Forward-Looking Statements. This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding prospects or future results of operations or financial position, made in this Annual Report on Form 10-K are forward-looking. We use words such as anticipates, believes, expects, future, intends, and similar expressions to identify forward-looking statements. Forward-looking statements reflect management's current expectations and are inherently uncertain. Actual results could differ materially for a variety of reasons, including, among others: the effects on the airline industry and the global economy of events such as terrorist activity and the COVID-19 pandemic, changes in oil prices and other disruptions to the world markets; trends in the airline industry and our ability to capitalize on those trends, including growth rates of markets and other economic factors; risks associated with owning and leasing jet engines and aircraft; our ability to successfully negotiate equipment purchases, sales and leases, to collect outstanding amounts due and to control costs and expenses; changes in interest rates and availability of capital, both to us and our customers; our ability to continue to meet the changing customer demands; regulatory changes affecting airline operations, aircraft maintenance, accounting standards and taxes; and the market value of engines and other assets in our portfolio. These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ significantly from management's expectations, are described in greater detail in Item 1A "Risk Factors" of Part I which, along with the other discussion in this report, describes some, but not all, of the factors that could cause actual results to differ significantly from management's expectations. General. Our core business is acquiring and leasing commercial aircraft and aircraft engines and related aircraft equipment pursuant to operating leases, all of which we sometimes collectively refer to as "equipment." As of
December 31, 2022, the majority of our leases were operating leases with the exception of certain failed sale-leaseback transactions classified as notes receivable under the guidance provided by ASC 842 and investments in sales-type leases. As of December 31, 2022, we had 80 lessees in 41 countries. Our portfolio is continually changing due to acquisitions and sales. As of December 31, 2022, we had $2,111.9 millionof equipment held in our operating lease portfolio, $81.4 millionof notes receivable, $17.7 millionof maintenance rights, and $6.4 millionof investments in sales-type leases, which represented 339 engines, 13 aircraft, one marine vessel and other leased parts and equipment. As of December 31, 2022, we also managed 324 engines, aircraft and related equipment on behalf of other parties. Willis Aero is a wholly-owned and vertically-integrated subsidiary whose primary focus is the sale of aircraft engine parts and materials through the acquisition or consignment of aircraft engines. Willis Asset Managementis a wholly-owned and vertically-integrated subsidiary whose primary focus is the engine management and consulting business. In 2011 we entered into an agreement with Mitsui & Co., Ltd. to participate in a joint venture formed as a Dublin-based Irish limited company, WMES, for the purpose of acquiring and leasing jet engines. Each partner holds a 50% interest in the joint venture. WMES owns a lease portfolio of 35 engines and five aircraft with a net book value of $255.5 millionat December 31, 2022. Our investment in the joint venture was $41.0 millionas of December 31, 2022. In 2014 we entered into an agreement with CASC to participate in CASC Willis, a joint venture based in Shanghai, China. Each partner holds a 50% interest in the joint venture. CASC Willis acquires and leases jet engines to Chinese airlines and concentrates on meeting the fast-growing demand for leased commercial aircraft engines and aviation assets in the People's Republic of China. CASC Willis owned a lease portfolio of four engines with a net book value of $42.7 millionas of December 31, 2022. Our investment in the joint venture was $15.2 millionas of December 31, 2022. 25 -------------------------------------------------------------------------------- Table of Contents We actively manage our portfolio and structure our leases to maximize the residual values of our leased assets. Our leasing business focuses on popular Stage IV commercial jet engines manufactured by CFMI, General Electric, Pratt & Whitney, Rolls Royce and International Aero Engines. These engines are the most widely used engines in the world, powering Airbus, Boeing, Bombardier and Embraer aircraft. COVID-19 Impact. In January 2022, the Company lifted travel restrictions and subsequently reopened its corporate headquarters and other offices for employees and contractors to work from. The Company has experienced and continues to experience various degrees of disruption due to the COVID-19 pandemic. Lower demand