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Emirates Airlines —
A Billion Dollar Sukuk Issue
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THIS SESSION’S AGENDA
> Emirates Airline — History, Expansion Plans, and Financing Needs
> Financing Options — Islamic or Traditional?
> A look at the Financing Market and the Cost of each Alternative —
Why are they Different?
> Why Would Emirates Structure the Sukuk as a Wakala?
> What is Arbitrage? How would a non-lslamic Institution make
Money from this? Can an IFI exploit such Market Discrepancy?
> Plan of Action for the Client and the IFI
> Concluding Thoughtsielif 22 ae
Emirates Airlines - A Bit of History
> Founded in March 1985, with start-up capital of US$ 10 million, and
two royal family aircraft
> Expanded rapidly into Asia, Europe, UK, and later Oceania and the
Americas
» Wholly-Owned by the government of Dubai, but operated as an
independent entity
> Doubled every four years and became one of the largest inn the
world, with 60,000 employees, 200 planes, and 140 destinations in
70 countries!
> Awarded “WORLD’s BEST AIRLINE” Award in 2013*»
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Emirates Airlines —A Bit < of ‘Strategy
> Emirates clearly targeted the long-haul segment, and operated four
of the world’s 10 longest flights from Dubai to Dallas, Houston, Los
Angeles, and San Francisco
» The airline already had the world’s largest fleets of Airbus A380 (with
34 in service) and Boeing 777
» EA then announced plans to acquire 30 more Airbus A380s, in
addition to the 34 already in service and the 56 on order
> By comparison, Malaysia Airlines has ordered and received a total
of six (6) A380s
> Emirates included shower spas in its first-class area, along with two
lounges on the upper deck. Alcohol was served generously...Shariah >? >
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Emirates Airlines — Financing Needs
> At about US$ 390 million per plane, Emirates’ fleet of 120 A380’s
would require a total investment of nearly $ 47 billion, over several
years
> In the immediate future (as of early 2013), Emirates needed
approximately $ 2 billion in new cash... and was considering ways
to raise such funds in the capital markets
> Emirates had strong working relationships with regional as well as
global banking institutions, both Islamic and non-Islamic...
> In particular, Emirates was well-known to Citigroup, Standard
Chartered, Abu Dhabi Commercial Bank (ADCB), Abu Dhabi Islamic
Bank (ADIB), Dubai Islamic Bank (DIB), and Emirates NBD Capital,
among many others.ielif Sezer"
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Financing Options
> If you were advising Emirates Airlines, would you encourage them to
tap the Islamic Finance market? Or the non-lslamic market?
> Why?
> If both options were available, which would you pursue?
> As a Respected Shari'ah Scholar serving on the Shari'ah Committee
of an Islamic Financial Institution, would you encourage your CEO to
try to finance some of Emirates’ needs?
> Why?
> Does the fact that they serve alcohol on their flights matter?,
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Leadership and Leaders >”
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Advice from Emirates’ Bankers...
> Emirates is told by its bankers that “Comparatively, bonds were
treated as senior to Sukuk and bondholders’ rights were better
protected.
> Also, bonds were typically tradable in conventional markets,
whereas not all Sukuk were tradable (depending on the type of
Sukuk)” [Case Page 5.]
> Are the bankers right, in your opinion?
> Based on this, (assuming the bankers are right,) which would be
more cost-effective for Emirates, traditional (non-lslamic) Bonds, or
Sukuk?
> Why?
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Financing Proposals _
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In early February 2013, Emirates’ financial advisers proposed to the
Airline that they issue two instruments:
A $1 billion, 10-year amortizing Sukuk at a profit rate of 3.875%
And a $750 million conventional bond, with 12-year amortization,
and a coupon of 4.50%
Does this make sense?
Why/Why not?
What is a coupon?
What is a profit rate?
How are they different?yy
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Detai ed Terms as Proposed:
Regular Bonds Key terms ‘Sukuk Key Terms
lobtigor Emirates Emirates
lissue Ratings Not Rated Not Rated
[Ranking ‘Senior Unsecured ‘Senior Unsecured
Principal Amount _USS750 million USSt billion
Issue Date February 6, 2013 March 12, 2013
Final Maturity Date February 6,2025 March 19, 2023
‘Coupon [4.50% per annum 6.875%Shariah >? >
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“How a Traditional $750 million Bond Would
Work...
Annual Payment = (82,249,641) (82,249,641) (82,249,641) (92,249,641) (82,249,641)
Interest Rate = 450%
Pve 750,000,000
Total Payments = 926,995,698
= Principal: 750,000,000
interest Payments: 236,995,698
> Total Payments = $987 million, over 12 years,
> Of which $237 million are INTEREST PAYMENTS!
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Annual Payment = (122,524,943) (122,524,943) (122,524,943) aan, (122,524,943) (122,524,943)
Profit Rate = 280%
rvs $2,000,000,000
sents = 1,225;249,481
Principal 2,000,000,000
+= Profit sharing 225,249,481
> Total Payments = $1.225 billion, over 10 years,
> Of which $225 million are PROFIT SHARING PAYMENTS!iclif paver’ Heater
How do the Two Instruments Compare?
> Which is riskier?
> Ina Conventional Bond, who bears more risk? The Bond Holders, or
the owners (i.e. Equity Holders?)
