trustee and the Issuer for so long as the Certificates remain outstanding (i) its annual financial statements audited by an internationally recognized accounting firm promptly after they are published (but in any case no later than the date falling 180 days after the last day of the financial year to which they relate) and (ii) its abridged, unaudited, half yearly financial information no later than 90 days after the halfway point of each financial year. Turkish Airlines shall not be obliged to provide any such information to the Trustee and the Issuer to extent that it is publicly available on its website (currently http://investor.turkishairlines.com/en). Merger and Consolidation Turkish Airlines has agreed that if Turkish Airlines consolidates or merges, then either (i) Turkish Airlines must be the successor person resulting from such consolidation or merger, or (ii) the successor person resulting from such consolidation or merger (if other than Turkish Airlines) or the person that acquired or leased all or substantially all of the assets of Turkish Airlines, must assume all of Turkish Airlines’ obligations and liabilities under the Operative Agreements (as defined in the Note Purchase Agreement) to which it is a party. To the extent that any filings or registrations in relation to the Security Documents or the Collateral (each as defined in the Note Purchase Agreement) are adversely affected by such consolidation, merger or acquisition, Turkish Airlines will undertake to use reasonable endeavors to make such filings or registrations as are necessary to avoid such effect.
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POSSIBLE ISSUANCE OF ADDITIONAL CERTIFICATES Turkish Airlines may elect to issue a single additional series of Equipment Notes, referred to herein as the Additional Equipment Notes on the Issuance Date or at any time thereafter with respect to any Aircraft. If issued, the Additional Equipment Notes, will be funded from sources other than this offering but will be issued under the same Indentures as the Equipment Notes for such Aircraft. The Additional Equipment Notes issued under an Indenture will be subordinated in right of payment to the Series A Equipment Notes issued under such Indenture, will bear interest at a fixed rate and the scheduled payment dates will be the Regular Distribution Dates. Turkish Airlines will fund the sale of the Additional Equipment Notes through the sale of Additional Certificates issued by the trust related to the Additional Certificates. Any issuance of Additional Certificates will be made pursuant to a separate private offering memorandum. There will be no liquidity facility with respect to the Additional Certificates. The trustee for such Additional Certificates will become a party to the Intercreditor Agreement, and the Intercreditor Agreement will be amended by written agreement of Turkish Airlines and the Subordination Agent to provide for the addition thereto of the interest rate and final maturity date of the Additional Certificates. The Intercreditor Agreement already provides for the subordination of any Additional Certificates to the Administration Expenses, the Liquidity Obligations, and, other than with regard to interest on the Preferred Additional Certificate Pool Balance, the Class A Certificates, as and to the extent described herein. The holders of Additional Certificates will have the right to purchase all of the Class A Certificates under certain circumstances after a Certificate Buyout Event of Turkish Airlines. See “Description of the Certificates—Purchase Rights of Certificateholders”. In addition, the trustee for such Additional Certificates will be the Controlling Party upon payment of Final Distributions to the holders of the Class A Certificates, subject to the rights of the Liquidity Provider to be the Controlling Party under certain circumstances. See “Description of the Intercreditor Agreement—Intercreditor Rights”. Any issuance of Additional Equipment Notes and Additional Certificates, and any such amendment of the Intercreditor Agreement (and any amendment of an Indenture in connection with such issuance) will be contingent upon each Rating Agency providing written confirmation that such actions will not result in a withdrawal, suspension, or downgrading of the rating of the Class A Certificates. The issuance of the Additional Certificates is conditioned on the prior issuance of the Class A Certificates. If Additional Certificates are issued prior to the Delivery Period Termination Date, (a) the net proceeds thereof will be held in escrow and placed in deposit on behalf of the escrow agent with a depositary, all on terms and conditions and under documentation substantially similar to the Deposit Agreement and Escrow Agreement applicable to the net proceeds of the Class A Certificates and (b) the Additional Equipment Notes will be issued and purchased by the Subordination Agent on behalf of the trustee of the Additional Certificates on terms and conditions and under documentation substantially similar to the Note Purchase Agreement and Participation Agreement applicable to the purchase of the Equipment Notes. The net proceeds of any issuance of Additional Equipment Notes and Additional Certificates will be paid over to Turkish Airlines.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS General The following summary describes all material generally applicable U.S. federal income tax consequences to Certificateholders of the purchase, ownership and disposition of the Certificates. Except as otherwise specified, the summary is addressed to beneficial owners of Certificates that are citizens or residents of the United States, corporations created or organized in or under the laws of the United States or any state therein or the District of Columbia, estates the income of which is subject to U.S. federal income taxation regardless of its source, or trusts if: (a) a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (b) the trust has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person (“U.S. Certificateholders”). If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds the Certificates, the U.S. federal income tax treatment of the partnership and a partner in such partnership generally will depend on the status of the partner and the activities of the partnership. Such a partner or partnership should consult its own tax advisor as to the U.S. federal income tax consequences of the purchase, ownership, disposition and retirement of the Certificates. This summary does not address the tax treatment of U.S. Certificateholders that may be subject to special tax rules, such as banks, insurance companies, dealers in securities or commodities, partnerships, holders subject to the mark-to-market rules, tax-exempt entities, holders that will hold Certificates as part of a straddle or holders that have a “functional currency” other than the U.S. Dollar, nor, except as otherwise specified, does it address the tax treatment of U.S. Certificateholders that do not acquire Certificates at the public offering price as part of the initial offering. The summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to purchase Certificates. This summary does not describe any U.S. federal estate, gift, alternative minimum tax or net investment income tax considerations or any tax consequences arising under the laws of any state, locality or taxing jurisdiction other than the United States. The summary is based upon the U.S. Internal Revenue Code of 1986, as amended (the “Code”) and U.S. Treasury regulations thereunder as in effect on the date of this offering memorandum, as well as judicial and administrative interpretations thereof (in final or proposed form) available on or before such date. All of the foregoing are subject to change, which change could apply retroactively. Turkish Airlines has not sought any ruling from the U.S. Internal Revenue Service (the “IRS”) with respect to the tax consequences described below, and Turkish Airlines cannot assure you that the IRS will not take contrary positions. The Trust is not indemnified for any U.S. federal income taxes that may be imposed upon it, and the imposition of any such taxes on the Trust could result in a reduction in the amounts available for distribution to the Certificateholders. Prospective investors should consult their own tax advisors with respect to the federal, state, local and foreign tax consequences to them of the purchase, ownership and disposition of the Certificates. Tax Status of the Trust Although there is no authority addressing the characterization of entities that are similar to the Trust in all material respects, based upon an interpretation of analogous authorities and the terms of the transaction documents, all as in effect on the date hereof, the Trust will be classified for U.S. federal income tax purposes either as a grantor trust or as a partnership, and will not be treated as a corporation or other entity taxable as a corporation. The Trust intends to file income tax returns and report to investors on the basis that it is a grantor trust. Except as otherwise stated below, the discussion assumes that the Trust will be classified as a grantor trust. If the Trust is classified as a partnership for U.S. federal income tax purposes, it will not be classified as a publicly traded partnership taxable as a corporation provided that at least 90% of the Trust’s gross income for each taxable year of its existence is “qualifying income” (which is defined to include, among other things, interest income, gain from the sale or disposition of capital assets held for the production of interest income, and income derived with respect to a business of investing in securities). Income derived by the Trust from the Equipment Notes will constitute qualifying income and the Trust therefore will meet the 90% test described above, assuming that the Original Trust operates in accordance with the terms of the Pass Through Trust Agreement and other agreements to which it is a party. 148
Taxation of U.S. Certificateholders Generally Trust Classified as Grantor Trust Assuming that the Trust is classified as a grantor trust, a U.S. Certificateholder will be treated as owning its pro rata undivided interest in the relevant Deposits (as evidenced by Escrow Receipts) and each of the Equipment Notes held by the Trust, the Trust’s contractual rights and obligations under the Note Purchase Agreement, and any other property held by the Trust. Accordingly, each U.S. Certificateholder’s share of interest paid on Equipment Notes will be taxable as ordinary income, as it is paid or accrued, in accordance with such U.S. Certificateholder’s method of accounting for U.S. federal income tax purposes, and a U.S. Certificateholder’s share of premium, if any, paid on redemption of an Equipment Note will be treated as capital gain. The Deposits will likely be subject to the short-term obligation rules, with the result that a U.S. Certificateholder using the cash method of accounting will be required to defer interest deductions with respect to the debt incurred or continued to purchase or carry an interest in a Deposit unless the U.S. Certificateholder elects to include income from the Deposit using the accrual method of accounting. Any amounts received by the Trust under the Liquidity Facility in order to make interest payments will be treated for U.S. federal income tax purposes as having the same characteristics as the payments they replace. It is anticipated that the Equipment Notes will not be issued with original issue discount (“OID”) for U.S. federal income tax purposes. If, however, any Equipment Note is issued with more than a de minimis amount of OID, a Certificateholder of the Certificates generally would be required to include such OID in income for U.S. federal income tax purposes as it accrues under a constant yield method based on a compounding of interest, regardless of such Certificateholder’s method of accounting and prior to such Certificateholder’s receipt of cash attributable to such income. In the case of a subsequent purchaser of a Certificate, the purchase price for the Certificate should be allocated among the relevant Deposits and the assets held by the Trust (including the Equipment Notes and the rights and obligations under the Note Purchase Agreement with respect to Equipment Notes not theretofore issued) in accordance with their relative fair market values at the time of purchase. Any portion of the purchase price allocable to the right and obligation under the Note Purchase Agreement to acquire an Equipment Note should be included in the purchaser’s basis in its share of the Equipment Note when issued. Although the matter is not entirely clear, in the case of a purchaser after initial issuance of the Certificates but prior to the Delivery Period Termination Date, if the purchase price reflects a “negative value” associated with the obligation to acquire an Equipment Note pursuant to the Note Purchase Agreement being burdensome under conditions existing at the time of purchase (e.g., as a result of the interest rate on the unissued Equipment Notes being below market at the time of purchase of a Certificate), such negative value probably would be added to such purchaser’s basis in its interest in the Deposits and the remaining assets of the Trust and reduce such purchaser’s basis in its share of the Equipment Notes when issued. The preceding two sentences do not apply to purchases of Certificates following the Delivery Period Termination Date. A U.S. Certificateholder who is treated as purchasing an interest in an Equipment Note at a market discount (generally, at a cost less than its remaining principal amount) that exceeds a statutorily defined de minimis amount will be subject to the “market discount” rules of the Code. These rules provide, in part, that gain on the sale or other disposition of a debt instrument with a term of more than one year and partial principal payments (including partial redemptions) on such a debt instrument are treated as ordinary income to the extent of accrued but unrecognized market discount. The market discount rules also provide for deferral of interest deductions with respect to debt incurred or continued to purchase or carry a debt instrument that has market discount. A U.S. Certificateholder who purchases an interest in an Equipment Note at a premium may elect to amortize the premium as an offset to interest income on the Equipment Note under rules prescribed by the Code and U.S. Treasury regulations promulgated under the Code. Each U.S. Certificateholder will be entitled to deduct, consistent with its method of accounting, its pro rata share of fees and expenses paid or incurred by the corresponding Trust as provided in Section 162 or 212 of the Code. Certain fees and expenses, including fees paid to the Trustee and the Liquidity Provider, will be 149
borne by parties other than the Certificateholders. It is possible that the payments related to such fees and expenses will be treated as constructively received by the Trust, in which event a U.S. Certificateholder will be required to include in income and will be entitled to deduct its pro rata share of such fees and expenses. If a U.S. Certificateholder is an individual, estate or trust, the deduction for such holder’s share of such fees or expenses will be allowed only to the extent that all of such holder’s miscellaneous itemized deductions, including such holder’s share of such fees and expenses, exceed 2%. of such holder’s adjusted gross income. In addition, in the case of U.S. Certificateholders who are individuals, certain otherwise allowable itemized deductions will be subject generally to additional limitations on itemized deductions under applicable provisions of the Code. Trust Classified as Partnerships If the Trust is classified as a partnership (and not as a publicly traded partnership taxable as a corporation) for U.S. federal income tax purposes, income or loss with respect to the assets held by the Trust will be calculated at the Trust level but the Trust itself will not be subject to U.S. federal income tax. A U.S. Certificateholder would be required to report its share of the Trust’s items of income and deduction on its tax return for its taxable year within which the Trust’s taxable year (which should be a calendar year) ends as well as income from its interest in the relevant Deposits. A U.S. Certificateholder’s basis in its interest in the Trust generally would be equal to its purchase price therefor (including its share of any funds withdrawn from the Depositary and used to purchase Equipment Notes), plus its share of the Trust’s net income, minus its share of any net losses of the Trust, and minus the amount of any distributions from the Trust. In the case of an original purchaser of a Certificate that is a calendar year taxpayer, income or loss generally should be the same as it would be if the Trust were classified as a grantor trust, except that income or loss would be reported on an accrual basis even if the U.S. Certificateholder otherwise uses the cash method of accounting. A subsequent purchaser, however, generally would be subject to tax on the same basis as an original holder with respect to its interest in the Trust, and would not be subject to the market discount rules or the bond premium rules during the duration of the Trust, except that it is possible that, in the case of a subsequent purchaser that purchases Certificates at a time when the total adjusted tax basis of the Trust’s assets exceeds their fair market value by more than U.S.$250,000, taxable income would be computed as if the adjusted basis of the Trust’s assets were reduced by the amount of such excess. Effect of Reallocation of Payments under the Intercreditor Agreement In the event that a trust with respect to Additional Certificates (if any Additional Certificates are issued) receives less than the full amount of the interest, principal or premium paid with respect to the Additional Equipment Notes held by such trust because of the subordination of the Additional Certificates under the Intercreditor Agreement, the corresponding owners of beneficial interests in the Additional Certificates likely would be treated for federal income tax purposes as if they had:
received as distributions their full share of interest, principal or premium;
paid over to the Class A Certificateholders an amount equal to their share of the amount of the shortfall; and
retained the right to reimbursement of the amount of the shortfall to the extent of future amounts payable to them on account of the shortfall.