for air travel presents significant risks to the Company, resulting in impacts which have adversely affected the Company's business, results of operations, and financial condition. The Company is not able to evaluate or foresee the full extent of these impacts at the current time. The scope and nature of the impact of COVID-19 on the airline industry, and in turn the Company's business, continue to evolve and the outcomes are uncertain. Given the uncertainty in the rapidly changing market and economic conditions related to COVID-19, we will continue to evaluate the nature and extent of the impact to the Company's business and financial position. The ultimate extent of the effects of the COVID-19 pandemic on the Company will depend on future developments, and such effects could exist for an extended period of time.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to residual values, estimated asset lives, impairments and bad debts. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies, grouped by our activities, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements: Leasing Related Activities. Revenue from leasing of aircraft equipment is recognized as operating lease revenue on a straight-line basis over the terms of the applicable lease agreements. Where collection cannot be reasonably assured, for example, upon a lessee bankruptcy, we do not recognize revenue until cash is received. We also estimate and charge to income a provision for bad debts based on our experience in the business and with each specific customer and the level of past due accounts. The financial condition of our customers may deteriorate and result in actual losses exceeding the estimated allowances. In addition, any deterioration in the financial condition of our customers may adversely affect future lease revenues. As of
December 31, 2022, the majority of our leases were operating leases with the exception of certain failed sale-leaseback transactions classified as notes receivable under the guidance provided by ASC 842 and investments in sales-type leases. Under these leases, we retain title to the leased equipment, thereby retaining the potential benefit and assuming the risk of the residual value of the leased equipment. We generally depreciate engines on a straight-line basis over 15 years to a 55% residual value. Aircraft and airframes are generally depreciated on a straight-line basis over 13 to 20 years to a 15% to 17% residual value. The marine vessel is depreciated on a straight-line basis over an estimated useful life of 18 years to a 15% residual value. Other leased parts and equipment are generally depreciated on a straight-line basis over 14 to 15 years to a 25% residual value. Major overhauls paid for by us, which improve functionality or extend the original useful life, are capitalized and depreciated over the shorter of the estimated period to the next overhaul ("deferral method") or the remaining useful life of the equipment. We do not accrue for planned major maintenance. For equipment which is unlikely to be repaired at the end of its current expected life, and is likely to be disassembled upon lease termination, we depreciate the equipment over its estimated life to a residual value based on an estimate of the wholesale value of the parts after disassembly. As of December 31, 2022, 28 engines having a net book value of $24.2 millionwere depreciated under this policy with estimated remaining useful lives ranging from 1 to 101 months. Asset Valuation. Long-lived assets and certain identifiable intangibles to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable, and long-lived assets and certain identifiable intangibles to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. On a quarterly basis, management monitors the lease portfolio for events which may indicate that a particular asset may need to be evaluated for potential impairment. These events may include a decision to part-out or sell an asset, knowledge of specific damage to an asset (e.g., impairment of two engines as a result of the Russiaand Ukraineconflict), or supply/demand events which may impact the Company's ability to lease an asset in the future. On an annual basis, even absent any such 'triggering event', we evaluate the carrying value of the assets in our lease portfolio to determine if any impairment exists. 26 -------------------------------------------------------------------------------- Table of Contents Impairment may be identified by several factors, including, comparison of estimated sales proceeds or forecasted undiscounted cash flows over the life of the asset with the asset's book value. If the forecasted undiscounted cash flows are less than the book value, the asset is written down to its fair value. When evaluating for impairment, we test at the individual asset level (e.g., engine or aircraft), as each asset generates its own stream of cash flows, including lease rents, maintenance reserves and repair costs.