> Answer: Bond Holders are senior to equity holders, therefore
owners bear more risk, and Bond Holders bear less risk!
> In Sukuk, who bears more risk, the Sukuk holders, or the owners
(i.e. equity holders?)
> Answer: In a properly-structured Sukuk, the risk is shared
ratably, there is no risk transfer allowed
> A traditional Bond leaves the owners in a riskier position, thus, the
Bond Holders bear less risk...
> Who, then, should be rewarded more generously, the Bond Buyers,
who take less risk, or the Sukuk Buyers who share the risk?| The tot
| Governance
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And yet..
Terms as Actually Issued:
>
>
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Leaders »
Education
Regular Bonds Key terms Sukuk Key Terms
lobligor Emirates - Emirates
Issue Ratings Not Rated INotRated
[Ranking ‘Senior Unsecured ‘Senior Unsecured
Principal Amount | US$750 milion \Usst billion -
Issue Date February 6, 2013 March 12, 2013
Final Maturity Date February 6.2025 March 19, 2023
= <7
Issue Price '99,941% 99.331% 7
Listing Irish Stock Exchange Nasdaq Dubai
(Sebal ators __illsoup and Standard Chartered Bank Citigroup and Standard Chartered Bank
ifigroup. Deutsche Bank, Emirates Citigroup, Abu Dhabi Commercial Bank,
Joint Lead IBD Capital Limited, JP. Morgan, [Abu Dhabi Islamic Bank, Dubal Islamic
is gen Sane, Sandard Chaired Bak, Emsatee NBD, Sands Chaere
‘Source: Emirates Aine Sukuk Prospectus and Bloomberg.
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What Might Explain This?
> Ona $1 billion issue, the difference in cost (+/- 625 bps) amounts to
$6.25 million per year, or $62.5 million over a 10-yer issue
(assuming a balloon bullet structure)
> Why are Bond Holders demanding more compensation to
part with their money... or
>Why are Sukuk investors willing to accept less
compensation?
> Structure?
> “Investor Segmentation’?
> Liquidity?
> Credit Risk differences?
> Bailout probabilities?Leadership and
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Leaders >
Education
>
One Argument for the Investor
Segmentation Explanation...
181 2: SUKUX SUPPLY AND DEMAND
‘OUTSTANONG SUKUK MATURITY PROFILE AND ESTIUATED DEMAND BY ISLAMIC BANKS
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Arbitrage Opportunity?
> In the conventional finance markets, ifMwhen an instrument appears
mispriced, as some would argue is the case here...
> Arbitrageurs, as they are called, would “buy low, sell high”
» They would buy the cheaper instrument, the one that pays the
higher coupon, i.e. the bond... and
> “Sell short", or borrow-and-sell, the more “expensive” instrument, in
this case the Sukuk.
> They would pocket the difference in yields...
> On a million-dollar “arbitrage, they would collect 4.5% and pay
3.875%, and keep the difference.
> Why is this not possible in Islamic Finance?>
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Other Considerations |
> Emirates chose to issue both the conventional bond ($750 million)
and the Sukuk ($1 billion)
> Why would they do both?
> Why not do all Sukuk, which would save them money, as we saw
above?ielif Sben~ a
‘Emirates Engaged Six Different
Intermediaries for These Issuances...
> Why did Emirates feel the need to engage Citi, Deutsche, Emirates
NBD, JP Morgan, Morgan Stanley, and Standard Chartered for the
conventional bond?
> And the identical six for the Sukuk?tell serene”
Six Banks Probably Broadens the Banks’ Reach
EXHIBIT 6: INVESTOR DISTRIBUTION BY GEOGRAPHY
‘Note: Regular bond ison the lef, sukuk on the right.
‘Source: Bloomberg.
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For the Longer Term, as the Case Asks...
How should EA finance the next set of planes? Analysts were conflicted as to the best altemative. Some
favoured repeating the sukuk issue, some appeared focused on exploring other types of sukuk bonds and
others leaned toward conventional financing arrangements. The EA treasury department faced a difficult
decision in determining the best way to finance these new planes.
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A Few Concluding Thoughts...
> There appears to be substantial, and continuing, demand for Islamic
instruments, such as Sukuk, particularly from SE Asian and MENA
investors...
This would seem to present opportunities for your Islamic Financial
Institutions
> Sukuk, interestingly, do not appeal only to Islamic investors
> Nor only to Islamic institutions; for example, the UK has started
issuing sovereign Sukuk...
> Hong Kong has been deliberating this possibility as well...
To appeal to such a broad array of issuers and investors, the
intermediary needs to display a profound understanding of both
Shari’ah and traditional corporate governance
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- Session 4 Take-Aways
Emirates Airline
The aircraft financing business is a huge opportunity. It is anticipated
that, over the next 10 years, airlines will take delivery of about 1,500
airplanes every year, worth about USD 225 Billion per annum.
Aircraft financing is a largely Shariah-compliant (SC) activity.
But the average life of a new plane is 25+ years and the typical pay-
back period is about 10 years.
Many studies show there is far greater demand for long-term SC
investments than the supply.
Consequently, SC instruments can be very competitive sources of
finance.
Therefore, a great opportunity for significant growth.