Fair Value Measurements

6 Months Ended

Jun. 30, 2021

Fair Value Measurements

NOTE 7 - Fair Value Measurements

7. 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

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 Company had no interest rate swaps as of June 30, 2021 or during the quarter then ended. As of December 31, 2020, the Company measured the fair value of its interest rate swaps of $14,091,300 (notional amount) based on Level 2 inputs, due to the usage of inputs that can be corroborated by observable market data. The interest rate swaps had a net fair value liability of $767,900 as of December 31, 2020. In the year ended December 31, 2020, $1,979,800 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 June 30, 2021 and December 31, 2020:

	June 30, 2021								December 31, 2020
	Total		Level 1		Level 2		Level 3		Total			Level 1		Level 2			Level 3
Derivatives	$	-		-	$	-		-	$	(767,900	)	$	-	$	(767,900	)	$	-
Total	$	-	$	-	$	-	$	-	$	(767,900	)	$	-	$	(767,900	)	$	-

There were no transfers into or out of Level 3 during the six months ended June 30, 2021 or 2020.

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. The independent appraisals utilized the market approach which uses recent sales of comparable assets, making appropriate adjustments to reflect differences between them and the subject property being analyzed. Certain assumptions are used in the management’s estimate of the fair value of aircraft including the adjustments made to comparable assets, identifying market data of similar assets, and estimating cost to sell. 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 second quarter of 2021, the Company recorded impairment losses totaling $2,264,000 on five assets held for sale, based on appraised values or expected sales proceeds, which had an aggregate fair value of $29,333,100. During the second quarter of 2020, the Company recorded impairment losses totaling $6,706,600 for two of its aircraft held for lease, which were written down to their estimated sales prices, less cost of sale.

The following table shows, by level within the fair value hierarchy, the Company’s assets at fair value on a nonrecurring basis as of June 30, 2021 and December 31, 2020:

	Assets Written Down to Fair Value																Total Losses
	June 30, 2021								December 31, 2020								For the Six Months Ended June 30,
			Level								Level
	Total			1		2		3	Total			1		2		3	2021		2020
Assets held for lease	$	-	$	-	$	-	$	-	$	32,650,000	$	-	$	-	$	32,650,000	$	-	$	6,706,600
Assets held for sale		53,409,400		-		-		53,409,400		38,041,600		-		-		38,041,600		4,204,400		9,674,900
Total	$	53,409,400	$	-	$	-	$	53,409,400	$	70,691,600	$	-	$	-	$	70,691,600	$	4,204,400	$	16,381,500

There were no transfers into or out of Level 3 during the six months ended June 30, 2021 or 2020.

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 Drake Indebtedness, 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(k). 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.”

The Drake Indebtedness bears floating rates of interest that reset periodically to a market benchmark rate plus a credit margin. The Company believes the effective interest rate of the Drake Indebtedness approximates current market rates, and therefore that the outstanding principal and accrued interest of $80,060,900 at June 30, 2021 approximates its fair values on such date. The fair value of the Company’s outstanding balance of its Drake Indebtedness is categorized as a Level 3 input under the GAAP fair value hierarchy. Pursuant to rules related to its bankruptcy filing, the Company reported the liability of the Drake Indebtedness as subject to compromise at the amount expected to be allowed.

The Company believes the effective interest rate under the Nord Loans approximated 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 $0 and $14,150,300 approximate their fair values at June 30, 2021 and December 31, 2020, respectively. Such fair value is categorized as a Level 3 input under the GAAP fair value hierarchy.

As discussed in Note 2(b), as a result of payment delinquencies by the Company’s two customers of aircraft subject to sales-type finance leases, the Company recorded bad debt allowances of $821,000 and $326,000 during the first and second quarters of 2021, respectively. The aircraft securing one of the sales-type finance leases was sold to the lessee during the second quarter. The finance lease receivable for the Company’s remaining finance lease is valued at the cash flow from the expected sale during the fourth quarter of 2021.

There were no transfers in or out of assets or liabilities measured at fair value under Level 3 during the three months or nine months ended June 30, 2021 or 2020.