The managers of Pictet Asset Management’s FP-Multi Asset Portfolio fund have made their latest direct loan investment in the aircraft sector which is currently accounting for around 6% of the funds’ portfolio.
The first of several such deals Pictet Asset Management’s multi asset team was involved in was in 2010 backing the purchase of an Airbus A380 aircraft – Airbus’ so-called Super Jumbo – to be operated on a 12 year lease by the airline Emirates.
At a time of rock bottom interest rates, the annual yield on this investment was around 9.5% over 12 years. Since the transaction was backed by a real asset, there is also the opportunity to realise the residual value of the plane at the end of the period.
Since 2009, companies have found bank loans harder to come by. Airlines typically finance around half their fleet to better manage their balance sheets and when banks started lending less, and in many cases unwinding their aircraft financing operations, they were forced to look for alternative sources for the loans they needed.
They were also now prepared to pay more for scarcer financing so the risk premium on providing the loans for new aircraft was sufficient to make this viable for investors. When looking at Boeing 747, you normally get between 40 and 60% depreciation over 12 years.
But crucially, in spite of the loss of value, investors still have a claim on the real asset at the end of the period. If an asset bought in 2010 is sold after a 12 year deal matures, it is priced in 2022 dollars so it can also be treated as a partial hedge against inflation.
Shaniel Ramjee, fund manager commented: “The most recent investment we made in this area was priced at an 8.25% yield – very attractive and nearly double the yield on an Emirates corporate bond. However, a growing number of asset managers are moving into aircraft financing and yields have started to come down as capital becomes more abundant. At below 8 per cent interest rates on aircraft deals, we would probably be less likely to participate in this type of investment. Nonetheless, the conditions that encouraged us to become involved in direct financing in the first place are likely to persist and we continue to look for new opportunities.”
Ramjee added: “To date, few fund companies have moved in on these deals providing direct financing to corporates, and returns are still attractive. We also see these types of investments as a valuable addition to the fund’s asset allocation strategy which in aims to deliver diversification coupled with equity like, lower-volatility returns.”