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

Emirates Airline: A Billion-Dollar Sukuk-Bond Issue Case Solution

Question 2

The investor clientele effect theory explains the fluctuation in the stock price of the company in relation with the investors ‘demand and goals. It means that if the investors are attracted towards the company’s policy, they will invest in the company. However, if the company changes its policy, which do not benefit the investors, it will lead to adjustments in the stick holdings of the investors, ultimately leading to fluctuation in the company’s stock price.

According to analysis, it is observed that the investor clienteles creates an opportunity, which can be exploited by the hedge fund managers. It’s because though different strategies are opted by the hedge fund managers, it is argued that a common value proposition is sharedby all the hedge fund managers i.e. they search mispriced marketable securities in order to earn arbitrage profit. During this process, the hedge fund manager who has a comparative advantage or technical information will use different types of analysis (qualitative and quantitative), in order to identify the stock’s fair price. It would help them successful and specialized in the market. The role of hedge fund managers is very important, as they are bale to speculate the prices, where the participants do not understand the valuation. For instance, a hedge fund manager speculates the stock prices and played his strategy by purchasing a stock, perceived to be undervalued and selling the stock, perceived to be overvalued.

The only market impediment, which restricts the hedge fund managers from acting on these price differentials is the securities law. For instancee, the Securties and Exchange Commisssion (SEC) has implemented enforcement action for the hedge funds, which have cuased the impact on the securities markets. The brokers or dealers are charged by the Securtities and Exchange Commission for the hedge fnd violations. No only this, the hedge fund managers also have to be responsible and they should excerise appropriate supervision over the employees, in order to make sure that the employees are adhering to Securities Law. Such compliance of the Securities law is a key impediment in preventing the hedge fund managers from active over the price differentials and earning arbitrage profits.

Question 3

The main purpose of involving different banks (Citi group, Deutsche bank, JP Morgan, Emigrates NBD capital limited and chartered bank) in this issuance process was to maximize sukuk which we also called the Islamic bonds for the consumers. The idea behind was to improve the Islamic banking industry the different banks were gathered to provide the service to maintain the diversity in the network. The emergence of the sukuk was increasing the demand for the Islamic bonds among the consumers. Company needed investment to purchase the new aircrafts. So it was not possible for the company with one bank that’s why company involved the 6 different banks to get the $5 billion amount for the new aircrafts six different banks involvements made this possible for the company. . On the other hand the company had the plan to sell the securities in profit and generate the $ 1 billion amount though it was risky for one bank so company involved the six banks to reduce the risk. The majority of the ratings was given to the highest fees. The AA category was given the highest rating and that includes the Nakilat INC and IPIC Gmtn Limited. Whereas the B category was assigned the low ratings and that includes Bahrain Mumtalakat, Kuwait Project Company and Atlantic Finance Limited.

Question 4

The Emirates Airline should repeat the Sukuk issuance for financing its next batch of A380 aircrafts. The main reason behind this suggestion is that the Sukuk holder is the Emirates Airline itself, and the repetition of the Sukuk issuance would make the company entitled to the performance and profitability of the business activity or the underlying asset i.e. the Emirates Airline will ultimately have a right in profits resulting from the operation of the underlying asset. The other reason behind repetition of Sukuks issuance is that the Emirates Airline had been issuing Sukuks already, which created a fund for the company to pay for existing order of the aircrafts.

Further, the average yield on the global corporate Sukuks have increased by 46 bps to 4.62%, since the Fed had announce it might reduce the asset purchase programmes by June 2019, according to HSBC & Nasdaq Corporate US Dollar Sukuk Index. Similarly, the yield on the Sukuks (worth $1 billion) of Emirates airlines, with a profit rate of 3.875% has increased to 5% in Dubai. So, it would be convenient for the Emirates Airlines to finance the upcoming batch of its aircrafts through repetition of Sukuks issuance, rather than trying alternative modes of financing.

In addition, the important reason for repition of the Sukuk issuance is that the cost of Sukuk issuance for Emirate s Airline is comparatively low. However, in providing a financing roadmap for the existing A380 aircrafts; the recommended strategy is that the Emirates Airlines should repeat the issuance of Sukuks based on “Murabaha i.e. cost plus financing” or “Ijara i.e. sale and lease back”.

Therefore, it is recommended that the Emirates airline should continue their plan of $1 billion Sukuk issuance, with a maturity of 10 years and same rate on March, 11, 2013, in order to finance the new batch of aircrafts...............................

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