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
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
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 ("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.
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
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
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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