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Emirates Airline eyes Islamic finance as Europe banks balk

Airline looking at Islamic finance options - president; Says French banks more risk-averse; Emirates has 13 aircraft deliveries by end of March; Sukuk market bearing up well versus conventional finance; But any Emirates sukuk deal might have to be complex

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November 8, 2011 2:19 by



Dubai’s Emirates , the rapidly expanding Gulf Arab carrier, is looking at the more resilient Islamic finance market to fund aircraft deliveries as international banks back out of plane deals because of the euro zone debt crisis.

European lenders, especially French banks, which have been major financiers for Emirates’ aircraft deals with Airbus and Boeing , have become risk-averse because of the crisis, the airline’s president Tim Clark told Reuters.

“We were kind of planning for finance from European banks…but it’s just a bit difficult now,” said Clark.

“We still have the Islamic finance market to go with and other funding options are always open for us,” he said, adding that issuing an Islamic bond or sukuk was “not out of the question”.

Clark declined to comment on specific financing deals, but said liquidity in the international loan market was lower and French banks were shying away from new deals. “This won’t change for the next six to nine months,” he said.

Societe Generale , France’s second-biggest listed bank, on Tuesday scrapped its 2011 dividend to help bolster capital as it reported a 31 percent drop in quarterly profit, hit by charges including Greek debt writedowns. Its chief executive said the bank would reduce its aerospace financing “very significantly”.

Emirates is active in corporate funding markets because of its busy schedule of plane purchases; it received 10 new aircraft this year and a further 13 are scheduled for delivery before the end of March next year. Emirates chairman Sheikh Ahmed bin Saeed al-Maktoum has said there is a good chance of the airline placing yet more orders at next week’s Dubai Airshow.

However, Clark played down that idea. “We will book if we have a requirement and get good deals. Otherwise we won’t,” he said.

RESILIENT
The sukuk market has been relatively resilient during this year’s instability in global financial markets, which has made it more difficult for even highly rated companies around the world to issue conventional bonds.

That is partly because Islamic investors in the Gulf remain cash-rich, partly due to the limited supply of sukuk, and partly since sukuk investors tend to hold the bonds until maturity, reducing the chance of big swings in secondary market prices triggered by shorter-term speculators bailing out of positions.

Goldman Sachs registered a $2 billion Islamic bond programme last month, a fresh case of a conventional borrower looking at sharia-complaint funding sources as other markets dry up.

Traditionally, Islamic finance has been more expensive than conventional money. But the gap between the two, especially in the fixed income sector, has narrowed during the global financial turmoil of the past year and may, for now, have disappeared completely.

Dubai shopping mall developer Majid Al Futtaim decided against issuing a conventional bond because of pricing concerns earlier this year. It has now mandated banks to set up a separate sukuk programme.

Emirates has used sharia-compliant financing facilities before so the company is aware of how Islamic finance works, according to Qudeer Latif, head of Islamic finance at law firm Clifford Chance in Dubai.

TRICKY
However, funding planes on order using sukuk could be tricky because Islamic finance, in addition to forbidding payment of interest, prohibits pure monetary speculation and requires deals to involve concrete assets. It would be harder to win a seal of approval from Islamic finance scholars for a sukuk that was based on assets which the airline did not yet own.

“It’s much easier to use existing planes to issue a corporate sukuk,” Latif said.

“For new aircraft, it’s not impossible but it’s much more complicated as the cash would have to go from investors through a special purpose vehicle to the manufacturer, and then a lease- back arrangement put in place with Emirates.”

Currently, two aircraft-based sukuks have been issued globally, and they were backed by existing aircraft: a $500 million issue from GE Capital in November 2009, and a $100 million deal for Nomura in July 2010 .

Clark acknowledged that his airline, whose conventional $1 billion bond issue in June was more than five times oversubscribed, would be in new territory with a sukuk.

“This will be a new territory for Islamic finance. They (Islamic banks) are a bit hesitant, but they definitely have the capacity,” he said.

Emirates has continued to grow exponentially despite Dubai’s debt crisis two years ago, which hit several other government-related entities and forced the restructuring of billions of dollars in debt.

The Gulf carrier has over 190 aircraft worth more than $66 billion to be delivered over the next few years, including 73 Airbus A380 superjumbos and 41 Boeing 777-300aircraft. Emirates already operates in 67 countries and has 114 destinations; it has launched five new destinations this year.

The expansion of the carrier, as well as the growth of Etihad of Abu Dhabi and Qatar Airways, have alarmed older European airlines and fuelled mutual accusations of protectionism. Clark last year heaped further pressure on the European carriers by voicing plans to expand his fleet to include 120 Airbus A380s.



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