More than 700 airlines are struggling to gain

a share of the global aviation market. The

price pressure is enormous. At the same

time, globalisation is driving the demand for

air travel. Many large airports have already

reached their capacity limits. This is a com-

plicated situation, which means that aircraft

financing is becoming a major cost factor in

today's airline business. Right in the thick of

things: EMP as an arranger and pioneer in

the market for aircraft finance.

Text: François BaumgartnerPhotos: Enno Kapitza C

HA

NG

ER

S

considerable," says Florian Maier, one of the two ma-naging directors and founding partners of EMP.On behalf of Emirates airline and various institutional investors, the company arranged four A380 transac-tions totalling more than USD 1 billion. "We are not only talking about opportunities, but also about the risks of a potential aircraft investment. This is very well received by many professional investors,” says managing partner Maier. "A successful aircraft investment is characteri-sed by various factors and, in particular, by the under-standing of sector-specific interrelationships in order to provide an optimal risk-return profile of the investment." So far, success appears to have proven EMP right. The first EMP transaction was completed one year after its founding in mid-2014, the aircraft was delivered in September 2015, a "Dreamliner". The company also fi-

nanced a Boeing 787-9 for the UK long-distance airline Virgin Atlantic. The EMP team arranged the long-term lease financing with the airline and placed the finan-cing tranches as an institutional product for German banks, insurance companies, foundations and sub-stantial family assets. In December 2015 and Febru-ary 2016 this transaction was followed by two Airbus A380 jets for Emirates. The December transaction was awarded the “Deal of the Year” award in the "Sale and Leaseback" category by Air-Finance-Journal . The rea-son for the award: For the first time the deal combined German senior loan and equity expertise with Sha-ria-compliant senior and mezzanine funding from the Middle East. In March 2016, further transactions were completed: two Boeing 777-300ER jets. This time the mezzanine capital came from institutional investors in South Korea, who also invested in one A380 and two B777-300ERs in December 2016. For these transac-tions EMP received the “Airline Economics Aviation 100 Awards 2016” as well as the “Air Finance Journal Inno-vative Deal of the Year 2016”. “In the first year we found ourselves and our product, in the second year the first

transactions followed and in the third year we success-fully completed the founding phase with a financing volume of USD 1.3 billion,” says Philipp Prior, managing director and founding partner of EMP. With one Boeing 787-9, four Boeing 777-300ERs, as of November 2017 four Airbus A380s and almost USD 2 billion “assets under management”, EMP is now one of the market leaders for structured aircraft financing in Germany.

“German institutional investors have only recently begun to deal more intensively with aircraft invest-ments. For Anglo-American investors, however, such investments are not unusual and have been common for a long time,” explains Prior and also states: “Our fixed-income oriented products for these clients and our international investors are based on specific aircraft lease transactions. The cash flows are well-hedged by

valuable, homogeneous and fungible assets in a trans-parent and global market. This is how we complement the sector of fixed-income products with a new asset or, if you like, with an alternative asset class.”Long-term contracts also mitigate market-specific risks such as cyclical downturns, and operating and cost risks are transferred to the airline.

“With regard to credit assessment, first priority finan-cing tranches are usually investment grade. In cont-rast to maturity and risk-equivalent corporate bonds, subordinated tranches offer higher yields of up to 100 basis points. Depending on the credit, the returns are on high-yield bond level, while additionally benefiting from the asset as collateral," explains Prior. Finally, a good combination of aircraft type, airline quality and long-term lease contracts forms the basis, in order to meet the high demands institutional investors have for the risk/return profile, transparency and reliable cash flow planning. Prior continues, “Aircraft leasing investments offer good returns in the overall portfolio context and contribute to a higher stability of the port-folio and a reduction in overall risk."

MP's team arranges and structu-res investments in aircraft leasing transactions. The target groups are competitive and creditworthy airlines on the active side and German as well as international investors on the passive side. But what is so special about EMP's

business model?In the case of secured aircraft finan-cing, this principally involves long-term investments, which are subject to a buy-and-hold strategy. They complement long-term fixed-income investments or, in the alternative investments segment, for example, real estate and infrastructure facilities, for which the-re is often no sufficient or appropriate deal flow. The transactions are acquired by EMP, underwritten to the airlines, and structured precisely to meet institutional investors’ demands.The group of investors includes, to name but a few German insurance companies, pen-sion funds and family and foundation funds. Instituti-onal investors from Asia and the Middle East are also among EMP's customers. In addition, there is close cooperation with DekaBank with regard to financing and placement. DekaBank is one of biggest German asset managers. But who is EMP? And what is so spe-cial about the company's investment managers?