We must make assumptions which underlie the most significant and subjective
estimates in determining whether any impairment exists. Those estimates, and the
underlying assumptions, are as follows:
•Fair value - we determine fair value by reference to independent appraisals, quoted market prices (e.g., an offer to purchase) and other factors, including but not limited to current data from airlines, engine manufacturers and MRO providers as well as specific market sales and repair cost data. •Future cash flows - when evaluating the future cash flows that an asset will generate, we make assumptions regarding the lease market for specific engine models, including estimates of market lease rates and future demand. These assumptions are based upon lease rates that we are obtaining in the current market as well as our expectation of future demand for the specific engine/aircraft model. If the forecasted undiscounted cash flows and fair value of our long-lived assets decrease in the future, we may incur impairment charges. Write-downs of equipment to their estimated fair values totaled
$21.8 millionfor the year ended December 31, 2022, primarily reflecting an adjustment of the carrying value of four impaired engines. Of these write-downs, $20.4 millionreflects the impairment of two engines located in Russiawhich were determined, due to the Russiaand Ukraineconflict, to be unrecoverable. The remaining write-downs were in the ordinary course of business. As of December 31, 2022, included within equipment held for lease and equipment held for sale was $32.4 millionin remaining book value of 16 assets which were previously written down. Write-downs of equipment to their estimated fair values totaled $7.7 millionfor the year ended December 31, 2021which included write-downs of $3.9 milliondue to a management decision to monetize three engines and one airframe either by sale to a third party or for part-out and $3.8 millionfor the adjustment of the carrying value of seven impaired engines. Management continuously monitors the aviation industry and evaluates any trends, events and uncertainties involving airlines, individual aircraft and engine models, as well as the engine leasing and sale market which would materially affect the methodology or assumptions employed by WLFC. We do not consider there to be any trends, events or uncertainties that currently exist or that are reasonably likely to occur that would materially affect our methodology or assumptions. However, should any arise, we will adjust our methodology and our disclosure accordingly. Spare parts inventory is stated at the lower of cost or net realizable value. An impairment charge for excess or inactive inventory is recorded based upon an analysis that considers current inventory levels, historical usage patterns, future sales expectations and salvage value. Accounting for Maintenance Expenditures and Maintenance Reserves. Use fees received are recognized in revenue as maintenance reserve revenue if they are not reimbursable to the lessee. Use fees that are reimbursable are recorded as a maintenance reserve liability until they are reimbursed to the lessee, the lease terminates, or the obligation to reimburse the lessee for such reserves ceases to exist, at which time they are recognized in revenue as maintenance reserve revenue. Our expenditures for maintenance are expensed as incurred. Expenditures that meet the criteria for capitalization are recorded as an addition to equipment recorded on the balance sheet.
RECENT ACCOUNTING PRONOUNCEMENTS
The most recent adopted and to be adopted accounting pronouncements are
described in Note 1(x) to our Consolidated financial statements included in this
Annual Report on Form 10-K.
27 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS
Revenue is summarized as follows:
Years Ended December 31, 2022 2021 % Change (dollars in thousands) Lease rent revenue
$ 162,571 $ 134,83120.6 % Maintenance reserve revenue 83,424 73,961 12.8 % Spare parts and equipment sales 27,009 17,417 55.1 % Interest income 7,579 12,938 (41.4) % Gain on sale of leased equipment 3,133 5,975 (47.6) % Gain on sale of financial assets 3,116 10,874 (71.3) % Asset transition fee - 6,256 (100.0) % Other revenue 25,095 11,950 110.0 % Total revenue $ 311,927 $ 274,20213.8 % Lease Rent Revenue. Lease rent revenue consists of rental income from long-term and short-term engine leases, aircraft leases, and other leased parts and equipment. Lease rent revenue increased by $27.7 million, or 20.6%, to $162.6 millionfor the year ended December 31, 2022from $134.8 millionfor the year ended December 31, 2021. The increase is primarily due to an increase in the number of engines acquired and placed on lease, including an increase in utilization compared to the prior period. During the year ended December 31, 2022, we purchased equipment (including capitalized costs) totaling $286.4 million, which consisted of 46 engines, one aircraft and other parts and equipment purchased for our lease portfolio. During the year ended December 31, 2021, we purchased equipment (including capitalized costs) totaling $205.8 million, which primarily consisted of 34 engines, four airframes, one aircraft and other parts and equipment purchased for our lease portfolio.
