Garuda issues $630M worth of Shariah bonds

PT Garuda Indonesia's debut $630-million Islamic loan, which follows sukuk by Emirates Airlines and Malaysian Airline System Bhd., is a test that may pave the way for more Shariah funding, the carrier's chief executive said.

The state-owned company announced an agreement last week with Kuwait's Aviation Lease and Finance Company KSCC, which will finance two Boeing 777-300 Extended Range aircraft, CEO Emirsyah Satar said in an April 26 interview from Jakarta. Pricing for the 12-year facility was "competitive" and it will help Garuda gain access to a wider pool of investors, he said, adding that it may consider issuing sukuk in the future.

"It's the first time for Garuda, and I think for an Indonesian airline, to use a Shariah-based structure," Satar said. "The financing of these two aircraft is a start for us to know how the market is."

The loan is a boost for the worldwide Islamic credit market which has slumped 94 percent to $389 million in 2013. Airlines have sold $1.6 billion of sukuk this year, compared with $1.1 billion in all of 2012. Aircraft purchases are a natural fit with Shariah finance, in which funding is tied to an asset, said U. Saefudin Noer, head of CIMB Niaga Syariah in Jakarta.

Garuda, which had $613 million of borrowings as of December, has embarked on a "Quantum Leap" plan that includes increasing its fleet to 194 aircraft in 2015 from 106 as of end-2012. It will start a Sydney-to-London via Jakarta service in the fourth quarter and plans to fly to the west coast of the US by 2015, Satar said in a March 28 interview with Bloomberg Television's Rishaad Salamat.

The airline, which is 69 percent-owned by the government, was listed on the stock exchange in early 2011. As well as the Shariah loan, Garuda may offer as much as 2 trillion rupiah ($206 million) of non-Islamic bonds in June and is also planning to sell 10 percent of the company in a rights offer this year, Satar told reporters in Jakarta on April 26.

Garuda's net income rose to $110.6 million in 2012 from $63.9 million a year earlier, according to a company statement.

The carrier's share price fell 6.1 percent this year to 620 rupiah, compared with a 16 percent rise in the Jakarta Composite Index, after rallying 39 percent in 2012.

Dubai-based Emirates sold $1 billion of 10-year sukuk at 3.875 percent in March and the notes last yielded 4.09 percent, data compiled by Bloomberg show. Turus Pesawat Sdn., a special- purpose company set up to sell debt on behalf of Malaysian Airlines, issued $623 million of Islamic bonds this year at yields ranging from 3.77 percent to 4.37 percent. SriLankan Airlines Ltd. announced a $175 million four-year Shariah loan from five United Arab Emirates lenders in June 2012.