The Munich-based company has become an import-ant player in the market for aircraft financing since its founding in mid-2013. "EMP as a transaction arranger and expert in aircraft leasing investments concentra-tes on airlines as financing recipients and on profes-sional investors as financing providers. The need for expertise in aircraft leasing investments and the va-rious financing options for new commercial aircraft is

IF YOU NEED STABILITY AND RETURN IN A LOW INTEREST RATE ENVIRONMENT, YOU HAVE TO CONSIDER VALUABLE AND STRONG ALTERNATIVES „

PHILIPP PRIOR MANAGING PARTNER EMP

Source: EMP

EWITH ITS TRACK RECORD AND A FINANCING VOLUME OF MORE THAN 1.7 BILLION USD, EMP HAS HAD AN EXTREMELY SUCCESSFUL START „

FLORIAN MAIER AND PHILIPP PRIOR, MANAGING PARTNERS EMP

L E A D S T O RYGA M E C H A N G E R S

ASSET

AIRLINES INVESTORS

BANKS

FINANCING INVESTMENT

EMPTRANSACTION

ARRANGER

The EMP team also has years of experience in the field of aviation finance and therefore, in all their acti-vities, they commit themselves to reliability, professi-onalism and operational excellence.

"First there is a principle decision concerning the as-set class. A close information and communication process helps reduce the need for detailed expla-nations about the assets,” says Florian Maier. "In our discussions and documents we inform the investor comprehensively about the interaction of airline cre-ditworthiness, asset quality, financing form and mar-ket environment as well as about all questions about regulations.“ This is a trustworthy and transparent way to support strategic and tactical asset allocati-on with regard to a future investment decision. The chances are substantial, if we look at the forecasts of the IMF, IATA and the big aircraft manufacturers. Despite all consolidation pressures, they forecast annual growth rates above average economic growth and a considerable additional demand for aircraft for the next decades. “The most important future mar-kets for commercial aircraft will undoubtedly be Asia, especially China and India,” says Philipp Prior.With growing prosperity, a new generation of wealthy consumers is also emerging. Moreover, population growth and increasing urbanisation are leading to higher demand for infrastructure and mobility. The latter will also be perceivable by a higher demand for flights. "According to assessments made by Airbus and Boeing, the sales potential in the coming 20 ye-ars amounts to more than 5,000 new orders, for the Chinese market alone" said Florian Maier. Also, the construction of production capacities and final as-sembly lines for medium-haul aircraft in China are evidence of the growth trend in this market. Other emerging markets such as Indonesia will also enter the market. Maier says “With 216 million inhabitants, Indonesia is the fourth most populous country wor-ldwide. These people live on about 17,000 islands and these islands are often only accessible by air. That is why 26 new commercial airports have to be built the-re. Airbus assumes around 33,000 new orders for all aviation markets in the world will be made by 2035.

"Boeing's forecasts are even more optimistic," adds Philipp Prior and continues, “All these aircraft have to be financed reliably and securely.” For banks, inter-national and institutional investors, as well as aircraft leasing companies, commercial aircraft have been reliable financing objects for years. “Due to standar-disation within the series and worldwide third-party

utilisation, the fungibility of commercial aircraft is extremely high. In addition, there are high legal cont-ractual standards in this sector. This is proven by the historically very high recovery rates in cases of rest-ructuring. For the occasional rare exit from an aircraft investment, even in a difficult market environment, shorter scheduling periods can be estimated than, for example, in real estate or many other tangible assets," says Prior. For the financing of their fleets airlines rely on large leasing companies, commercial banks and funds covered by export credit agencies. In addition, they are launching capital market transactions, which, until now, have mainly been addressed to US investors. Moreover, equity from various sources has been used, in the past, for example, from German closed-end funds or international, tax-subsidized structures.

Dr Marco Albers, Head of Infrastructure, Transport- & Export Financing at DekaBank, explains what has chan-ged in the past decades in aircraft financing. "The com-petition in aircraft financing is very high and has mean-while contributed to a significant reduction in margins. The low-interest environment also puts the market under pressure. Institutional investors are increasingly demanding higher returns, which are often no lon-ger achievable on the basis of senior loans. Therefore, highly profitable junior loans are also in vogue today.”

OUR JOURNEY AS INVESTORS: WE ACCOMPANY OUR INVESTORS DURING THE ENTIRE INVESTMENT PROCESS -WITH OWN CO-INVESTMENTS AS WELL.

Sou

rce:

Bör

sen-

Zeit

ung

vom

07.

06.

