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Apollo-linked life insurer builds on direct origination focus with GE deal

A life insurer's emphasis on utilizing direct loan origination capabilities makes its involvement in General Electric Co.'s recently announced agreement to sell an affiliate of GE Capital Aviation Services Inc. less unusual than it might seem at first glance.

Athene Holding Ltd. and Apollo Global Management LLC, the alternative asset manager to which it is closely tied, agreed Aug. 29 to acquire PK AirFinance SA from GE. Athene will take ownership of a portfolio of loans, valued at $3.6 billion as of June 30, while Apollo will acquire the PK AirFinance platform, which provides and arranges loans secured by commercial aircraft, aircraft engines and helicopters on a global basis to the likes of airlines, aircraft traders, lessors, investors, financial institutions and manufacturers.

Insurance companies have more typically made headlines in recent years for getting out of aircraft leasing through multibillion-dollar divestitures. American International Group Inc. sold International Lease Finance Corp. to AerCap Holdings NV in 2014. Pacific Life Insurance Co. announced Sept. 9 that it agreed to sell its 75.5% stake in Aviation Capital Group LLC to minority investor Tokyo Century Corp. in a transaction the acquirer valued at approximately $3 billion. The life insurer valued its stake in the common stock of Aviation Capital Group parent Pacific Life Aviation Holdings at $1.85 billion at year-end 2018.

But Athene has identified investments in aircraft loans and leases, albeit not the leasing platforms themselves, as part of a broader strategy to expand its horizons beyond garden-variety bonds and stocks due to what it views as the scarcity of yield among traditional CUSIPs. As Athene Chairman, CEO and Chief Investment Officer James Belardi explained during a September 2018 investor day, Apollo has invested in long-term capabilities to directly originate senior secured assets on behalf of the life insurer, for which it manages investments.

"It's a new paradigm," Belardi said. "Insurers can't continue what they have done in the past. It's not generating enough alpha."

To that end, Athene executives said during the company's second quarter 2019 earnings conference call that it had sourced more than $1 billion in investments from a triple-net lease platform that Apollo has been building out. Previously, they highlighted the capabilities associated with Apollo-backed mortgage servicing rights originator AmeriHome Mortgage Co. LLC and the Apollo-managed, middle-market focused, senior-secured lender MidCap Financial LLC.

Of arguably the most relevance to the PK AirFinance deal, the Apollo-managed Apollo Investment Corp. formed Merx Aviation Finance LLC in 2012. The company states on its website that it maintains a portfolio of 102 aircraft operated by 45 lessees across 28 countries. In addition, Athene executives listed aircraft securitizations among the asset classes in which it has recently been finding opportunities to generate what it considers to be attractive risk-adjusted returns.

Apollo Co-President James Zelter described PK AirFinance as "highly complementary to our existing aircraft leasing capabilities" in announcing the acquisition. Belardi praised the transaction as additional evidence of Apollo's commitment to building direct origination platforms.

Luxembourg-based PK AirFinance offers products including full payout loans, balloon loans, nonrecourse loans, syndicated loans, finance leases, conditional sales and bridge loans. The loans are mostly secured by narrowbody aircraft, widebody aircraft and, to a significantly lesser extent, aircraft engines. GE Capital, in an expansionary phase at the time, acquired PK AirFinance from Credit Lyonnais in 2000.

With PK AirFinance exiting the fold and peer Aviation Capital Group about to have a new ownership structure, questions about GE's future ownership of the remainder of GE Capital Aviation Services are bound to re-emerge.

The company said its plan to create a smaller and simpler GE Capital by shrinking its assets by $10 billion in 2019 is more than 50% complete. But GE Capital President and CEO Alec Burger in the sale announcement listed GE Capital Aviation Services among a handful of remaining operations intended to support the growth of GE's industrial businesses.

GE Chairman and CEO H. Lawrence Culp Jr. said in May that the aircraft leasing business is not for sale. He added, however, that the company was "open to the best ways to create value in and around this portfolio."

In that context, the PK AirFinance divestiture appears to fit the current approaches of the seller and the buyer alike.