Under this analysis:
holder of any Additional Certificates, if issued, incurring a shortfall would be required to include as current income any interest or other income of the trust of the Additional Certificates that was a component of the shortfall, even though that amount was in fact paid to the Class A Certificateholders; 150
any resulting loss generally would only be allowed to holders of any Additional Certificates, if issued, when their right to receive reimbursement of the shortfall becomes worthless (i.e., when it becomes clear that funds will not be available from any source to reimburse the shortfall); and
reimbursement of the shortfall before a claim of worthlessness would not be taxable income to the holder of any Additional Certificates, if issued, because the amount reimbursed would have been previously included in income.
These results should not significantly affect the inclusion of income for holders of any Additional Certificates, if issued, on the accrual method of accounting, but could accelerate inclusion of income to holders of such Additional Certificates on the cash method of accounting by, in effect, placing them on the accrual method. Dissolution of Original Trust and Formation of New Trust Assuming that the Original Trust is classified as a grantor trust, the dissolution of the Original Trust and distribution of interests in the Successor Trust will not be a taxable event to U.S. Certificateholders, who will continue to be treated as owning their shares of the property transferred from the Original Trust to the Successor Trust. If the Original Trust is classified as a partnership, a U.S. Certificateholder will be deemed to receive its share of the Equipment Notes and any other property transferred by the Original Trust to the Successor Trust in liquidation of its interest in the Original Trust in a non-taxable transaction. In such case, the U.S. Certificateholder’s basis in the property so received will be equal to its basis in its interest in the Original Trust, allocated among the various assets received based upon their bases in the hands of the Original Trust and any unrealized appreciation or depreciation in value in such assets, and the U.S. Certificateholder’s holding period for the Equipment Notes and other property will include the Original Trust’s holding period. Sale or Other Disposition of the Certificates Upon the sale, exchange or other disposition of a Certificate, a U.S. Certificateholder generally will recognize capital gain or loss (subject to the possible recognition of ordinary income under the market discount rules) equal to the difference between the amount realized on the disposition (other than any amount attributable to accrued interest which will be taxable as ordinary income and any amount attributable to any Deposits or the associated Escrow Receipts) and the U.S. Certificateholder’s adjusted tax basis in the Note Purchase Agreement, Equipment Notes and any other property held by the corresponding Trust (not including the tax basis attributable to the associated Escrow Receipts). Any such gain or loss will be long-term capital gain or loss to the extent attributable to property held by the Trust for more than one year. Any gain with respect to an interest in a Deposit or the associated Escrow Receipts will likely be treated as ordinary income and any loss will likely, to the extent of cumulative net accruals on the Deposits, be treated as ordinary loss. Notwithstanding the foregoing, if the Trust is classified as a partnership, gain or loss with respect to a disposition of an interest in the Trust will be calculated and characterized by reference to the U.S. Certificateholder’s adjusted tax basis and holding period for its interest in the Trust. Backup Withholding Payments made on the Certificates and proceeds from the sale of Certificates will not be subject to a backup withholding tax unless, in general, a U.S. Certificateholder fails to comply with certain reporting procedures or otherwise fails to establish an exemption from such tax under applicable provisions of the Code. Non-U.S. Certificateholders Payments of principal, interest or premium on the Equipment Notes or associated Deposits to, or on behalf of, any beneficial owner of a Certificate that is not a U.S. Certificateholder (a “non151
U.S. Certificateholder”) and any capital gain (not including any amount treated as interest) realized upon the sale, exchange, retirement or other disposition of a Certificate or upon receipt of premium paid on an Equipment Note by a non-U.S. Certificateholder will not be subject to U.S. federal income taxes if (i) such non-U.S. Certificateholder’s income or gain is not effectively connected with a U.S. trade or business of the holder and (ii) with respect to gain or sale, exchange, retirement or other disposition in the case of an individual, such holder is not present in the United States for 183 days or more in the taxable year of the sale, exchange, retirement or other disposition or receipt. Payments of interest on the Deposits likely will constitute income from sources within the United States for U.S. federal income tax purposes. As such, subject to the discussions of the U.S. Foreign Account Tax Compliance Act (“FATCA”) and backup withholding below, payments of interest on the Deposits to, or on behalf of, any beneficial owner of a Certificate that is a non-U.S. Certificateholder will not be subject to U.S. federal withholding taxes if (i) the non-U.S. Certificateholder does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of the Depositary entitled to vote, (ii) the non-U.S. Certificateholder is not a bank receiving interest pursuant to a loan agreement entered into in the ordinary course of its trade or business, or a controlled foreign corporation for U.S. federal income tax purposes that is related to the Depositary, and (iii) certain certification requirements (including identification of the beneficial owner of the Certificate) are satisfied. In addition, any gain (not including any amount treated as interest) realized upon the sale, exchange, retirement or other disposition of an Escrow Receipt which evidences an interest in a Deposit by a non-U.S. Certificateholder will not be subject to U.S. federal income or withholding taxes if (i) such gain is not effectively connected with a U.S. trade or business of the non-U.S. Certificateholder and (ii) in the case of an individual, such holder is not present in the United States for 183 days or more in the taxable year of the sale, exchange, retirement or other disposition or receipt. Payments of interest on the Equipment Notes should constitute income from sources outside the United States for U.S. federal income tax purposes and therefore, subject to the discussions of FATCA and backup withholding below, should not be subject to U.S. federal withholding taxes. FATCA generally imposes a 30% withholding tax (“FATCA Withholding”) on interest paid on, and the gross proceeds from the disposition of, debt obligations that generate U.S.-source interest paid to either (i) a foreign financial institution, unless such institution enters into an agreement with the U.S. government to collect and provide to the U.S. tax authorities information regarding such institution’s United States account holders, or is otherwise compliant with FATCA, or (ii) a foreign entity that is not a financial institution, unless such entity provides the relevant withholding agent with certification identifying any substantial U.S. owners. Under U.S. Treasury regulations and IRS guidance, FATCA Withholding generally applies to (a) payments of U.S. source interest paid on debt obligations issued (or materially modified) after June 30, 2014, (b) payments of gross proceeds from a redemption, retirement or disposition of such debt obligations after December 31, 2016, and may also apply to (c) certain “foreign pass-thru payments” (a term not yet defined) in respect of obligations that are issued after the “grandfathering date”, which is the date that is six months after the date on which final U.S. Treasury regulations defining the term foreign passthru payment are filed with the Federal Register, or which are materially modified after the grandfathering date. The United States and a number of other jurisdictions have entered into intergovernmental agreements to facilitate the implementation of FATCA (each, an “IGA”). Pursuant to FATCA and the "Model 1" and "Model 2" IGAs released by the United States, an FFI in an IGA signatory country could be treated as a Reporting FI not subject to FATCA Withholding on any payments it receives. Further, an FFI in an IGA jurisdiction would not be required to withhold under FATCA or an IGA (or any law implementing an IGA) from payments it makes. Under each Model IGA, a Reporting FI would still be required to report certain information in respect of its account holders and investors to its home government or to the IRS. The United States and Turkey have reached an agreement in substance on the terms of an IGA based largely on the Model 1 IGA. Until the United States and Turkey sign an IGA, Turkey will be treated as having a Model 1 IGA in effect provided that it remains on the IRS list of jurisdictions that have reached an agreement in substance on the terms of an IGA. The U.S. Treasury will review this list on a monthly basis to determine whether each jurisdiction will continue to be treated as having an IGA in effect.
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Assuming Turkish Airlines is operated, as expected, in a manner such that interest on the Equipment Notes will constitute income from sources outside the United States, interest (and gross proceeds) paid with respect to the Equipment Notes should not be subject to FATCA Withholding. However, it is possible that interest with respect to the Deposits paid to, or on behalf of, a non-U.S. Certificateholder will be subject to FATCA Withholding unless the non-U.S. Certificateholder establishes an exemption therefrom (because the interest likely will constitute income from sources within the United States). Investors are not indemnified for FATCA or any other U.S. withholding. Therefore and because FATCA is particularly complex and its application sometimes uncertain, prospective investors should consult with their own tax advisors regarding the implications of FATCA on and the withholding consequences of their investment in the Certificates. Payments made on the Certificates, and proceeds from the sale of Certificates, generally will not be subject to U.S. federal backup withholding tax unless such non-U.S. Certificateholder fails to comply with certain reporting procedures or otherwise fails to establish an exemption from such tax under applicable provisions of the Code. CERTAIN DELAWARE TAXES The Trustee is a Delaware trust company with its corporate trust office in Delaware. In the opinion of Morris James LLP, Wilmington, Delaware, counsel to the Trustee, under currently applicable law, assuming that the Trust will not be taxable as a corporation, but, rather, will be classified as a grantor trust under subpart E, Part I of Subchapter J of the Code or as a partnership under Subchapter K of the Code, (i) the Trust will not be subject to any tax (including, without limitation, net or gross income, tangible or intangible property, net worth, capital, franchise or doing business tax), fee or other governmental charge under the laws of the State of Delaware or any political subdivision thereof and (ii) Certificateholders that are not residents of or otherwise subject to tax in Delaware will not be subject to any tax (including, without limitation, net or gross income, tangible or intangible property, net worth, capital, franchise or doing business tax), fee or other governmental charge under the laws of the State of Delaware or any political subdivision thereof as a result of purchasing, holding (including receiving payments with respect to) or selling a Certificate. Neither the Trust nor the Certificateholders will be indemnified for any state or local taxes imposed on them, and the imposition of any such taxes on the Trust could result in a reduction in the amounts available for distribution to the Certificateholders. In general, should a Certificateholder or the Trust be subject to any state or local tax which would not be imposed if the Trustee were located in a different jurisdiction in the United States, the Trustee will resign and a new Trustee in such other jurisdiction will be appointed.
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CERTAIN U.S. ERISA CONSIDERATIONS The Employee Retirement Income Security Act of 1974, as amended (“ERISA”), imposes certain requirements on employee benefit plans subject to Title I of ERISA (“ERISA Plans”), and on those persons who are fiduciaries with respect to ERISA Plans. Investments by ERISA Plans are subject to ERISA’s general fiduciary requirements, including, but not limited to, the requirement of investment prudence and diversification and the requirement that an ERISA Plan’s investments be made in accordance with the documents governing the Plan. Section 406 of ERISA and Section 4975 of the Code prohibit certain transactions involving the assets of an ERISA Plan (as well as those plans that are not subject to ERISA but which are subject to Section 4975 of the Code, such as individual retirement accounts (together with ERISA Plans, “Plans”)) and certain persons (referred to as “parties in interest” or “disqualified persons”) having certain relationships to such Plans, unless a statutory or administrative exemption is applicable to the transaction. A party in interest or disqualified person who engages in a prohibited transaction may be subject to excise taxes and other penalties and liabilities under ERISA and the Code. The Department of Labor has promulgated a regulation, 29 CFR Section 2510.3-101 (as modified by Section 3(42) of ERISA, the “Plan Asset Regulation”), describing what constitutes the assets of a Plan with respect to the Plan’s investment in an entity for purposes of ERISA and Section 4975 of the Code. Under the Plan Asset Regulation, if a Plan invests (directly or indirectly) in a Certificate, the Plan’s assets will include both the Certificate and an undivided interest in each of the underlying assets of the corresponding Trust, including the Equipment Notes held by the Trust, unless it is established that equity participation in the Trust by “benefit plan investors” (including but not limited to Plans and entities whose underlying assets include “plan assets” by reason of an employee benefit plan’s investment in the entity) is not “significant” within the meaning of the Plan Asset Regulation. In this regard, the extent to which there is equity participation in a Trust by, or on behalf of, employee benefit plans will not be monitored. If the assets of the Trust are deemed to constitute the assets of a Plan, transactions involving the assets of the Trust could be subject to the prohibited transaction provisions of ERISA and Section 4975 of the Code unless a statutory or administrative exemption is applicable to the transaction. The fiduciary of a Plan that proposes to purchase and hold any Certificates should consider, among other things, whether such purchase and holding may involve (i) the direct or indirect extension of credit to a party in interest or a disqualified person, (ii) the sale or exchange of any property between a Plan and a party in interest or a disqualified person, and (iii) the transfer to, or use by or for the benefit of, a party in interest or a disqualified person, of any Plan assets. Such parties in interest or disqualified persons could include, without limitation, Turkish Airlines, the Issuer and their respective affiliates, the Initial Purchasers, the Loan Trustees, the Escrow Agent, the Depositary, the Trustee and the Liquidity Provider. In addition, if one Class of Certificates is purchased by a Plan and another Class of Certificates is held by a party in interest or a disqualified person with respect to such Plan, the exercise by the holder of the subordinate Class of Certificates of its right to purchase the senior Classes of Certificates upon the occurrence and during the continuation of a Triggering Event could be considered to constitute a prohibited transaction unless a statutory or administrative exemption were applicable. Depending, in part, on the identity of the Plan fiduciary making the decision to acquire or hold Certificates on behalf of a Plan and the circumstances under which such decision is made, Prohibited Transaction Class Exemption (“PTCE”) 91-38 (relating to investments by bank collective investment funds), PTCE 84-14 (relating to transactions effected by a “qualified professional asset manager”), PTCE 95-60 (relating to investments by an insurance company general account), PTCE 96-23 (relating to transactions directed by an in-house professional asset manager) or PTCE 90-1 (relating to investments by insurance company pooled separate accounts) (collectively, the “Class Exemptions”) could provide an exemption from the prohibited transaction provisions of ERISA and Section 4975 of the Code. However, there can be no assurance that any of these Class Exemptions or any other exemption will be available with respect to any particular transaction involving the Certificates.
