1. What are the main issues in the given case study?

The main issue in this case study is that Emirates Airlines faced a difficult decision in

determining the best way to finance the new aircraft. Emirates Airlines plan to purchase 30

more aircraft which are Airbus A380 as an addition to the 34-existing aircraft in service and

56 on order. Emirates Airlines believe that they would contain 120 of the largest commercial

planes available with the purchase of these 30 new aircraft.

By issue the Islamic and conventional bonds, Emirates Airlines able to raise a capital of

US$ 1.75 billion in March 2013. This US$ 1.75 billion are come from the issuance of US$ 1

billion of Islamic conventional bonds and US$ 750 million of regular bonds. The maturity of

Islamic bonds is ten years which will mature on 2023 and has an amortizing structure with an

average weighted life of five years. This mean that the sukuk will reduce the value of the

bond over a period of time and the full amount will be paid before the maturity date. The sale

of 10-years amortizing Islamic bonds are at a profit rate of 3.857%. However, the sale of 12-

years amortizing regular bonds are at a coupon rate of 4.5%.

The Islamic bonds that due on March 19, 2023 were issued at the offer price of 99.331.

Although the bonds are issued at a lower price, the yield curve at issuance of these bonds

should share the similar rates. However, the sukuk bonds has yielded at 48.6 basis point

which are lower profits than the yield on the regular bonds. Emirates Airlines issued the

sukuk bonds probably due to this lower financing cost.

Emirates Airlines’ president, Tim Clark stated that raising funds to finance new aircrafts

through sukuk could be tricky. This is because under Islamic finance, the payment of interest

and pure monetary speculation is prohibited and requires deals to involve concrete assets. It

would be not easy to get approval from Islamic finance scholars for a sukuk that was based on

assets, which the airline did not yet own [ CITATION Isl \l 1033 ].

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 The senior vice president for corporate treasury, Mr. Brian Jeffery stated that Emirates

Airlines’ decision on whether to issue bonds will based on the pricing and an acceptable

structure. Other than issue bonds, they can also raise funds through commercial debt,

operating leases and export credits, which are typically restricted to 20% of the deliveries

[ CITATION Shr13 \l 1033 ].

Thus, the treasury department of Emirates Airlines have to choose the best alternative to

finance the deliveries of aircrafts for coming batch.

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2. Why is there a yield difference between the two issuances in these two different

markets? Is this due to difference in risk, investor clienteles, liquidity, seniority or

something else?

Sukuk are known as Islamic bonds and there is a correct translation from Arabic word

which are, Sukukis, which also known as Islamic Investment Certificates. Under Sukuk

structure, the holders of the Sukuk will hold an undivided beneficial ownership in the Sukuk

assets. Conventional Bonds are defined as long-term debt instruments that are issued by

corporations and government to sell to investors in order to raise capital [CITATION ATa13 \l

1033 ].

Although the Sukuk and conventional bonds are both bonds, but there are a lot of

differences between them. The first difference between Sukuk and conventional bonds is that

the Sukuk has no interest payments while conventional bonds have interest payments based

on the specific term. This is because interest is prohibited in Shariah principles and Sukuk are

issued based on the Shariah law and the return for investors in Sukuk are called as profit.

The second difference is in terms of the risk. Both Sukuk holders and conventional

bondholders face the business risk which the bond issuer will default on the interest payment

or profit, the face value or both. However, there are difference between Sukuk and

conventional bonds in this risk. Under the conventional bond, the bondholders need to

recourse to the issuer for default amount and have no other ways. This normally is done by a

lawsuit against bond issuer. Additionally, the amount and the period to get back their money

is undetermined. On the other hand, the Sukuk holders have recourse to the asset and not to a

bankrupted individual which are the issuer [ CITATION ATa13 \l 1033 ].

The next difference between the Sukuk and conventional bonds is the investor clienteles.

The price of the Sukuk are valued based on the real market value of the assets that are backing

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the sukuk certificate. However, the price of conventional bonds was valued based on the

credit rating. This is an obligation because the investors are selling the debt in the underlying

loan relationship when they sell the conventional bonds in the secondary market. However,

the Sukuk holders is only sell the ownership of the asset in the secondary market [ CITATION

Moh14 \l 1033 ].

