Aircastle (AYR)

will renew, extend or replace them in the near future. At September 30, 2008 we had four aircraft financed under Amended Credit Facility No. 2. Two of these aircraft have committed financing available under Term Financing No. 2, subject to certain conditions being satisfied. We expect to sell the third aircraft, provided that we satisfy the conditions for delivery under the sale agreement. If any of these conditions are not met, we will have to repay Amended Credit Facility No. 2 using cash on hand or cash from the sale of other assets. In addition, we anticipate refinancing our securitization transactions within five years of closing each such transaction. Conditions in the capital markets or bank debt market may make the issuance of aircraft lease-backed securities or other long-term debt financing more costly or otherwise less attractive to us when we anticipate refinancing a portfolio. We also may not be able to structure any future securitizations or other long-term debt financings to allow for distributions of excess cash flows to us at the same levels, or at all. If we are unable to finance these assets on a long-term basis on terms similar to our existing securitizations, we may be required to seek other forms of more costly, dilutive or otherwise less attractive financing or otherwise to liquidate the assets.

 

An increase in our borrowing costs may adversely affect our earnings and cash available for distribution to our shareholders; a decrease in interest rates may result in margin calls and losses on hedging contracts and reduce or adversely affect cash available for distribution to our shareholders.

 

We utilize credit facilities to finance a portion of the purchase price of our aircraft. As our credit facilities mature, we will be required to either refinance these instruments by entering into new credit facilities, which could result in higher borrowing costs, or repay them by using cash on hand or cash from the sale of our assets.

 

Our credit facilities are primarily London Interbank Offered Rate, or LIBOR, based floating-rate obligations and the interest expense we incur will vary with changes in the applicable LIBOR reference rate. As a result, to the extent we are not sufficiently hedged, changes in interest rates may increase our interest costs and may reduce the spread between the returns on our portfolio investments and the cost of our borrowings. A decrease in interest rates may result in margin calls under certain of our hedging contracts, which allow our hedging counterparty to require us to pledge cash collateral to secure a loss in value of such contracts resulting from a decrease in interest rates below levels prevailing when we entered into such contracts. We also may suffer economic loss if we terminate any such contracts before they mature in connection with a refinancing of our short-term credit facilities, or otherwise.

 

As of October 31, 2008, if interest rates were to increase by 100 basis points, we would expect the annual interest expense on our credit facilities to increase by approximately $3.3 million on an annualized basis, net of amounts received from our interest rate hedges. As of October 31, 2008, we had pledged $9.0 million to satisfy margin calls under our hedging contracts, and if interest rates were to decrease by one basis point, we would expect to be required to pledge an additional approximately $0.3 million to satisfy margin calls under our interest rate hedging arrangements. As of October 31, 2008, the aggregate fair value of our interest rate swaps and our interest rate forward contracts was a liability of $131.9 million.