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Governmental plans and certain church plans, while not subject to the fiduciary responsibility provisions of ERISA or the prohibited transaction provisions of ERISA and Section 4975 of the Code, may nevertheless be subject to state or other federal laws that are substantially similar to the foregoing provisions of ERISA and the Code. Fiduciaries of any such plans should consult with their counsel before purchasing any Certificates to determine the need for and availability of any exemption. Any Plan fiduciary which proposes to cause a Plan to purchase any Certificates should consult with its counsel regarding the applicability of the fiduciary responsibility and prohibited transaction provisions of ERISA and Section 4975 of the Code to such an investment, and to confirm that such purchase and holding will not constitute or result in a non-exempt prohibited transaction or any other violation of an applicable requirement of ERISA. Each person who acquires or accepts a Certificate or an interest therein, will be deemed by such acquisition or acceptance to have represented and warranted that either: (i) no Plan assets have been used to purchase or hold such Certificate or an interest therein or (ii) the purchase and holding of such Certificate or an interest therein are exempt from the prohibited transaction restrictions of ERISA and the Code pursuant to one or more prohibited transaction statutory or administrative exemptions. In addition, if a person acquiring or accepting a Certificate or an interest therein is a governmental, church, non-U.S. or other employee benefit plan that is subject to any federal, state, local or non-U.S. law that is substantially similar to the provisions of Title I of ERISA or Section 4975 of the Code, such person will be deemed by such acquisition or acceptance to have represented and warranted that the purchase and holding of such Certificate or an interest therein do not constitute or result in a non-exempt violation of any such substantially similar law.
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PLAN OF DISTRIBUTION Citigroup Global Markets Inc. and Goldman, Sachs & Co. are acting as joint book-running managers of this offering and as representatives of the Initial Purchasers named herein. Subject to the terms and conditions stated in the purchase agreement dated the date of this offering memorandum, the Initial Purchasers have severally agreed to purchase, and Turkish Airlines has agreed to sell to the Initial Purchasers, the entire face amount of the Certificates offered hereby. The purchase agreement provides that the obligations of the Initial Purchasers to purchase the Certificates are subject to approval of legal matters by counsel and to other conditions. The Initial Purchasers must purchase all the Certificates if they purchase any of the Certificates. The Initial Purchasers propose to resell the Certificates at the offering price set forth on the cover page of this offering memorandum within the United States to QIBs in reliance on Rule 144A and outside the United States in reliance on Regulation S. See “Transfer Restrictions”. The price at which the Certificates are offered may be changed at any time without notice. The Certificates have not been and will not be registered under the Securities Act or any state securities laws and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (as defined in Regulation S) except in transactions exempt from, or not subject to, the registration requirements of the Securities Act, nor have the Certificates been registered or approved for sale in Turkey under Turkish securities laws. See “Transfer Restrictions”. In addition, until 40 days after the commencement of this offering, an offer or sale of Certificates within the United States by a dealer that is not participating in this offering may violate the registration requirements of the Securities Act if that offer or sale is made otherwise than in accordance with Rule 144A. During the period from the date of the sale of the Certificates offered hereunder through and including 31 March 2015, Turkish Airlines shall not, without prior written consent of the Initial Purchasers, offer, issue, sell, contract or agree to sell or issue any equipment notes, pass through certificates, equipment trust certificates or equipment purchase certificates secured by aircraft owned or leased by Turkish Airlines, other than the Certificates or any Additional Certificates. The Certificates are a new issue of securities with no established trading market. Turkish Airlines has applied for the listing of the Certificates on the Official List of the Irish Stock Exchange and for the trading of the Certificates on the Global Exchange Market of the Irish Stock Exchange. Turkish Airlines has been advised by the Initial Purchasers that the Initial Purchasers intend to make a market in the Certificates but are not obligated to do so and may discontinue market making at any time without notice. No assurance can be given as to the liquidity of the trading market for the Certificates. Turkish Airlines expects that delivery of the Certificates will be made against payment therefor on or about the closing date specified on the cover page of this offering memorandum, which will be the fifth business day following 19 March 2015 (this settlement cycle being referred to as T+5). Under Rule 15c6-1 under the Exchange Act, trades in the U.S. secondary market generally are required to settle in three business days, unless the parties to the trade expressly agree otherwise. Accordingly, purchasers who wish to trade Certificates in the U.S. secondary market on a day prior to the third business day before the date of initial delivery of the Certificates will be required, by virtue of the fact that the Certificates initially will settle on a delayed basis, to specify an alternate settlement cycle at the time of any trade to prevent a failed settlement and should consult their own advisor. In connection with this offering, the Initial Purchasers may purchase and sell Certificates in the open market. Purchases and sales in the open market may include short sales, purchases to cover short positions and stabilizing purchases.
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Short sales involve secondary market sales by the Initial Purchasers of a greater number of Certificates than they are required to purchase in this offering.
Covering transactions involve purchases of Certificates in the open market after the distribution has been completed in order to cover short positions.
Stabilizing transactions involve bids to purchase Certificates so long as the stabilizing bids do not exceed a specified maximum.
Purchases to cover short positions and stabilizing purchases, as well as other purchases by the Initial Purchasers for their own accounts, may have the effect of preventing or retarding a decline in the market price of the Certificates. They may also cause the price of the Certificates to be higher than the price that would otherwise exist in the open market in the absence of these transactions. The Initial Purchasers may conduct these transactions in the over-the-counter market or otherwise. If the Initial Purchasers commence any of these transactions, they may discontinue them at any time. The Initial Purchasers are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, principal investment, hedging, financing and brokerage activities. The Initial Purchasers and their respective affiliates have in the past performed commercial banking, investment banking and advisory services for Turkish Airlines from time to time for which they have received customary fees and reimbursement of expenses and may, from time to time, engage in transactions with and perform services for Turkish Airlines in the ordinary course of their business for which they may receive customary fees and reimbursement of expenses. Certain of the Initial Purchasers are lenders to Turkish Airlines under various facilities and also serve as counterparties to certain hedging agreements. In particular, Citigroup Global Markets Inc. and Goldman, Sachs & Co. provide cash management services, commodity, foreign exchange and interest rate hedging products and advisory and long term lending activities. In addition, an affiliate of BNP Paribas Securities Corp. is acting as the Depositary and the Liquidity Provider for the Certificates. Turkish Airlines has agreed to indemnify the Initial Purchasers against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Initial Purchasers may be required to make because of any of those liabilities. Notice to Prospective Investors in the European Economic Area In relation to each Relevant Member State, each Initial Purchaser has represented and agreed that with effect from and including the Relevant Implementation Date it has not made and will not make an offer of Certificates which are the subject of the offering contemplated by this offering memorandum to the public in that Relevant Member State other than: (a)
to any legal entity which is qualified as defined in the Prospectus Directive;
(b)
to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the relevant Initial Purchaser or Initial Purchasers nominated by the Issuer for any such offer; or
(c)
in any other circumstances falling within Article 3(2) of the Prospectus Directive,
provided that no such offer of Certificates shall require Turkish Airlines or the Initial Purchasers to publish a prospectus pursuant to Article 3 of the Prospectus Directive. For the purposes of this provision, the expression an “offer of Certificates to the public” in relation to any Certificates in any Relevant Member State means the communication in any form and by any means of 157
sufficient information on the terms of the offer and the Certificates to be offered so as to enable an investor to decide to purchase or subscribe the Certificates, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, the expression “Prospectus Directive” means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State and the expression “2010 PD Amending Directive” means Directive 2010/73/EU. Each of the Initial Purchasers has represented and agreed that: (a)
it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of the Certificates in circumstances in which Section 21(1) of the FSMA does not apply to the Issuer; and
(b)
it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Certificates in, from or otherwise involving the United Kingdom.
Notice to Prospective Investors in the United Kingdom This offering memorandum and any other material in relation to the Certificates described herein are only being distributed (i) to and are only directed at persons who are outside the United Kingdom, (ii) to investment professionals falling within Article 19(5) of the Order, (iii) to high net worth entities and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order and (iv) to persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the FSMA in connection with the issue or sale of any Certificates may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as “relevant persons”). This offering memorandum and its contents should not be distributed, published or reproduced (in whole or in part) or disclosed by recipients to any other persons in the United Kingdom. Any person in the United Kingdom that is not a relevant person should not act or rely on this offering memorandum or any of its contents. Notice to Prospective Investors in France Neither this offering memorandum nor any other offering material relating to the Certificates described in this offering memorandum has been submitted to the clearance procedures of the Autorité des Marchés Financiers or to the competent authority of another member state of the European Economic Area and notified to the Autorité des Marchés Financiers. The Certificates have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in France. Neither this offering memorandum nor any other offering material relating to the Certificates has been or will be:
released, issued, distributed or caused to be released, issued or distributed to the public in France; or
used in connection with any offer for subscription or sale of the Certificates to the public in France.
Such offers, sales and distributions will be made in France only:
to qualified investors (investisseurs qualifiés) and/or to a restricted circle of investors (cercle restreint d’investisseurs), in each case investing for their own account, all as defined in, and in accordance with, articles L.411-2, D.411-1, D.411-2, D.734-1, D.744-1, D.754-1 and D.764-1 of the French Code monétaire et financier;
to investment services providers authorized to engage in portfolio management on behalf of third parties; or 158
in a transaction that, in accordance with article L.411-2-II-1°-or-2°-or 3° of the French Code monétaire et financier and article 211-2 of the General Regulations (Règlement Général) of the Autorité des Marchés Financiers, does not constitute a public offer (appel public à l’épargne).
The Certificates may be resold directly or indirectly, only in compliance with articles L.411-1, L.411-2, L.412-1 and L.621-8 through L.621-8-3 of the French Code monétaire et financier. Notice to Prospective Investors in Hong Kong Each Initial Purchaser has represented and agreed that:
it has not offered or sold and will not offer or sell in Hong Kong, by means of any document or any Certificates other than (a) to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance or (b) in other circumstances which do not result in the offering memorandum being a “prospectus” as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance; and
it has not issued or had in its possession for the purposes of issue, and will not issue or have in its possession for the purposes of issue whether in Hong Kong or elsewhere, any advertisement, invitation or document relating to the Certificates that is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to Certificates which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the Securities and Futures Ordinance and any rules made under that Ordinance.
Notice to Prospective Investors in Japan The Certificates have not been and will not be registered under the Financial Instruments and Exchange Act of Japan (the “Financial Instruments and Exchange Act”). Accordingly, each Initial Purchaser has represented and agreed that it has not, directly or indirectly, offered or sold and will not, directly or indirectly, offer or sell any Certificates in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan) or to others for re-offering or re-sale, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Financial Instruments and Exchange Act and other relevant laws and regulations of Japan. Notice to Prospective Investors in Singapore Each Initial Purchaser has acknowledged that this offering memorandum has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, each Initial Purchaser has represented and agreed that it has not offered or sold any Certificates or caused such Certificates to be made the subject of an invitation for subscription or purchase and will not offer or sell such Certificates or cause such Certificates to be made the subject of an invitation for subscription or purchase and has not circulated or distributed, nor will it circulate or distribute this offering memorandum, or any other document or material in connection with the offer or sale or invitation for subscription or purchase of such Certificates, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275, of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA, in each case, subject to compliance with the conditions set forth in the SFA. Where the Certificates are subscribed or purchased in reliance of an exemption under Sections 274 or 275 of the SFA, the Certificates shall not be sold within the period of six months from the date of the initial acquisition of the Certificates, except to any of the following persons: 159
an institutional investor (as defined in Section 4A of the SFA);
a relevant person (as defined in Section 275 (2) of the SFA); or
any person pursuant to an offer referred to in Section 275 (1A) of the SFA, unless expressly specified otherwise in Section 276(7) of the SFA.
Where Certificates are subscribed or purchased under Section 275 of the SFA by a relevant person which is:
a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or
a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor,
which securities (as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the Certificates pursuant to an offer made under Section 275 of the SFA except:
to an institutional investor (under Section 274 of the SFA), or to a relevant person (as defined in Section 275(2) of the SFA) and in accordance with the conditions specified in Section 275 of the SFA;
(in the case of a corporation) where the transfer arises from an offer referred to in Section 276(3)(i)(B) of the SFA or (in the case of a trust) where the transfer arises from an offer referred to in Section 276(4)(i)(B) of the SFA;
where no consideration is or will be given for the transfer;
where the transfer is by operation of law; or
as specified in Section 276(7) of the SFA.
