UAE

Emirates Airline considers $4.5bn sukuk to pay for 21 aircraft

Emirates Airline is considering the sale of Islamic bonds as it seeks to raise US$4.5 billion in the financial year starting April 2014 to pay for planes.

Bloomberg News

August 28, 2013

Emirates Airline, the world's biggest airline by international passenger traffic, is considering the sale of Islamic bonds as it seeks to raise US$4.5 billion in the financial year starting April 2014 to pay for planes.

The Dubai carrier will need an average of $5.34bn a year over the next five years, including 2013, to finance 119 aircraft deliveries, Brian Jeffery, senior vice president for corporate treasury, said in an interview at the airline's headquarters. Among financing options the company could tap the sukuk or non-Sharia-compliant bond market early next year, he said.

Emirates last sold $1bn of Islamic bonds in March, before speculation that the US Federal Reserve will reduce its bond purchasing programme prompted an emerging-market debt selloff and sent yields higher. The state-owned airline is undergoing a period of rapid growth as its home base Dubai recovers from the 2008 global financial crisis.

The debt market is currently volatile, "and that is not ideal for us, but volatility has not stopped us from issuing bonds in the past," Mr Jeffery said last week. "I'm pretty confident that, given the brand and the credit story of Emirates, sufficient funding will be available."

Average yields on global corporate sukuk have risen 46 basis points to 4.62 per cent since the Fed said June 19 it might taper its asset-purchase programme as early as this year, according to the HSBC/Nasdaq Dubai Corporate US Dollar Sukuk Index. The yield on Emirates' $1bn sukuk, which carries a 3.875 per cent profit rate, increased 31 basis points, or 0.31 of a percentage point, in the period to 5 per cent late Wednesday morning in Dubai. The so-called amortising notes have a final maturity date of March 2023 and a weighted average life of five years.

Emirates' decision on whether to sell bonds will depend "on pricing and an acceptable structure," Mr Jeffery said. Other options for funding are commercial debt, operating leases and export credits, which are typically restricted to 20 per cent of the deliveries, he said.

Cash raised for next year will finance the delivery of 21 aircraft including 10 Airbus A380s, nine Boeing 777-300 ER and two Boeing 777 freighters, Mr Jeffery said.

* Bloomberg News

Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

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