Besides that, there are another difference between the Sukuk and conventional bonds

which are the Sukuk indicate ownership of an asset while the conventional bonds indicate a

debt obligation. Sukuk are backed by physical assets and these assets has a specific value.

Under the conventional bond, the investors are acting as the lenders and the bond issuers are

acting as the borrower. Therefore, there will be a fixed interest payment to the bondholders

and is prohibited in Sukuk’s case [ CITATION Moh14 \l 1033 ].

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3. For this question only, assume this price differential is due to differences in investor

clienteles. Does this provide an opportunity that hedge fund managers could exploit?

If so, how exactly would they exploit this opportunity? If not, explain the market

impediment or friction that prevents hedge fund managers from acting on these

price differences.

A theory of clientele effect is an experiencing of fluctuations in a company’s stock price

according to the changes in the company’s policies. In a better understanding, if a company

has raised its dividend, investors are more likely to buy that company’s stock which also will

increase the price. However, when a company has a huge debt there is a low possibility for

investors to buy the stock and the price will decrease. For example, in 2016, the CEO of

Northwestern Mutual publicly announced in a press release, a 45-basis-point in the dividend

scale interest rate. This situation has shown that the negative impact of the company’s

dividend producing policy. Following the plans that they exposed, the company stressed their

dividend rates from 5.45% to 5.00% [ CITATION Blo19 \l 1033 ].

From my understanding, I think that investors clientele does provide an opportunity that

hedge fund managers could exploit. This is because although different styles are managed by

hedge fund managers, it is of the opinion that all hedge fund managers basically share

common value proposals for which they are working to exploit temporary errors in

marketable securities values. In the process, hedge fund managers with comparative

information or technical advantages will use quantitative and qualitative analysis to identify

the fair price of the stock. This makes them successful and experts in the market. The

expertise of the hedge fund manager has contributed and made it an asset market boundary,

where securities valuation was not well understood by all participants. For example, hedge

fund managers exploit stock price differences by buying stocks that are considered low and

sell stocks that are considered too high at some point.

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 In Emirates Airline case, where the financial crisis took place. The reason is that, when it

comes to short-term debt due to the development of Dubai's financial markets by global

standards, potentially inhibiting the economic development of Dubai and the UAE.

It is clear that in the case of Emirates Airline, the company has been issued a billion

dollar of sukuk bonds. Sukuk Securities allow conventional and Islamic investors to access

significant liquidity pools in the Gulf Delegation Council countries without comprising risk-

return objectives and at the Dubai Mercantile Exchange it comprises 'ijarah', (sale and lease

back) 'murabaha', (cost-plus financing) and 'musharaka' (partnership).

It truly exploits this opportunity with a highly recoverable sukuk issuance, with $ 52

billion in 2010, $ 84 billion in 2011 and $ 131 billion in 2012. From that, it sees the growing

market demand for sukuk (for the purpose of liquidity management Islamic financial

institutions) would outstrip sukuk supply by at least $221 billion by 2015.

In June 2012, Emirates Airline repaid $ 550 million in sukuk which was used to finance

the purchase of airplanes in 2005. EA raised $ 1.75 billion from issuing Islamic and

conventional bonds in February and March 2013 while in March 2014, the company had to

raise about $ 5 billion to pay for existing aircraft bookings. The 10-year repayment of Islamic

bonds at a profit rate of 3.875 per cent contributed $ 1 billion of EA’s funds which rose in

early 2013. The remaining $ 750 million came from 12 years paid off the fixed bonds at a

coupon rate of 4.5 per cent. The Islamic bonds are scheduled on March 19, 2023 and issued at

a bid price of $ 99,331.

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4. Why were six different banks involved in this issuance? For simplicity, assume that

the banks equally split the issuance. Should the banks’ fees for their services differ

between the sukuk bond and the straight bond? If so, by how much and in which

direction?

