Aircraft ‘sukuk’ set to soar across Gulf

The use of ‘sukuk’ – financial bonds that comply with Islamic law – is expected to take off in the leasing of commercial aircraft, according to industry experts.

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By  Ben Flanagan Published  September 17, 2006

The use of ‘sukuk’ – financial bonds that comply with Islamic law – is expected to take off in the leasing of commercial aircraft, according to industry experts. In an interview with Arabian Business, Nadim Fattaleh, regional director at Boeing Capital Corporation (BCC), said that aircraft could increasingly form the asset base of Shariah-compliant sukuk. “Something that could happen in the future is to use aircraft, as opposed to real estate, to back sukuk,’’ said Fattaleh. Aircraft can be bought as part of a sukuk and leased to airlines looking to expand their fleet, thus providing a return. This is compliant with Islamic law, which forbids the payment of straight interest (‘riba’), and instead requires a tangible asset on which to pay a return. Sukuk account for over US$200bn of assets worldwide, with real estate being one of the more obviously compliant assets. But liquidity in Middle East markets could see Islamic-compliant banks and financial institutions increasingly turning to other forms of investment such as commercial aircraft. The issue was discussed at last week’s Middle East & Africa Airfinance Conference, held at Dubai’s Royal Mirage Hotel. ‘‘Everybody knows how to invest in a building in Dubai,’’ says Fattaleh. ‘‘But now that there is a lot more liquidity than there used to be, you find that a lot of the local institutions are looking at other ways of investing. And aircraft make an excellent Islamic investment.” One rather obvious advantage over real estate is that aircraft are mobile. “If the value of the asset in that location goes down, you can take an airplane and place it somewhere else. With a building it’s kind of difficult to do that,” Fattaleh points out. Another incentive to investing in aircraft is a legal framework for aircraft and mobile assets agreed in Cape Town in 2001. ‘‘If ratified in the United Arab Emirates, this could mean the cheaper and more secure investment of aircraft,” says Fattaleh. But worldwide increases in the price of aviation fuel could make such an investment vulnerable. Assessing the fuel-efficiency of a particular aircraft, as well as likely increases in fuel prices, would be a vital precursor to investment. Dubai-based Emirates airline has led the way in innovative Islamic aircraft finance. Its announcement last year of a US$550m bond marked the largest-ever corporate sukuk issue. This “established investor appetite for this asset class,’’ according to Robert Fugard, partner of the Asset Finance Group at Linklaters. The Emirates sukuk was unwritten by the Dubai Islamic Bank, which – covering assets from aircraft to property – is considered the international leader in sukuk management. The trend of aircraft being used directly as a sukuk asset base is a sign of increasing sophistication of Islamic finance, and that it is maturing as an internationally acceptable instrument. “Dubai Islamic Bank has financed aircraft for Emirates for a long time. But Dubai Standard Bank has financed something in Germany,” says Fattaleh. ‘‘You find that a lot more investors in the region are moving away from being concentrated on the [local airlines].’’ BCC, the finance arm of the US-based aircraft manufacturer Boeing, does not provide sukuk itself but acts as a broker to marry banks and investment institutions with airlines. Fattaleh denies that the troubled history of BCC’s parent company – in which two CEOs have been lost to corruption and sex scandals in recent years – would deter ‘sukuk’ investors. “It’s something that we’re not proud of, it’s something that’s in the past. It was individuals, not the Boeing company,” he says. “We have very active programmes to combat that kind of stuff. It doesn’t affect us in terms of helping airlines find financing – why would it?’’

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