Fair Value Measurements

9 Months Ended

Sep. 30, 2020

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs, to the extent possible. The fair value hierarchy under GAAP is based on three levels of inputs.

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis

As of September 30, 2020, the Company measured the fair value of its interest rate swaps of $25,783,000 (notional amount) based on Level 2 inputs, due to the usage of inputs that can be corroborated by observable market data. The Company estimates the fair value of derivative instruments using a discounted cash flow technique and has used creditworthiness inputs that corroborate observable market data evaluating the Company’s and counterparties’ risk of non-performance. The interest rate swaps had a net fair value liability of $874,700 as of September 30, 2020. In the quarter and nine months ended September 30, 2020, $(10,000) and $1,980,500 was realized through the income statement as a (decrease)/increase in interest expense.

As of December 31, 2019, the Company measured the fair value of its interest rate swaps of $80,914,500 (notional amount) based on Level 2 inputs, due to the usage of inputs that can be corroborated by observable market data. The Company estimates the fair value of derivative instruments using a discounted cash flow technique and has used creditworthiness inputs that corroborate observable market data evaluating the Company’s and counterparties’ risk of non-performance. The interest rate swaps had a net fair value liability of $1,824,500 as of December 31, 2019. In the year ended December 31, 2019, $255,200 was realized through the income statement as an increase in interest expense.

The following table shows, by level within the fair value hierarchy, the Company’s assets and liabilities at fair value on a recurring basis as of September 30, 2020 and December 31, 2019: 

	September 30, 2020										December 31, 2019
	Total			Level 1		Level 2			Level 3		Total			Level 1		Level 2			Level 3
Money market funds	$	-		$	-	$	-		$	-	$	400		$	400	$	-		$	-
Derivatives		(874,700	)		-		(874,700	)		-		(1,824,500	)		-		(1,824,500	)		-
Total	$	(874,700	)	$	-	$	(874,700	)	$	-	$	(1,824,100	)	$	400	$	(1,824,500	)	$	-

There were no transfers between Level 1 and Level 2 during the third quarters or nine months ended September 30, 2020 or 2019, and there were no transfers into or out of Level 3 during the same periods.

Assets Measured and Recorded at Fair Value on a Nonrecurring Basis

The Company determines fair value of long-lived assets held and used, such as aircraft and aircraft engines held for lease and these and other assets held for sale, by reference to independent appraisals, quoted market prices (e.g., offers to purchase) and other factors. These are considered Level 3 within the fair value hierarchy. An impairment charge is recorded when the Company believes that the carrying value of an asset will not be recovered through future net cash flows and that the asset’s carrying value exceeds its fair value. During the third quarter of 2020, the Company recorded impairment losses totaling $300,000 for two of its aircraft held for lease, which were written down to their estimated sales prices, less cost of sale. The Company also recorded a losses of $139,000 for a turboprop aircraft that was written down its estimated sales price, less cost of sale. The Company recorded impairment charges totaling $23,354,600 on two of its assets held for lease and three of its assets held for sale in the third quarter of 2019, which had a fair value of $36,256,500.

The following table shows, by level within the fair value hierarchy, the Company’s assets at fair value on a nonrecurring basis as of September 30, 2020 and December 31, 2019:

	Assets Written Down to Fair Value																Total Losses
	September 30, 2020								December 31, 2019								For the Nine Months Ended September 30,
	Total		Level						Total		Level						2020		2020
			1		2		3				1		2		3
Assets held for lease	$	17,000,000	$	-	$	-	$	17,000,000	$	-	$	-	$	-	$	-	$	7,006,600	$	-
Assets held for sale		12,970,000		-		-		12,970,000		25,880,700		-		-		25,880,700		9,813,900		11,424,900
Total	$	29,970,000	$	-	$	-	$	29,970,000	$	25,880,700	$	-	$	-	$	25,880,700	$	16,820,500	$	11,424,900

There were no transfers between Level 1 and Level 2 and no transfers into or out of Level 3 in either of the third quarters or nine-month periods ended September 30, 2020 or 2019.

Fair Value of Other Financial Instruments

The Company’s financial instruments, other than cash and cash equivalents, consist principally of finance leases receivable, amounts borrowed under the MUFG Credit Facility, notes payable under special-purpose financing, its derivative termination liability and its derivative instruments. The fair value of accounts receivable, accounts payable and the Company’s maintenance reserves and accrued maintenance costs approximates the carrying value of these financial instruments because of their short-term maturity. The fair value of finance lease receivables approximates the carrying value as discussed in Note 1(f). The fair value of the Company’s derivative instruments is discussed in Note 5 and in this note above in “Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis.”

Borrowings under the Company’s MUFG Credit Facility bore floating rates of interest that reset periodically to a market benchmark rate plus a credit margin. The same is true of the MUFG Loan. The Company believes the effective interest rate under the MUFG Credit Facility approximated then current market rates for such indebtedness at December 31, 2019 and, under the MUFG Loan, approximates current market rates, and therefore that the outstanding principal and accrued interest of $87,349,100 and $84,460,300 at September 30, 2020 and December 31, 2019, respectively, approximate their fair values on such dates. The fair value of the Company’s outstanding balance of its MUFG Credit Facility and MUFG Loan are categorized as a Level 3 input under the GAAP fair value hierarchy.

Before their repayment in February 2019 in connection with the Nord Loans refinancing, the amounts payable under the UK LLC SPE Financing were payable through the fourth quarter of 2020 and bore a fixed rate of interest. As discussed above, during February 2019, the UK LLC SPE Financing and four assets that previously served as collateral under the MUFG Credit Facility were refinanced using the Nord Loans. The Company believes the effective interest rate under the special-purpose financings approximates current market rates for such indebtedness at the dates of the condensed consolidated balance sheets, and therefore that the outstanding principal and accrued interest of $25,855,400 and $31,003,800 approximate their fair values at September 30, 2020 and December 31, 2019, respectively. Such fair value is categorized as a Level 3 input under the GAAP fair value hierarchy.

There were no transfers in or out of assets or liabilities measured at fair value under Level 3 during the third quarters or nine months ended September 2020 or 2019.