Malaysian Airline System Bhd. and AirAsia X Sdn. are joining Emirates in planning sales of Islamic bonds as banks curb lending on Europe’s debt crisis.
Malaysian Air, voted Asia’s leading air carrier by World Travel Awards this year, may sell sukuk to partly fund an order for 12 billion ringgit ($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 Shariah-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 percent to $184.4 billion this quarter from the previous three months, while global sales of sukuk rose 38 percent to $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.”
‘Diversification’ Source
Average yields on sukuk have dropped eight basis points, or 0.08 percentage point, to 4.09 percent since reaching a seven- month high of 4.17 percent 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 percent 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.
Ijara Option
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 Shariah-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 $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.
Industry Outlook
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 percent in 2011 to $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 percent to $26.4 billion, short of the 2007 record of $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 percent this year and 49 percent 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 percent this year to $119.40 per barrel.
‘Traditional Sources’
“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.”
Shariah-compliant bonds returned 6.7 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, while debt in developing markets rose 7.9 percent, 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 percent Islamic notes due in November 2014 fell two basis points to 5.89 percent yesterday and has decreased from the year’s high of 6.64 percent 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.
‘Variety of Funding’
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 percent 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 $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
