WILLIS LEASE FINANCE CORP (WLFC) FY 2023 MD&A

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

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 the current high interest rate and inflationary environment; 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; managing the risks and impacts of potential and actual security breaches, cyberattacks, privacy breaches or data breaches, including business, service, or operational disruptions, the unauthorized access to or disclosure of data, financial loss, reputational damage, increased response and remediation costs, legal and regulatory proceedings or other unfavorable outcomes; 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; the market value of engines and other assets in our portfolio; and the impact of pandemics or other public health crises on our business, financial condition, and results of operations. 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, 2023, 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, 2023, we had 74 lessees in 42 countries. Our portfolio is continually changing due to acquisitions and sales. As of December 31, 2023, we had $2,112.8 million of equipment held in our operating lease portfolio, $92.6 million of notes receivable, $9.2 million of maintenance rights, and $8.8 million of investments in sales-type leases, which represented 337 engines, 12 aircraft, one marine vessel and other leased parts and equipment. As of December 31, 2023, we also managed 198 engines, aircraft and related equipment on behalf of other parties.

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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. As of December 31, 2023, Willis Aero had $40.3 million in spare parts inventory. Willis Asset Management is 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 four aircraft with a net book value of $232.2 million at December 31, 2023. Our investment in the joint venture was $40.0 million as of December 31, 2023.

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 $39.8 million as of December 31, 2023. Our investment in the joint venture was $18.0 million as of December 31, 2023.

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.

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, bad debts, and credit losses. 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, 2023, 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 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. When we pay for major overhauls, which improve functionality or extend the original useful life, they 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, 2023, 24 engines having a net book value of $17.2 million were depreciated under this policy with estimated remaining useful lives ranging from 1 to 83 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.

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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 Russia and Ukraine conflict), 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.

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 $4.4 million for the year ended December 31, 2023, primarily reflecting an adjustment of the carrying value of five engines and two airframes. As of December 31, 2023, included within equipment held for lease and equipment held for sale was $31.9 million in remaining book value of 15 assets which were previously written down.

Write-downs of equipment to their estimated fair values totaled $21.8 million for the year ended December 31, 2022. Of this write-down, $20.4 million reflects the impairment of two engines located in Russia which were determined, due to the Russia and Ukraine conflict, to be unrecoverable. The remaining write-downs were in the ordinary course of business.

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.

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.

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RESULTS OF OPERATIONS

Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

Revenue is summarized as follows:

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 $50.6 million, or 31.1%, to $213.1 million for the year ended December 31, 2023 from $162.6 million for the year ended December 31, 2022. 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 that of the prior period. During the year ended December 31, 2023, we purchased equipment (including capitalized costs) totaling $163.6 million, which consisted of 23 engines and other parts and equipment purchased for our lease portfolio. 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.

One customer accounted for more than 10% of total lease rent revenue during the years ended December 31, 2023 and 2022.

As of December 31, 2023, the Company had $2,112.8 million of equipment held in our operating lease portfolio, $92.6 million of notes receivable, $9.2 million of maintenance rights, and $8.8 million of investments in sales-type leases. As of December 31, 2022, the Company had $2,111.9 million of equipment held in our operating lease portfolio, $81.4 million of notes receivable, $17.7 million of maintenance rights, and $6.4 million of investments in sales-type leases. Average utilization (based on net book value) was approximately 84% and 82% for the years ended December 31, 2023 and 2022, respectively.

Maintenance Reserve Revenue. Maintenance reserve revenue for the year ended December 31, 2023 increased $50.2 million, or 60.2%, to $133.7 million from $83.4 million for the year ended December 31, 2022. Long-term maintenance revenue was $15.4 million for the year ended December 31, 2023 compared to $36.0 million for the year ended December 31, 2022. Engines out on lease with “non-reimbursable” usage fees generated $118.3 million of short-term maintenance revenues for the year ended December 31, 2023 compared to $47.4 million for the year ended December 31, 2022. This increase is primarily due to an increase in the percentage of engines on short-term leases as well as the increase in utilization on those engines relative to prior period. Additionally, as of December 31, 2023 and 2022, there were $28.4 million and $6.3 million, respectively, of deferred in-substance fixed payment use fees included in Unearned Revenue associated with engines on short-term leases.