One customer accounted for more than 10% of total lease rent revenue during the
December 31, 2022, the Company had $2,111.9 millionof equipment held in our operating lease portfolio, $81.4 millionof notes receivable, $17.7 millionof maintenance rights, and $6.4 millionof investments in sales-type leases. As of December 31, 2021, the Company had $1,991.4 millionof equipment held in our operating lease portfolio, $115.5 millionof notes receivable, and $22.5 millionof maintenance rights. Average utilization (based on net book value) was approximately 82% and 81% for the years ended December 31, 2022and 2021, respectively. Maintenance Reserve Revenue. Maintenance reserve revenue for the year ended December 31, 2022increased $9.5 million, or 12.8%, to $83.4 millionfrom $74.0 millionfor the year ended December 31, 2021. Long-term maintenance revenue was $36.0 millionfor the year ended December 31, 2022compared to $56.3 millionfor the year ended December 31, 2021. Engines out on lease with "non-reimbursable" usage fees generated $47.4 millionof short-term maintenance revenues for the year ended December 31, 2022compared to $17.7 millionfor the year ended December 31, 2021, as a result of recovery in global flight traffic subsequent to the most significant impacts of the COVID-19 pandemic. As of December 31, 2022, there was $6.3 millionof deferred in-substance fixed payment use fees included in Unearned Revenue. Spare Parts and Equipment Sales. Spare parts and equipment sales for the year ended December 31, 2022increased by $9.6 million, or 55.1%, to $27.0 millioncompared to $17.4 millionfor the year ended December 31, 2021. Spare parts sales for the year ended December 31, 2022were $25.9 millioncompared to $17.4 millionfor the year ended December 31, 2021. The increase in spare parts sales was driven by an industry-wide increase in engine and aircraft utilization, and the demand for parts associated with such increase compared to the prior year period. There were equipment sales of $1.1 millionfor the sales of two engines during the year ended December 31, 2022, compared to no equipment sales during the year ended December 31, 2021. Interest Income. Interest income decreased by $5.4 million, to $7.6 millionfor the year ended December 31, 2022from $12.9 millionin 2021. The decrease is primarily the result of a decrease in notes receivable of $34.0 million, partially offset by an increase in investments in sales-type leases of $6.4 million. 28 -------------------------------------------------------------------------------- Table of Contents Gain on Sale of Leased Equipment. During the year ended December 31, 2022, we sold 25 engines from the lease portfolio for a net gain of $3.1 million. During the year ended December 31, 2021, we sold 12 engines and one airframe from the lease portfolio for a net gain of $6.0 million. Gain on Sale of Financial Assets. During the year ended December 31, 2022, we sold four notes receivable for a net gain of $3.1 million. There were two notes receivable sold for a $10.9 millionnet gain on sale of financial assets during the year ended December 31, 2021. Asset Transition Fee. There was no asset transition fee during the year ended December 31, 2022. Asset transition fee was $6.3 millionduring the year ended December 31, 2021reflecting the settlement received from the close out of an engine transition program.
Other Revenue. Other revenue increased by
the year ended
primarily reflects an increase of
subsequent to the most significant impacts of the COVID-19 pandemic.
Depreciation and Amortization Expense. Depreciation and amortization expense decreased
$2.2 million, or 2.5%, to $88.3 millionfor the year ended December 31, 2022compared to $90.5 millionfor the year ended December 31, 2021. The decrease reflects certain assets reaching the end of their depreciable lives as compared to the prior year period. Cost of Spare Parts and Equipment Sales. Cost of spare parts and equipment sales increased by $5.9 million, or 39.6%, to $20.8 millionfor the year ended December 31, 2022compared to $14.9 millionin the prior year period due to higher spare parts sales and aged lot write-downs. Cost of equipment sales was $0.1 millionfor the year ended December 31, 2022, compared to no cost of equipment sales for the year ended December 31, 2021. Write-down of Equipment. Write-downs of equipment to their estimated fair values totaled $21.8 millionfor the year ended December 31, 2022, primarily reflecting an adjustment of the carrying value of four impaired engines. Of these write-downs, $20.4 millionreflects the impairment of two engines located in Russiawhich were determined, due to the Russiaand Ukraineconflict, to be unrecoverable. The remaining write-downs were in the ordinary course of business. Write-downs of equipment totaled $7.7 millionfor the year ended December 31, 2021which included write-downs of $3.9 milliondue to a management decision to monetize three engines and one airframe either by sale to a third party or for part-out and $3.8 millionfor the adjustment of the carrying value of seven impaired engines. General and Administrative Expenses. General and administrative expenses increased 22.8% to $92.5 millionfor the year ended December 31, 2022compared to $75.4 millionin 