Korean fund to put $42 mn in two aircraft funds; $900 mn aviation fund in final stage of fundraising

Dec 12, 2016 (Gmt+09:00)

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South Korea’s Public Officials Benefit Association (POBA) has decided to invest $42 million in mezzanine debt of two aircraft funds which will buy used Boeing and Airbus airplanes for a lease to Emirates Airline and Singapore Airlines, expecting about 5~6% of interest incomes a year and an additional profit from selling an airplane upon maturity of the funds.

Separately, a $900 million joint aviation fund of Mizuho Securities Co. Ltd. and South Korea’s Meritz Securities Co. Ltd. is in the final stage of fundraising, according to industry banking sources on Dec. 8. Principal investment divisions of South Korea’s brokerage companies, leasing and other financial services firms, and insurance companies have shown interest in the mezzanine and subordinated equity tranches of the fund which will acquire a 20 aircraft portfolio from GE Capital Aviation Services.

One of the two aviation funds POBA will invest in is aiming to raise $200 million to lease two used Boeing 777 models to Emirates Airline. The fund is composed of senior loans (60%), A-type mezzanine loans (25%), B-type mezzanine loans (10%) and equities (5%). POBA will underwrite the B-type mezzanine debt for $20 million through South Korea’s HI Investment & Securities Co. Ltd., after winning approval of its investment review committee on Dec. 7.

The Boeing aircraft, produced in 2009, will be leased to Emirates Airline for four years, online news media edaily reported.

The other aircraft fund for a lease to Singapore Airlines aims to raise $83 million to buy a used Airbus A330 model. It breaks down into senior loans (70%), mezzanine loans (25%) and equities (5%). POBA will put $22 million in the mezzanine tranche through Taurus Investment & Securities Co. Ltd, a South Korean brokerage company. The fund reportedly has a six-year maturity.

“The two aircraft funds POBA is investing in have a low proportion of equity, compared with other funds, so the mezzanine tranches actually have the nature of equity,” said one of the IB sources. “Despite high risks, the expected returns are relatively high given that they gave mezzanine debt investors an opportunity to share a profit from selling the aircraft.”

Considering that about 30% of profits from the sale of an airplane will be returned to mezzanine investors, the sources said both aviation funds could deliver two-digit internal rate of returns a year.

Aviation funds recently have taken center stage among alternative assets for South Korean institutional investors, as airlines and aircraft leasing firms are stampeding into new aircraft to meet growing travel demand. A group of small-sized domestic brokerage houses also are jumping into the aviation financing market which lends airlines money for a new airplane purchase, or helps a leasing firm securitize used airplanes.

“As the global aircraft financing market is expanding, risks of selling used airplanes have decreased,” edaily quoted a POBA source as saying. “We are paying attention to it, which is a niche market producing a steady stream of cash flows.”

For the $900 million aviation fund of Mizuho and Meritz, a final agreement is expected to be signed around next weekend with investors of mezzanine and subordinated financing worth a total of $245 million. The fund is set to be South Korea’s first aircraft portfolio fund composed of multiple airplanes.

Meanwhile, the Police Mutual Aid Association and four other unidentified South Korean institutional investors will underwrite $100 million of mezzanine tranches in a $300 million aircraft fund launched to buy two Boeing 777-300ER models for a lease to Emirates Airline in December.

By Donghun Lee and Daehun Kim

@hankyung.com