UAE & Cross Border Deal of the Year
Emirates Airline on the 25th March 2015 successfully completed the auction of its US$913.02 million Sukuk. With a final orderbook of approximately US$3.3 billion, the issuance was undeniably well received by the market. The Sukuk is the first in the world to be guaranteed by an export credit agency (ECA). Speaking to Nirmal Govindadas, the senior vice-president of corporate treasury at Emirates, NABILAH ANNUAR provides an in-depth account of this historical transaction.
According to documents by the issuer, the auction began on the 23rd March 2015, where a US$913.03 million Sukuk involving four aircraft was announced with initial price thoughts of MS+100bps released at London open. Strong demand was registered with the orderbook totaling circa US$900 million within the first few hours and US$1.5 billion by close of business. By the next day, books were in excess of US$1.9 billion, allowing the joint lead managers at London open on the 24th March to release price guidance of “MS+95a (+/- 5bps)/will price in range”. The orderbook reached US$2.5 billion in the following few hours, subsequently surpassing the US$3 billion mark, allowing the final credit spread to be set at MS+90bps, with books going subject by the end of the day. The following day, on the 25th March, the final orderbook stood at about US$3.3 billion from over 50 investors. The deal was finally priced at a final profit rate of 2.47%.
“Given that this deal was a Sukuk transaction with the assets (aircraft) being delivered post issuance, the structuring banks had to consider how to ensure the Sukuk was tradable from issuance date. The decision was made to use a ‘hybrid’ structure involving the use of ‘rights to travel’ measured by Available Tonne Kilometres (ATKM) equal to or greater than a minimum of one-third of the issuance amount, to ensure tradability prior to the delivery of the aircraft. This meant that the ATKMs would ‘phase out’ of the structure as and when aircraft were delivered to Emirates, thus requiring additional structuring to enable such flexibility,” explained Govindadas on the structure of the deal. Proceeds therefrom will be used to finance the acquisition of four Airbus A380-800 aircraft; and in addition, as part of the wider UK government’s initiative to support Islamic finance, Export Credits Guarantee Department of the UK government (ECGD) decided to guarantee their first-ever Sukuk transaction.
Commenting on the challenges faced in the process of the Sukuk transaction, Govindadas said: “As this was the first time that ECGD guaranteed a Sukuk transaction, it was inevitable that there would be a number of aspects in the documentation that would require lengthy discussions once documentation drafting began. As the first ECA-guaranteed Sukuk, the main commercial and structural points then had to be finalized and summarized in a paper that was passed through to ECGD’s committee for its approval.” He further relayed that the marketing phase was another challenge as: (1) For the Islamic investors, this was the first time they have been faced with an ECGD-guaranteed transaction; and (2) For the conventional ECA-backed investor base, this was the first time they were presented with a Sukuk structure. To address this, global investor calls and meetings were set up to discuss and clarify the structure of the transaction.
Summary of terms & conditions |
|
Issuer |
|
Sub-lessee |
Emirates |
Guarantor |
Her Britannic Majesty’s Secretary of State acting by the Export Credits Guarantee Department of the UK government currently operating as UK Export Finance (ECGD) |
Issuance price |
100 |
Purpose of issuance |
To finance the acquisition of four Airbus A380-800 aircraft to be delivered over the next four months |
Trustee |
|
Tenor |
10 years/5.37 years average life |
Profit rate |
2.47% |
Payment |
Quarterly |
Currency |
US dollars |
Maturity date |
31st March 2025 |
Structuring agents |
|
Lead managers and bookrunners |
Citi, JPMorgan, HSBC, National Bank of Abu Dhabi, Abu Dhabi Islamic Bank, Dubai Islamic Bank, Emirates NBD Capital, Standard Chartered Bank |
Co-lead manager |
|
Governing law |
English |
Legal advisors |
Emirates’s counsel: Norton Rose Fulbright JLM’s counsel: Clifford Chance ECGD’s counsel: Allen & Overy and Hogan Lovells |
Listing |
|
Underlying assets |
Rights to travel (measured by Available Tonne Kilometres (ATKM)) and lease of Airbus A380 aircraft |
Tradability |
Yes |
As the first-ever Sukuk guaranteed by any ECA, the paper was also the largest ECA-wrapped debt capital markets transaction in the aviation sector, the largest-ever ECGD-guaranteed debt capital markets transaction as well as the first time that the ECGD guaranteed the funding with a lengthy period in advance of aircraft delivery. With an orderbook that was 3.5 times oversubscribed, the Sukuk attracted investors from: Middle East and Asia (39%), Europe (32%), the US (29%); comprising of: Banks (38%), fund managers (47%), insurance and pension funds (15%). This deal has also extended the buyer base of the Sukuk product to the typical ECA-backed bond investors. Having met Emirates’s and ECGD’s objectives of introducing this product to the Islamic investor base, as well as broadening the US and European investor base, this issuance paves the way for Sukuk investors to invest in future issuances of a similar nature, while enhancing the diversity of the Sukuk product.