Alternative financing structures for the aviation industry Gregory - - PowerPoint PPT Presentation

Alternative financing structures for the aviation industry

Gregory Man Partner and Head of Debt Capital Markets (Middle East) Norton Rose Fulbright (Middle East) LLP October 4, 2016

Agenda

• Introduction
• Islamic Finance in perspective
• What is Islamic Finance?
• Introduction to Sukuk
• Emirates ECA backed Sukuk
• Future innovations

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Muslim Demographics

Islamic Finance in perspective

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• Estimates of the current size of the Islamic Finance market range from [US]$1.66 trillion

to [US]$2.1 trillion with expectations of market size to be [US]$3.4 trillion by end of 2018

• One of the fastest growing segment of the financial industry
• Despite rapid growth, global Islamic finance market only represents around 1% of

worldwide financial services industry

• 1.6 billion Muslims (23% of the world’s population)
• In 2015 it was reiterated that the world’s Muslim population will grow twice as fast as non-

Muslim over the next three decades

• Popularity in non-Muslim jurisdictions
• Islamic finance is a credible alternative to conventional finance
• Regulations changing globally to accommodate

What is Islamic Finance?

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• As practisedtoday, Islamic finance involves the application of Shari’a principles to

financial activity of Muslims in the modern world

• Traditional techniques and structures available for centuries, evolved and refined, within

parameters of Islamic jurisprudence, to accommodatemodern financial institutions and modern banking

• Applicable to range of financial products
• Ethical form of financing that aims to create business activities that generate a fair and

equitable profit from transactions that are backed by real assets

• Often try to achieve similar commercial outcome to conventional financing
• Requires an understanding of the Shari’a

What is the Shariah?

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Shariah is the religious law of Islam. It has two principal sources:

• The Qur’an - the sacred book that records the word of God as revealed to the Prophet

Muhammad (PBUH) “Oh you who believe! Fear Allah (God) and give up what remains of your demand for usury, if you are indeed believers. If you do not, take notice of war from Allah and His Apostle: but if you turn back, you shall have your capital sums: deal not unjustly, and you shall not be dealt with unjustly” (Qur’an 278-279)

• The Hadith - the body of documents that records the Sunnah (the practice or “life-

example”) of the Prophet Muhammad (PBUH)

What is permissible?

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Haram (Prohibited )

Halal (Permissible)

The key prohibitions

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Key prohibitions

Unjust enrichment Unethical investments Interest (Riba) Speculation (Maisir) Uncertainty (Gharrar)

The concept of riba

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• Probably the best known and biggest practical difference from conventional finance
• Underlying concept stems from the nature of money in Islam

– Money has no intrinsic value and is simply a means of facilitating trade – Money is not a commodity – Money can only be exchanged for the same at par value

• There should be no charge for the use of money
• Financial activities that are approved in Islam:

– Trading and enterprise - the prohibition of riba does not preclude obtaining a rate of return on an investment

• r profit from a commercial venture

– Taking security (including guarantees) – if it guards against negligence, willful wrongdoing or breach of contract of customers/partners

• Islamic finance is sometimes said to be “asset based” as the trading of assets is often

used to create obligations (where money is just the payment mechanism)

The basic difference*

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Bank Client

Conventional Islamic

Bank Client money money money + money (interest) Goods and Services

*Courtesy of Sheikh Nizam Yaquby

Common Islamic financing structures

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The typical Islamic Financing structures

• Goods Murabaha (cost-plus financing)
• Tawarruq / Commodity Murabaha (murabaha financing through the use of a commodity)
• Ijara /Ijara-waIqtina (leasing / leasing with a promise to sell)
• Mudaraba (participation financing)
• Musharaka(partnership / equity financing)
• Wakala (agency)
• Istisna’a (variation of murabaha that permits goods to be financed while under

construction or manufacture)

• Sukuk (Islamic bonds)

What is a Sukuk?

