Planes Beat Bonds in Korea as Asset Managers Chase Higher Yields

  • Hyundai Marine & Fire sees plane leasing as stable investment
  • Korea's yield premium vanishes after bonds rally on rate cuts

South Korean asset managers are teaming up with insurers to finance aircraft leasing as record-low bond yields in Asia’s fourth-biggest economy boost the appeal of alternative assets.

Hyundai Marine & Fire Insurance Co., Kyobo Life Insurance Co. and Hyundai Life Insurance Co. pooled about 100 billion won ($87 million) in a deal led by Hyundai Asset Management Co. in August to buy a Boeing Co. 777 plane that was leased to Emirates Airlines for 12 years. Separately, Daewoo Securities Co., the nation’s biggest brokerage by market value, led a $65 million deal with local institutions to purchase and lease a 777-300ER aircraft to Emirates on Aug. 28.

Such deals will exceed 1 trillion won next year as Koreans follow in the footsteps of Asian investors including Hong Kong billionaire Li Ka-shing, according to HI Investment & Securities Co. The investments offer annual returns of at least 12 percent, according to Endau Analytics, a Malaysia-based aviation consultancy. Korea’s 10-year sovereign bonds yielded 2.14 percent as of Monday.

“Airplanes are fast emerging as alternative assets, as investors seek higher returns in a low-yield environment,” said Kim Tae Kyun, the Seoul-based head of maritime investment and finance at HI Investment, the first Korean brokerage to enter the leasing business by arranging a deal a year ago. “Airplane prices are stable and relatively easier to value, and big airlines are considered to have very low risk of failing to repay.”

South Korean bonds are losing their appeal as their premium to Treasuries vanishes. The 10-year sovereign yield sank to a record 2.04 percent on Oct. 5, two basis points less than on comparable benchmark U.S. debt, data compiled by Bloomberg show. The discount compared with a premium of as much as 74 basis points in January. The notes offered six basis points more than similar-maturity U.S. debt on Monday.

Record-Low Rates

Local bonds have rallied this year as the weakest economic growth in more than two years and low inflation prompted the Bank of Korea to cut its benchmark interest rate to an unprecedented 1.5 percent in June. The central bank will keep its policy rate unchanged at the next review on Thursday, according to 15 of 17 economists surveyed by Bloomberg. Two expect a cut to 1.25 percent. The BOK will keep the rate at its current level until the end of 2016, according to the median estimate in a separate survey.

Hyundai Marine & Fire, which also joined other insurers last year to lease an Airbus Group SE A380 aircraft to Emirates, expects stable returns from leasing because the contracts with airlines are long-term in nature, a spokesperson for South Korea’s biggest property and casualty insurer by assets said in a statement to Bloomberg News. The supply of planes is limited due to their long production period, whereas demand is growing steadily, it said.

Daewoo Securities entered the aircraft financing market in 2014 with a deal to Finnair, and so far has directly invested in or arranged deals for three passenger planes and two cargo planes, it said in a statement.

‘Highly Lucrative’

“Investors love it because they are investing in something that is highly lucrative,” said Shukor Yusof, founder of Endau Analytics.

China’s Bohai Leasing Co. agreed last month to buy Avolon Holdings Ltd., the Dublin-based jet lessor whose private-equity backers include Oak Hill Capital Partners, in a deal with an enterprise value of $7.6 billion. Australia’s Macquarie Group Ltd. said in March it bought aircraft from AWAS Aviation Capital Ltd. for $4 billion. The purchase, comprising 90 passenger planes leased to 40 airlines, expanded its portfolio to 220 aircraft, Macquarie said.

Asian leasing companies are boosting fleets and expanding across the continent, which is set to overtake the U.S. as the world’s largest plane market in two decades. Economic growth in China, India and Southeast Asia is encouraging more air travel. Li Ka-shing’s Cheung Kong Holdings Ltd., now part of CK Hutchison Holdings Ltd., agreed in November to pay $1.89 billion to buy 45 planes from companies including General Electric Co.’s aviation services unit. Malaysian low-fare carrier AirAsia Bhd. also entered the leasing market last year.

Capital markets are expected to support nearly a third of new deliveries through both secured and unsecured funding in 2015, Boeing Capital Corp. said in a report last December. The company said it expects slower but still robust growth in airplane delivery financing requirements over the next five years, with a projected $156 billion of delivery financing needed in 2019.

Kim of HI Securities predicts the number of leasing contracts will rise more than 50 percent annually for the next two to three years.

“Airlines have started to come to Korean investors as they diversify their financing sources from the U.S., Japan and Middle East,” Kim said. “Interest in aircraft leasing is growing in Korea and we expect a broader range of investors to participate."

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