* Airline looking at Islamic finance options - president
* Says French banks more risk-averse
* Emirates has 13 aircraft deliveries by end of March
* Sukuk market bearing up well versus conventional finance
* But any Emirates sukuk deal might have to be complex
By Praveen Menon and David French
DUBAI, Nov 8 Dubai's Emirates , the
rapidly expanding Gulf Arab carrier, is looking at the more
resilient Islamic finance market to fund aircraft deliveries as
international banks back out of plane deals because of the euro
zone debt crisis.
European lenders, especially French banks, which have been
major financiers for Emirates' aircraft deals with Airbus
and Boeing , have become risk-averse because of
the crisis, the airline's president Tim Clark told Reuters.
"We were kind of planning for finance from European
banks...but it's just a bit difficult now," said Clark.
"We still have the Islamic finance market to go with and
other funding options are always open for us," he said, adding
that issuing an Islamic bond or sukuk was "not out of the
Clark declined to comment on specific financing deals, but
said liquidity in the international loan market was lower and
French banks were shying away from new deals. "This won't change
for the next six to nine months," he said.
Societe Generale , France's second-biggest listed
bank, on Tuesday scrapped its 2011 dividend to help bolster
capital as it reported a 31 percent drop in quarterly profit,
hit by charges including Greek debt writedowns. Its chief
executive said the bank would reduce its aerospace financing
Emirates is active in corporate funding markets because of
its busy schedule of plane purchases; it received 10 new
aircraft this year and a further 13 are scheduled for delivery
before the end of March next year. Emirates chairman Sheikh
Ahmed bin Saeed al-Maktoum has said there is a good chance of
the airline placing yet more orders at next week's Dubai
However, Clark played down that idea. "We will book if we
have a requirement and get good deals. Otherwise we won't," he
The sukuk market has been relatively resilient during this
year's instability in global financial markets, which has made
it more difficult for even highly rated companies around the
world to issue conventional bonds.
That is partly because Islamic investors in the Gulf remain
cash-rich, partly due to the limited supply of sukuk, and partly
since sukuk investors tend to hold the bonds until maturity,
reducing the chance of big swings in secondary market prices
triggered by shorter-term speculators bailing out of positions.
Goldman Sachs registered a $2 billion Islamic bond
programme last month, a fresh case of a conventional borrower
looking at sharia-complaint funding sources as other markets dry
Traditionally, Islamic finance has been more expensive than
conventional money. But the gap between the two, especially in
the fixed income sector, has narrowed during the global
financial turmoil of the past year and may, for now, have
Dubai shopping mall developer Majid Al Futtaim decided
against issuing a conventional bond because of pricing concerns
earlier this year. It has now mandated banks to set up a
separate sukuk programme.
Emirates has used sharia-compliant financing facilities
before so the company is aware of how Islamic finance works,
according to Qudeer Latif, head of Islamic finance at law firm
Clifford Chance in Dubai.
However, funding planes on order using sukuk could be tricky
because Islamic finance, in addition to forbidding payment of
interest, prohibits pure monetary speculation and requires deals
to involve concrete assets. It would be harder to win a seal of
approval from Islamic finance scholars for a sukuk that was
based on assets which the airline did not yet own.
"It's much easier to use existing planes to issue a
corporate sukuk," Latif said.
"For new aircraft, it's not impossible but it's much more
complicated as the cash would have to go from investors through
a special purpose vehicle to the manufacturer, and then a lease-
back arrangement put in place with Emirates."
Currently, two aircraft-based sukuks have been issued
globally, and they were backed by existing aircraft: a $500
million issue from GE Capital in November 2009,
and a $100 million deal for Nomura in July 2010 .
Clark acknowledged that his airline, whose conventional $1
billion bond issue in June was more than five times
oversubscribed, would be in new territory with a sukuk.
"This will be a new territory for Islamic finance. They
(Islamic banks) are a bit hesitant, but they definitely have the
capacity," he said.
Emirates has continued to grow exponentially despite Dubai's
debt crisis two years ago, which hit several other
government-related entities and forced the restructuring of
billions of dollars in debt.
The Gulf carrier has over 190 aircraft worth more than $66
billion to be delivered over the next few years, including 73
Airbus A380 superjumbos and 41 Boeing 777-300 aircraft.
Emirates already operates in 67 countries and has 114
destinations; it has launched five new destinations this year.
The expansion of the carrier, as well as the growth of
Etihad of Abu Dhabi and Qatar Airways, have alarmed older
European airlines and fuelled mutual accusations of
protectionism. Clark last year heaped further pressure on the
European carriers by voicing plans to expand his fleet to
include 120 Airbus A380s.
(Additional reporting by Rachna Uppal; Editing by Sitaraman
Shankar and Andrew Torchia)