Emirates Airline: A Billion-Dollar Sukuk Bond Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Emirates Airline: A Billion-Dollar Sukuk Bond Case Solution

Financial Size Up

The Sukuk bond tends to be an attractive instrument in the Islamic financial market for the investors in terms of competitive investment. Even though the Sukuk bond’s largest block has fallen in the Ijara category, the company has issued Sukuk bond of the Wakala variety, because it allowed conventional and Islamic investors to easily access its liquidity pool without compromising on risk and return objectives. In addition to this, it has also incurred low financing cost which is a key reason behind issuing the Sukuk bond. In order to have a look at the financial position of the firm through ratio analysis see Appendix 2.

Besides, Emirates Airline has issued Sukuk bonds with Wakala, which is the right structure. Under this structure, interest is prohibited while following Islamic law. In addition to this, it is very important for Emirates Airlines in terms of underlying assets while the Sukuk bond is sanctioned to proceed the underlying asset performance. See Appendix 3 for bond pricing.

Decision

Based on the information given in the case, Emirates Airline would have to finance its next batch of planes through repeating the issue of Sukuk bonds. If Emirates Airline would keep repeating the Sukuk bond issuance, Emirates Airline might be entitled to proceed with the performance of the business activity and underlying assets, additionally, it would have a right to earn profit from the business activity as well.

In addition to this, Emirates Airline should keep issuing Sukuk bond because it has already been engaged in this practice and the funds might be raised so that it would pay for the existing order made for the aircraft's.

Another reason to suggest to continue issuing Sukuk bond is that financing cost is lower as compared to other bonds. Thus, the best recommendation to Emirates Airlines would be that Sukuk can used to finance the road-map for the existing order of A380 planes for which, EA itself must issue Sukuk bonds which consist of Hammurabi (cost plus financing) or Ijara (lease or sale back concept).

Emirates Airline can easily proceed to issue Sukuk bond as they have already announced to issue US$1 billion of Sukuk bonds (Islamic bonds) with maturity date of 10 years on March 11, 2013 and a similar rate is used in order to finance their next batch of planes.

In conclusion, it can be summarized by stating that the issuance of Sukuk bonds would help Emirates Airlines to finance their next plane batch itself.

Appendices

Appendix-1: Evaluation of Alternatives

Alternative

Benefits

Costs

Debt

· Fewer creditors or only 1 creditor.

· Fixed rate of interest.

· Periodic principal payment rather than one time.

· Easy to raise.

· Interest-tax shield

· Lower debt ratings

· Higher debt to equity ratio.

Regular Bond

· Suitable for conventional bondholders.

· Large number of interest creditors.

· Market compatibility.

· Higher yield.

· Dissatisfaction of Islamic Shariah following creditors.

Sukuk Bond

· Large number of interested creditors through shariah compliance.

· Low yield.

· International creditors’ conflicts.

Bond Mix

· Satisfaction of a large amount of creditors.

· Easy to manage.

· Fixed rates.

· Redemption payment after maturity.

· Cash flow problems.

· Increase in debt burden.

Equity

· Volatile nature of return.

· Easy to raise.

· Volatile cost in growing firm.

· Higher required rate of return.

Internal Cash Flow

· Saving of any financing costs.

· No transaction cost.

· Instant Availability.

· Liquidity issues.

· The funds can be utilized in other projects.

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Emirates Airline: A Billion-Dollar Sukuk Bond Harvard Case Solution & Analysis