Dubai: Middle East banks are becoming increasingly cautious about funding aircraft orders as sustained low oil prices have slowed the flow of fresh capital.
Regional banks, particularly those from the Gulf, have emerged as major funders in the regions booming aviation sector, including aircraft orders by the likes of Emirates, Qatar Airways and Etihad Airways.
But a drop in oil prices — down more than 40 per cent in the past 12 months — has seen banks move to a more case-by-case approach.
“They are cautious,” Khurso Hamdulay, Chief Financial Officer at Kuwait-based aircraft lessor and financer ALAFCO, told reporters at the Middle East & Africa Airfinance Conference in Dubai on Wednesday.
“There is still appetite but … it will be transaction based. It won’t be a free for fall,” he added.
A change in mindset is unlikely to affect the region’s major airlines, lenders and lessors say, with Emirates, Etihad and Qatar Airways perceived as low-risk opportunities. The Emirates aircraft order book is valued at more than $100 billion (Dh367 billion) in the coming years; Qatar Airways is around $57 billion and Etihad at about $28 billion at list prices.
Bond issuance
Etihad Airways Partners, a group representing Etihad Airways and airlines it holds stakes in, recently raised $500 million on international markets in a debut bond issuance. Local airline flydubai raised $500 million its debut sukuk last year and Emirates has also tapped credit export agencies and capital markets to finance new aircraft.
“The banks are more keen to lend the existing airlines, they don’t want to go outside the region,” Hamdulay said.
But local airlines will have to increasingly diversify their funding sources now that the banks have become less sure about funding new orders.
“Diversification is key,” Bertand Grabowski, member of the board of managing directors and German lender DVB Bank, told Gulf News.
As the Middle East banks back off, new players are likely to step in, which Grabowski said will likely come from China.
“We have seen a lot of liquidity in the region coming to the airline industry in the Middle East. Perhaps [now] there will be some kind of rebalance to some other region of the world,” he said.
But at the conference on Tuesday, bankers said the Middle East carriers, who are predominantly state-owned, will need to be more transparent such as released audited financial documents if they want to diversify their funding from outside the region.
Lessors before banks in Iran
Financial institutions and aircraft leasers are bullishly watching Iran, a market where officials have said there are as many as 400 aircraft orders over the next decade. But years of economic-sanctions that have cut Iran off from the world raises concerns over how foreign companies will be protected under the country’s legal framework.
Banks will likely adopt a wait-and-see approach, lenders and leasers say, while the aircraft lessors will enter the country much sooner.
“It’s deemed to be a commercial deal as opposed to a financial deal. You don’t lend money, you just rent aircraft,” Grabowski said.
Western banks are likely to be more cautious than Middle East banks or credit export agencies in lending to Iranian companies. Banks in the United States will have to wait on guidance from the US government and European banks will be mindful of having run a foul with the US government in recent years.
“The legal infrastructure and other things have to match … the banks will be slow to react,” Hamdulay said.
