LONDON, 29 August 2005 — Another sign that the Sukuk (Islamic bond) structure is maturing into a diversified internationally-acceptable instrument to raise corporate finance for acquisitions or working capital purposes or to re-finance existing debt is its pioneering use in the commercial transport sector, especially in the shipping and aircraft sectors.
The first Sukuk issued by Dubai’s national airlines, Emirates International, closed in July 2005, which at $550 million is by far the single largest corporate Sukuk issuance to date anywhere. The Sukuk, lead arranged and underwritten by Dubai Islamic Bank, the oldest commercial Islamic bank in the world, has a seven-year tenor and is structured as a musharaka or joint venture.
Rahail Ali, partner in international law firm Denton Wilde Sapte’s Dubai office, who advised the underwriter, is confident that more such issuances will come to the market in the near future: “The Emirates Sukuk is the first airline Sukuk. Working regularly with leading Sukuk houses, such as Dubai Islamic Bank and the rapidly expanding Sukuk market, means that a lot more Shariah-compliant securities will come to the capital markets.”
The rated Sukuk is listed on the Luxembourg Stock Exchange, the second Musharaka Sukuk to be listed on the exchange. The first such issue was the $200 million trust certificates (Sukuk Al-Musharaka), the Gold Sukuk (DMCC), issued by the Dubai Metals and Commodities Center in May 2005, and arranged by Dubai Islamic Bank and the London branch of Standard Bank of South Africa.
London-based ABC International Bank (ABCIB) subsidiary, Islamic Asset Management Ltd. in April this year arranged, structured and jointly underwrote with Abu Dhabi Commercial Bank a pioneering Islamic ship finance transaction through the issuance of a $26 million Al-Safeena Ijara Sukuk.
According to ABC International Bank, Al-Safeena was the first such issue that combines Islamic equity with conventional debt for the same asset, in this case a VLCC called “Venus Glory”, owned by Pacific Star (PacStar) International Holding Corporation, which in turn is owned by Saudi Aramco, the world’s largest oil exporting company.
In the aircraft financing sector, on the other hand, hitherto, Emirates had regularly accessed the Islamic finance market largely for leasing Boeing or Airbus aircraft in its fleet expansion plans. Emirates strategy is based on the diversification of sources of funding for its fleet acquisition and operational plans. According to Emirates, Islamic finance, especially aircraft leasing facilities, is a conducive and competitive financing alternative, which forms part of the airline’s financing strategy at least in the short-to-medium term.
Emirates is the largest carrier in the region, in the year ended March 31, 2005, Emirates carried more than 12.5 million passengers to 76 destinations on a fleet of 75 aircraft.
In fact, Emirates International, in May 2005 leased two Airbus A340-300 aircraft acquired by Millennium Aircraft Leasing Company (MALC), a Bahamas registered aviation fund incorporated in 2002 as a joint venture company undertaking aircraft operating lease transactions.
MALC invests in diverse portfolio of aircraft on lease with several operators worldwide, and its assets are managed by MALC MC, a joint venture between the Geneva based Novus Management and Consulting SA and ALAFCO, a Kuwait based Shariah-compliant aviation investment vehicle. The $72 million transaction for MALC Fin Fourteen and MALC Fin Fifteen — the two Airbus A340-300 aircraft — was arranged by Arab Banking Corporation.
Apart from Emirates, other airlines such as Kuwait Airways, Garuda of Indonesia, Thai Airlines, Malaysian Airlines, Syrian Air, and Cathay Pacific have all accessed the Islamic leasing finance market for new acquisitions. In addition Dubai Airport, Kuala Lumpur International Airport and the Ataturk International Airport in Istanbul have all used Islamic finance for construction and expansion work.
The Dubai Civil Aviation Authority (DCA), a quasi-sovereign entity, broke the mould last year by going down the Sukuk route instead of plain vanilla finance, by issuing a $1bn Sukuk — the world’s largest single Sukuk issuance in terms of size to date by any issuer, The proceeds are being used to finance the building of a new international terminal and for the expansion of existing engineering and other infrastructure.
According to Denton Wilde Sapte, the Musharaka was set up to develop a new engineering center and a new headquarters building on land situated near Dubai’s airport which will ultimately be leased to Emirates. Profit, in the form of lease returns, generated from the Musharaka will be used to pay the periodic distribution on the trust certificates.
Joint book-runners for the $550 million Emirates Sukuk transaction were Dubai Islamic Bank, HSBC and Standard Chartered Bank and the other joint lead managers include Gulf International Bank BSC, National Bank of Abu Dhabi and UBS Investment Bank.
