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