As other airlines cut capacity to cope with a global travel slump and banks shy away, Emirates Airline appears to have found a way to keep expanding by tapping the updraft in demand among global investors for corporate bonds.
Last week, Emirates announced plans to sell US$413.7 million (Dh1.51 billion) in bonds to finance the purchase of three Boeing 777 aeroplanes, marking the first time it has used bonds to borrow money to buy aircraft.
Analysts say the deal could help the largest Arab airline vault several new hurdles in its path to building a 450-aircraft fleet by 2020 that will turn Dubai into the world's largest hub for international passenger traffic. While Emirates and other airlines have traditionally turned to banks to finance aircraft purchases, the global financial crisis has left banks reticent to make new loans, particularly to an industry projected to lose $11bn this year.
Funding is particularly tight for companies in Dubai, which has sought federal aid to help it service the estimated $85bn in debts owed by the emirate's Government and the companies it controls.
But demand globally for bonds is soaring as low interest rates on US dollars spark a boom in demand by investors seeking higher returns.
"We've very strong demand for any bond that's come into the market," said Jason Rogers, the director of credit research at Barclays Capital in Singapore.
Emirates's bond issue mirrors a broader turn to bonds across the Gulf as other forms of fund-raising dry up. According to figures from Thomson Reuters, bond sales in the six GCC nations rose by 61 per cent in the first nine months of this year, even as the total amount of funds raised by companies and governments fell by roughly two-thirds.
Emirates is working to link the world's biggest population centres via its base in Dubai. The three new 777s are intended to expand the airline's fleet of jets capable of ferrying more than 200 passengers between any two points, such as Johannesburg to Seoul.
The airline already has 138 passenger and cargo jets, with another 154 aircraft on order, including 28 777s. Emirates operates the world's largest fleet of 777s, with 78, which it uses primarily on flight of over eight hours.
The financial crisis has strained the airline's expansion plans, and growth in passenger traffic has slowed considerably. In May, Emirates said its traffic growth in the year that ended on March 31 nearly halved from the year before, to 7 per cent, helping to drag profits down by 72 per cent. The International Air Transport Association predicts that worldwide airline passenger traffic will fall by 4 per cent this year.
That is contributing to what bankers have reportedly said is a gap in funding for aircraft purchases of as much as $30bn this year.
Emirates has sold bonds before, but largely for working capital, and not to fund purchases of aeroplanes. Like most other airlines, Emirates typically finances aircraft purchases by borrowing from banks, analysts said.
Banks, they said, were more familiar with how to value aircraft and borrowing from a few banks makes for less complicated transactions.
According to the airline's latest financial statements, it had long-term borrowings and lease liabilities amounting to Dh15.1bn as of March 31. That figure is part of the $85bn owed by Dubai Inc.
Concerns about how Dubai and its companies will service that debt have pushed its cost of borrowing higher. The cost of insuring Dubai Government debt remains among the highest in the world. Emirates's own bonds, issued in Singapore dollars, are yielding at least 7 per cent, giving some indication of how much the company would have to pay as a Dubai entity.
But efforts by the US government to pull the American economy out of recession have produced a surge in funding for cash-strapped companies around the world like Emirates. Low US interest rates and massive government spending are convincing investors to borrow dollars cheaply in the US and invest them in faster-growing markets overseas to avoid what many predict will be a surge in inflation that has sent the US dollar falling amid concerns about inflation.
Much of that money is pouring into global bonds. According to the Investment Company Institute in Washington, investors have poured a net $275bn into bonds funds so far this year, compared to just $2bn they have put into equity funds.
Emirates is not the first company in the UAE to tap this demand. So far this year, several Abu Dhabi entities have ventured into the global bond markets, including Mubadala Development,. Bankers have said that some Dubai state-linked companies may also be looking at issuing bonds, including Dubai Electricity and Water Authority, Dubai's Road and Transport Authority and Dubai's Emirates National Oil Company.
The rate that Emirates is paying on its new 12-year US dollar bonds may serve as further encouragement. The bonds are priced at just 3.465 per cent, thanks largely to the fact that the airline won guarantees from the US Export-Import Bank. The bank, with an eye to promoting US exports, frequently finances sales of big-ticket US exports such as Boeing aircraft to developing nations. It has guaranteed bank loans to Emirates in the past, including for six 777s last year.
