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Tuesday, 2 April 2013

Sukuk: A ‘new’ option of aircraft financing

LONDON – Several airlines have indicated that they are exploring the possibilities of financing new fleet acquisitions and expansion through the issuance of sukuk or other suitable Shariah-compliant financing instruments. 

This follows the issuance of sukuk in March by Emirates Airlines and Malaysia Airlines (MAS), who sought to raise funds to finance fleet acquisition and expansion. 

Turkish Airlines and Malaysia’s budget long-haul carrier, Air Asia, have confirmed that they are considering issuing sukuk to finance the purchase of new aircraft, although it will depend on the timing and market conditions. 

Emirates issued a $1 billion 10-year amortizing sukuk, which carries an average weighted life of five years and priced at the tighter end at 300 basis points over 5-year MS (Midswaps). 

Malaysia Airlines, on the other hand, used the proceeds of its 20-year RM5.3 billion sukuk under its Bai Bithaman Ajil (BBA) Notes Issuance Program, established in late 2012, to pay for the delivery of its final Airbus A380 aircraft out of a total order of eight Airbus aircraft, including six A380-800s, one A330-200F and one A330-300. This final aircraft (MSN 114) was Airbus’ 100th A380 delivery. 

So, why this new-found interest in sukuk as a form of aviation finance, and is there a possibility of international airlines from non-OIC countries will also start issuing sukuk for their acquisitions?

Bankers in the UAE and Malaysian suggest that airlines such as Emirates, MAS and possibly Air Asia favor sukuk over ijara (lease) financing and often more costly conventional loans. Sukuk, they stress, are ideal for the airline and aviation industry because of the excellent match between the long-term nature of the assets with a regular income stream from passenger traffic and the structure and tenor of the securities. Sukuk yields are currently also relatively more competitive than conventional loans. 

However, aviation finance industry experts such as Charles F Yeterian, Vice President of the Geneva-based Novus Aviation Capital, which has an established record in arranging Islamic aircraft leasing and other financing facilities, stresses that “sukuk is not necessarily a better option, it is simply a different option in that it affords airlines to find a “new” source of financing. Sukuk has the ability, like its “sister-product” in conventional banking, to go directly to the capital market, and not rely only on commercial bank financing; i.e. going directly to capital, after the uncertainty surrounding the role of commercial banking following the global financial crises. Sukuk represents a still un-tapped Islamic financing reservoir; this market is craving for new Shariah-compliant, well structured financing products and sukuk just seems to fit the bill.”

Both Emirates and MAS have issued Islamic papers in the past. An estimated 60 transactions valued at just under $10 billion have been closed for various airlines and airline leasing companies over the last three decades including Emirates, MAS, Garuda, Syrian Arab Airlines, Gulf Air, Turkish Airlines etc. and several of the major global aircraft leasing firms, all of which are very familiar and comfortable with documentation involving Shariah compliant structures related to purchasing, maintenance and insurance.

MAS itself confirmed in March that it is set to receive 17 new aircraft in 2013 alone.

Some bankers stress that airport infrastructure potentially holds out even more exciting opportunities for various types of Islamic finance instruments and solutions. Both the Kuala Lumpur International Airport (KLIA) and the International Terminal at Istanbul’s Ataturk Airport involved large Islamic financing tranches. 

Perhaps the largest such involvement was in 2012 when the state-owned General Authority of Civil Aviation (GACA) in Saudi Arabia issued a SR15 billion sukuk whose proceeds are being used to part finance the construction of the SR27.1 billion ($7.23 billion) new King Abdul Aziz International Airport in Jeddah. 

GACA since then also issued awarded a contract to Tibah Airport Development Company, a consortium of TAV Airports of Turkey, Al Rajhi Holding Group and Saudi Oger, to build the new $1.2 billion Prince Muhammad bin Abdulaziz International Airport in Madinah. The project is being built under a public-private partnership agreement involving a build-operate-transfer (BOT) structure, and the financing comprises Shariah-compliant equity participation, bridge and istisna (construction forward financing) facilities provided by National Commercial Bank of Saudi Arabia and a $750 million syndicated istisna facility arranged by Japan’s Sumitomo Mitsui Banking Corporation.

The $1 billion Sukuk Al Ijara issued by Emirates Airlines was well received and successfully soled to investors in MENA, Europe, Asia, and offshore US accounts.

(Saudi Gazette / 02 April 2013)

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