Spare Parts and Equipment Sales. Spare parts and equipment sales for the year ended December 31, 2023 decreased by $6.7 million, or 24.6%, to $20.4 million compared to $27.0 million for the year ended December 31, 2022. Spare parts sales for the year ended December 31, 2023 were $20.4 million compared to $25.9 million for the year ended December 31, 2022. The decrease in spare parts sales reflects variations in the timing of sales. There were no equipment sales during the year ended December 31, 2023, compared to $1.1 million for the sales of two engines during the year ended December 31, 2022.

Gain on Sale of Leased Equipment. During the year ended December 31, 2023, we sold 28 engines, one airframe, and other parts and equipment from the lease portfolio for a net gain of $10.6 million. During the year ended December 31, 2022, we sold 25 engines from the lease portfolio for a net gain of $3.1 million.

Gain on Sale of Financial Assets. During the year ended December 31, 2023, there was no gain on sale of financial assets as we did not sell any notes receivable. During the year ended December 31, 2022, we sold four notes receivable for a net gain of $3.1 million.

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Other Revenue. Other revenue increased by $7.0 million, to $32.1 million for the year ended December 31, 2023 from $25.1 million in 2022. Other revenue consists primarily of management fee income, lease administration fees, third-party consignment commissions earned, service fee revenue, and other discrete revenue items. The increase primarily reflects an increase of $5.6 million in managed service revenues.

Depreciation and Amortization Expense. Depreciation and amortization expense increased $2.7 million, or 3.0%, to $90.9 million for the year ended December 31, 2023 compared to $88.3 million for the year ended December 31, 2022. The increase primarily reflects the growth in our portfolio subject to depreciation as compared to the prior period.

Cost of Spare Parts and Equipment Sales. Cost of spare parts and equipment sales decreased by $5.6 million, or 27.0%, to $15.2 million for the year ended December 31, 2023 compared to $20.8 million in the prior year period, reflecting the decline in spare part sales. There were no equipment sales or cost of equipment sales for the year ended December 31, 2023, compared to $0.1 million of cost of equipment sales for the year ended December 31, 2022.

Write-down of Equipment. Write-down of equipment to their estimated fair values totaled $4.4 million for the year ended December 31, 2023, primarily reflecting the write-down of five engines and two airframes. Write-down of equipment totaled $21.8 million for the year ended December 31, 2022, primarily reflecting write-downs of $20.4 million for the impairment of two engines located in Russia which were determined, due to the Russia and Ukraine conflict, to be unrecoverable. The remaining write-downs were in the ordinary course of business.

General and Administrative Expenses. General and administrative expenses increased 56.5% to $144.8 million for the year ended December 31, 2023 compared to $92.5 million in 2022. The increase primarily reflects a $29.5 million increase in personnel costs, which includes an increase of $18.4 million in bonus compensation. Additionally, a $4.9 million increase in outside service fees, a $7.4 million increase in asset management project costs, a $4.4 million increase in aviation hull war insurance as a result of the Russia and Ukraine conflict, a $1.8 million increase in other taxes due to an increase in business conducted in India, and a $1.5 million increase in equipment costs further contributed to the increased general and administrative expenses.

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 40.3% to $20.2 million for the year ended December 31, 2023, compared to $14.4 million in 2022. The increase is primarily due to a higher level of engine repair activity and thrust rental fees, which is driven by increased activity in the industry.

Net Finance Costs. Net finance costs increased to $78.8 million for the year ended December 31, 2023, from $64.2 million for the year ended December 31, 2022, primarily due to an increase in short-term interest rates, which drive borrowing costs in our revolving credit facility. This increase was partially offset by derivative-related receipts of $23.4 million for the year ended December 31, 2023 as compared to $7.8 million for the year ended December 31, 2022.

Income Taxes. Income tax expense for the year ended December 31, 2023 increased to $23.3 million from $4.4 million for the comparable period in 2022. The effective tax rate for the years ended December 31, 2023 and December 31, 2022 was 34.8% and 44.5%, respectively. The decrease in the effective tax rate was predominantly due to an increase in pre-book tax income.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2023, the Company had $168.0 million of cash, cash equivalents, and restricted cash. At December 31, 2023, $4.9 million in cash and cash equivalents and restricted cash were held in foreign subsidiaries. Other than $1.3 million held 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 $229.7 million in 2023. 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 $625.7 million and $284.0 million in the years ended December 31, 2023 and 2022, respectively, was derived from this borrowing activity. In these same time periods $665.5 million and $228.8 million, respectively, was used to pay down related debt.

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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 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.