Notice to Prospective Investors in Taiwan This offering memorandum is provided for information only. It is not an offer to sell or a solicitation of an offer to buy the Certificates. Any such sale or solicitation may only be made pursuant to final offering documents. The offer of Certificates has not been registered with the Securities and Futures Bureau, Financial Supervisory Commission of the Republic of China pursuant to relevant securities laws and regulations and may not be offered or sold within the Republic of China through an offering or in circumstances which constitute an offer within the meaning of the securities and exchange law of the Republic of China that requires a registration or approval of the Securities and Futures Bureau, Financial Supervisory Commission of the Republic of China. Notice to Prospective Investors in Korea Each Initial Purchaser acknowledges that a registration statement for the offering and sale of the Certificates has not been filed with the Financial Services Commission of Korea, and accordingly, that the Certificates may not be offered, sold or delivered, directly or indirectly, in Korea or to, or for the account or benefit of, any resident of Korea (as such term is defined under the Foreign Exchange Transaction Law of Korea) for a period of one year from the Issuance Date, except as otherwise permitted by applicable Korean laws and regulations (such as the sale of the Certificates to professional investors (as such term is defined under the Financial Investment Services and Capital Market Act and its enforcement decree) in the secondary market). 160
TRANSFER RESTRICTIONS The Certificates are subject to restrictions on transfer as summarized below. By purchasing the Certificates, you will be deemed to have made the following acknowledgements, representations to and agreements with Turkish Airlines and the Initial Purchasers: (1)
You acknowledge that: the Certificates have not been registered under the Securities Act or any other securities laws, including registration or approval for sale under the securities laws of Turkey, and are being offered for resale in transactions that do not require registration under the Securities Act or any other securities laws; and unless so registered, the Certificates may not be offered, sold or otherwise transferred except under an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act or any other applicable securities laws, and in each case, in compliance with the conditions for transfer set forth in paragraphs (5), (6) and (7) below.
(2)
You acknowledge that this offering memorandum relates to an offering that is exempt from registration under the Securities Act and may not comply in important respects with SEC rules that would apply to an offering document relating to a public offering of securities.
(3)
You represent that you are not an affiliate (as defined in Rule 144 under the Securities Act) of Turkish Airlines, that you are not acting on Turkish Airlines’ behalf and that either: you are a qualified institutional buyer (as defined in Rule 144A under the Securities Act) and are purchasing Certificates for your own account or for the account of another qualified institutional buyer, and you are aware that the Initial Purchasers are selling the Certificates to you in reliance on Rule 144A; or you are not a U.S. person (as defined in Regulation S under the Securities Act) or purchasing for the account or benefit of a U.S. person, other than a distributor, and you are purchasing Certificates in an offshore transaction in accordance with Regulation S.
(4)
You acknowledge that neither Turkish Airlines nor the Initial Purchasers nor any person representing Turkish Airlines or the Initial Purchasers have made any representation to you with respect to Turkish Airlines or the offering of the Certificates, other than the information contained in this offering memorandum. Accordingly, you acknowledge that no representation or warranty is made by the Initial Purchasers as to the accuracy or completeness of such materials. You represent that you are relying only on this offering memorandum in making your investment decision with respect to the Certificates. You agree that you have had access to such financial and other information concerning Turkish Airlines, the Issuer and the Certificates as you have deemed necessary in connection with your decision to purchase Certificates, including an opportunity to ask questions of and request information from Turkish Airlines and the Initial Purchasers.
(5)
You represent that you are purchasing Certificates for your own account, or for one or more investor accounts for which you are acting as a fiduciary or agent, in each case not with a view to, or for offer or sale in connection with, any distribution of the Certificates in violation of the Securities Act or any state securities laws, subject to any requirement of law that the disposition of your property or the property of that investor account or accounts be at all times within your or their control and subject to your or their ability to resell the Certificates pursuant to Rule 144A or any other available exemption from registration under the Securities Act. You agree on your own behalf and on behalf of any investor account for which you are purchasing Certificates, and each subsequent holder of the Certificates by its acceptance of the Certificates will agree, that until the end of the Resale Restriction Period (as defined below), the Certificates may be offered, sold or otherwise transferred only:
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(a)
to Turkish Airlines or any of Turkish Airlines’ subsidiaries;
(b)
under a registration statement that has been declared effective under the Securities Act;
(c)
for so long as the Certificates are eligible for resale under Rule 144A, to a person the seller reasonably believes is a qualified institutional buyer that is purchasing for its own account or for the account of another qualified institutional buyer and to whom notice is given that the transfer is being made in reliance on Rule 144A;
(d)
through offers and sales to non-U.S. persons that occur outside the United States within the meaning of Regulation S under the Securities Act; or
(e)
under any other available exemption from the registration requirements of the Securities Act,
subject in each of the above cases to any requirement of law that the disposition of the seller’s property or the property of an investor account or accounts be at all times within the seller or account’s control and to compliance with any applicable state securities laws. (6)
You also acknowledge that to the extent that you hold the Certificates through an interest in a global note, the Resale Restriction Period (as defined below) may continue until one year after Turkish Airlines or the Issuer, or any affiliate of Turkish Airlines or the Issuer, was the owner of such note or an interest in such global note, and so may continue indefinitely.
(7)
You also acknowledge that: the above restrictions on resale will apply from the closing date until the date that is one year (in the case of Rule 144A Certificates) after the later of the closing date and the last date that Turkish Airlines or the Issuer or their respective affiliates was the owner of the Certificates or any predecessor of the Certificates or 40 days (in the case of Regulation S Certificates) after the later of the closing date and when the Certificates or any predecessor of the Certificates are first offered to persons other than distributors (as defined in Rule 902 of Regulation S) in reliance on Regulation S (the “Resale Restriction Period”), and will not apply after the applicable Resale Restriction Period ends; Turkish Airlines, the Issuer and the Trustee reserve the right to require in connection with any offer, sale or other transfer of Certificates under clauses (d) and (e) above the delivery of an opinion of counsel, certifications and/or other information satisfactory to Turkish Airlines, the Issuer and the Trustee; and each Certificate will contain a legend substantially to the following effect: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS SECURITY, BY ITS ACCEPTANCE HEREOF, AGREES ON ITS OWN BEHALF AND ON BEHALF OF ANY INVESTOR ACCOUNT FOR WHICH IT HAS PURCHASED SECURITIES, TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE THAT IS [IN THE CASE OF RULE 144A CERTIFICATES: ONE YEAR AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH TURKISH AIRLINES, THE ISSUER OR ANY OF THEIR AFFILIATES WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY),] [IN THE CASE 162
OF REGULATION S CERTIFICATES: 40 DAYS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE DATE ON WHICH THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY) WAS FIRST OFFERED TO PERSONS OTHER THAN DISTRIBUTORS (AS DEFINED IN RULE 902 OF REGULATION S) IN RELIANCE ON REGULATION S], ONLY (A) TO TURKISH AIRLINES OR ANY SUBSIDIARY THEREOF, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT (“RULE 144A”), TO A PERSON IT REASONABLY BELIEVES IS A “QUALIFIED INSTITUTIONAL BUYER” AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO TURKISH AIRLINES’ AND THE TRUSTEE’S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/ OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THE HOLDER AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY SIMILAR TO THE EFFECT OF THIS LEGEND. [IN THE CASE OF REGULATION S CERTIFICATES: BY ITS ACQUISITION HEREOF, THE HOLDER HEREOF REPRESENTS THAT IT IS NOT A U.S. PERSON NOR IS IT PURCHASING FOR THE ACCOUNT OF A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT.] BY ITS ACQUISITION OF THIS SECURITY, THE HOLDER THEREOF WILL BE DEEMED TO HAVE REPRESENTED AND WARRANTED THAT EITHER (1) NO PORTION OF THE ASSETS USED BY SUCH HOLDER TO ACQUIRE OR HOLD THIS SECURITY CONSTITUTES THE ASSETS OF (A) AN EMPLOYEE BENEFIT PLAN THAT IS SUBJECT TO TITLE I OF THE U.S. EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED (“ERISA”), (B) A PLAN, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER ARRANGEMENT THAT IS SUBJECT TO SECTION 4975 OF THE U.S. INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE “CODE”), (C) A PLAN SUBJECT TO ANY OTHER FEDERAL, STATE, LOCAL, NON-U.S. OR OTHER LAWS OR REGULATIONS THAT ARE SIMILAR TO SUCH PROVISIONS OF ERISA OR THE CODE (“SIMILAR LAWS”), OR (D) AN ENTITY WHOSE UNDERLYING ASSETS ARE CONSIDERED TO INCLUDE “PLAN ASSETS” OF ANY SUCH PLAN, ACCOUNT OR ARRANGEMENT, OR (2) THE ACQUISITION, HOLDING AND DISPOSITION OF THIS SECURITY WILL NOT CONSTITUTE A NON-EXEMPT PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE OR A SIMILAR VIOLATION UNDER ANY APPLICABLE SIMILAR LAW. If you purchase Certificates, you will also be deemed to acknowledge that the foregoing restrictions apply to holders of beneficial interests in these Certificates as well as to holders of these Certificates. (8)
You agree that you will give to each person to whom you transfer the Certificates notice of any restrictions on the transfer of such Certificates.
(9)
You represent and warrant that either (i) no portion of the assets used by you to acquire or hold the Certificates constitutes assets of (a) any employee benefit plan subject to ERISA, (b) any plan, account or other arrangement that is subject to Section 4975 of the Code, (c) any plan subject to any other federal, state, local, non-U.S. or other laws or regulations that are similar to such provisions of ERISA or the Code (“Similar Laws”), or (d) an entity whose underlying assets are considered to include “plan assets” of any such plan, account or arrangement, or (ii) your acquisition, holding and disposition of the Certificates will not constitute a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code or a similar violation under any applicable Similar Law. 163
(10)
You acknowledge until 40 days following the commencement of this offering, an offer or sale of the Certificates within the United States by a dealer (whether or not participating in this offering) may violate the registration requirements of the Securities Act unless the dealer makes the offer or sale in compliance with Rule 144A or another exemption from registration under the Securities Act.
(11)
You acknowledge that the Trustee will not be required to accept for registration or transfer any Certificates acquired by you except upon presentation of evidence satisfactory to Turkish Airlines and the Trustee that the restrictions set forth therein have been complied with.
(12)
You acknowledge that Turkish Airlines, the Issuer, the Initial Purchasers and others will rely upon the truth and accuracy of the above acknowledgments, representations and agreements. You agree that if any of the acknowledgments, representations or agreements you are deemed to have made by your purchase of Certificates is no longer accurate, you will promptly notify Turkish Airlines and the Initial Purchasers. If you are purchasing any Certificates as a fiduciary or agent for one or more investor accounts, you represent that you have sole investment discretion with respect to each of those accounts and that you have full power to make the above acknowledgments, representations and agreements on behalf of each account.
(13)
You understand that no action has been taken in any jurisdiction (including the United States) by Turkish Airlines, the Issuer or the Initial Purchasers that would result in a public offering of the Certificates or the possession, circulation or distribution of this offering memorandum or any other material relating to Turkish Airlines, the Issuer or the Certificates in any jurisdiction where action for such purpose is required.
164
LEGAL MATTERS The validity of the Certificates is being passed upon for Turkish Airlines by Allen & Overy LLP, London, Turkey and New York, New York, and for the Initial Purchasers by Milbank, Tweed, Hadley & McCloy LLP, New York, New York and Paksoy, Turkey. Morris James LLP, counsel for Wilmington Trust Company, as Trustee, will pass upon certain matters of Delaware law relating to the Pass Through Trust Agreement. Morris James LLP will pass upon certain matters of the laws of Delaware with respect to the Issuer. INDEPENDENT AUDITORS Turkish Airlines’ consolidated balance sheet as at 31 December 2012 and the related consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flow for the years ended 31 December 2012, included in this offering memorandum, have been audited by DRT Bağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik A.ş. (Deloitte), independent auditors, registered to carry out audit work by the Accounting and Auditing Standards Authority of Turkey, as stated in their report appearing herein. Turkish Airlines’ consolidated balance sheets as of 31 December 2014 and 2013, and the related consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flow for the years then ended, included in this offering memorandum, have been audited by KPMG Akis Bağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik A.Ş. (KPMG), independent auditors, registered to carry out audit work by the Accounting and Auditing Standards Authority of Turkey, as stated in their report appearing herein. In 2013, in accordance with the requirement for the mandatory rotation of auditors every seven years under Turkish regulations, Turkish Airlines changed its auditors to KPMG. INDEPENDENT APPRAISERS The references to AISI, BK and mba and to their appraisal reports, each dated as of 16 January 2015, 13 January 2015 and 16 January 2015, respectively, are included herein in reliance upon the authority of each such firm as an expert with respect to the matters contained in its appraisal report. AISI’s address is 1409 Peachtree Street, Suite 200, Atlanta, Georgia. BK’s address is 1295 Northern Boulevard, Manhasset, New York 11030, United States of America. mba’s address is 2101 Wilson Boulevard, Suite 1001, Arlington, Virginia 22201, United States of America. Each of AIS, BK and mba is certified by the International Society of Transport Aircraft Trading.