Emirates Airline is the government owned by Dubai. Dubai ‘s Emirates Airline hired six

different banks to involve in this issuance. Citigroup and Standard Chartered are picked as

global coordinates. While, Abu Dhabi commercial bank, Abu Dhabi Islamic bank and

Emirates NDB capital are the planned sale.

The purpose of Emirates Airline for picked six different banks to involve because to

arrange the potential dollar denominated and benchmark sukuk sale, in what would be its

second bond sale. Generally, they were pick for potential sukuk issuance. The bank has

mandated BNP Paribas, Emirates NBD Capital, HSBC and Standard Chartered. The planned

deal would be of benchmark size that generally of at least 500 million.

Due to Dubai global financial crisis in 2009, people are seeking for alternatives forms of

financing. Therefore, improved investor sentiment and strong liquidity in the Islamic bond

market to raise financing at the cheaper rates for its state entities gives advantages for Dubai.

Emirates Airline raised 1.75 billion from issuing Islamic and conventional bond in February

and March 2013. Besides, it is also looking for innovative financing opportunities in the

global markets and is looking forward to working lead bank partners on the latest transaction.

The difference between the sukuk bond and straight bond are straight bond are defined as

long term debt instruments that are issued by corporations and government. Their contract is

based on seller-buyer relationship as opposed to the borrower-lender. It also, assets may be

tangible or intangible, existing or described with deferred delivery, usufruct or services a non-

existing asset similar to bonds.

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 Sukuk also refers to certificates of equal value which evidence undivided ownership or

investment in the assets using Shariah principles, which prohibits riba’ or interest. Charging

of interest such as fixed income, interest bearing bond are not permissible in Islam. Sukuk is

one of the significant Islamic Shariah compliant financial instruments which provide an

alternative source of financing. Sukuk prices depend on the market value of the firm’s

underlying assets or the value of its business venture. Sovereign sukuk have, in general,

higher yields (lower prices) than their conventional counterparts.

Straight bonds can be simply understood as pure debt obligations. Exchange based sukuk

and straight bond choices are consistent with trade off predictions. While, both exchange

based sukuk and straight bond issuer aligning towards a particular target, only firm with

higher sales growth prefer the former. As such, together with industry insights, we attribute

our findings that sukuk offers brings unique benefits to the issuers that may not be available if

conventional are issued instead, although it is against traditional theoretical interpretation.

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5. The sukuk bond issued by EA is of the “wakala” variety (comparable to principle-

agent model), even though the largest block of sukuk bonds falls into the “ijara”

category (sale and lease back). Why did the company choose this structure? Is its

right structure? Why or why not?

Sukuk bond is an Islamic bond that is compliance to the Shariah principles. Under sukuk

bond interest is must not be included either directly or indirectly and the income would only

include profit and loss-sharing components. The structures of Sukuk must not be based on

sale of debt, which is prohibited by Islamic law as the sale of debt or discounting gives rise to

interest payments. Sukuk bond is linked to an underlying asset so that the sukuk holder was

entitled to proceeds of the performance of the underlying assets or business activity. Islamic

bond emerged as a significant asset class in international markets [ CITATION HoF16 \l 1033 ].

The sukuk bond issued by EA is the “wakalah” variety even though the largest block of

sukuk bonds fails into the “ijarah” category is because that the sukuk bonds allowed

conventional and Islamic investors to access significant liquidity pools without compromising

risk-return objectives. The “wakalah” variety is particularly useful where the underlying

assets available to the originator, and which can be used to support the issuance of the sukuk.

The financing cost is also lower in issuing sukuk bond. In “ijarah” the lessor is the bank, and

this could incur high cost compare to “wakalah” where the principal will just appoint an

agent.

EA has issue “wakalah” variety bond is a right structure. The major exchanges such as

London, Luxembourg, Dubai and Kuala Lumpur have expanded in offering Islamic bonds and

this has added more transparency and credibility to any sukuk issues and ensured investors’

confidence. This is because that under “wakalah” the profit has been agreed-upon to. During

the previous bond issued it was intent to raise debt finance and the bondholder will be

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receiving interest before principle and dividend. However, “wakalah” allow the investor to

receive profit return which has been agreed-upon to. Any excess profit will be kept as a

performance fee. According to the Syariah principles interest is strictly prohibited. Other than

that, under “wakalah” at least 30% of the assets should comprise tangible assets. If it is the

“ijarah” bond then it will be like a lease finance and the lessee is held responsible for

maintaining the asset in proper order, which will bring higher cost.

