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Emirates and AirAsia X favouring sukuk over costly conventional loans


Emirates is planning a new issue of debt after its last sukuk matured in June. Photo — Bloomberg file picture

Kuala Lumpur: AirAsia X, Malaysia's long-haul budget carrier, plans to sell its first Islamic bonds this year, joining Emirates Airlines in favouring sukuk over more costly loans. The company, which was started by millionaire Tony Fernandes who owns the UK's Queens Park Rangers soccer club, may issue $160 million of the debt as soon as the second quarter, Chief Executive Officer Azran Osman Rani said in a March 6 interview. Malaysian Airline System completed a sale of 5.3 billion ringgit ($1.7 billion) of the securities guaranteed by the finance ministry last month.

Sharia-compliant bonds are well suited to the airline business given the long-term investments and income streams from passenger traffic, according to CIMB Group Holdings Bhd. A corporate sukuk rated AAA currently yields 3.4 per cent to 3.6 per cent, while US dollar two-party loan rates are about five per cent, said Mohamed Azahari Kamil, the chief executive officer of Asian Finance Bank in Kuala Lumpur. "Planes are long-term assets and they are a clear-cut match with sukuk," Azahari, whose bank is a unit of Qatar Islamic Bank, said in an interview on Monday.

Emirates plan
AirAsia X plans to use the funds to buy two new Airbus SAS A330s, part of the seven planned for this year that will complement its existing fleet of 11, Azran said. A final decision on whether the offering will be sukuk or non-Islamic will be made in April, Azran said, adding that "we are exploring all options as we want to have the best terms," he further added.

Malaysian Airline sold ringgit-denominated Islamic bonds last month in a range of maturities, offering a 10-year portion at a coupon rate of 3.83 per cent and 15-year notes at 4.16 per cent. Average yields on global Shariah notes have climbed four basis points, or 0.04 percentage point, to 2.89 per cent in March, the HSBC/Nasdaq Dubai US Dollar Sukuk Index shows. Borrowing costs in the six-member Gulf Cooperation Council  (GCC) rose three basis points to 2.97 per cent.

Emirates is planning a new issue of debt after its last sukuk matured in June. The airline may price its notes at 300 basis points to 310 basis points over the benchmark midswap rate, said three people familiar with the matter, who asked not to be identified because the details are private. The company sold $550 million of floating-rate securities in 2005 at 75 basis points over the London interbank offered rate, or generally called Libor.

Risk sharing
The difference in yield between global Sharia-compliant securities and Libor has narrowed 15 basis points in 2013 to 167 basis points, seven basis points shy of a five-year low on January 10, according to the HSBC index. Sukuk sold in the international market returned 0.4 per cent this year, while debt in emerging nations declined two per cent, JPMorgan Chase's EMBI Global Index shows.

Islamic finance promotes the concept of risk sharing and adopts various types of transactions to suit the application. Malaysia Airline sold its debt under a Murabaha agreement, where a bank or institution buys a product on behalf of the customer and sells it back at a markup over a fixed credit period. Another form is Ijara, or a sale and lease agreement, where the asset is purchased and then rented out to the user, with ownership optional at the end of the contract.

Malaysia is the world's leading sukuk market and gives tax exemptions on issuance to encourage sales. Offerings have dropped 64 per cent in 2013 to 13.6 billion ringgit from a year earlier, as a global economic recovery boosted appetite for stocks, data compiled by Bloomberg show.

Global sales of the debt may exceed $100 billion this year, dominated by ringgit issuance, Paul-Henri Pruvost, a senior credit analyst at Standard & Poor's, said in an interview in Dubai on Monday. AirAsia X, which is seeking a listing on the Malaysian stock exchange, has mandated bankers to help raise funds for the aircraft purchases, chief executive officer  Azran said, declining, however, to name them.

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