2021. The increase primarily reflects a $3.8 millionincrease in personnel costs, inclusive of a $1.0 millionbonus to our Executive Chairman for his 25 years of prior service to the Company, as well as a $2.2 millionreduction to the prior year period personnel costs resulting from the Coronavirus Aid, Relief, and Economic Security Act employee retention credit. Additionally, with the lifting of travel bans and the opening of various markets, travel and related costs increased by $3.8 millionas our sales force reengaged with customers globally. Project costs increased by $3.5 million, primarily related to an increase in managed service revenues subsequent to the most significant impacts of the COVID-19 pandemic. Technical Expense. Technical expenses consist of the non-capitalized cost of engine repairs, engine thrust rental fees, outsourced technical support services, sublease engine rental expense, engine storage and freight costs. These expenses increased 53.7% to $14.4 millionfor the year ended December 31, 2022, compared to $9.4 millionin 2021. The increase is primarily due to an increase in engine maintenance due to an industry-wide increase in engine and aircraft utilization and engine hub repairs resulting from a FAAairworthiness directive, as compared to the prior year period. Net Finance Costs. Net finance costs decreased to $64.2 millionin the year ended December 31, 2022, from $68.0 millionfor the year ended December 31, 2021. The decrease was primarily due to a $2.6 milliongain on debt extinguishment associated with the repurchase of six tranches of ABS notes as well as a reduction in interest expense primarily related to assets that transitioned in our WEST VI financing, which allowed for restricted cash to pay down credit facility indebtedness. Income Taxes. Income tax expense for the year ended December 31, 2022decreased to $4.4 millionfrom $5.8 millionfor the comparable period in 2021. The effective tax rate for the years ended December 31, 2022and December 31, 2021was 44.5% and 63.3%, respectively. The decrease in the effective tax rate was predominantly due to a state tax benefit recognized in 2022. 29 -------------------------------------------------------------------------------- Table of Contents FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES At December 31, 2022, the Company had $89.0 millionof cash, cash equivalents and restricted cash. At December 31, 2022, $10.7 millionin cash and cash equivalents and restricted cash were held in foreign subsidiaries. Other than $6.2 millionheld at a subsidiary in China, for which the tax impact of the planned repatriation has been accrued, we do not intend to repatriate the funds held in other foreign subsidiaries to the U.S.In the event that we decide to repatriate these funds held at the other foreign subsidiaries to the U.S., we would be required to accrue and pay taxes upon the repatriation. We generate significant cash flow from our core business as evidenced by our net cash provided by operating activities which was $144.4 millionin 2022. Beyond cash provided through operations, we generally fund the growth of our business through a combination of equity and corporate borrowings secured by our equipment lease portfolio. Cash of approximately $284.0 millionand $513.7 millionin the years ended December 31, 2022and 2021, respectively, was derived from this borrowing activity. In these same time periods $228.8 millionand $417.0 million, respectively, was used to pay down related debt. Our credit facility is our primary source of capital to grow our business. We also access the ABS and other markets to establish term fixed rate debt financing to better match our long-lived assets. The Company's credit facility matures in 2024 and we have historically rolled that facility prior to its expiration. The ABS market continues to be open for issuers like the Company. Refer to Note 6 of the consolidated financial statements for a detailed discussion of the Company's debt obligations.
The impact of the COVID-19 pandemic on the global business environment has
caused and could result in additional customer bankruptcies, early lease
returns, payment defaults, or future rental concessions which could reduce rent
or defer customer payments, negatively impacting our financial results.
Preferred Stock Dividends
October 2016, the Company sold and issued to DBJ an aggregate of 1,000,000 shares of the Company's 6.5% Series A Preferred Stock, $0.01par value per share (the "Series A Preferred Stock") at a purchase price of $20.00per share. The net proceeds to the Company after deducting investor fees were $19.8 million. In September 2017, the Company sold and issued to DBJ an aggregate of 1,500,000 shares of the Company's 6.5% Series A-2 Preferred Stock, $0.01par value per share (the "Series A-2 Preferred Stock") at a purchase price of $20.00per share. The net proceeds to the Company after deducting issuance costs were $29.7 million. The Company's Series A-1 Preferred Stock and Series A-2 Preferred Stock accrue quarterly dividends at the rate per annum of 6.5% per share. During each of the years ended December 31, 2022and 2021, the Company paid total dividends of $3.3 millionon the Series A-1 and Series A-2 Preferred Stock, respectively.