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6. How should EA finance its next batch of planes? What about the batch after that?

Recommend a financing roadmap for EA for its existing orders of A380 planes.

Make sure to consider the maturity choice of the firm as well.

There are a lot of factors that should be considered on the decision on how to finance the

next batch of planes of EA. Based on the information given in the case, EA should finance its

next batch of planes by repeating the sukuk bonds issuance, since previously EA had issued

this and it is associated with Islamic finance. Through practicing this type of financing, it will

make the movement of finance of the next batch will be flow smoothly rather than issuing

another new type of financing that has not been experienced to use it.

In addition, this is the best alternatives and the safest for EA financing then exploring

other types of Sukuk bonds and others leaned toward conventional financing. If EA trying to

explore new financing ways instead of repeating the sukuk issue, EA will have to pay a higher

interest rate for their planes and need some periods to observe how the new financing works.

According to the HSBC & NASDAQ DUBAI CORPORATE US DOLLAR SUKUK

INDEX (2013), average yield on global corporate sukuk have risen 46 basis points to 4.62%

since the Fed said June 19 it might taper its asset-purchase programmes as early as this year

and the yield on Emirate $1bn sukuk which carries a 3.875% profit rate increase 0.31 of

percentage point in the period to 5% in Dubai . So, if EA continues repeating this sukuk issue,

therefore, it will be easier for them to finance the next batch of planes [ CITATION Emi13 \l

1033 ].

Another reason why EA should continue issuing sukuk bond because of their financing

cost is lower compared to others. Thus, the best recommendations to EA can be used to

finance the roadmap for existing order of A380 is EA could finance their planes by

Murabahah (cost-plus financing) which is the sukuk type of trade credit or loan. The vital key

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about Murabahah is the bank will purchase and take the actual physical ownership of the asset

and it will be resold to the borrower for an agreed mark-up. In this process, the borrower will

pay the loan in a set of instalments.

Next is, by issuing secured sukuk to the public. By issuing sukuk, the EA supposed to

issue a 10-year amortizing Islamic bond for instance. As through sukuk, the company can

diversify their risk and sukuk also can be used to fund the order of the planes as sukuk is one

of the famous instruments to attract investors. Here we can conclude that, continue repeating

sukuk issue is consider the best option that EA can take to finance its next batch of their

planes itself.

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REFERENCES

Afshar, T. A. (2013). Compare and Contrast Sukuk (Islamic Bonds) with. Journal of Global

Business Management, 9(1), 44.

Bloomenthal, A. (2019). Clientele Effect. Retrieved from Investopedia:

https://www.investopedia.com/terms/c/clienteleeffect.asp

Emirates Airline considers $4.5bn sukuk to pay for 21 aircraft. (2013). Retrieved from The

National: https://www.thenational.ae/uae/emirates-airline-considers-4-5bn-sukuk-to-

pay-for-21-aircraft-1.286101

Ho, F. (2016). Investing In Sukuk: How Does It Work? Retrieved from iMoney.my:

https://www.imoney.my/articles/investing-in-sukuk-how-does-it-work

Islamic Finance. (n.d.). Retrieved from ACCA:

https://www.accaglobal.com/my/en/student/exam-support-resources/professional-

exams-study-resources/p4/technical-articles/islamic-finance---theory-and-practical-

use-of-sukuk-bonds.html

Mohammed, N. (2014). Five Important Differences Between Sukuk and Traditional Bonds.

Retrieved from Sukuk: https://www.sukuk.com/education/important-differences-

sukuk-traditional-bonds-2207/

Shroff, R. (2013). Emirates Looking At Aircraft Finance Options. Retrieved from

Aviationbusinessme.com:

https://www.aviationbusinessme.com/airlines/2013/aug/29/340500

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