Emirates Airline: A Billion-Dollar Sukuk-Bond Issue Case Solution
The treasury department at the Emirates Airline had to decide about raising funds for the purchase of 30 A380 aircrafts. The company announced to issue Sukuks worth $1 billion and conventional bonds worth $750. Both types of bonds had same risk profile but the Sukuks were sold with a low implied yield. It seemed odd as compared to the conventional mode of financing because the securities with similar default risks were priced differently, as a result of which, the treasury department at the Emirates Airline hadto decide about an appropriate way of funding the next purchase of the A380 aircrafts’ batch.
To acquire more 30 Airbus; the company issued a 10 year amortized Islamic bond which are large organizations issue shares to generate more finance to invest in the business. So here, in this case, the company is also known as Sukuk. Sukuk had an average life of five years and it would be matured before the final maturity date. To generate finance; the company had to issue the Sukuks and purchase the new aircraft’s. It was a risky option so the company involved more banks to diversify and reduce the risk.
There are two modes of financing available for the company, i.e. issuing Sukuks (Islamic Bonds) and the conventional bonds. The Sukuks financing is raised by the issuer according the Sharia principle and Islamic laws. The Sukuk bond’s face value is based upon the market value of the underlying assets. According to the Shariah principles; the interest rate and speculation are prohibited. The investors will be compensated on the basis of share of profit or loss, incurred on the underlying asset. In addition, Sukuks enable the investors to hold portion of ownership in the underlying asset, which should be directly linked with the purpose of financing.
In order to raise financing through debt in the long term; conventional bonds are used. The price or the face value is based upon the credit rating of the bonds’ issuer. The issuance of conventional bonds makes it mandatory for the issuer to pay principal and interest till the maturity of the bonds. However, the conventional bonds do not provide ownership in the share of issuer’s assets, as it is basically a debt obligation towards the investors by the issuer. Further, the risk sharing elements are also eligible under the issuance of conventional bonds.
In general, the difference between the yields of Sukuks and conventional bonds is because the Sukuks do no refer to a debt obligation as it instead provide ownership in the underlying asset. However, the conventional bonds refer to a debt obligation but not the ownership in the underlying asset. The Emirates Airline issued 10 year Sukuks at a yield of 3.875%; however, the 12 year conventional bonds were issued at a yield of 4.5%. At issuance, the yield curve indicated that both the bonds should be offering similar profit rate; however, the yield of Sukuk bonds was 48.6 bps less than the yield of the conventional bonds………………….
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