linklaters - airline sukuk

8/9/2019 LINKLATERS - Airline Sukuk

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Islamic Aircraft FinancingStructures

Robert FugardLinklaters

Partner, Asset Finance Group


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reappraisal by banks of approach to aircraft finance

e!it of some traditional lenders restriction of categories of airline credits considered

difficulties in sourcing e"uity prepared to in#est in the industry as a reaction to uncertainty in the industry as a result of changes to ta! rules

restriction of ta!based leasing loss of traditional ta! products$ %S, Germany and &apan

curtailing of '!port (redit Agency support abolition of LAS% fi!ed rate option

increases in premia and reduction in ad#ance rates

the current en#ironment


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Islamic funds estimated at o#er )*++ billion

groing market

return of Islamic funds to region

opportunity to tap into the significant funds of Islamic in#estorsseeking Shari-a compliant in#estments

establishment of regional secondary market infrastructure in .ubai/.IF(0, 1ahrain, Saudi Arabia

o#er *2+ Islamic Finance Institutions orldide

3estern institutions most acti#e in this market are 4S1( 1ank plc/through 4S1( Amanah Finance0 and (itigroup

Local financial institutions include Arab 1anking (orporation,

.ubai Islamic 1ank,Abu .habi Islamic 1ank, 5uait Finance 4ouse, First Islamic In#estment 1ank, as ell as Islamic .e#elopment1ank

the Islamic finance market


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di#ersification of funding sources

in#estor-s regional understanding of risk

con#entionalstyle documentation

bankable go#erning la

ability to combine ith con#entional funding sources

hat Islamic finance offers


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6basic- Islamic leasing structure

Islamic investors

Modareb

Islamic Lessor

(Cayman SPV)

Airline

Sale ofaircraft

.eclaration of trust

Islamic lease/I7ara0

in#estment /8290

'"uitycontribution/initial rental0/:290

in#estment/8290

In#estment /;odaraba0agreement


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airline sukukstructure

sukukdefined by AA>FI-S Shari-a standards as

Certificates of equal value representing undivided shares inownership of tangible assets, usufruct and services or (in theownership of) the assets of particular projects or specialinvestment activity

can pro#ide greater di#ersification of funding sources than 6basic-Islamic leasing structure

access to larger #olumes of capital

potential to pro#ide li"uid in#estments for Islamic in#estors


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airline sukukstructure

sukukgi#es in#estors share in profits generated by in#estment inasset

? ijara based cash flos most appropriate for sukuks? real estate ijara based sukuks

;alaysia )@++m issue /&une *++*0I.1 )++m issue /&uly *++B0Catar )D++m issue /September *++B01ahrain )*2+m issue /&une *++0Sa!ony E :++m issue /August *++0.ubai .(A )D2+m issue /proposed0

problems ith morabaha based sukuksand tradeability? sale of debt /bay al dayn0 prohibition

aircraft ijara based sukuk ould fuse aircraft ijaratechnology andcon#entional ''( technology


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airline sukukfeatures

relationship of sukukholders to issuer is that of in#estor, notcreditor

sukukholders are 7oint oners of trust assets, being? aircraft /sub7ect to leases0? lease re#enues

? lease rights

sukukholders e!ercise rights as oners through sukukagent, hois empoered to enforce lease rights against airline, and can becompelled to do so by rele#ant proportion of sukukholders

sukukholders rights against Issuer are limited recourse to the trustassets


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comple!ity dictated by in#estorrating re"uirements? rating agencies /eg Standard Poor-s, ;oody-s, Fitch0 apply

con#entional rating criteria Shari-a compliance not rele#ant so needto minimise reliance on performance of ijara

likely rating agency focus on? le#el of o#er collateralisation? bankruptcy protection? "uality of assets? li"uidity facility

possibility of credit enhancement? asset #alue guarantee? in#estment grade put option


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airline sukukfeatures in#estor loan to #alue ratio enhancements restricted by Hone class

only certificates? possible solution$ morabaha based subordinated tranche /on limited

recourse basis0

le#el of bankruptcy protection depends on 7urisdiction of airline? relati#e underde#elopment of regional bankruptcy las /compared to

s:::+ %S 1ankruptcy (ode0

? repossession and deregistration risk mitigated by international routenetork and e!ternal flagging

li"uidity facility classic %S ''( :8 month re"uirement #ersus *month HIberbond li"uidity line? con#entional interest bearing li"uidity line not possible? possible solution$ morabaha based secured li"uidity facility


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6standard- ingredients ill include? aircraft management and remarketing agreements? lessor 6ring fenced- from other transactions for bankruptcy remoteness? lessor established in ta! neutral 7urisdiction

listing issues eg$ Lu!embourgLondon.IF(

Shari-a board appro#al? structural and documentation re#ie? ritten opinion in prospectus? composition of Shari-a board


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airline sukukstructureSukuk Holders

Issuer

SPV Lessor

Airline

4ead Lease/I7ara0

in#estment/8290

.eclaration of rust

Airline

Sub Lease/I7ara0

%pfront purchase price /8290

.eferred purchase price /:290

Li"uidityPro#ider

Li"uidityFacility

;ortgage

Asset


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market outlook

regional inflo of Islamic funds increasingly matched by greatersophistication of regional financial intermediaries and in#estors

airlines- re"uirement for funding seems likely to outstripcon#entional funding sources a#ailable to region due to? huge aircraft orders

? need for specialised appetite for regional risk

run of inno#ati#e Islamic aircraft financings /egJ by 'mirates0 ha#ehelped de#elop 6donstream- Islamic aircraft financing technology,hile nonairline sukuksand airline bonds /egJ 'mirates- )2++million eurobond issue0 ha#e established in#estor appetite for this

asset class


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Any CuestionsK

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