2017

, „L

uftf

ahrt

verb

and

hebt

Pro

gnos

e an

“ an

d IA

TA

„FLORIAN MAIER

MANAGING PARTNER EMP

Growing aircraft marketsAnnual traffic increase (in %)

L E A D S T O RYGA M E C H A N G E R S

inte

rnal

con

nect

ions

0 5 10 15 20 25 30 35

VIETNAM

JAPAN-SOUTH KOREA

INDIA

GER-SPAIN

GB-SPAIN

MEXICO

INDONESIA

THAILAND

CHINA

USA

The entry of new investor groups into the market and an increasing number of private placements have prompted airlines and lessors to make com-plementary use of various financing sources. Overall, aircraft leasing is becoming more and more import-ant. Across all forms of financing; the market share amounts to 50 percent, as measured by the finan-cing volume of over 40 percent.

Those who enter EMP's Munich office will learn more about the inner workings of a financial boutique. EMP’s business premises also serve as a meeting point for stakeholders. The modern business areas, separated by glass walls, are all visible at a glance. The rooms convey purism and a sense of transpa-rency. Patrice Dietzel, a Vice President at EMP, is the in-house expert when it comes to the concept and implementation of aircraft investments. “EMP is a spin-off of Hannover Leasings’ alternative investment

team, and Hannover Leasing was a subsidiary of the Landesbank Hessen-Thüringen (Helaba). This is why most of us have known each other for many years,” says Dietzel. The team can look back on more than 50 aircraft financing transactions with clients such as United Airlines, Cathay Pacific, Singapore Airlines and Emirates. "EMP is not only an advisor, but also arranges investment transactions at its own risk. On the one hand this strengthens our capital base, while on the other hand we offer our investors the greatest possible alignment of interest," adds Florian Maier.

In the course of the investor journey, the clear-cut pre-paration of a transaction is a very sensitive milesto-ne. “Although aircraft leasing transactions are highly standardised, they can be extremely complex, for ex-ample, there were far more than one hundred main and subsidiary contracts for the Emirates transacti-on. Our task is to translate all this into understandable economics." Sitting in front of their monitors, operati-onal management evaluates data regarding the cre-ditworthiness of various airlines and the performan-ce of a wide variety of aircraft types. "The economic content is only one essential parameter. The form of investments plays an equally important role in times of strict regulatory rules," says EMP Vice President Klaus Roeder, who is an expert in project financing and has an exact knowledge of the regulatory requi-rements of the investors. Roeder: "We are confronted with a very heterogeneous set of requirements. This starts with different regulatory regimes and ends with the investor’s allocation of the asset class in his portfolio. It is quite challenging to structure the largest possible overlap." Alexander Hagmann, also Vice President of EMP, is sitting opposite him. As an expert for financial modelling, the 33-year-old ma-nager and future CFA prepares a transaction with a renowned airline. The airline wants to expand its fleet by one Boeing 787. "The calculation corresponds to an annuity payment that sometimes has and so-metimes doesn't have a final instalment. The maturi-ties are between eight and 16 years; we must include interest rate and currency hedges, and always have to maintain sufficient liquidity over such a long term,” explains Hagmann. "There are leasing structures in which the airline takes over the aircraft at a fixed purchase price at the end of the financing period. With our transactions, it is more often the case that the lessor gets the aircraft back. Therefore, the aim is to keep the residual value risk as low as possible at

the end of the term by means of substantial repay-ment" adds Roeder. The newest colleague is Spike Fulford. He was previously responsible for the global development of maintenance centres at Airbus, and was also responsible for strategic projects involving final assembly as well as for the credit assessments of airlines. He does not make a secret of his predi-lection for short and medium-haul aircraft and thus always contributes to an exciting and varied discus-sion between the short- and long-haul aircraft fans at EMP. "The Boeing 737 MAX is an excellent aircraft with great growth opportunities in Asia," says Fulford. Dietzel counters, "Long-haul aircraft are more suited to our requirements. We can achieve higher leasing rents from creditworthy airlines, which is more suita-

ble for fixed-income investments with full repayment, without substantial residual risks." Over the past few years the EMP team has convinced customers due to its experience and competence. Its strength with regards to implementation is also based on its high problem-solving competence. The company has a broad network of airlines, leasing companies, in-ternational financing partners and technicians. The entrepreneurial team can quickly adapt to the most different customer requirements, and its motivation for success is based on its own entrepreneurial risk.

"We are a progressive and value-oriented company. We rely on corporate responsibility and transparency, on experience and know-how in a very specific sector of financing. Our partners count on us because we quickly and reliably find suitable solutions and also assume responsibility for them," says Prior.

EMP SERVES AS A TRANSLATOR FOR INVESTORS’ AND AIRLINES’ REQUIREMENTS.