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• Capital markets instrument sometimes called an Islamic “bond”
• Trust certificate which represents an undivided beneficial ownership interest in an

underlying asset/venture

• To the extent that underlying assets generate a profit, profit can be distributed to

certificate holders

• Returns based on profits from assuming risk related to ownership
• Profit payments can therefore not be guaranteed
• Requirement for “tangibility” in order for Sukuk to be tradeable

Sukuk-al-ijara structure (lease structure) – acquisition finance

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Investors

Issuance Proceeds Sukuk Principal & Profit

Airline Aircraft manufacturer

Assignment Agreement Service Agency Agreement Purchase Price Title

SPV/Issuer/Lessor “owner” Airline/Lessee

Rental Payments Lease Agreement Sale Undertaking Purchase Undertaking

Sukuk-al-manafa’a (usufruct structure) – corporate funding

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Investors

Issuance Proceeds Sukuk Principal & Profit

Emirates (as Agent) Emirates (as Seller)

Revenue Appointment as Service Agent Sale of Rights to Travel (measured in ATKMs)

SPV / Issuer Third parties

Revenue from Rights to Travel Sale of Allotted Rights to Travel (materialised through sale of tickets

Emirates (as Obligor)

Sale of Outstanding Rights to Travel Exercise Price Purchase Price

Why did Emirates choose to do an ECA backed Sukuk?

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• First UK Export Finance backed Sukuk for aircraft financing
• Largest ever capital markets offering in the aviation space with an Export Credit Agency

guarantee

• First Sukuk to be used to pre-fund the acquisition of aircraft
• First ever Sukuk financing for 4 A380 aircraft
• Regulation S and Rule 144A offering
• Admitted to listing and trading on the London Stock Exchange and on NASDAQ Dubai

Investor base and geographies

39% 32% 29%

Geographies

Middle East and Asia Europe US

47% 38% 15%

Investor Type

Fund Managers

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20 40 60 80 100 120 140 2006 2007 2008 2009 2010 2011 2012 2013 2014

Annual Sukuk issuances

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Emirates ECA backed Sukuk

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Emirates Lessor SPV ECGD Secured Proceeds Account Emirates Owner SPV Emirates Manufacturer Trustee Certificateholders

• 12. Advanced Rental
• 16. Actual Rental
• 11. Emirates

Forward Lease of Aircraft and EK Service Agency Agreement

• 10. Owner Forward

Lease of Aircraft and Owner Service Agency Agreement

• 20. Aircraft

Exercise Price

• 13. Advance

Rental

• 17. Actual

Rental

• 19. Aircraft

Purchase Undertaking

• 30. Security
• 31. Security
• 29. Security
• 14. Delivery

Period Periodic Profit Distribution Amount

• 8. Issuance

Proceeds Balance

• 28. ECGD

Guarantee Purchase Price for Aircraft

• 9. Procurement
• 15. Advance

Rental

• 18. Actual Rental
• 21. Aircraft Exercise

Price

• 7. Issuance

Proceeds Balance and Rights to Travel

• 6. Declaration
• f Owner

Trust

• 4. Purchase
• f Rights to

Travel

• 5. ATKM

Purchase Price

• 22. ATKM

Exercise Price

• 23. ATKM

Purchase Undertaking

• 25. Aircraft

Exercise Price

• 24. Aircraft Sale

Undertaking Sale of Aircraft

• 27. Dissolution

Distribution Amounts / Partial Dissolution Amounts / Delivery Period Partial Distribution Amounts / Aggregate Total Loss Dissolution Amounts / Trust Property Distribution Amount

• 3. Declaration
• f Issuer Trust
• 2. Issuance

Proceeds

• 1. Certificates
• 26. Periodic

Distribution Amounts Notes ECA Security Trustee Cash flow Asset flow Delivery of Aircraft

• 32. Security

Future innovations

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• Islamic EETCs

– some structural challenges

• Tax leasing structures

– already utilise capital market products – could be adapted for Sukuk

International

Latin America Bogotá Caracas Rio de Janeiro

* associate office ** alliance

Africa Bujumbura** Cape Town Casablanca Dar es Salaam Durban Harare** Johannesburg Kampala** Middle East Abu Dhabi Bahrain Dubai Riyadh* Australia Brisbane Melbourne Perth Sydney Asia Bangkok Beijing Hong Kong Jakarta* Shanghai Singapore Tokyo Central Asia Almaty Europe Amsterdam Athens Brussels Frankfurt Hamburg London Milan Moscow Munich Paris Piraeus Warsaw Canada Calgary Montréal Ottawa Québec Toronto USA Austin Dallas Denver Houston Los Angeles Minneapolis New York Pittsburgh- Southpointe San Antonio St Louis Washington DC

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Contact details

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Gregory Man

Partner, Head of debt capital markets (Middle East) Norton Rose Fulbright (Middle East) LLP Tel +971 4 369 6307 greg.man@nortonrosefulbright.com

Disclaimer

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