FIXED INCOME INVESTMENTS
ASSIGNMENT 2
CLASS 70506
SIR NOORUDDIN HYDERABADWALLA
ABDUL HAFEEZ 21930
Q1.
Q1: Discuss the different financing options available to Emirates Airline. What are their
pros and cons given the unique requirements of aircraft financing?
An EETC (Enhanced Equipment Trust Certificate), which is effectively an improved or
customised version of an ETC, is the first financing option available to Emirates (equipment
trust certificate). Using an asset or piece of equipment now while paying for it over time is
possible with an equipment trust certificate. With the exception of the security being
separated into many classes based on priority of payment and asset claims, an EETC is
practically the same. An EETC typically has a higher credit rating than other issues,
frequently an investment grade rating, as a result of being overcollateralized, having the
equipment (in this example, aeroplanes) as collateral, and being divided into tranches.
Because of this rating, the company can borrow money through an EETC at a cheaper rate
than it would have to if it had turned to other sources of funding. The business will profit
from this. However, an EETC's issuer may only offer its own assets as security, and as there
is no asset diversification, the investors' chances of getting their money back in the event of
an issuer default (in this example, Emirates) are extremely slim. An EETC also has the benefit
of being quite versatile in that it may accommodate various investment profiles inside the
framework. The collateralized aircraft is typically the most desirable and modern aircraft in
the issuer's fleet, which is one of the EETC's disadvantages. A liquidity provider or financial
institution with a very good credit rating must also support the offering. Last but not least, it
is not a very quick and simple process because the legal procedure for the EETC's permission
also takes a long time.
The issue that arises here is that there is a need for unencumbered assets for the structuring
of the loan; if Emirates does not have unencumbered assets available, it may have to go for
a conventional bond issue. Emirates can also choose to issue Sukuk bonds, which may help
them raise capital more quickly and easily than an EETC.
Q2. How do you explain that sukuk are referred to as Islamic bonds when interest
payments are forbidden by Shariah law?
Sukuk are Islamic financial certificates that adhere to Shariah law and are comparable to
bonds in Western finance. Sukuk certificates are sold by the sukuk issuer to an investor
group, who then rents the sukuk back to the sukuk issuer for a set rental charge. These
could be viewed as the Islamic equivalent of traditional bonds. Lending with interest
payments (riba), which is regarded as usurious and exploitative in character, is forbidden
under Sharia (Islamic law). Bonds are so prohibited in Islamic financing.
Some reason why sukuk are referred to as Islamic bonds when interest payments are forbidden
by Shariah law:
 Complies with Sharia.
 Partial ownership of the asset.
 Based on the value of the underlying asset.
 Less risky investments than equity
 Investors receive a stream of payments.
Q3. How would you compare the effective cost of traditional/Western versus Islamic
financing options? What is your final recommendation to Emirates Airline?
The cost of financing through Islamic instruments like an EETC, ETC, and sukuk issue is
significantly higher than the cost of standard interest-based financing like a running finance
facility. The Islamic instruments demand an asset around which the borrowing is
constructed, increasing the collateral; however, this raises the collateral while decreasing
the cost of borrowing because the risk and potential size of loss are reduced.
I would urge Emirates to choose EETC financing over traditional loans or sukuk because,
even though it might take longer to process, Emirates will benefit from the lower cost of
borrowing and since there is a very small possibility that it will default and forfeit its
collateralized asset.