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Saturday, 24 December 2011

Malaysia, Emirates plan sukuk to fund aircraft



Malaysian Airline System Bhd (MAS) and AirAsia X Sdn are joining Emirates in planning sales of Islamic bonds as banks curb lending on Europe’s debt crisis.

MAS, voted Asia’s leading air carrier by World Travel Awards this year, may sell sukuk to partly fund an order for RM12 billion (US$3.8 billion) of aircraft due to be delivered by the end of 2014, chief executive officer Ahmad Jauhari Yayha told reporters in Kuala Lumpur on Dec. 7. AirAsia X, the region’s first long-haul budget service, may issue syariah-compliant debt to expand its fleet, CEO Azran Osman Rani said in an interview in the capital on Dec. 13.

The airlines are turning to Islamic markets on prospects European lenders will reduce credit next year due to the region’s financial crisis, according to Standard & Poor’s. Syndicated loans in Europe, the Middle East and Africa fell 31 per cent to US$184.4 billion this quarter from the previous three months, while global sales of sukuk rose 38 per cent to US$7.2 billion, according to data compiled by Bloomberg.

“Banks in Europe are less willing to provide financing for large asset purchases because of the region’s debt crisis and the need to preserve capital,” Hang Tuah Amin Tajudin, vice president of Kuala Lumpur-based OCBC Al-Amin Bank Bhd, the Islamic unit of Singapore’s Oversea-Chinese Banking Corp, said in a Dec 19 interview. “Sukuk is a good option as there’s still pent-up demand.”


Average yields on sukuk have dropped eight basis points, or 0.08 percentage point, to 4.09 per cent since reaching a seven- month high of 4.17 per cent on Dec 9, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Yields fell 65 basis points this year, following a 252 basis-point decline in 2010.

Yields on emerging-market bonds fell five basis points this month to 6.06 per cent and are down seven basis points since the end of last year, according to JPMorgan Chase & Co’s EMBI Global Sovereign Index.

“Sukuk may not necessarily be priced lower than conventional bonds but they offer the airlines a source of diversification,” Michael Oh-Lau, head of debt markets at Kuala Lumpur-based Maybank Investment Bank Bhd, said by e-mail on Dec 12. “The sukuk market opens doors to a wider group of investors.”

Islamic bonds are “naturally suited” to airlines given their structure and because aircraft can be used as the underlying asset to back the debt, said Badlisyah Abdul Ghani, chief executive officer of Kuala Lumpur-based CIMB Islamic Bank Bhd, a unit of CIMB Group Holdings Bhd.

Sukuk can be based on a sale and lease agreement such as Ijara, where the asset is rented out and final ownership is optional. Islamic bonds can also use Murabaha, a three-party transaction where a bank buys a product on behalf of the customer and sells it back at a mark up. There is also Istisna, a contract to make an item at an agreed price with the potential buyer making periodic payments.

“More airlines can be expected to look at the Islamic market for financing,” Badlisyah said in a Dec. 12 interview. “Ijara is a perfect Islamic structure for airlines.”

Selling syariah-compliant notes is an option for Emirates, the biggest international carrier, chairman Sheikh Ahmed bin Saeed al Maktoum said at the Dubai Airshow on Nov 15. Gary Chapman, president for group services, didn’t answer calls to his mobile phone this week seeking comment.

The company, based in the United Arab Emirates, sold US$550 million of floating rate dollar-denominated Islamic bonds in June 2005, the world’s first sale of sukuk by an airline. The price of the notes was 98.36 on Dec 20, compared with 94.12 at the end of last year, according to data compiled by Bloomberg.

Loans in Europe, the Middle East and Africa are poised for the worst quarter since the three months ended March 2010 and have climbed 8 per cent in 2011 to US$1 trillion from the year earlier period, data compiled by Bloomberg show. Global sales of Islamic bonds, which pay returns on assets to comply with Islam’s ban on interest, rose 68 per cent to US$26.4 billion, short of the 2007 record of US$31 billion.

The deteriorating outlook for the airline industry and the clampdown on lending may encourage companies to turn to the Islamic bond market, Shukor Yusof, a Singapore-based aviation analyst at S&P, said in an interview on Dec 20.

Profits may drop 57 per cent this year and 49 per cent in 2012 as Europe’s crisis hurts bookings, the International Air Transport Association said in a Dec 7 statement. Companies may be unprofitable next year should the contagion “spiral out of control,” according to the Montreal-based agency that represents 240 airlines worldwide. Jet fuel prices have increased 14 per cent this year to US$119.40 per barrel.

“Many airlines won’t be able to raise funds from their traditional sources,” said Shukor. “It’s natural for the Emirates and the Malaysian Airlines to look at sukuk as they are from Muslim jurisdictions.”

Syariah-compliant bonds returned 6.7 per cent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, while debt in developing markets rose 7.9 per cent, JPMorgan Chase & Co’s EMBI Global Composite Index shows.

The difference between average yields and the London interbank offered rate, or Libor, was little changed this month at 286 and narrowed four basis points in 2011, according to the HSBC/NASDAQ index.

The yield on Dubai’s 6.396 per cent Islamic notes due in November 2014 fell two basis points to 5.89 per cent yesterday and has decreased from the year’s high of 6.64 per cent on Jan 31, according to data compiled by Bloomberg. The difference in yields between Malaysia’s sukuk and the Dubai Department of Finance’s debt narrowed three basis points yesterday to 316, data compiled by Bloomberg show.

The Bloomberg Malaysian Sukuk Ex-MYR Index of foreign- currency Islamic debt sold by companies in Malaysia climbed to 104.2280 on Dec 20, the highest level since Nov 17. The gauge has gained 5.8 per cent this year.

AirAsia X, the long-haul affiliate of Asia’s biggest discount carrier AirAsia Bhd, is looking at Islamic bonds as it may add at least another 60 aircraft to an existing order of 30 Airbus SAS planes, CEO Azran said.

Emirates is building the world’s biggest fleet of wide-body jets and signed an order for US$18 billion of planes on Nov 13 with Boeing Co.

“In today’s environment, you need a variety of funding sources,” Azran said in telephone interview in Kuala Lumpur. “The situation in Europe plays a part.” -- (Bloomberg: 22-Dec-2011)
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Alfalah Consulting Malaysia: www.alfalahconsulting.com

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