Over the last few years we have seen a number of aviation entities make a foray into the Islamic finance market. Examples of this include the launch of a US$5 billion Shariah-compliant aircraft leasing fund by International AirFinance Corp, representing the first time that an aircraft financing company has exclusively utilised an Islamic finance structure for their leasing operations. In addition, many of the world’s leading airlines have issued Islamic bonds (or “sukuk”) to raise funds via the debt capital markets, generally for the purpose of funding the acquisition or leasing of new aircraft. These airlines include amongst others Emirates, Etihad Airlines, Saudi Arabian Airlines, Air Arabia, Royal Jordanian, Pakistan International Airlines, SriLankan Airlines, Garuda Indonesia, Malaysian Airlines, Turkish Airlines, Ethiopian Airlines and AirAsia. As well as the more vanilla sukuk issuances by airline companies, there is also a growing appetite to explore more innovative Islamic products.
An example of innovation in Islamic airline financing is the Emirates ECA sukuk, the first ever Export Credit Agency (ECA) backed sukuk transaction;the proceeds of which were used for the pre-funded aircraft financing of four Airbus A380-800 aircraft, subsequently leased to and operated by Emirates. The transaction was the largest ever capital markets offering in the aviation sector to have the benefit of an ECA guarantee and was the first time this alternative source of funding had been successfully used to pre-fund the acquisition of aircraft.
The certificates, which comprised US$913 million sukuk due 2025, were issued by a Cayman Islands incorporated special purpose vehicle, have a tenor of ten years and were listed on both the regulated market of the London Stock Exchange and NASDAQ Dubai and were issued in line with Regulation S and Rule 144A of the United States Securities Act of 1933. The transaction used an innovative Islamic finance structure which was based on a combination of ijara (leases) and manfa’a (usufruct represented by available tonne kilometres, an airline industry measure of total capacity) to overcome challenging Islamic structuring issues on ‘tangibility’ during the pre-funding period. This innovative structuring allowed a sukuk financing to be combined with pre-funded aircraft financing, which then also benefited from an ECA, UK Export Finance guarantee.