DUE TO THESE EXPERIENCES; WE HAVE AROUSED OUR CUSTOMERS’ INTEREST IN JUNIOR INVESTMENTS „

DR MARCO ALBERS DEKABANK

„PHILIPP PRIOR

MANAGING PARTNER EMP

L E A D S T O RYGA M E C H A N G E R S

Dr Albers from DekaBank can only agree with this, and adds that “EMP is not only very fast, but also flexible and creative in its decisions and product develop-ments. And that's exactly what we very much appre-ciate when we're doing business with EMP”. Based on EMP’s input, it is possible to generate a reasonable additional offer beyond the banking standard within a very short time. Looking out the window, Prior says,

"The implementation of an investment requires a gre-at deal of tact and a high degree of professional com-petence. The structuring process has to run without errors and must always be investor-friendly.“ Prior is a realist and visionary at the same time, and he strictly rejects gamblers." EMP stands for these conservative values. The group of shareholders consists of experien-ced senior executives from the banking and insurance industry, who, in addition to their starting capital, give valuable entrepreneurial impulses and provide us with their network,” explains Philipp Prior. After studying business, he started his career in the field of aircraft finance at Hannover Leasing. As Head of Alternative Investments, he was responsible for the worldwide acquisition, structuring and implementation of aircraft financing and other alternative investments such as private equity and infrastructure. The manager and fa-mily father can look back on a comprehensive transac-tion experience in the field of international structured asset financing with a total volume of more than 10 bil-lion Euro. But what motivates the 44-year-old mana-ger? "Currently, EMP is undergoing a strong phase of growth." The next milestone for EMP will therefore be the launching of fund vehicles with portfolios including several transactions and offering diversification to in-vestors. In addition, the EMP team and its spectrum of partners is becoming more international. In 2016 EMP was one of the largest arrangers in South Korea with a volume of over USD 500 million. This also resulted in a stake in Crianza Aviation, the first Korean aircraft lea-sing platform, together with one of the largest Korean private equity houses, IMM. But how can new investors be inspired and how can lasting trust be created? "The enthusiasm for aircraft finance begins with the appro-priate investor approach," answers Florian Maier. "An important precondition for enthusiasm is one's own conviction and the passion for the métier you are wor-king in. Also important is a certain visibility. At interna-tional trade fairs and conferences, such as the annual Global Airfinance Conference in Dublin, EMP has to fly its flag to be visible and attractive for investors and airlines." Maier continues, "For the ongoing investment phase we earn trust through the effective monitoring

of our aircraft leasing investments, the lessees and the current market development. Risk management, regular budget monitoring and reporting as well as the valuation of current investments have to be accurate and implemented in an investor-friendly way. So, we are talking about ongoing due diligence." Maier is also a family father and loves to sail on Lake Starnberg. The 41-year-old founding partner also has extensi-ve transaction experience in the field of aviation and private equity, on not only a conceptual level but also on the placement side. Most recently, he managed an asset volume of around 5 billion Euro. After studying business, he started to work in the tax department of a well-known company in 2001. In 2005 he joined the Alternative Investments department at Hannover Lea-sing, where he was responsible for numerous transac-tions as Co-Head of Alternative Investments. "Suc-cess shows that our concept works. We owe this to our partners, who have placed great trust in us from the very beginning,” emphasise Prior and Maier in unison.

"First and foremost, Dr Dierk Ernst - the "E" in EMP. One of EMP's founding partners, he is one of the pioneers of the leasing and fund business in Germany and has 40 years of experience in the financing of tangible as-sets worldwide." From 1979 to 1993, he was Managing Director of KG Allgemeine Leasing, where he built up the aviation division with the founding of Lufthansa Leasing. In 1979 he completed one of the first aircraft leasing transactions in Germany. After two years as CEO of Advanta AG, Dr Ernst served as Managing Di-rector of Hannover Leasing from 1995 until his retire-ment in 2008. Ernst is modest, clever and very reso-lute. As an experienced and sovereign chairman, he supports EMP with advice and action. "I've known the two managing directors and partners for more than 15 years; Florian Maier - the M - slightly shorter because he came later, Philipp Prior - the P – slightly longer. We have worked together very closely. I was responsib-le for the aircraft business at Hannover Leasing as a managing partner. They were both very successful in managing this and other business units and they have always been innovative," says Dr Ernst. These experi-ences were an essential prerequisite for Ernst with re-gard to the founding of EMP. At EMP, the team cheer-fully looks ahead to the future with great energy. "We want to be a game changer in the market for aircraft finance," says Prior, concluding that "We will reward the confidence of our investors with an above-avera-ge return on investment in relation to our conservative approach. To achieve this, we will continue to grow re-sponsibly and sustainably. "

WE HAVE SHOWN THAT

OUR CONCEPT IS SUCCESSFUL AND HAVE NOW

STARTED A PHASE OF GROWTH. „

PHILIPP PRIOR MANAGING PARTNER EMP

L E A D S T O RYGA M E C H A N G E R S