165
LISTING AND GENERAL INFORMATION 1.
The Certificates have been accepted for clearance and settlement through DTC. The CUSIP and ISIN numbers for the Certificates are as follows:
CUSIP………….. ISIN…………….
Class A Restricted Global Certificates 10010Y AA0 US10010YAA01
Class A Regulation S Global Certificates U0567P AA4 USU0567PAA40
2.
Copies of Turkish Airlines’ audited consolidated annual financial statements and unaudited consolidated semi-annual financial statements, if any, and copies of Turkish Airlines’ Articles of Association, as well as the Pass Through Trust Agreement (including forms of Certificates) and appraisal letters will be available (free of charge) at the offices of the Trustee and the Paying Agent and any other paying agent. For the life of the listing particulars, the documents referred to in this paragraph may be inspected, by physical or electronic means.
3.
There has been no material adverse change in the prospects of Turkish Airlines since 31 December 2014 and there has been no significant change in the financial or trading position of Turkish Airlines since 31 December 2014.
4.
Except as disclosed in this offering memorandum, there are no governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which Turkish Airlines is aware) during the 12 months before the date of this offering memorandum, which may have, or have had in the recent past, significant effects on the financial position or profitability of Turkish Airlines.
5.
Application has been made to the Irish Stock Exchange for the approval of this offering memorandum as Listing Particulars. Application has been made to the Irish Stock Exchange for the Certificates to be admitted to the Official List and trading on the Global Exchange Market which is the exchange regulated market of the Irish Stock Exchange. The Global Exchange Market is not a regulated market for the purposes of Directive 2004/39/EC.
6.
Arthur Cox Listing Services Limited is acting solely in its capacity as listing agent (the “Listing Agent”) for the Issuer in relation to the Certificates and is not itself seeking admission of the Certificates to the Official List of the Irish Stock Exchange or to trading on the Global Exchange Market of the Irish Stock Exchange.
7.
Turkish Airlines will comply with any undertakings assumed or undertaken by Turkish Airlines from time to time to the Global Exchange Market of the Irish Stock Exchange in connection with the Certificates, and Turkish Airlines will furnish to them all such information as the rules of the Global Exchange Market of the Irish Stock Exchange may require in connection with the listing of the Certificates.
8.
Turkish Airlines has obtained all necessary consents, approvals and authorizations in the jurisdiction of Turkish Airlines’ incorporation in connection with the issuance and performance of the Certificates. The issuance of the Certificates by the Trust will be authorized by all necessary consents, approvals and authorizations.
9.
The expenses in relation to the admission of the Certificates to the Official List of the Irish Stock Exchange and trading on the Global Exchange Market will be approximately €5,000.
166
APPENDIX I - INDEX OF TERMS Page
Page
2010 Prospectus Directive Amending Directive........ v
Certificateholders................................................... 100
Actual Disposition Event ....................................... 131
Certificates ........................................................... 1, 99
Additional Certificate Adjusted Interest ................ 130
Chicago Convention ................................................ 84
Additional Certificates ............................................. 11
CIP ............................................................................. 5
Additional Equipment Notes ........................... 13, 136
CIS ............................................................................. 1
Administration Expenses ....................................... 128
Class A Certificates ............................................. 1, 99
Aircraft ...................................................................... 1
Class A Trust ........................................................... 99
Airframe ................................................................ 143
Class A Trustee........................................................ 99
Airframe Manufacturer .......................................... 141
Class Exemptions .................................................. 157
AKP ......................................................................... 34
CMB ........................................................................ 34
Appraisal................................................................ 128
CO ........................................................................... 87
Appraised Current Market Value........................... 128
Code................................................................. 16, 151
Appraisers .............................................................. 134
Controlling Party ..................................................... 12
ASK ....................................................................... viii
Convention .............................................................. 37
Assumed Amortization Schedule .......................... 102
Corporate Governance Communiqué ...................... 34
Atatürk Airport .......................................................... 1
CRA Regulation ........................................................ x
ATK ....................................................................... viii
CTK ....................................................................... viii
Average Life Date ................................................. 138
Current Distribution Date ...................................... 130
Base Rate ............................................................... 123
Deemed Disposition Event .................................... 131
Basic Agreement ..................................................... 99
default .................................................................... 105
BIST ........................................................................ 34
Delivery Period ...................................................... 135
Boeing ....................................................................... 7
Delivery Period Termination Date................... 13, 116
Business Day ......................................................... 102
Deposit................................................................... 116
Cape Town Treaty ................................................... 37
Deposit Agreement ................................................ 116
Cash Collateral Account ........................................ 120
Depositary.............................................................. 117
Certificate Account ................................................ 101
Depositary Threshold Rating ................................. 117
Certificate Buyout Event ....................................... 106
Deposits ................................................................... 13
Certificated Security .............................................. 113
distribution compliance period .............................. 113
Appendix I–1
Distribution Date ................................................... 128
Financial Statements .................................................ix
Downgrade Drawing.............................................. 120
FSMA ...................................................................... iii
Downgrade Event .................................................. 120
GDS ......................................................................... 24
DTC ................................................................... 1, 104
Global Certificate .................................................. 113
DTC Participants ................................................... 104
H.15(519)............................................................... 138
EBL ....................................................................... 147
Hava-Is .................................................................... 21
EEA ..........................................................................iv
HEAS....................................................................... 86
EECA....................................................................... 22
IATA ....................................................................... 72
Engine .................................................................... 143
IDERA ................................................................... 147
Engines .................................................................. 143
IFRS..........................................................................ix
Equipment Note Special Payment ......................... 128
IGS........................................................................... 86
Equipment Notes ............................................... 1, 136
Indenture ............................................................ 9, 136
ERISA ............................................................. 16, 157
Indenture Default ................................................... 139
ERISA Plans .......................................................... 157
Indenture Event of Default .................................... 139
Escrow Agent ........................................................ 118
indirect participants ............................................... 115
Escrow Agreement ................................................ 118
Initial Aircraft ............................................................ 7
Escrow Receipts .................................................... 118
Initial Purchasers ........................................................i
ETS .......................................................................... 27
Intercreditor Agreement ........................................ 126
EU ............................................................................ 16
Interest Drawing .................................................... 119
Event of Loss ......................................................... 131
Investment Company Act .......................................... v
Exchange Act............................................................vi
Irish Stock Exchange ................................................. 1
Ex-Im Bank ............................................................. 22
IRS ......................................................................... 151
Expected Distributions .......................................... 130
Issuance Date ........................................................... 99
FATCA .................................................................. 155
Issuer ......................................................................1, i
FATCA Withholding ............................................. 155
Lease .......................................................................... 1
Federal Funds Rate ................................................ 123
Lease Agreement ....................................................... 1
Final Distributions ................................................. 127
Lease Event of Default .......................................... 145
Final Drawing ........................................................ 122
LIBOR ................................................................... 123
Final Maturity Date ............................................... 100
Liquidity Event of Default ..................................... 124
Financial Lease Law .............................................. 141
Liquidity Expenses ................................................ 130
Appendix I–2
Liquidity Facility ............................................... 1, 119
Original Trustee ..................................................... 112
Liquidity Obligations ............................................. 130
participants ............................................................ 114
Liquidity Provider.................................................. 119
Pass Through Trust Agreement ............................... 99
Liquidity Threshold Rating.................................... 120
Paying Agent ......................................................... 118
Listing Agent ......................................................... 169
Paying Agent Account ........................................... 102
Listing Particulars ...................................................... 1
Performing Equipment Note .................................. 120
Loan Trustee .................................................... 11, 136
Plan Asset Regulation ............................................ 157
Long-Term Rating ................................................. 121
Plans ...................................................................... 157
LTVs .......................................................................... 8
Pledgee .................................................................... 11
Make-Whole Amount .................................... 112, 137
Pool Balance .......................................................... 102
Make-Whole Spread .............................................. 137
Pool Factor............................................................. 102
Market Disruption Base Rate................................. 123
Post Default Appraisals ......................................... 128
Maximum Available Commitment ........................ 119
Preferred Additional Certificate Pool Balance ...... 131
Maximum Commitment ........................................ 119
Prospectus Directive .................................................. v
Membership Interest Pledge .................................... 11
Protocol ................................................................... 37
Membership Interest Pledge Agreement.................. 11
PTC Event of Default ............................................ 106
Minimum Sale Price .............................................. 127
PTCE ..................................................................... 157
Ministry of Transportation....................................... 29
QIBs........................................................................... 1
Moody’s..................................................................... x
Rate Determination Notice .................................... 123
most recent H.15(519) ........................................... 138
Rating Agencies......................................................... x
New Trustee........................................................... 112
Receiptholder ......................................................... 118
Non-Extension Drawing ........................................ 121
Reference Banks .................................................... 123
Non-Global Purchasers .......................................... 113
Regular Distribution Dates .................................... 100
Note Holders .......................................................... 111
Regulation S .............................................................. 1
Note Purchase Agreement ..................................... 109
Regulation S Global Certificate ............................. 113
O&D .......................................................................... 3
Relevant Implementation Date .................................iv
OFAC ...................................................................... 30
Relevant Member State ............................................iv
OID ........................................................................ 152
relevant persons ............................................... iii, 161
Order ........................................................................ iii
Remaining Weighted Average Life ....................... 138
Original Trust ........................................................ 112
Replacement Facility ............................................. 122
Appendix I–3
Required Amount .................................................. 119
Stated Interest Rates .............................................. 119
Required Terms ..................................................... 109
Subordination Agent .............................................. 126
Resale Restriction Period....................................... 165
Substitute Aircraft.................................................. 135
Restricted Global Certificate ................................. 113
Successor Trust ...................................................... 112
Risk Retention Requirement ..................................... ii
Temporary Regulation S Global Certificate .......... 113
RPK ..........................................................................ix
Termination Notice ................................................ 124
RTK ..........................................................................ix
THY ............................................................................i
Rule 144A.................................................................. 1
Total Loss .............................................................. 145
S&P ........................................................................... x
Treasury Yield ....................................................... 137
Sabiha Gökçen Airport .............................................. 1
Triggering Event .................................................... 101
Scheduled Payments .............................................. 100
Trust..................................................................... 1, 99
SEC .......................................................................... iii
Trust Indenture Act................................................ 107
Section 2.4 Fraction ............................................... 130
Trust Property .......................................................... 99
Securities Act............................................................. 1
Trust Supplement..................................................... 99
Series A Equipment Notes ..................................... 136
Trustee ..................................................................... 99
SHY-6A ................................................................... 86
Turkey ....................................................................... v
Similar Laws .......................................................... 166
Turkish Airlines ......................................................1, i
Special Distribution Date....................................... 101
Turkish Airlines Bankruptcy Event ....................... 127
Special Payment .................................................... 101
Turkish HABOM ....................................................... 1
Special Payments Account .................................... 102
Turkish Technic ......................................................... 1
Special Termination Drawing ................................ 121
U.S. Certificateholders .......................................... 151
Special Termination Notice ................................... 121
U.S. GAAP ...............................................................ix
Star Alliance .............................................................. 1
Volcker Rule .............................................................. v
Appendix I–4
APPENDIX II - APPRAISAL LETTERS
Appendix II–1
Turkish Airlines Taha Cakmak Genel Yonetim Binasi Finans Baskanligi Kat: 11 Ataturk Havalimani 34149 Yesilkoy, Istanbul
Sight Unseen New Base and Current Market Value Opinion 3 Future Delivery Turkish Airlines Aircraft Portfolio
AISI File No.: A5S006BVO-1 Report Date: 16 January 2015 Values as of: Date of Delivery
Main Office: 1409 Peachtree Street, Suite 200, Atlanta, Georgia 30309 TEL: 404 870-AISI (2474) E-MAIL:
[email protected] Appendix II–2
16 January 2015
Turkish Airlines Taha Cakmak Genel Yonetim Binasi Finans Baskanligi Kat: 11 Ataturk Havalimani 34149 Yesilkoy, Istanbul Subject:
Sight Unseen New Base and Current Market Value Opinion for 3 Future Delivery Turkish Airlines Aircraft Portfolio, AISI File number: A5S006BVO-1
Ref:
(a) Email messages and phone calls Turkish Airlines to AISI, 13 - 15 January 2015
Ladies and Gentlemen: Aircraft Information Services, Inc. (AISI) has been requested to offer our 16 January 2015 opinion of the sight unseen new base and current market values as of each aircraft’s delivery date in delivery date U.S. Dollars for a portfolio of three future delivery Boeing 777-300ER aircraft, with GE90-115BL engines, at 775,000 lbs maximum takeoff weight as identified and defined in Table I and reference (a) above (the 'Aircraft'). 1.
