HI Investment sets up leasing firm to buy Boeing aircraft jointly for $209 mn

HI Investment & Securities Co. Ltd., an affiliate of South Korean shipbuilder Hyundai Heavy Industries Co. Ltd., has established an offshore aircraft leasing company to buy two used Boeing 777-300ER aircraft from a Chinese leasing firm for $209 million, jointly with nine other institutional investors.

Emirates Airlines will continue to lease the airplanes, manufactured in 2009, through 2021, according to a HI Investment source involved in the transaction on March 23.

The brokerage house first approached the Chinese aircraft leasing company which was working on its portfolio reshuffle, and specified conditions for the purchase in consultation with the investors which include the Public Officials Benefit Association (POBA) and German’s DVB Bank, a specialized lender for transport finance.

It is rare for a South Korean institution to contact the seller of aircraft portfolios directly, and establish a leasing company to buy them. South Korean brokerage firms generally acted as arrangers of aircraft finance by launching a domestic fund investing in a foreign aviation fund, or underwrote them for resale to other investors.

HI Investment and a group of South Korean installment financing companies injected a combined $10 million into the special purpose company (SPC) established by HI Investment to secure subordinated notes, or participating notes, which represent the entire equity interests in the SPC.

The subordinated note holders are eligible to share the proceeds from the aircraft sale after the lease contract with Emirates Airlines expires, and expect an internal rate of return of about 8% per annum from the tranche.

POBA, a savings fund for South Korean government employees, invested $20 million in mezzanine debts of the SPC, and other unidentified institutions committed $56 million to the mezzanine tranche for annual yields of 4 to 5%.

DVB Bank and other institutions will extend senior loans of $123 million to the SPC for an expected average yield of 3% per year.

Both mezzanine and senior debt investors will receive fixed-rate interest incomes through 2021, financed by lease fees.

Amid rising caution about the recent surge in aviation fund investments in Korea, HI Investment set its product apart from others by emphasizing: it selected the target asset at firsthand, instead of choosing an asset put on the market; it bought the aircraft at a discount to the market price; and investors could participate in designing the deal structure.

Market observers say that domestic brokerage houses need to introduce tailor-made products to meet the return targets of limited partners, diversify aircraft portfolios into a range of budget carriers and cut brokering fees by establishing their own aircraft leasing companies.

HI Investment plans to unveil other aviaiton funds with diversified portfolios in terms of aircraft models and types, in an effort to reduce its reliance on property financing.

The latest deal is the fourth aircraft financing arrangement for HI Investment since it began the business in 2014.

By Ikhwan Kim and Daehun Kim

lovepen@hankyung.com