Korean banks lend club loan for $115 mn aircraft debt finance

Three big South Korean lenders have lent a $85 million club loan to ALAFCO, a Kuwait-based aircraft leasing company, which recently raised $115 million in a six-year senior loan to buy a new Airbus A350.

State-run Korea Development Bank (KDB), Woori Bank and KEB Hana Bank have participated in the club deal, inviting an unidentified German transport financing company, a source from one of the three Korean lenders said on Nov. 28. It was first reported by South Korea’s Financial News.

The total cost for the new airplane purchase is estimated at around $155 million, and ALAFCO financed the remainder on its own, according to the source.

In detail, KDB, KEB Hana and the German lender lent $30 million respectively, with Woori providing $25 million.

ALAFCO guaranteed the loan which is expected to yield less than 2% plus 3-month LIBOR.

It leased the Airbus A350 to a foreign airline last week.

The source noted that the club deal lowered risk with a shorter term to maturity and a lower loan to value (LTV) ratio of about 75%, compared to other aircraft financing.

Typically, aircraft-backed loans have a 10-year term with an 80~90% LTV.

The club deal does not include mezzanine, subordinated or equity tranches.

KDB and KEB Hana built relationships with ALAFCO in 2016 by providing a $135 million club loan for a narrow-body aircraft.

In 2017, KDB lent a $80 million club loan for a narrow-body plane together with the German transport financing company which participated in the recent $115 million club deal.

South Korean banks have been pushing into aircraft financing deals in search of safe and liquid investments.

“Despite low nominal yields, aircraft is easy to cash out and generates a decent risk-adjusted return compared to lending which carries some level of default risk,” the source told the Korean Investors. “That’s why we want to have aircraft assets at a steady level.”

Aircraft investments are less than 3% of the bank’s lending assets, he added.

In May of this year, six domestic lenders – KDB, KEB Hana, Woori, Shinhan, Nonghyup and Busan Bank -- provided a $171 million club loan of a debt refinancing package to lease an A380 built in 2016 to Emirates Airline.

It followed a $216 million aircraft-backed club loan lent by five unidentified Korean banks in December 2017 for lease to Emirates Airline.

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