Methodology and Definitions
The standard terms of reference for commercial aircraft value are 'base value' and ‘current market value’ of an 'average' aircraft. Base value is a theoretical value that assumes a hypothetical balanced market while current market value is the value in the actual market; both assume a hypothetical average aircraft condition. All other values are derived from these values. AISI value definitions are consistent with the current definitions of the International Society of Transport Aircraft Trading (ISTAT), those of 30 January 2013. AISI is a member of that organization and employs one ISTAT Certified Senior Appraiser and two ISTAT Certified Appraisers. AISI defines a 'base value' as that of a transaction between an equally willing and informed buyer and seller, neither under compulsion to buy or sell, for a single unit cash transaction with no hidden value or liability, with supply and demand of the sale item roughly in balance and with no event which would cause a short term change in the market. Base values are typically given for aircraft in 'new' condition, 'average half-life' condition, or 'adjusted' for an aircraft in a specifically described condition at a specific time. An 'average' aircraft is an operable airworthy aircraft in average physical condition and with average accumulated flight hours and cycles, with clear title and standard unrestricted certificate of airworthiness, and registered in an authority which does not represent a penalty to aircraft value
Main Office: 1409 Peachtree Street, Suite 200, Atlanta, Georgia 30309 TEL: 404 870-AISI (2474) E-MAIL:
[email protected] Appendix II–3
16 January 2015 AISI File No. A5S006BVO-1 Page - 2 -
or liquidity, with no damage history and with inventory configuration and level of modification which is normal for its intended use and age. Note that a stored aircraft is not an average aircraft. AISI assumes average condition unless otherwise specified in this report. AISI also assumes that airframe, engine and component parts are from the original equipment manufacturer (OEM) and that maintenance, maintenance program and essential records are sufficient to permit normal commercial operation under a strict airworthiness authority. 'Half-life' condition assumes that every component or maintenance service which has a prescribed interval that determines its service life, overhaul interval or interval between maintenance services, is at a condition which is one-half of the total interval. An 'adjusted' appraisal reflects an adjustment from half life condition for the actual condition, utilization, life remaining or time remaining of an airframe, engine or component. A ‘new’ aircraft is an aircraft with no utilization, equipped with engines, buyer furnished equipment, seller furnished equipment and other equipment typical or required for the mission for which the aircraft is designed. It should be noted that AISI and ISTAT value definitions apply to a transaction involving a single aircraft, and that transactions involving more than one aircraft are often executed at considerable and highly variable discounts to a single aircraft price, for a variety of reasons relating to an individual buyer or seller. AISI defines a 'current market value', which is synonymous with the older term ‘fair market value’ as that value which reflects the actual market conditions including short term events, whether at, above or below the base value conditions. Assumptions of a single unit sale and definitions of aircraft condition, buyer/seller qualifications and type of transaction remain unchanged from that of base value. Current market value takes into consideration the status of the economy in which the aircraft is used, the status of supply and demand for the particular aircraft type, the value of recent transactions and the opinions of informed buyers and sellers. Note that for a current market value to exist, the seller may not be under duress. Current market value assumes that there is no short term time constraint to buy or sell. AISI defines a 'distressed market value' as that value which reflects the actual market condition including short term events, when the market for the subject aircraft is so depressed that the seller is under duress. Distressed market value assumes that there is a time constraint to sell within a period of less than 1 year. All other assumptions remain unchanged from that of 'current market value'.
Appendix II–4
16 January 2015 AISI File No. A5S006BVO-1 Page - 3 -
AISI encourages the use of base values to consider historical trends, to establish a consistent baseline for long term value comparisons and future value considerations, or to consider how actual market values vary from theoretical base values. Base values are less volatile than current market values and tend to diminish regularly with time. Base values are normally inappropriate to determine near term values. AISI encourages the use of current market values to consider the probable near term value of an aircraft when the seller is not under duress. AISI encourages the use of distressed market values to consider the probable near term value of an aircraft when the seller is under duress. No physical inspection of the Aircraft or their essential records was made by AISI for the purposes of this report, nor has any attempt been made to verify information provided to us, which is assumed to be correct and applicable to the Aircraft. It should be noted that the values given are not directly additive, that is, the total of the given values is not the value of the fleet but rather the sum of the values of the individual aircraft if sold individually over time so as not to exceed demand. 2.
Valuations
These B777-300ER aircraft are equipped with overhead flight and cabin crew rest facilities. It is our considered opinion that the sight unseen new base and current market values as of 16 January 2015 in delivery date U.S. Dollars are as follows in Table I subject to the assumptions, definitions, and disclaimers herein.
Table I
$LUFUDIW 7\SH
'HOLYHU\ 'DWH
$LUFUDIW 6HULDO 1XPEHU
072: /EV
(QJLQHV
1HZ %DVH9DOXH 'HOLYHU\'DWH 86'ROODUV
%(5
0DU
*( %/
%(5
0DU
*( %/
%(5
$SU
*( %/
Appendix II–5
1HZ&XUUHQW 0DUNHW9DOXH 'HOLYHU\'DWH 86'ROODUV
16 January 2015 AISI File No. A5S006BVO-1 Page - 4 -
Unless otherwise agreed by Aircraft Information Services, Inc. (AISI) in writing, this report shall be for the sole use of the client/addressee. This report is offered as a fair and unbiased assessment of the subject aircraft. AISI has no past, present, or anticipated future interest in any of the subject aircraft. The conclusions and opinions expressed in this report are based on published information, information provided by others, reasonable interpretations and calculations thereof and are given in good faith. AISI certifies that this report has been independently prepared and it reflects AISI’s conclusions and opinions which are judgments that reflect conditions and values current at the time of this report. The values and conditions reported upon are subject to any subsequent change. AISI shall not be liable to any party for damages arising out of reliance or alleged reliance on this report, or for any party’s action or failure to act as a result of reliance or alleged reliance on this report.
Sincerely, AIRCRAFT INFORMATION SERVICES, INC.
Mark D. Halsor Certified Appraiser, International Society of Transport Aircraft Trading
Fred Bearden ISTAT Certified Senior Appraiser
Appendix II–6
Turkish Airlines Taha Cakmak Genel Yonetim Binasi Finans Baskanligi Kat: 11 Ataturk Havalimani 34149 Yesilkoy, Istanbul
Sight Unseen New Base Value Opinion 3 Future Delivery Turkish Airlines Aircraft Portfolio
AISI File No.: A5S006BVO-2 Report Date: 16 January 2015 Values as of: Date of Delivery
Main Office: 1409 Peachtree Street, Suite 200, Atlanta, Georgia 30309 TEL: 404 870-AISI (2474) E-MAIL:
[email protected] Appendix II–7
16 January 2015
Turkish Airlines Taha Cakmak Genel Yonetim Binasi Finans Baskanligi Kat: 11 Ataturk Havalimani 34149 Yesilkoy, Istanbul Subject:
Sight Unseen New Base Value Opinion for 3 Future Delivery Turkish Airlines Aircraft Portfolio, AISI File number: A5S006BVO-2
Ref:
(a) Email messages and phone calls Turkish Airlines to AISI, 13 - 15 January 2015
Ladies and Gentlemen: Aircraft Information Services, Inc. (AISI) has been requested to offer our 16 January 2015 opinion of the sight unseen new base values as of each aircraft’s delivery date in delivery date U.S. Dollars for a portfolio of three future delivery Boeing 777-300ER aircraft, with GE90-115BL engines, at 775,000 lbs maximum takeoff weight as identified and defined in Table I and reference (a) above (the 'Aircraft'). 1.
Methodology and Definitions
The standard terms of reference for commercial aircraft value are 'base value' and ‘current market value’ of an 'average' aircraft. Base value is a theoretical value that assumes a hypothetical balanced market while current market value is the value in the actual market; both assume a hypothetical average aircraft condition. All other values are derived from these values. AISI value definitions are consistent with the current definitions of the International Society of Transport Aircraft Trading (ISTAT), those of 30 January 2013. AISI is a member of that organization and employs one ISTAT Certified Senior Appraiser and two ISTAT Certified Appraisers. AISI defines a 'base value' as that of a transaction between an equally willing and informed buyer and seller, neither under compulsion to buy or sell, for a single unit cash transaction with no hidden value or liability, with supply and demand of the sale item roughly in balance and with no event which would cause a short term change in the market. Base values are typically given for aircraft in 'new' condition, 'average half-life' condition, or 'adjusted' for an aircraft in a specifically described condition at a specific time. An 'average' aircraft is an operable airworthy aircraft in average physical condition and with average accumulated flight hours and cycles, with clear title and standard unrestricted certificate of airworthiness, and registered in an authority which does not represent a penalty to aircraft value
Main Office: 1409 Peachtree Street, Suite 200, Atlanta, Georgia 30309 TEL: 404 870-AISI (2474) E-MAIL:
[email protected] Appendix II–8
16 January 2015 AISI File No. A5S006BVO-2 Page - 2 -
or liquidity, with no damage history and with inventory configuration and level of modification which is normal for its intended use and age. Note that a stored aircraft is not an average aircraft. AISI assumes average condition unless otherwise specified in this report. AISI also assumes that airframe, engine and component parts are from the original equipment manufacturer (OEM) and that maintenance, maintenance program and essential records are sufficient to permit normal commercial operation under a strict airworthiness authority. 'Half-life' condition assumes that every component or maintenance service which has a prescribed interval that determines its service life, overhaul interval or interval between maintenance services, is at a condition which is one-half of the total interval. An 'adjusted' appraisal reflects an adjustment from half life condition for the actual condition, utilization, life remaining or time remaining of an airframe, engine or component. A ‘new’ aircraft is an aircraft with no utilization, equipped with engines, buyer furnished equipment, seller furnished equipment and other equipment typical or required for the mission for which the aircraft is designed. It should be noted that AISI and ISTAT value definitions apply to a transaction involving a single aircraft, and that transactions involving more than one aircraft are often executed at considerable and highly variable discounts to a single aircraft price, for a variety of reasons relating to an individual buyer or seller. AISI defines a 'current market value', which is synonymous with the older term ‘fair market value’ as that value which reflects the actual market conditions including short term events, whether at, above or below the base value conditions. Assumptions of a single unit sale and definitions of aircraft condition, buyer/seller qualifications and type of transaction remain unchanged from that of base value. Current market value takes into consideration the status of the economy in which the aircraft is used, the status of supply and demand for the particular aircraft type, the value of recent transactions and the opinions of informed buyers and sellers. Note that for a current market value to exist, the seller may not be under duress. Current market value assumes that there is no short term time constraint to buy or sell. AISI defines a 'distressed market value' as that value which reflects the actual market condition including short term events, when the market for the subject aircraft is so depressed that the seller is under duress. Distressed market value assumes that there is a time constraint to sell within a period of less than 1 year. All other assumptions remain unchanged from that of 'current market value'.
Appendix II–9
16 January 2015 AISI File No. A5S006BVO-2 Page - 3 -
AISI encourages the use of base values to consider historical trends, to establish a consistent baseline for long term value comparisons and future value considerations, or to consider how actual market values vary from theoretical base values. Base values are less volatile than current market values and tend to diminish regularly with time. Base values are normally inappropriate to determine near term values. AISI encourages the use of current market values to consider the probable near term value of an aircraft when the seller is not under duress. AISI encourages the use of distressed market values to consider the probable near term value of an aircraft when the seller is under duress. No physical inspection of the Aircraft or their essential records was made by AISI for the purposes of this report, nor has any attempt been made to verify information provided to us, which is assumed to be correct and applicable to the Aircraft. It should be noted that the values given are not directly additive, that is, the total of the given values is not the value of the fleet but rather the sum of the values of the individual aircraft if sold individually over time so as not to exceed demand. 2.
Valuations
These B777-300ER aircraft are equipped with overhead flight and cabin crew rest facilities. It is our considered opinion that the sight unseen new base values as of 16 January 2015 in delivery date U.S. Dollars are as follows in Table I subject to the assumptions, definitions, and disclaimers herein.
Table I
$LUFUDIW 7\SH
'HOLYHU\ 'DWH
$LUFUDIW 6HULDO 1XPEHU
072: /EV
(QJLQHV
1HZ %DVH9DOXH 'HOLYHU\'DWH 86'ROODUV
%(5
0DU
*( %/
%(5
0DU
*( %/
%(5
$SU
*( %/
Appendix II–10
16 January 2015 AISI File No. A5S006BVO-2 Page - 4 -
Unless otherwise agreed by Aircraft Information Services, Inc. (AISI) in writing, this report shall be for the sole use of the client/addressee. This report is offered as a fair and unbiased assessment of the subject aircraft. AISI has no past, present, or anticipated future interest in any of the subject aircraft. The conclusions and opinions expressed in this report are based on published information, information provided by others, reasonable interpretations and calculations thereof and are given in good faith. AISI certifies that this report has been independently prepared and it reflects AISI’s conclusions and opinions which are judgments that reflect conditions and values current at the time of this report. The values and conditions reported upon are subject to any subsequent change. AISI shall not be liable to any party for damages arising out of reliance or alleged reliance on this report, or for any party’s action or failure to act as a result of reliance or alleged reliance on this report.
Sincerely, AIRCRAFT INFORMATION SERVICES, INC.