Cash Flows Discussion
Cash flows provided by operating activities were
Cash flows from operations are driven significantly by payments made under our lease agreements, which comprise lease revenue, security deposits and maintenance reserves, and are offset by interest expense and general and administrative costs. Cash received as maintenance reserve payments for some of our engines on lease are partially restricted by our debt arrangements. The lease revenue stream, in the short term, is at fixed rates while a portion of our debt is at variable rates. If interest rates increase, it is unlikely we could increase lease rates in the short term and this would cause a reduction in our earnings and operating cash flows. Revenue and maintenance reserves are also affected by the amount of equipment off lease. Approximately 80% and 82%, by book value, of our assets were on-lease as of
December 31, 2022and 2021, respectively. The average utilization rate for the years ended December 31, 2022and 2021 was approximately 82% and 81%, respectively. If there is an increase in off-lease rates or deterioration in lease rates that are not offset by reductions in interest rates, there will be a negative impact on earnings and cash flows from operations. 30 -------------------------------------------------------------------------------- Table of Contents Cash flows used in investing activities were $194.4 millionfor the year ended December 31, 2022and primarily reflected $15.3 millionrelated to a lease entered into during 2022 which was classified as a note receivable under ASC 842 and $286.4 millionfor the purchase of equipment held for operating lease (including capitalized costs and prepaid deposits made during the year), partly offset by $69.2 millionin proceeds from sales of equipment (net of selling expenses) and $40.7 millionin proceeds from the sale of notes receivable (net of selling expenses). Cash flows used in investing activities were $148.0 millionfor the year ended December 31, 2021and primarily reflected $44.4 millionrelated to leases entered into during 2021 which were classified as notes receivable under ASC 842 and $205.8 millionfor the purchase of equipment held for operating lease (including capitalized costs and prepaid deposits made during the year), partly offset by $37.6 millionin proceeds from sales of equipment (net of selling expenses) and $58.4 millionin proceeds from the sale of notes receivable (net of selling expense). Cash flows provided by financing activities for the year ended December 31, 2022were $43.3 millionand primarily reflected $284.0 millionin proceeds from the issuance of debt obligations, partly offset by $228.8 millionin principal payments and $5.2 millionin share repurchases. Cash flows provided by financing activities for the year ended December 31, 2021were $74.1 millionand primarily reflected $513.7 millionin proceeds from the issuance of debt obligations, partly offset by $417.0 millionin principal payments, $10.1 millionin share repurchases, and $4.6 millionin debt issuance costs.
Debt Obligations and Covenant Compliance
December 31, 2022, debt obligations consists of loans totaling $1,847.3 million, net of unamortized debt issuance costs, payable with interest rates varying between approximately 3.1% and 7.4%. Substantially all of our assets are pledged to secure our obligations to creditors. For further information on our debt instruments, see Note 6 "Debt Obligations" in Part II, Item 8 of this Form 10-K. In June 2021, the Company entered into Amendment No. 2 to the Amended Credit Agreement, which updates the provisions relating to the future discontinuance of LIBOR and sets forth the mechanics for establishing the Secured Overnight Financing Rate ("SOFR") as a benchmark replacement rate. In May 2021, WLFC and its direct, wholly-owned subsidiary WEST VI, closed its offering of $336.7 millionaggregate principal amount of fixed rate notes. The WEST VI Notes were issued in three series, with the Series A Notes issued in an aggregate principal amount of $278.6 million, the Series B Notes issued in an aggregate principal amount of $38.7 millionand the Series C Notes issued in an aggregate principal amount of $19.4 million. The WEST VI Notes are secured by, among other things, WEST VI's direct and indirect ownership interests in a portfolio of aircraft engines and an airframe. The Series A Notes have a fixed coupon of 3.104%, an expected maturity of approximately eight years and a final maturity date in May 2046, the Series B Notes have a fixed coupon of 5.438%, an expected maturity of approximately eight years and a final maturity date in May 2046and the Series C Notes have a fixed coupon of 7.385%, an expected maturity of approximately eight years and a final maturity date in May 2046. The Series A Notes were issued at a price of 99.99481% of par, the Series B Notes were issued at a price of 99.99996% of par and the Series C Notes were issued at a price of 99.99869% of par. Principal on the WEST VI Notes is payable monthly to the extent of available cash in accordance with a priority of payments included in the indenture.
