24 Mar

Market Overview

Despite a slowdown in 2013 with 13% decline by sukuk volume, it is most likely to witness a distinct expand in next year since it will lie beyond Gulf region. UK, Luxembourg and Hong Kong will be hot players in sovereign sukuk market.  Sukuk volume boost will predominantly substantiate by corporate issuers operating in regulated markets as a financing tool for their prospective investments. Particularly, extensive need in infrastructure financing will trigger sukuk issuance in the upcoming years. The fundamental reasons for the attractiveness of sukuk are its liquidity, functionality on trade and being rateable in terms of issuer country.

Aircraft Finance Methods

Operational (True) Lease:  In stark contrast to past, airline companies are not opt for acquiring aircrafts whereas they incline leasing options as a consequence of the reasons below:

  • Airlines companies enable to increase their liquidity by
  • Generally 1% of new aircraft cost per month.
  • Residual value risk: Aircraft values have been depreciating year by year significantly in contrast with many properties

Bank Loans

Structure of the bank loans is similar to mortgage system that the requested  loan is guaranteed by aircraft. Bank has  right to seize the aircraft unless airline company fails to pay the loan. The length of these loans are mostly twelve years.

EETCs

EETCs (“Enhanced Equipment Trust Certificates”) are applicable when airline companies prefer to issue bonds for the purpose of debt financing. The mechanism of the issuing EETCs is based on setting up a SPV (“Special Purpose Vehicle”)to generate the cash by selling the bonds and use for aircraft purchase through a sale/leaseback strategy. Afterwards, the lease payments are made by airline company to SPV with the object of bond interest allocation amongst the investors.

Islamic Leasing

Ijarah: This is a kind of agreement that the lessor/owner is involved in the deal by transferring the right of use on aircraft to airline company in return for predetermined monthly rental payment to lessors. Typically, it is similar to conventional lease agreement that leads Ijarah being the most applied sukuk type for aircraft financing. The main covenant of Ijarah contract is the underlying aircraft has to be in valuable use.  Therefore, the operating risk for underlying aircraft is transferred from lessor to airline company (“lessee”).

Istisna: This financing method is applicable on condition that the transaction appears directly between aircraft seller and the airline company where the manufacturing of the aircraft is not completed yet.

GE Capital is the first sukuk issuer for the purpose of aircraft financing in 2009. The structure of the financing is based on ijarah that was issued by SPV to the lessees in exchange for the cash they provided.  The procedure progressed by a servicing agent which collected the payment from other sources and transferred to the sukuk holders through SPV.  Currently, Emirates Airlines $5.5 billion valuing sukuk for airplane acquisition in last two years. European sixth largest airline company is considering issuing sukuk with the intent of expanding their fleet

Legislation in Turkey

Pursuant to “New Financial Leasing Law” in Turkey, cross border leasing operations in aviation industry are accepted as financial leases instead of operational lease which provides some considerable opportunities related to tax& incentives. In line with this new legislation, cross border lease agreements in aviation industry for the purpose of aircraft finance are exempt from stamp tax and duties which are normally seen in operating lease agreements. Furthermore, the sale back transaction of ijarah certificates to the originator by SPV is exempt from corporate tax. Thus, lease agreements in line with the sukuk certificates will potentially be a highly beneficial aircraft financing method for on coming years. With regards to sukuk investors, corporate earnings from ijarah certificates are not subject to any corporate tax whereas individual investors are ony liable to 10% income tax in Turkey. It is highly expected that aircraft financing by capital markets through Islamic bonds will open up new opportunities for airline companies, institutional and individual investors in a close future.


Herdem Law Firm, Istanbul Turkey

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