Aircraft leasing: new addition to the infra debt portfolio

Norman Liu, a senior advisor at Global Infrastructure Partners, tells PDI why brand-new airplanes are not the best investment pick.

Aircraft leasing is the latest infrastructure-related addition to institutional investors’ debt investment strategies, according to Norman Liu, a senior advisor at Global Infrastructure Partners, a New York-headquartered infrastructure investment firm. However, there are two risk factors that investors should take into consideration when looking at aircraft leasing strategies, namely the type of the aircraft and its age, Liu said.

On the vintage side, he thinks ‘mid-life assets’, with eight to 16 years of usage, are the most suitable aircrafts for finance.

“Aircraft is a long-lived asset with over 25 years of life, with technology set at least for the next 10 to 15 years,” he added.

Speaking to PDI at the Credit Suisse Asian Investment Forum 2018 about his advice to institutional investors as a former president and chief executive of GE Capital Aviation Service, Liu argued that for institutional investors, a carve-out strategy is not optimal.

According to him, carving out airplanes means scrapping the planes after 16 years of usage, by realizing the value of an asset in parts.

“There are not many opportunities here [in airplane carve-outs] in dollar amounts for institutional investors and [it] is more of an entrepreneurial game”, Liu noted.

According to him, only certain assets match investors’ requirements for aircraft leasing where a typical unleveraged internal rate of return ranges from six to eight percent, depending on the debt structure. Majority of airlines operate both wide-body aircrafts such as Boeing 787 series and maxis and smaller planes with narrow bodies. The intermediates such as 787s and 8350s are also present in the market.

Among institutional investors that have made credit investments in this sector include a Seoul-headquartered financial service provider, Hana Financial Group. The firm previously told PDI that it plans to increase its exposure to aviation financing with a focus on narrow-body types, including Boeing’s 737 series and the Airbus A320 family. Hana Alternative Asset Management, a subsidiary of the financial group, has disclosed that it invested over $120 million in loans for aircraft leasing to Emirates with underlying assets of Boeing 777-300ER and A380-800.

“What is the next thing to add if you raise a fund? Aircraft is the one to add,” said Liu.