This appears to be the first time it has guaranteed an airline bond, meaning the bonds have the advantage of being backed not by Dubai, but by the US government.
@Email:warnold@thenational.ae
igale@thenational.ae
How Alia's experiment will help humans get to Mars
Alia’s winning experiment examined how genes might change under the stresses caused by being in space, such as cosmic radiation and microgravity.
Her samples were placed in a machine on board the International Space Station. called a miniPCR thermal cycler, which can copy DNA multiple times.
After the samples were examined on return to Earth, scientists were able to successfully detect changes caused by being in space in the way DNA transmits instructions through proteins and other molecules in living organisms.
Although Alia’s samples were taken from nematode worms, the results have much bigger long term applications, especially for human space flight and long term missions, such as to Mars.
It also means that the first DNA experiments using human genomes can now be carried out on the ISS.
Medicus AI
Started: 2016
Founder(s): Dr Baher Al Hakim, Dr Nadine Nehme and Makram Saleh
Based: Vienna, Austria; started in Dubai
Sector: Health Tech
Staff: 119
Funding: €7.7 million (Dh31m)
'Lost in Space'
Creators: Matt Sazama, Burk Sharpless, Irwin Allen
Stars: Molly Parker, Toby Stephens, Maxwell Jenkins
Rating: 4/5
The specs
AT4 Ultimate, as tested
Engine: 6.2-litre V8
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Torque: 623Nm
Transmission: 10-speed automatic
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Best Foreign Language Film nominees
Capernaum (Lebanon)
Cold War (Poland)
Never Look Away (Germany)
Roma (Mexico)
Shoplifters (Japan)
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NO OTHER LAND
Director: Basel Adra, Yuval Abraham, Rachel Szor, Hamdan Ballal
Stars: Basel Adra, Yuval Abraham
Rating: 3.5/5
Profile
Company name: Jaib
Started: January 2018
Co-founders: Fouad Jeryes and Sinan Taifour
Based: Jordan
Sector: FinTech
Total transactions: over $800,000 since January, 2018
Investors in Jaib's mother company Alpha Apps: Aramex and 500 Startups
Formula Middle East Calendar (Formula Regional and Formula 4)
Round 1: January 17-19, Yas Marina Circuit – Abu Dhabi
Round 2: January 22-23, Yas Marina Circuit – Abu Dhabi
Round 3: February 7-9, Dubai Autodrome – Dubai
Round 4: February 14-16, Yas Marina Circuit – Abu Dhabi
Round 5: February 25-27, Jeddah Corniche Circuit – Saudi Arabia
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Engine: Dual-motor all-wheel-drive electric
Range: Up to 610km
Power: 905hp
Torque: 985Nm
Price: From Dh439,000
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THE SPECS
Engine: 6.75-litre twin-turbocharged V12 petrol engine
Power: 420kW
Torque: 780Nm
Transmission: 8-speed automatic
Price: From Dh1,350,000
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The%20specs%3A%202024%20Mercedes%20E200
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UAE Rugby finals day
Games being played at The Sevens, Dubai
2pm, UAE Conference final
Dubai Tigers v Al Ain Amblers
4pm, UAE Premiership final
Abu Dhabi Harlequins v Jebel Ali Dragons
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
RACE CARD
6.30pm: Madjani Stakes Group 2 (PA) Dh97,500 (Dirt) 1,900m
7.05pm: Maiden (TB) Dh82,500 (D) 1,400m
7.40pm: Maiden (TB) Dh82,500 (D) 1,600m
8.15pm: Handicap (TB) Dh87,500 (D) 2,200m
8.50pm: Dubai Creek Mile Listed (TB) Dh132,500 (D) 1,600m
9.25pm: Conditions (TB) Dh120,000 (D) 1,900m
10pm: Handicap (TB) Dh92,500 (D) 1,400m
The biogs
Name: Zinah Madi
Occupation: Co-founder of Dots and links
Nationality: Syrian
Family: Married, Mother of Tala, 18, Sharif, 14, Kareem, 2
Favourite Quote: “There is only one way to succeed in anything, and that is to give it everything.”
Name: Razan Nabulsi
Occupation: Co-founder of Dots and Links
Nationality: Jordanian
Family: Married, Mother of Yahya, 3.5
Favourite Quote: A Chinese proverb that says: “Be not afraid of moving slowly, be afraid only of standing still.”
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