When Airbus Group NV’s new Islamic plane-leasing fund gets up and running, it will mark the latest milestone for Shariah-compliant finance in an industry growing at the fastest pace since 2011.
Airbus and Jeddah-based Islamic Development Bank will each provide 10 percent of an initial $1 billion in equity for a fund that may grow five-fold in its first two years, according to Dubai-based Quantum Investment Bank Ltd., one of the placement agents for the fund. The vehicle will buy new and used planes and lease them to carriers. Borrowers in the air-transport industry have raised almost $10 billion in Shariah-compliant debt since 2012, data compiled by Bloomberg show.
“All the stars are aligned for this,” Rizwan H Kanji, a Dubai-based partner at law firm King & Spalding LLP, said by phone yesterday. “The airline industry is growing, and we have strength in the Middle East by virtue of the orders from our airlines. And that’s in a region with a lot of Islamic liquidity looking at places to deploy.”
Islamic finance is booming as investors looking for vehicles that adhere to the religion’s ban on interest pour in cash. Shariah banking assets will double to $3.4 trillion by 2018 from 2013, according to Ernst & Young LLP. The airline industry is forecast to grow 5.9 percent this year, the fastest since 2011, with Middle Eastern carriers expanding 13 percent, according to a June 2 report from the International Air Transport Association.
The Gulf Cooperation Council has become the most important market for wide-body planes in the past decade, with Dubai-based Emirates, Doha-based Qatar Airways Ltd. and Abu Dhabi’s Etihad Airways PJSC racking up hundreds of purchases as they expand their home bases into leading hubs for intercontinental travel.
The Airbus Leasing Islamic Fund aims to raise $5 billion in equity and debt over two years with the first tranche due to close in the third quarter. It will be managed by International Airfinance Corp. and will offer jets to carriers based in Islamic states led by those in the GCC and Southeast Asia.
“When you look at the Airbus orderbook, clearly the Middle East is important to us as well as Southeast Asia,” Yann Ballet, head of projects and structure finance at Airbus, said in a phone interview from Paris today. “There is an increasing role of operating leases, which may have not been well developed by airlines in the region.”
Financial institutions in the Middle East are becoming more interested in the aviation industry and airlines are looking into diversifying their sources of finance through Islamic funding, he said.
“It’s a market that’s increasing in size, it’s something we’ve been following over the years,” he said. “Now it seems people are willing to look into longer maturities that match the operating lease transaction.”
Shariah investors are flush with cash as demand for securities far exceeds supply. A $500 million perpetual sukuk from Abu Dhabi’s Al Hilal Bank PJSC sold yesterday received orders of about $5 billion, according to people familiar with the matter.
Given Islamic investors’ “solid liquidity conditions,” the fund will probably be welcomed, Apostolos Bantis, a Dubai-based credit analyst at Commerzbank AG, said by e-mail yesterday. “The successful story and healthy growth dynamics of GCC-based airlines should provide additional comfort.”
The Airbus fund’s success may determine if structures of this kind take off in the airline industry and other asset classes, according to Kanji. The airline industry is heavily exposed to the economic climate, and “the less aircraft are leased, the lower the return could be,” he said.
The Middle East will need about 2,000 new planes through 2032, according to Airbus’s latest global market forecast. Emirates last year made the biggest commercial commitment for planes in history. The carrier ordered 150 planes from Boeing Co. and 50 from Airbus at the Dubai Airshow in November.
“We wanted something more liquid than real estate and felt that transportation would be an ideal asset,” Quantum Chief Executive Officer Idriss Ghodbane said by phone from London. “There’s a lot of Islamic liquidity sitting in the market and looking for better options.”