Preferred Stock Dividends

In October 2016, the Company sold and issued to DBJ an aggregate of 1,000,000 shares of the Company’s Series A Preferred Stock, $0.01 par value per share (the “Series A Preferred Stock”) at a purchase price of $20.00 per 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 Series A-2 Preferred Stock, $0.01 par value per share (the “Series A-2 Preferred Stock”) at a purchase price of $20.00 per share. The net proceeds to the Company after deducting issuance costs were $29.7 million.

The Company’s Series A-1 Preferred Stock accrued quarterly dividends at the rate per annum of 6.5% per share through October 15, 2023 and accrue quarterly dividends at the rate per annum of 8.5% per share thereafter. The Company’s Series A-2 Preferred Stock accrue quarterly dividends at the rate per annum of 6.5% per share. During the years ended December 31, 2023 and 2022, the Company paid total dividends of $3.2 million and $3.3 million on the Series A-1 and Series A-2 Preferred Stock, respectively.

Cash Flows Discussion

Cash flows provided by operating activities were $229.7 million and $144.4 million in the years ended December 31, 2023 and 2022, respectively. The $85.3 million, or 59.1%, increase in operating cash flows was primarily driven by a 31.1% increase in lease rent revenue and a 60.2% increase in maintenance reserve revenue, reflecting growth in the size and utilization of the lease portfolio along with increased levels of usage fees resulting from high levels of travel and supply chain constraints. Changes in maintenance reserves contributed to a $29.8 million increase in year-over-year operating cash flows as market conditions limited asset returns, thereby reducing the return or forfeiture of maintenance reserves. Additionally, changes in unearned revenue contributed to $18.2 million of incremental operating cash flows, reflecting deferrals of in-substance fixed payment use fees. Changes in accounts receivables and accounts payables year-over-year largely offset as increased business activities impacted both balances. 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 84% and 80%, by book value, of our assets were on-lease as of December 31, 2023 and 2022, respectively. The average utilization rate for the years ended December 31, 2023 and 2022 was approximately 84% and 82%, 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.

Cash flows used in investing activities were $92.8 million for the year ended December 31, 2023 and primarily reflected $163.6 million for the purchase of equipment held for operating lease (including capitalized costs and prepaid deposits made during the year), and $15.4 million related to a lease entered into during 2023 which was classified as a note receivable under ASC 842, partly offset by $85.1 million in proceeds from sales of equipment (net of selling expenses). Cash flows used in investing activities were $194.4 million for the year ended December 31, 2022 and primarily reflected $286.4 million for the purchase of equipment held for operating lease (including capitalized costs and prepaid deposits made during the year), and $15.3 million related to leases entered into during 2022 which were classified as notes receivable under ASC 842, partly offset by $69.2 million in proceeds from sales of equipment (net of selling expenses) and $40.7 million in proceeds from the sale of notes receivable (net of selling expense).

Cash flows used in financing activities for the year ended December 31, 2023 were $57.9 million and primarily reflected $665.5 million in principal payments and $9.4 million in new debt issuance costs, partly offset by $625.7 million in proceeds from the issuance of debt obligations. Cash flows provided by financing activities for the year ended December 31, 2022 were $43.3 million and primarily reflected $284.0 million in proceeds from the issuance of debt obligations, partly offset by $228.8 million in principal payments, and $5.2 million in share repurchases.

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Debt Obligations and Covenant Compliance

At December 31, 2023, debt obligations totaled $1,802.9 million, net of unamortized debt issuance costs and note discounts, payable with interest rates varying between approximately 3.1% and 8.0%. 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 October 2023, the Company entered into Amendment No. 4 to the Fourth Amended and Restated Credit Agreement (“Amendment No. 4”), which extended the maturity date for $500.0 million of its credit facility to June 2025. In December 2023, under the terms of Amendment No. 4, the Company terminated $292.0 million of its credit facility. This termination resulted in the credit facility having a reduced total committed amount of $708.0 million as of December 31, 2023. $49.8 million revolves until the earlier of the final WEST VII novated asset or the maturity date of March 31, 2024, and $158.2 million revolves until the maturity date of June 2024.

In October 2023, the Company and its direct, wholly-owned subsidiary WEST VII, closed its offering of $410.0 million aggregate principal amount of fixed rate notes. The notes are secured by, among other things, WEST VII’s direct and indirect interests in a portfolio of aircraft engines and airframes. The notes have a fixed coupon of 8.00%, an expected maturity in October 2029, and a final maturity date in October 2048. The notes were issued at a price of 98.84814% of par. Principal on the notes is payable monthly to the extent of available cash in accordance with a priority of payments included in the indenture.

