Police fund, 4 other Korean firms to put $100 mn in Emirates aircraft fund

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

The fund set up by an unidentified German aircraft leasing firm will raise a total of $300 million, amid soaring interest in aviation financing as air travel demand is expected to pick up from emerging markets, investment banking sources said on Dec. 1.

The mezzanine investment accounts for the whole mezzanine slices of the fund, which are divided into three types by maturity – five, 11 and 12 years. They are expected to deliver 4~6% annual returns depending on maturity: the longer the maturity, the higher returns the mezzanine debts will provide.

The police savings fund and four unidentified Korean institutional investors - savings funds and insurance companies – will invest between the upper end of the 10 billion won ($8.5 million) range and 30 billion won ($25 million) in the aviation fund, respectively. The five institutions all received approval of their internal investment committees for the investment.

Emirates Airline will pay the principal and lease fees through the maturity of the fund. Hana Financial Investment Co. Ltd. has arranged the mezzanine financing.

A recent rush into aviation financing has led to a decline in expected returns, but Korean investors say they are still an attractive asset class because of travel demand growth from China and India.

“It is true that there are concerns about declining returns (of aircraft funds), but global travel demand has been rising enough to ease those worries,” a local brokerage company source told the Korea Economic Daily. “And now lease companies are lining up for new airplanes from Boeing and Airbus, they are in rush to find investors for the airplanes they have already had. That’s why such investment opportunities are being extended to South Korean institutions.”

The airplane leasing funds recently introduced to Korean investors also show a diversification into a broader base of airline companies from top global airlines on which domestic institutions had concentrated in their early stages of investing in aviation funds.

In September, the Construction Workers Mutual Aid Association and JB Asset Management Co. Ltd., a small-sized Korean asset manager, had reportedly invested around 36 billion won in an aircraft fund for Japan’s All Nippon Airways Co. Ltd.

The Public Officials Benefit Association and the Yellow Umbrella Mutual Aid also had recently invested $34 million in mezzanine debt to fund Air France’s $115.7 million lease of two aircraft. The French airline leased the B777-300ER model which is a large and best-selling airplane.

Meritz Securities Co. Ltd. and Mizuho Securities Co. Ltd. are aiming to raise about $900 million jointly from mezzanine and equity investors to acquire a 20 aircraft portfolio from GE Capital Aviation Services (GECAS) by mid-December.

Year to date, South Korean institutions’ investment in aviation financing is estimated to exceed 1.6 trillion won, according to a news outlet edaily earlier this week.

By Daehun Kim

daepun@hankyung.com