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Emirates Airline: A Billion-Dollar Sukuk Bond Case Solution & Answer

Emirates Airline: A Billion-Dollar Sukuk Bond Case Solution 

Key Issue

The treasury department of Emirates is considering funding the new batch of 30 A380 airplanes through issuance of Regular and Sukuk bonds. Management announced the plans to issue $1 billion Sukuk and $750 million Regular bonds. However, does the firm have another funding alternative? Or does the mix of bonds planned is optimal or not based on the risks and benefits of both bonds.

Alternatives

The alternative solutions include; Debt, Sukuk Bonds, Regular Bonds, Mix of both, Equity and Internal Cash flows. See Appendix 1 for cost-and benefits of each.

Criteria

The points that are to be considered while taking decision about the optimal financing alternative includes; liquidity risk, financing cost, time duration, redemption amount, ease to acquire, and the number of parties involved.

Analysis

External Size-up

The global crises took place in 2008, which had posed severe and drastic impact on the worldwide economy. People started seeking for alternative forms of financing that were based on Shariah financing and were more ethical and met the requirements of the Shariah. Based on the people’s demand, the Islamic financing started growing very rapidly. The financial institutions and Islamic banks marked their existence by locating their offices in various Muslim countries such as Middle Eastern, GCC and North Africa regions, Indonesia, Malaysia, Brunei, Qatar, Oman, United Arab Emirates, Pakistan and many others.

In addition to this, innovation has played an effective part in driving the growth of Islamic based financing. For this instance, the Sukuk market was tenor less than five years and was relatively small, couple of years back. The Islamic banks have launched hybrid capital Sukuk and perpetual Sukuk as the Sukuk became a more innovative feature with longer maturity terms. So it was launched in order to attract a maximum number of investors.

Different banks such as Citi group, JP Morgan, Deutsche bank, Morgan Stanley, Emigrates NBD Capital Limited and Standard Chartered Bank were involved in providing Islamic banking services to the customers for the purpose of maximum Sukuk or Islamic bonds to the customers. In order to improve the Islamic banking service industry, the banks came as service providers in a diversified network. As the demand for the Islamic bondswas increasing amongst people, one bank was not liable to fulfil the demand for Islamic bonds, however, the company needed $5 billion to purchase the next batch of aircraft’s, which became possible after the involvement of six different banks.

EA has intended to sell securities at a profit rate of 3.875% with the funds raise amounted to $1 billion, which is very risky for one bank, so they have decided to share the risk amongst six banks. As it can be seen in Exhibit 12 that according to Standards and Poor’s, the rating is given to the highest fees. The AA category such as IPIC Gmtn Limited and Nakilat INC have given the highest rating. Whereas, the B category such as Kuwait Project Company, Emaar Sukuk Limited, Bahrain Mumtalakat and Atlantic Finance Limited have given low rating………………

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