Mark D. Halsor Certified Appraiser, International Society of Transport Aircraft Trading
Fred Bearden ISTAT Certified Senior Appraiser
Appendix II–11
1295 Northern Boulevard Manhasset, New York 11030 (516) 365-6272 ∙ Fax (516) 365-6287 January 13, 2015 Turkish Airlines Taha Cakmak Genel Yonetim Binasi Finans Baskanligi Kat: 11 Anaturk Havalimani 34149 Yesilkoy, Istanbul Dear Sirs: In response to your request, BK Associates, Inc. is pleased to provide this opinion on the current base value (BV) of three Boeing 777-300ER aircraft equipped with General Electric GE90-115BL engines (Aircraft). The Aircraft, which will be operated by Turkish Airlines, in passenger configuration, are further described below: AIRCRAFT DESCRIPTION Aircraft Type
Serial Number
Date of Delivery
Takeoff Weight (lbs)
B777-300ER B777-300ER B777-300ER
44119 44120 44122
3/2015 3/2015 4/2015
775,000 775,000 775,000
CONCLUSIONS Based upon our knowledge of the B777-300ER aircraft and the GE90 series engines; our knowledge of the capabilities and uses to which they have been put in various parts of the world; our knowledge of the marketing of used aircraft; and our knowledge of aircraft generally; it is our opinion that the full-life BVs of the Aircraft in U.S. dollars are shown below: Serial Number
BV ($ Mil)
44119 44120 44122
170.35 170.35 171.10
Appendix II–12
Turkish Airlines January 13, 2015 Page 2
DEFINITIONS According to the International Society of Transport Aircraft Trading's (ISTAT) definition of Base Value, to which BK Associates subscribes, the base value is the Appraiser's opinion of the underlying economic value of an aircraft in an open, unrestricted, stable market environment with a reasonable balance of supply and demand, and assumes full consideration of its "highest and best use". An aircraft's base value is founded in the historical trend of values and in the projection of future value trends and presumes an arm's length, cash transaction between willing, able and knowledgeable parties, acting prudently, with an absence of duress and with a reasonable period of time available for marketing. The base value normally refers to a transaction involving a single aircraft. When multiple aircraft are acquired in the same transaction, the trading price of each unit may be discounted. MARKET DISCUSSION & METHODOLOGY Current values are normally based on comparison to recent sales of comparable equipment. Unfortunately, there have been few recent transactions involving comparable equipment for which the price was publicly divulged. For some years now the major airlines and other aviation industry entities in the United States have claimed, with support of the government and the courts that the realizations in their aircraft sales should be kept confidential. Prior to that, all transactions of U.S. carriers were reported to the Department of Transportation and the prices were available to the public. Now we are aware of values that are occasionally reported in the press, or when we are involved in the transaction or when our industry contacts share the prices of recent transactions. Equipment manufacturers also share with us confidential cost data related to their products. We are not aware of any publicly disclosed sales of similar equipment to that subject of this appraisal. For a new or nearly new aircraft, almost by definition, the new price determines the market value and, unless there are undelivered “white tails”, the market value is equal to the base value. For the B777-300ER, 527 are in service and another 231 are on order with the backlog extending to 2020. There are none listed as being available for sale or lease. It is safe to conclude that for this popular aircraft the new price is the current value and the base value. We do not know the price of the B777-300ER, but we know the average “list price” is in the vicinity of $320 million. However, we know that nobody pays list price and, discounts from 20 to 25 percent are common and airlines that placed larger orders usually got a deeper discount. Based on some delivery prices we are aware of we concluded the likely new price had a discount rate of some 45 to 50 percent at $170.35 million. This escalates by $750,000 for the one delivered in the last quarter.
Appendix II–13
Turkish Airlines January 13, 2015 Page 3
ASSUMPTIONS & DISCLAIMER It should be understood that BK Associates has neither inspected the Aircraft nor the maintenance records, but has relied upon the information provided by you and in the BK Associates database. The assumptions have been made that all Airworthiness Directives have been complied with; accident damage has not been incurred that would affect market values; and maintenance has been accomplished in accordance with a civil airworthiness authority's approved maintenance program and accepted industry standards. Further, we have assumed unless otherwise stated, that the Aircraft is in typical configuration for the type and has accumulated an average number of hours and cycles. Deviations from these assumptions can change significantly our opinion regarding the values. BK Associates, Inc. has no present or contemplated future interest in the Aircraft, nor any interest that would preclude our making a fair and unbiased estimate. This appraisal represents the opinion of BK Associates, Inc. and reflects our best judgment based on the information available to us at the time of preparation and the time and budget constraints imposed by the client. It is not given as a recommendation, or as an inducement, for any financial transaction and further, BK Associates, Inc. assumes no responsibility or legal liability for any action taken or not taken by the addressee, or any other party, with regard to the appraised equipment. By accepting this appraisal, the addressee agrees that BK Associates, Inc. shall bear no such responsibility or legal liability. This appraisal is prepared for the use of the addressee and shall not be provided to other parties without the express consent of the addressee. Sincerely, BK ASSOCIATES, INC.
John F. Keitz ISTAT Senior Certified Appraiser And Appraiser Fellow JFK/kf
Appendix II–14
aviation consulting
Extended Desktop Appraisal of: Three (3) Future Delivery Boeing 777-300ER Aircraft Client: Turkish Airlines
Date: January 16, 2015
HQ – Washington D.C. 2101 W ilson Boulevard Suite 1001 Arlington, Virginia 22201 USA Tel: +1 703 276 3200 Fax: +1 703 276 3201
Hong Kong 62/F & 66/F, The Center 99 Queens Road, Central Hong Kong Hong Kong Tel: +852 2824 8414 Fax: +852 3965 3222
www.mba.aero Appendix II–15
I.
Introduction and Executive Summary
Table of Contents: I. II. III. IV. V.
Introduction Value Definitions & Terminology Current Market Conditions Valuation Covenants
Page Page Page Page Page
1 2 4 12 14
Morten Beyer & Agnew (“mba”) has been retained by Turkish Airlines (the “Client”) to provide a Desktop Appraisal to determine the Current Market and Base Values (“CMV” / “BV”) of three (3) Future Delivery Boeing 777-300ER Aircraft, as of January 2015. The aircraft are fully identified in Section IV of this report. In performing this appraisal, mba relied on industry knowledge and intelligence, confidentially obtained data points, its market expertise and current analysis of market trends and conditions, along with information from its semiannual published mba Future Aircraft Values (FAV) – Jet Transport Plus, January 2015. Based on the information set forth in this report, it is our opinion that the total Current Market and Base Values of the aircraft in this portfolio is as follows and as set forth in Section IV.
(3) 777-300ER Aircraft
Current Base Value (US$)
Current Market Value (US$)
$497,170,000
$502,120,000
Section II of this report presents definitions of various terms, such as Current Base Value and Current Market Value as promulgated by the Appraisal Program of the International Society of Transport Aircraft Trading (“ISTAT”). ISTAT is a non-profit association of management personnel from banks, leasing companies, airlines, manufacturers, brokers, and others who have a vested interest in the commercial aviation industry and who have established a technical and ethical certification program for expert appraisers.
Appendix II–16
II.
Definitions
Desktop Appraisal A desktop appraisal does not include any inspection of the aircraft or review of its maintenance records. It is based upon assumed aircraft condition and maintenance status or information provided to the appraiser or from the appraiser's own database. A desktop appraisal would normally provide a value for a mid-time, mid-life aircraft (ISTAT Handbook).
Base Value ISTAT defines Base Value as the Appraiser’s opinion of the underlying economic value of an aircraft, engine, or inventory of aircraft parts/equipment (hereinafter referred to as “the asset”), in an open, unrestricted, stable market environment with a reasonable balance of supply and demand.
Full
consideration is assumed of its "highest and best use". An asset's Base Value is founded in the historical trend of values and in the projection of value trends and presumes an arm’s-length, cash transaction between willing, able, and knowledgeable parties, acting prudently, with an absence of duress and with a reasonable period of time available for marketing. In most cases, the Base Value of an asset assumes the physical condition is average for an asset of its type and age. It further assumes the maintenance time/life status is at mid-time, mid-life (or benefiting from an above-average maintenance status if it is new or nearly new, as the case may be).
Since Base Value pertains to a somewhat idealized asset and market
combination it may not necessarily reflect the actual current value of the asset in question, but is a nominal starting value to which adjustments may be applied to determine an actual value. Because it is related to long-term market trends, the Base Value definition is commonly applied to analyses of historical values and projections of residual values.
Turkish Airlines Job File #15005 Page 2 of 14
Appendix II–17
Market Value ISTAT defines Market Value (or Current Market Value if the value pertains to the time of the analysis) is the appraiser’s opinion of the most likely trading price that may be generated for an asset under market circumstances that are perceived to exist at the time in question. Current Market Value assumes that the asset is valued for its highest, best use, and the parties to the hypothetical sale transaction are willing, able, prudent and knowledgeable and under no unusual pressure for a prompt transaction. It also assumes that the transaction would be negotiated in an open and unrestricted market on an arm’s-length basis, for cash or equivalent consideration, and given an adequate amount of time for effective exposure to prospective buyers. Market Value of a specific asset will tend to be consistent with its Base Value in a stable market environment. In situations where a reasonable equilibrium between supply and demand does not exist, trading prices, and therefore Market Values, are likely to be at variance with the Base Value of the asset. Market Value may be based upon either the actual (or specified) physical condition or maintenance time or condition status of the asset, or alternatively upon an assumed average physical condition and mid-life, mid-time maintenance status. Qualifications mba is a recognized provider of aircraft and aviation-related asset appraisals and inspections. mba and its principals have been providing appraisal services to the aviation industry for over 20 years; and its employees adhere to the rules and ethics set forth by the International Society of Transport Aircraft Trading (“ISTAT”). mba’s clients include most of the world’s major airlines, lessors, financial institutions, and manufacturers and suppliers. mba maintains offices in North America and Asia. mba publishes the semiannual Future Aircraft Values (“FAV”), a two-volume compendium of current and projected aircraft values for the next 20 years for over 150 types of jet, turboprop and cargo aircraft. mba also provides consulting services to the industry relating to operations, marketing, and management with emphasis on financial/operational analysis, airline safety audits and certification, utilizing hands-on solutions to current situations. mba also provides expert testimony and witness support on cases involving collateral/asset disputes, bankruptcies, financial operations, safety, regulatory and maintenance concerns.
Turkish Airlines Job File #15005 Page 3 of 14
Appendix II–18
III.
Current Market Conditions
General Market Observation – 4th Quarter 2014 An essential consideration in any appraisal is market condition at the time the valuation is rendered. In this section we describe market conditions associated with the valuation. The first part of the section provides a general market commentary highlighting major factors currently influencing aircraft values. The second part contains the mba view of the current market situation for each aircraft type valued in this analysis. Passenger demand and jet fuel prices are two of the most significant factors influencing commercial transport aircraft values. Increases in passenger demand have a positive impact while increases in fuel prices have a different impact depending on the technology level of the asset. There are many other considerations that drive values of a specific aircraft type and model including: age, number of operators, regional distribution, total number in use, production status, and order backlog, among others. For near term values, armed political unrest and turmoil can affect airline route selection and hence aircraft preferences for specific routings. Passenger demand has been shown over the years to have a strong correlation with Gross Domestic Product (“GDP”). As shown in the following table, this correlation also extends to orders for new aircraft.
World GDP and RPK Growth, Orders 16% 4800 14%
3600
10% 8%
2400
6% 4%
1200
2%
0%
0
-2% -4%
-1200 2002
2003
2004
2005
2006
2007
2008
Total Aircraft Orders (ACAS)
2009
World GDP Growth
Source: ACAS; iata.org; worldbank.org as of October 2014
Turkish Airlines Job File #15005 Page 4 of 14
2010
Appendix II–19
2011
2012
2013
RPK Growth
2014 *Orders as of October 2014
Annual Passenger Aircraft Orders
Growth Percentage (WGDP and RPK)
12%
Underlying all of this is the historical and future predicted passenger growth on the order of 5.0% per year by manufacturers and government agencies alike. The International Air Transport Association (“IATA”) reports that in September 2014, global passenger traffic (RPK) 1 showed year-on-year growth of 5.3% compared to September 2013. Year-to-date (“YTD”) comparison as of September 2014 shows a 6.3% increase in international RPK worldwide, an increase in domestic RPK of 5.2% worldwide, and a total traffic increase of 5.9% worldwide. For regional total traffic, both international and domestic, according to IATA, Middle Eastern carriers experienced the strongest YTD rate of increase, up 13.0%. Asia/Pacific total air traffic YTD was up 6.9% with Latin America slightly less at 6.2% increase. European total traffic YTD was at 5.9% with some slowdown in growth seen in September 2014. North America reported an YTD increase in total traffic of 2.8% and Africa showed a 1.0% YTD growth. Based on the above, all regions are showing positive traffic growth for the year. Passenger capacity (ASK)2 also showed growth across all regions commensurate with traffic growth. Growth in air freight markets as reported by IATA for September 2014 showed encouraging signs following several years of sluggish demand. Total market growth worldwide was 5.2% year-on-year September 2013 vs September 2014, growth was 4.4% YTD, September 2014, compared to September 2013, and monthto-month growth from August to September 2014 was 0.6%. There is still over capacity in the market as the AFTK3 continue to expand mostly from passenger aircraft belly cargo space. AFTK increased by 3.5% YTD worldwide, while freight load factors averaged 45.0% worldwide. The encouraging news was the freight load factor in the Asia/Pacific region at 58.1%. The discouraging news was the Europe region negative growth year-on-year of -1.7% due primarily to the Ukraine situation and the Air France-KLM pilot’s strike. The manufacturers’ order books and delivery reports are remarkably healthy with all-time records in the backlog orders for both Airbus and Boeing, both of which have plans to increase production rates in the next few years. At end October 2014, Airbus has booked 1,080 gross and 794 net orders, while Boeing has booked 1,152 gross and 1,046 net orders. Also YTD, Airbus has delivered 493 aircraft and Boeing has delivered 590 aircraft. At the current order rate of approximately 100 per month and delivery rate of approximately 50 per month the backlog for both manufacturers is growing at about 600 per year. The Boeing backlog is now at 5,642 aircraft and the Airbus backlog is at 5,860; both backlogs represent about nine years of production.
