As other airlines cut capacity to cope with a global travel slump and banks shy away, Emirates Airline appears to have found a way to keep expanding by tapping the updraft in demand among global investors for corporate bonds. Last week, Emirates announced plans to sell US$413.7 million (Dh1.51 billion) in bonds to finance the purchase of three Boeing 777 aeroplanes, marking the first time it has used bonds to borrow money to buy aircraft.
Analysts say the deal could help the largest Arab airline vault several new hurdles in its path to building a 450-aircraft fleet by 2020 that will turn Dubai into the world's largest hub for international passenger traffic. While Emirates and other airlines have traditionally turned to banks to finance aircraft purchases, the global financial crisis has left banks reticent to make new loans, particularly to an industry projected to lose $11bn this year.
Funding is particularly tight for companies in Dubai, which has sought federal aid to help it service the estimated $85bn in debts owed by the emirate's Government and the companies it controls. But demand globally for bonds is soaring as low interest rates on US dollars spark a boom in demand by investors seeking higher returns. "We've very strong demand for any bond that's come into the market," said Jason Rogers, the director of credit research at Barclays Capital in Singapore.
Emirates's bond issue mirrors a broader turn to bonds across the Gulf as other forms of fund-raising dry up. According to figures from Thomson Reuters, bond sales in the six GCC nations rose by 61 per cent in the first nine months of this year, even as the total amount of funds raised by companies and governments fell by roughly two-thirds. Emirates is working to link the world's biggest population centres via its base in Dubai. The three new 777s are intended to expand the airline's fleet of jets capable of ferrying more than 200 passengers between any two points, such as Johannesburg to Seoul.
The airline already has 138 passenger and cargo jets, with another 154 aircraft on order, including 28 777s. Emirates operates the world's largest fleet of 777s, with 78, which it uses primarily on flight of over eight hours. The financial crisis has strained the airline's expansion plans, and growth in passenger traffic has slowed considerably. In May, Emirates said its traffic growth in the year that ended on March 31 nearly halved from the year before, to 7 per cent, helping to drag profits down by 72 per cent. The International Air Transport Association predicts that worldwide airline passenger traffic will fall by 4 per cent this year.
That is contributing to what bankers have reportedly said is a gap in funding for aircraft purchases of as much as $30bn this year. Emirates has sold bonds before, but largely for working capital, and not to fund purchases of aeroplanes. Like most other airlines, Emirates typically finances aircraft purchases by borrowing from banks, analysts said. Banks, they said, were more familiar with how to value aircraft and borrowing from a few banks makes for less complicated transactions.
According to the airline's latest financial statements, it had long-term borrowings and lease liabilities amounting to Dh15.1bn as of March 31. That figure is part of the $85bn owed by Dubai Inc. Concerns about how Dubai and its companies will service that debt have pushed its cost of borrowing higher. The cost of insuring Dubai Government debt remains among the highest in the world. Emirates's own bonds, issued in Singapore dollars, are yielding at least 7 per cent, giving some indication of how much the company would have to pay as a Dubai entity.
But efforts by the US government to pull the American economy out of recession have produced a surge in funding for cash-strapped companies around the world like Emirates. Low US interest rates and massive government spending are convincing investors to borrow dollars cheaply in the US and invest them in faster-growing markets overseas to avoid what many predict will be a surge in inflation that has sent the US dollar falling amid concerns about inflation.
Much of that money is pouring into global bonds. According to the Investment Company Institute in Washington, investors have poured a net $275bn into bonds funds so far this year, compared to just $2bn they have put into equity funds. Emirates is not the first company in the UAE to tap this demand. So far this year, several Abu Dhabi entities have ventured into the global bond markets, including Mubadala Development,. Bankers have said that some Dubai state-linked companies may also be looking at issuing bonds, including Dubai Electricity and Water Authority, Dubai's Road and Transport Authority and Dubai's Emirates National Oil Company.
The rate that Emirates is paying on its new 12-year US dollar bonds may serve as further encouragement. The bonds are priced at just 3.465 per cent, thanks largely to the fact that the airline won guarantees from the US Export-Import Bank. The bank, with an eye to promoting US exports, frequently finances sales of big-ticket US exports such as Boeing aircraft to developing nations. It has guaranteed bank loans to Emirates in the past, including for six 777s last year.
This appears to be the first time it has guaranteed an airline bond, meaning the bonds have the advantage of being backed not by Dubai, but by the US government. @Email:warnold@thenational.ae igale@thenational.ae
