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Alternative financing structures for the aviation industryGregory ManPartner and Head of Debt Capital Markets (Middle East)Norton Rose Fulbright (Middle East) LLP
October 4, 2016
Agenda• Introduction• Islamic Finance in perspective• What is Islamic Finance?• Introduction to Sukuk• Emirates ECA backed Sukuk• Future innovations
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Islamic Finance in perspective
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• 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
What is Islamic Finance?
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• 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
What is the Shariah?
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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 278-279)
• The Hadith - the body of documents that records the Sunnah (the practice or “life-example”) of the Prophet Muhammad (PBUH)
The key prohibitions
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Key prohibitions
Unjust enrichment
Unethical investments
Interest (Riba)
Speculation (Maisir)
Uncertainty(Gharrar)
The concept of riba
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• 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)
The basic difference*
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Bank Client
Conventional
Islamic
Bank Client
money
money
money + money (interest)
Goods and Services
*Courtesy of Sheikh Nizam Yaquby
Common Islamic financing structures
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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)
What is a Sukuk?
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• 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
Sukuk-al-ijara structure (lease structure) – acquisition finance
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Investors
Issuance Proceeds
SukukPrincipal & Profit
Airline Aircraft manufacturerAssignment Agreement
Service Agency Agreement
Purchase Price
Title
SPV/Issuer/Lessor“owner”
Airline/Lessee
Rental Payments
Lease Agreement
Sale Undertaking
Purchase Undertaking
Sukuk-al-manafa’a (usufruct structure) – corporate funding
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Investors
Issuance ProceedsSukukPrincipal &
Profit
Emirates (as Agent)
Emirates(as Seller)Revenue
Appointment as Service Agent
Sale of Rights to Travel (measured in ATKMs)SPV / Issuer
Third parties
Revenue from Rights to Travel
Sale of Allotted Rights to Travel
(materialised through sale of
tickets
Emirates (as Obligor)
Sale of Outstanding
Rights to Travel
Exercise Price
Purchase Price
Why did Emirates choose to do an ECA backed Sukuk?
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• 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
Investor base and geographies
39%
32%
29%
Geographies
Middle East and AsiaEurope US
47%38%
15%Investor Type
Fund Managers
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Emirates ECA backed Sukuk
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Emirates
Lessor SPV
ECGD
Secured ProceedsAccount
Emirates Owner SPV Emirates
Manufacturer
Trustee
Certificateholders
12. Advanced Rental
16. Actual Rental
11. EmiratesForward Lease of
Aircraft and EK Service Agency
Agreement
10. Owner Forward Lease of Aircraft
and Owner Service Agency Agreement
20. Aircraft Exercise
Price
13. Advance Rental
17. Actual Rental
19. Aircraft Purchase Undertaking
30. Security
31. Security
29. Security
14. DeliveryPeriod Periodic Profit Distribution Amount
8. Issuance ProceedsBalance
28. ECGDGuarantee
Purchase Price for Aircraft
9. Procurement
15. Advance Rental
18. Actual Rental21. Aircraft Exercise
Price
7. Issuance Proceeds Balance and Rights to Travel
6. Declaration of Owner
Trust
4. Purchase of Rights to Travel
5. ATKM Purchase
Price
22. ATKM Exercise Price
23. ATKM Purchase
Undertaking
25. Aircraft Exercise Price
24. Aircraft Sale Undertaking
Sale of Aircraft
27. Dissolution Distribution Amounts /Partial Dissolution Amounts / Delivery Period Partial Distribution Amounts / Aggregate Total Loss Dissolution Amounts / Trust Property Distribution Amount
3. Declaration of Issuer Trust
2. Issuance Proceeds1. Certificates
26. Periodic Distribution
Amounts
Notes
ECA Security Trustee
Cash flow
Asset flow
Delivery of Aircraft
32. Security
Future innovations
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• Islamic EETCs– some structural challenges
• Tax leasing structures– already utilise capital market products– could be adapted for Sukuk
International
Latin AmericaBogotáCaracasRio de Janeiro
* associate office** alliance
AfricaBujumbura**Cape TownCasablancaDar es SalaamDurbanHarare**JohannesburgKampala**
Middle EastAbu DhabiBahrainDubaiRiyadh*
AustraliaBrisbaneMelbournePerthSydney
AsiaBangkokBeijingHong KongJakarta*ShanghaiSingaporeTokyo
Central AsiaAlmaty
EuropeAmsterdamAthensBrusselsFrankfurtHamburgLondon
MilanMoscowMunichParisPiraeusWarsaw
CanadaCalgaryMontréalOttawa
QuébecToronto
USAAustinDallasDenverHoustonLos AngelesMinneapolisNew YorkPittsburgh-
SouthpointeSan AntonioSt LouisWashington DC
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Contact details
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Gregory ManPartner, Head of debt capital markets (Middle East)Norton Rose Fulbright (Middle East) LLPTel +971 4 369 [email protected]
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