1 2 3
RPK -- Revenue Passenger Kilometers ASK – Available Seat Kilometers AFTK – Available Freight Tonne Kilometers
Turkish Airlines Job File #15005 Page 5 of 14
Appendix II–20
Oil Prices during the late 3rd quarter of 2014 have taken a dramatic drop after having settled to a narrow range over the past three years, fluctuating from US$100.00 to US$120.00 per barrel for Brent Crude. But as shown in the 10 year historic graph below, prices have tumbled since August to approximately US$85.00 per barrel at the beginning of November 2014, a level not seen since November 2010.
Ten Year Brent Crude Price $150 $130 $110 $90 $70 $50 $30
Source: Energy Information Agency, www.eia.gov
The big question now is whether this drop in oil price is the beginning of a new lower plateau or is this just a short term response to current events, such as we witnessed in the Summer of 2008 and less dramatically in the Spring of 2012. Oil-price.net offers the opinion that the USA production of shale oil is strong enough to promise a permanent lowering of the price per barrel of crude to the low US$80s range. The Oil-price.net estimates that it takes US$80.00 per barrel to sustain USA production, while at the same time Saudi Arabia production costs require US$50.00 per barrel and Saudi Arabia does not want to surrender market share to the USA oil producers. Another source, Investorplace.com noted that Saudi Arabia cut prices on crude headed to the USA and cut production a bit, while keeping prices up on crude sent to Asia. In addition, OPEC cut its estimate for oil demanded of OPEC sources stating they expect demand to fall below 28.2 million barrels per day by the end of 2017. These actions, it seems to mba, all portend a permanent reduction in crude oil prices to the range of US$80.00-US$90.00 per barrel for the foreseeable future. This will tend to increase the value of older current generation aircraft at the expense of the latest technology new production aircraft. In general in the 4th quarter of 2014, mba sees a very healthy market-place for the industry. Operators are reporting profits, aircraft values are holding steady and current generation aircraft are holding value. Growth seems to be the consensus opinion for the long term. There are pockets of instability, such the economies of the Eurozone and Japan, and areas of political unrest, such as Ukraine and Syria, which can cause unpredictable conditions. All in all, the market is healthy with continued optimism for the near to mid term.
Turkish Airlines Job File #15005 Page 6 of 14
Appendix II–21
Boeing 777-300ER Current Market The widebody 777-300ER aircraft is a stretched version of its 777-200 and 777-200ER counterparts. With a stretched fuselage increasing passenger capacity, the aircraft is capable of transporting 63 additional passengers in a typical three class configuration or 110 additional passengers in a single class than its shorter siblings. The newer technology and operating economics of the 777 family have made it one of the most popular widebody aircraft families of all times.
Overview
Positive x
Healthy geographic distribution, particularly among the Pacific Rim and Middle East.
x
Sole-source engine which aids in remarketing and shares commonality with the 777-200LR.
x
Most popular widebody aircraft when looking at total orders. Operators of the 747-400 have in some cases opted to replace the 747 with the 777-300ER as the type offers similar capacity and greater range, as well as the benefits of twin engine fuel cost savings.
Negative x
Backlog for aircraft is in question from 2018 – 2020, as the aircraft only has deliveries to 2018 at the moment. Even assuming a reduced production rate is in the future, there is market speculation on whether values for the aircraft will be lowered to incentivize buyers later in the decade.
x
The A350-1000 may threaten the 777-300ER if the type delivers the promises it has made on range and fuel burn per passenger.
x
The 777X which was announced in November 2013 may impact orders for the current model and residual values, though the 777X is not anticipated to enter service until the end of the decade, assuming it is not delayed.
Turkish Airlines Job File #15005 Page 7 of 14
Appendix II–22
There are 512 passenger-configured 777-300ER aircraft in service with 36 operators.
Fleet Status
777-300ER
Ordered
793
Cancelled/Transferred
42
Net Orders
751
Backlog
239
Delivered
512
Destroyed/Retired Not in Service/Parked Active Aircraft
0 0 512
Number of Operators Average Daily Utilization (Hrs) Average Fleet Age (Yrs)
36 12.49 4.26
Source: ACAS October 2014
Recent Developments In January 2015, Boeing and Kuwait Airways announced they have finalized an order for 10 777-300ERs with deliveries beginning in 2016 (Flightglobal). In November 2014, Air Canada announced it has order two additional 777-300ERs (AviTrader).
Turkish Airlines Job File #15005 Page 8 of 14
Appendix II–23
Demographics & Availability Emirates is the largest operator with approximately 19.3% of the current fleet. The next largest operator is Cathay Pacific, currently with 8.4% of the type. Boeing 777-300ER Current Fleet by Operator Operator
In Service
Parked
Total
Total % of Fleet
Emirates Airline
99
99
19.3%
Cathay Pacific
43
43
8.4%
Air France
37
37
7.2%
Qatar Airways
25
25
4.9%
Singapore Airlines
22
22
4.3%
Etihad Airways
21
21
4.1%
Air China
20
20
3.9%
ANA - All Nippon Airways
19
19
3.7%
EVA Air
18
18
3.5%
Air Canada
17
17
3.3%
Turkish Airlines (THY)
15
15
2.9%
American Airlines
15
15
2.9%
Japan Airlines
13
13
2.5%
Saudia
12
12
2.3%
Korean Air
12
12
2.3%
Air India
12
12
2.3%
Others
112
0
112
21.9%
Grand Total
512
0
512
100.0%
Source: ACAS October 2014
Turkish Airlines Job File #15005 Page 9 of 14
Appendix II–24
Despite Emirates’ stronghold of the 777-300ER by operator, the Pacific Rim holds the greatest percentage of the 777-300ER fleet, with approximately 36.6% based in the region. However, following close behind is the Middle East with approximately 30.6% of the current fleet. Boeing 777-300ER Current Fleet by Region Region
In Service
Parked
Total
Total % of Fleet
Pacific Rim
188
188
36.6%
Middle East
157
157
30.6%
Europe
81
81
15.8%
North America
32
32
6.2%
Asia
27
28
5.5%
1
Africa
17
17
3.3%
South America
10
10
1.9%
513
100.0%
Grand Total
512
1
Source: ACAS October 2014
According to Airfax, as of January 2015, there are no 777-300ER aircraft advertised as available for sale or lease. There has been no availability over the past year due to the high demand for the aircraft.
Turkish Airlines Job File #15005 Page 10 of 14
Appendix II–25
Aircraft Ranking mba’s Aircraft Ranking model takes into account numerous factors that affect an aircraft’s market standing, on a scale specifically developed for each asset class. These ranking factors are individually weighted and compared against each other to develop mba’s overall ranking score for each aircraft type, which is expressed in a scale of 1.00 to 10.00. The most prevalent aircraft configurations are used in the ranking analysis which can be further identified in mba’s Future Aircraft Values “Redbook” publication or its web based valuation service, Redbook Online.
Boeing 777-300ER Score: 8.19 Total Orders Availability 10 Net Orders 8 Regional Distribution Deliveries 6 Seating Index Active 4 2 Max Payload Range Backlog 0 Active to Parked Ratio
Operator Base Freighter Conversion
Production Efficiency Ratio
Production Status Average Fleet Age Engine Technology
Source: mba FAV Jet Transport PLUS, 2nd Half 2014
Outlook mba expects the market for the 777-300ER to remain firm in the short term. It is the best-selling model of the 777 family and orders continue to be placed for the type. As more are delivered the geographic and operator distribution of the type will widen even further, thus supporting the secondary market. In November 2013, Boeing officially launched the 777X due to the success of the current program, though it is not anticipated to enter service until 2020, keeping values for the 777-300ER strong for the time being. Based on the current 777-300ER backlog, there is three-year gap between the last off the line and the start of production for the 777X. mba would expect Boeing to slow the current production rate of 8.3 per month and/or to offer heavy discounts to aircraft delivered between 2018 and 2020 to keep the production line open. Should this occur, the values of those aircraft would likely be significantly less than the current values of the type, though previous vintages would not be affected. As the replacement aircraft and last off the line aircraft near, a shortening of the economic life for later vintage aircraft can be expected, as has happened with previous technological replacements.
Turkish Airlines Job File #15005 Page 11 of 14
Appendix II–26
IV.
Valuation
In developing the Values of the aircraft in this portfolio, mba did not inspect the aircraft or the records and documentation associated with the aircraft, but relied on partial information supplied by the Client. This information was not independently verified by mba. Therefore, we used certain assumptions that are generally accepted industry practice to calculate the value of aircraft when more detailed information is not available. The principal assumptions for the aircraft in this portfolio are as follows: 1. The aircraft is in good overall condition; 2. The overhaul status of the airframe, engines, landing gear and other major components are the equivalent of mid-time/mid-life, or new, unless otherwise stated; 3. The historical maintenance documentation has been maintained to acceptable international standards; 4. The specifications of the aircraft are those most common for an aircraft of its type and vintage; 5. The aircraft is in a standard airline configuration; 6. The aircraft is current as to all Airworthiness Directives and Service Bulletins; 7. Its modification status is comparable to that most common for an aircraft of its type and vintage; 8. Its utilization is comparable to industry averages; 9. There is no history of accident or incident damage; and 10. In the case of the Base and Market Value, no accounting is made for lease revenues, obligations or terms of ownership unless otherwise specified.
Turkish Airlines Job File #15005 Page 12 of 14
Appendix II–27
Aircraft Portfolio No.
Aircraft Type
Serial Number
Registration
Manufacture Date
MTOW (lbs)
Engine Type
Operator
1
777-300ER
44119
TBD
1-Mar-15
775,000
GE90-115BL
Turkish Airlines
2
777-300ER
44120
TBD
1-Mar-15
775,000
GE90-115BL
Turkish Airlines
3
777-300ER
44122
TBD
1-Apr-15
775,000
GE90-115BL
Turkish Airlines
Portfolio Valuations (US$ Million) No.
Aircraft Type
Serial Number
BV w/Newness
MTOW Adj.
CBV
MAF
CMV
1
777-300ER
44119
$165.68
$0.00
$165.68
101.0%
$167.33
2
777-300ER
44120
$165.68
$0.00
$165.68
101.0%
$167.33
3
777-300ER
44122
$165.81
$0.00
$165.81
101.0%
$167.46
$497.17
$0.00
$497.17
Total Legend for Portfolio Valuation –
BV /w Newness MGTOW Adj. CBV CMV -
Turkish Airlines Job File #15005 Page 13 of 14
Base Value adjusted for Month of Build Maximum Gross Take Off Weight Adjustment Current Base Value Current Market Value
Appendix II–28
$502.12
V.
Covenants
This report has been prepared for the exclusive use of Turkish Airlines and shall not be provided to other parties by mba without the express consent of Turkish Airlines. mba certifies that this report has been independently prepared and that it fully and accurately reflects mba’s opinion as to the values as requested. mba further certifies that it does not have, and does not expect to have, any financial or other interest in the subject or similar aircraft and engines. This report represents the opinion of mba as to the values of the subject aircraft as requested and is intended to be advisory only, in nature. Therefore, mba assumes no responsibility or legal liability for any actions taken, or not taken, by Turkish Airlines or any other party with regard to the subject aircraft and engine. By accepting this report, all parties agree that mba shall bear no such responsibility or legal liability. PREPARED BY:
Lindsey Mohr Manager – Valuations Morten Beyer & Agnew
January 16, 2015
REVIEWED BY:
Thomas E. Burke Managing Director – Valuations ISTAT Certified Appraiser Morten Beyer & Agnew
Turkish Airlines Job File #15005 Page 14 of 14
Appendix II–29
aviation consulting
Extended Desktop Appraisal of: 7KUHH %RHLQJ(5$LUFUDIW
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HQ – Washington D.C. 2101 W ilson Boulevard Suite 1001 Arlington, Virginia 22201 USA Tel: +1 703 276 3200 Fax: +1 703 276 3201
Hong Kong 62/F & 66/F, The Center 99 Queens Road, Central Hong Kong Hong Kong Tel: +852 2824 8414 Fax: +852 3965 3222
www.mba.aero $SSHQGL[,,
I.
Introduction and Executive Summary
Table of Contents: , ,, ,,, ,9 9
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Current Base Value (US$)
(3) 777-300ER Aircraft
$497,170,000
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World GDP and RPK Growth, Orders 16% 4800 14%
3600
10% 8%
2400
6% 4%
1200
Annual Passenger Aircraft Orders
Growth Percentage (WGDP and RPK)
12%
2%
0%
0
-2% -4%
-1200 2002
2003
2004
2005
2006
2007
2008
Total Aircraft Orders (ACAS)
2009
World GDP Growth
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2010
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2012
2013
RPK Growth
2014 *Orders as of October 2014
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