that was secured by two engines.
extinguishment associated with the repurchase of six tranches of ABS notes with
a balance of
The assets of WEST III, WEST IV, WEST V and WEST VI are not available to satisfy the Company's obligations other than the obligations specific to the applicable WEST entity. WEST III, WEST IV, WEST V and WEST VI are consolidated for financial statement presentation purposes. WEST III, WEST IV, WEST V and WEST VI's ability to make distributions and pay dividends to the Company is subject to the prior payment of their debt and other obligations and their maintenance of adequate reserves and capital. Under WEST III, WEST IV, WEST V and WEST VI, cash is collected in restricted accounts, which are used to service the debt and any remaining amounts, after debt service and defined expenses, are distributed to the Company. Additionally, a portion of maintenance reserve payments and lease security deposits are formulaically accumulated in restricted accounts and are available to fund future maintenance events and to secure lease payments, respectively. The WEST III, WEST IV, WEST V and WEST VI indentures require that a minimum threshold of maintenance reserve and security deposit balances be held in restricted cash accounts. 31 -------------------------------------------------------------------------------- Table of Contents Virtually all of our debt requires ongoing compliance with the covenants of each financing, including debt/equity ratios, minimum tangible net worth and minimum interest coverage ratios, and other eligibility criteria including customer and geographic concentration restrictions. The Company also has certain negative financial covenants such as liens, advances, change in business, sales of assets, dividends and stock repurchases. These covenants are tested either monthly or quarterly, and the Company was in full compliance with all financial covenant requirements at
December 31, 2022. At December 31, 2022, we were in compliance with the covenants specified in the revolving credit facility, including the Interest Coverage Ratio requirement of at least 2.25 to 1.00, and the Total Leverage Ratio requirement to remain below 4.00 to 1.00. The Interest Coverage Ratio, as defined in the credit facility, is the ratio of earnings before interest, taxes, depreciation and amortization (EBITDA) and other one-time charges to consolidated interest expense. The Total Leverage Ratio, as defined in the credit facility, is the ratio of total indebtedness to tangible net worth. At December 31, 2022, we were in compliance with the covenants specified in the WEST III, WEST IV, WEST V and WEST VI indentures, servicing and other debt related agreements.
Contractual Obligations and Commitments
Repayments of our gross debt obligations primarily consist of scheduled installments due under term loans and are funded by the use of unrestricted cash reserves and from cash flows from ongoing operations. The table below summarizes our contractual commitments at
December 31, 2022: Payment due by period (in thousands) Less than More than Total 1 Year 1-3 Years 3-5 Years 5 Years Debt obligations $ 1,862,089 $ 88,090
Interest payments under
259,211 86,816 102,421 56,000 13,974 Operating lease obligations 11,350 3,268 5,909 1,319 854 Purchase obligations 428,137 98,233 237,134 92,770 - Total
$ 2,560,787 $ 276,407 $ 1,193,465 $ 600,319 $ 490,596From time to time we enter into contractual commitments to purchase engines directly from original equipment manufacturers. We are currently committed to purchasing nine additional new LEAP-1B engines for $145.3 millionand 18 additional new LEAP-1A engines for $282.8 millionby 2026. Our purchase agreements generally contain terms that allow the Company to defer or cancel purchase commitments in certain situations. These deferrals or conversions would not result in penalties or increased costs other than any potential increase due to the normal year-over-year change in engine list prices, which is akin to ordinary inflation. The Company continues to expect demand for LEAP-1B engines to increase as the 737 Max continues to be re-certified and aircraft (and their installed engines) that have been parked and in storage for more than one year begin the technical process of returning to service. In December 2020, we entered into definitive agreements for the purchase of 25 modern technology aircraft engines. As part of the purchase, we have committed to certain future overhaul and maintenance services which are anticipated to range between $77.7 millionand $112.0 millionby 2030.
scheduled above, are estimated by applying the interest rates applicable at
repayments identified in the table above. Actual interest payments made will
vary due to actual changes in the rates for one-month LIBOR.
