Alternative financing structures for the aviation industry

Transcription

1 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

2 Agenda Introduction Islamic Finance in perspective What is Islamic Finance? Introduction to Sukuk Emirates ECA backed Sukuk Future innovations 20

3 21 Muslim Demographics

4 Islamic Finance in perspective 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 22

5 What is Islamic Finance? As practised today, 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 accommodate modern 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 23

6 What is the Shariah? 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 ) The Hadith - the body of documents that records the Sunnah (the practice or lifeexample ) of the Prophet Muhammad (PBUH) 24

7 What is permissible? Haram (Prohibited ) Halal (Permissible) 25

8 The key prohibitions Interest (Riba) Unethical investments Speculation (Maisir) Unjust enrichment Key prohibitions Uncertainty (Gharrar) 26

9 The concept of riba 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 or 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) 27

10 The basic difference* Conventional Bank money money + money (interest) Client Islamic Bank Goods and Services Client money *Courtesy of Sheikh Nizam Yaquby 28

11 Common Islamic financing structures The typical Islamic Financing structures Goods Murabaha (cost-plus financing) Tawarruq / Commodity Murabaha (murabaha financing through the use of a commodity) Ijara /Ijara-wa Iqtina (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) 29

12 What is a Sukuk? 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 30

13 Sukuk-al-ijara structure (lease structure) acquisition finance Airline/Lessee Sale Undertaking Lease Agreement Rental Payments Purchase Undertaking Airline Service Agency Agreement SPV/Issuer/Lessor owner Purchase Price Assignment Agreement Title Aircraft manufacturer Principal & Profit Sukuk Issuance Proceeds Investors 31

14 Sukuk-al-manafa a (usufruct structure) corporate funding Third parties Emirates (as Obligor) Sale of Allotted Rights to Travel (materialised through sale of tickets Emirates (as Agent) Revenue from Rights to Travel Appointment as Service Agent Revenue Sale of Outstanding Rights to Travel SPV / Issuer Exercise Price Sale of Rights to Travel (measured in ATKMs) Purchase Price Emirates (as Seller) Principal & Profit Sukuk Issuance Proceeds Investors 32

15 Why did Emirates choose to do an ECA backed Sukuk? 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 33

16 Investor base and geographies Geographies 29% 39% 32% Middle East and Asia Europe US Investor Type 15% 47% 38% Fund Managers 34

17 Annual Sukuk issuances

18 Emirates ECA backed Sukuk Emirates 11. Emirates Forward Lease of Aircraft and EK Service Agency Agreement 12. Advanced Rental 16. Actual Rental 31. Security Lessor SPV 30. Security 19. Aircraft 20. Aircraft Purchase Exercise Undertaking Price 29. Security 10. Owner Forward Lease of Aircraft and Owner Service 13. Advance Agency Agreement Rental 14. Delivery 8. Issuance Period Periodic Proceeds Profit Distribution 17. Actual Balance Amount 24. Aircraft Sale Rental Undertaking Sale of Aircraft 9. Procurement Emirates Owner SPV Emirates 25. Aircraft Exercise Price ECA Security Trustee Secured Proceeds Account Purchase Price for Aircraft ECGD 28. ECGD Guarantee 23. ATKM Purchase Undertaking 22. ATKM Exercise Price 5. ATKM Purchase Price 4. Purchase of Rights to Travel 6. Declaration of Owner Trust 7. Issuance Proceeds Balance and Rights to Travel 15. Advance Rental 18. Actual Rental 21. Aircraft Exercise Price Delivery of Aircraft Manufacturer 32. Security Trustee 1. Certificates 2. Issuance 3. Declaration Proceeds of Issuer Trust Certificateholders 26. Periodic Distribution Amounts 27. Dissolution Distribution Amounts / Partial Dissolution Amounts / Delivery Period Partial Distribution Amounts / Aggregate Total Loss Dissolution Amounts/ Trust Property Distribution Amount Notes Cash flow Asset flow 36

19 Future innovations Islamic EETCs some structural challenges Tax leasing structures already utilise capital market products could be adapted for Sukuk 37

20 International Canada Europe Calgary Montréal Ottawa USA Québec Toronto Austin Dallas Denver Houston Los Angeles Minneapolis New York Pittsburgh- Southpointe San Antonio St Louis Washington DC Latin America Bogotá Caracas Rio de Janeiro Amsterdam Athens Brussels Frankfurt Hamburg London Milan Moscow Munich Paris Piraeus Warsaw Africa Bujumbura** Cape Town Casablanca Dar es Salaam Durban Harare** Johannesburg Kampala** Central Asia Almaty Middle East Abu Dhabi Bahrain Dubai Riyadh* Asia Bangkok Beijing Hong Kong Jakarta* Shanghai Singapore Tokyo Australia Brisbane Melbourne Perth Sydney * associate office ** alliance 38

21 Contact details Gregory Man Partner, Head of debt capital markets (Middle East) Norton Rose Fulbright (Middle East) LLP Tel greg.man@nortonrosefulbright.com 39

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