Korea Investment buys China Airlines-leased aircraft for $165 mn

Korea Investment & Securities Co. Ltd. has acquired a Boeing aircraft leased by Taiwan-based China Airlines for around 180 billion won ($165 million), which may signal domestic investors’ return to the aviation financing market in more than a half year.

The purchase of Boeing 777-300ER from Aviation Capital Group (ACG), a leading aircraft leasing company, marked the first investment by a South Korean investor in an airplane leased to a Taiwanese airline. Their previous deals had been heavily weighted towards Emirates Airline and Singapore Airlines.

Korea Investment broke an almost eight-month lull in aircraft purchase deals among South Korean investors by acquiring the airplane via DB Financial Investment Co. Ltd. (formerly, Dongbu Securities Co. Ltd.).

Concerns about overheated competition and lowered returns had deterred South Korean institutional investors from aviation financing investment, although the global aviation finance market remained resilient.

“With the forex market environment turning in our favor, the aviation financing market (in South Korea) is showing signs of a recovery,” said a Korea Investment source.

The South Korean won climbed to over a two-and-a-half-year high against the US dollar in November.

Korea Investment will sell down the investment by offering four securitized products backed by the aircraft, targeting annual returns of over 5%. (see table below)

It is considering buying part of the mezzanine tranche as a limited partner.

The aircraft has a remaining lease term of nine years and two months.

“Boeing 777 has a solid secondary market, so we believe that it will be easy to sell the plane after the fund expires,” said Jung-won Kang, of DB Financial Investment.

He added that more than 50% of China Airlines shares are held by the Taiwanese government and friendly shareholders.

The aircraft transaction was also the first alternative investment made after Korea Investment was designated as one of the country’s five biggest investment banks with an equity capital of more than 4 trillion won.

As a large investment bank in the country, Korea Investment was allowed last month to issue promissory notes for corporate financing. It will finance the aircraft purchase with the proceeds from promissory notes it issued last month.

By Ki-yeol Seo and Daehun Kim

philos@hankyung.com