Islamic financing to grow on back of airlines' appetite to refinance debt

Carriers to seek Islamic debt instruments in near-to-medium term for refinancing, Fitch says

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Middle East airlines seeking to refinance debt or diversify their funding sources will fuel a surge in Islamic financing in the near to medium term, according to a senior Fitch Ratings executive.

"Islamic financing will be driven by Mideast airlines’ re-financing needs or some carriers opting to change their funding structure away from a reliance on governments and more towards capital markets," Bashar Al-Natoor, Fitch Rating's global head of Islamic financing, said on Wednesday on the sidelines of an airlines economics conference in Dubai.. "Even if it’s not on the expansion side with new debt, we’ll see growth on the refinancing side in the near to medium term for Islamic loans and sukuk."

Within Fitch's rated portfolio that comprises $100 billion sukuk globally, most of which are in the Arabian Gulf, more than 65 per cent will mature in the next five years. It expects much of this debt to be refinanced, illustrating potential opportunities ahead.

Major aviation players such as Emirates, Etihad Airways, Saudi Arabian Airlines, Pakistan International Airlines, SriLankan Airlines, Garuda Indonesia, Malaysian Airlines, Turkish Airlines, Ethiopian Airlines and AirAsia have issued Islamic bonds or sukuk to finance the acquisition or leasing of new aircraft.

Oil price volatility, intensifying competition, currency swings, geopolitical tensions have impacted airlines.

"A slowdown in growth in some airlines will definitely have the element of a fall in new Islamic issuances, because it does not operate in a cocoon," Mr Al-Natoor said.

The International Air Transport Association (IATA), the industry body representing 290 airlines or more than 80 per cent of world traffic, has repeatedly warned that escalating trade tensions between US and China are hurting air freight volumes - a measure of global economic health - and slowing down demand for air travel.

In the GCC, sukuk issuance has mainly been dominated by sovereigns, and has yet to trickle down to corporations.

"The growth hotspots is efforts of governments to build their yield curves and diversify their funding, which would trickle down to the corporate sector to have more diversified funding rather than being reliant on the banking sector—that will be a key driver for the growth of the Islamic financing industry," Mr Al-Natoor said.