We believe our equity base, internally generated funds and existing debt facilities are sufficient to maintain our level of operations through 2023. A decline in the level of internally generated funds could result if the amount of equipment off-lease increases, there is a decrease in availability under our existing debt facilities, or there is a significant step-up in borrowing costs. Such decline would impair our ability to sustain our level of operations. We continue to discuss additions to our capital base with our commercial and investment banks. If we are not able to access additional capital, our ability to continue to grow our asset base consistent with historical trends will be impaired and our future growth limited to that which can be funded from internally generated capital.
MANAGEMENT OF INTEREST RATE EXPOSURE
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December 31, 2022, $727.0 millionof our borrowings were on a variable rate basis at various interest rates tied to one-month LIBOR. Our equipment leases are generally structured at fixed rental rates for specified terms. Increases in interest rates could narrow or result in a negative spread between the rental revenue we realize under our leases and the interest rate that we pay under our borrowings. Historically, we have entered into interest rate derivative instruments to mitigate our exposure to interest rate risk; such investments are not intended to speculate or trade in derivative products. As of December 31, 2022, we have five interest rate swap agreements. During the first quarter of 2021, the Company entered into four fixed-rate interest swap agreements, each having notional amounts of $100.0 million, two with remaining terms of 13 months and two with remaining terms of 37 months as of December 31, 2022. One interest rate swap agreement was entered into during 2019 which has a notional outstanding amount of $100.0 millionwith a remaining term of 18 months as of December 31, 2022. One interest rate swap agreement which the Company entered into in 2016 expired in April 2021. The net fair value of the swaps as of December 31, 2022was $34.8 million, representing an asset. The net fair value of the interest rate swaps as of December 31, 2021was $7.3 million, representing an asset of $8.0 millionand a liability of $0.7 million. We record derivative instruments at fair value as either an asset or liability. We have used derivative instruments (primarily interest rate swaps) to manage the risk of interest rate fluctuation. While substantially all of our derivative transactions are entered into for the purposes described above, hedge accounting is only applied when specific criteria have been met and it is practicable to do so. In order to apply hedge accounting, the transaction must be designated as a hedge and the hedge relationship must be highly effective. The hedging instrument's effectiveness is assessed utilizing regression at the inception of the hedge and either regression or qualitative analysis on at least a quarterly basis throughout its life. All of the transactions that we have designated as hedges are accounted for as cash flow hedges. The effective portion of the gain or loss on a derivative instrument designated as a cash flow hedge is reported as a component of other comprehensive income and is reclassified into earnings in the period during which the transaction being hedged affects earnings. The ineffective portion of these hedges flows through earnings in the current period. The Company recorded an adjustment to interest expense of $(7.8) millionand $2.4 millionduring the years ended December 31, 2022and 2021, respectively, from derivative investments. For any interest rate swaps that we enter into, we will be exposed to risk in the event of non-performance of the interest rate hedge counter-parties. We anticipate that we may hedge additional amounts of our floating rate debt in the future. RELATED PARTY TRANSACTIONS Joint Ventures "Other revenue" on the Consolidated Statements of Income includes management fees earned of $2.0 millionand $2.1 millionduring the years ended December 31, 2022and 2021, respectively, related to the servicing of engines for the WMES lease portfolio.
During 2022, the Company sold two engines to WMES for
2021, the Company sold two engines to WMES for
There were no engine or aircraft sales to CASC Willis during 2022 or 2021.
During 2022, the Company paid approximately
$35,000of expenses payable to Mikchalk Lake, LLC, an entity in which our Executive Chairman retains an ownership interest. These expenses were for lodging and other business-related services. Additionally, during the year ended December 31, 2022, the Company paid a third-party vendor approximately $0.1 millionunder an exclusive use agreement for an aircraft used for business-related purposes. The third-party vendor leased the aircraft from a company which our Executive Chairman owns. These transactions were approved by the Board's Independent Directors.
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