FlyDubai Follows Emirates as Airline Sukuk Demand Growing

FlyDubai’s debut Islamic bonds are signaling growing appetite for sukuk from aviation companies in the Gulf as they spend on airports and fleet expansion.

The budget carrier raised $500 million this month in the first sale of the debt by a regional airline after Emirates, the world’s largest operator of A380 superjumbo planes. The issue received bids for more than six times the amount offered.

Gulf cities including Dubai, home to the world’s second-busiest airport, are investing $40 billion on infrastructure such as runways and passenger terminals, according to the International Air Transport Association. Boeing Co. forecasts Middle East airlines will need more than 2,600 new aircraft over the next 20 years, worth $550 billion. Sukuk will be part of the financing mix, said Mansoor Durrani at National Commercial Bank, Saudi Arabia’s biggest bank.

“The aviation sector will look at it fairly closely,” Durrani, head of project finance at Jeddah-based National Commercial Bank, said by phone on Nov. 24. “There’s a successful precedent now. Airlines here are making money. There’s investor interest in this region.”

Saudi Arabian Airlines, which plans to double its fleet by 2020, said last month it will decide on whether to issue sukuk or bonds in the next six months. Commercial debt from banks and export credit agency-backed funding are also likely to be key sources of financing for the aviation industry’s expansion, Durrani said.

Yields Decline

The yield on Emirates’ $1 billion 10-year bond maturing in March 2023 has declined 80 basis points to 3.85 percent this year. That compares with a 52 basis-point drop in the average yield of sukuk in the Middle East, according to JPMorgan Chase & Co. indexes.

FlyDubai’s five-year sukuk pays a profit rate of 3.776 percent, or 200 basis points above the five-year mid swap rate.

“Clearly market appetite for bonds has been on the rise for some time in the region,” Dubai-based Maarten Wolfs, a infrastructure finance partner at PricewaterhouseCoopers LLP , said in an e-mail on Nov. 24. “Strong performance in growing markets has helped underpin the regional and international demand for FlyDubai paper.”

Some airlines are also opting for loans. Emirates last week raised 1.1 billion dirhams ($299 million) in a club finance lease funding package to buy two 777-300ERs. Budget carrier Air Arabia, which is mulling an order for narrow-body planes, signed a $230 million financing deal with Dubai Islamic Bank PJSC to facilitate the delivery of six A320s next year.

“Bank interest rates are very favorable and we find it’s the cheapest way of financing airplanes at the moment,” Air Arabia Chief Executive Officer Adel Ali said in an interview in London Nov. 24. “If the circumstances change and we found sukuk or bonds more favorable, by all means we will go at that.”

Aviation Expansion

Dubai will spend $32 billion expanding Al Maktoum International Airport to more than 200 million passengers a year. Emirates, Dubai International Airport and aviation-related industries are expected to double their contribution to the Dubai economy to $53 billion by 2020, accounting for 37.5 percent of domestic product, according to a study by research firm Oxford Economics.

“The steady growth in Dubai’s passenger throughput points to a foray into the debt and capital markets for long-term infrastructure financing,” Wolfs said.

Emirates this month reported an 8 percent increase in profit in the first half ended Sept. 30., while Sharjah, United Arab Emirates-based Air Arabia said third-quarter net income jumped 22 percent.

A combination of the right pricing, right currency and an attractive market means there will be demand for “good quality issuance,” Durrani said. “The beauty of the aviation sector is having stand-alone assets -- the planes -- and revenue from these assets can be relatively easily pooled and offered to sukuk-holders.”

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