In December 2022, the Company recognized a $2.6 million gain on debt extinguishment associated with the repurchase of six tranches of ABS notes with a balance of $12.2 million.

The assets of WEST III, WEST IV, WEST V, WEST VI, and WEST VII are not available to satisfy the Company’s obligations other than the obligations specific to that WEST entity. WEST III, WEST IV, WEST V, WEST VI, and WEST VII are consolidated for financial statement presentation purposes. WEST III’s, WEST IV’s, WEST V’s, WEST VI’s, and WEST VII’s abilities to make distributions and pay dividends to the Company is subject to the prior payments of their debt and other obligations and their maintenance of adequate reserves and capital. Under WEST III, WEST IV, WEST V, WEST VI, and WEST VII, cash is collected in restricted accounts, which is 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, WEST VI, and WEST VII indentures require that a minimum threshold of maintenance reserve and security deposit balances be held in restricted cash accounts.

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, quarterly, or annually as required, and the Company was in full compliance with all financial covenant requirements at December 31, 2023.

At December 31, 2023, 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 of not greater than 4.50 to 1.00, on or prior to December 31, 2024, and not greater than 4.25 to 1.00 for the quarter ending March 31, 2025 and thereafter. 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, 2023, we were in compliance with the covenants specified in the WEST III, WEST IV, WEST V, WEST VI, and WEST VII indentures, servicing and other debt related agreements.

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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, 2023:

From 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 and 18 additional new LEAP-1A engines for $459.7 million by 2027. 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 continue to return to service.

In December 2020, we entered into definitive agreements for the purchase of 21 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 $74.5 million and $102.3 million by 2030.

$38.4 million of variable interest payments due under debt obligations, scheduled above, are estimated by applying the interest rates applicable at December 31, 2023 to the remaining debt, adjusted for the estimated debt repayments identified in the table above. Actual interest payments made will vary due to actual changes in the rates for one-month term SOFR.

We believe our equity base, internally generated funds and existing debt facilities are sufficient to maintain our level of operations through 2024. 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

At December 31, 2023, $353.0 million of our borrowings were on a variable rate basis at various interest rates tied to one-month term SOFR. 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, 2023, we have five interest rate swap agreements with a total notional value of $500.0 million. During 2021, the Company entered into four fixed-rate interest swap agreements, each having notional amounts of $100.0 million, two with remaining terms of one month and two with remaining terms of 25 months as of December 31, 2023. One interest rate swap agreement was entered into during 2019 which has a notional outstanding amount of $100.0 million with a remaining term of six months as of December 31, 2023. The net fair value of the interest rate swaps as of December 31, 2023 and December 31, 2022 was $16.5 million and $34.8 million, respectively, each representing an asset and reflected within other assets on the Consolidated Balance Sheets.

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As it relates to the two fixed-rate interest swap agreements with remaining terms of one month as of December 31, 2023, the Company evaluated the probability of the forecasted transactions occurring. The Company determined that it is not probable that the forecasted transactions will occur upon the maturities of these two fixed-rate interest rate swap agreements and as such, reclassified into earnings the associated amount in accumulated other comprehensive income. The impact was an addition to interest income, or reduction to interest expense, in the Company’s Consolidated Statements of Income of approximately $0.2 million for the year ended December 31, 2023.

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 $(23.4) million and $(7.8) million during the years ended December 31, 2023 and 2022, 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 $2.4 million and $2.0 million during the years ended December 31, 2023 and 2022, respectively, related to the servicing of engines for the WMES lease portfolio.

During 2023, WMES sold an engine to the Company for $22.3 million, and the Company sold two engines to WMES for $28.8 million. During 2022, the Company sold two engines to WMES for $12.6 million.

During 2022, the Company subleased a WMES engine to a third party, with WMES as the head lessor. Under ASC 842, the Company recognized a right-of-use (“ROU”) asset of $4.9 million and a lease liability of $4.9 million for this lease during the year ended December 31, 2022.

Other

Between January 2023 and July 2023, Willis Asset Management Limited, one of the Company’s wholly-owned and vertically-integrated subsidiaries, leased one of its hangars to Fur Feather and Fin Limited, an entity in which the Company’s Executive Chairman retains an ownership interest, for quarterly rent payments of approximately $7,700. The lease was approved by the Board’s Independent Directors.

During 2023, the Company paid approximately $44,000 of 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 and were approved by the Board’s Independent Directors.