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Malaysia Airlines raises funds with $785m bond

Plan to lease eight Airbus planes, totalling $1.67b could be finalised soon

Image Credit: AP
Malaysia Airline aircraft at Kuala Lumpur International Airportin Sepang. Malaysia Airlines said yesterday that its 2.5 billionringgit ($785 million) Islamic bond has been fully sold.
Gulf News

Kuala Lumpur Malaysia Airlines said yesterday its 2.5 billion ringgit ($785 million) Islamic bond has been fully sold, allowing it to tap a new source of funds as it tries to recover from losses.

Chief Executive Ahmad Jauhari Yahya said Retirement Fund Inc, which is a Malaysian state pension fund, has bought 1 billion ringgit ($314 million) of the bonds.

He said the airline has commitments for the remaining 1.5 billion ringgit ($471 million) from local financial institutions, which it expects to drawdown later this year. He declined to name the institutions but said it reflected confidence in the carrier as the 10-year bonds are not guaranteed by the government.

The airline, which suffered a hefty 2.52 billion ringgit ($791 million) loss last year, has said it aims to return to the black by 2014. Ahmad Jauhari said the Islamic bond, also known as a sukuk, would help the company shore up its capital while implementing a recovery plan.

"This sukuk program is the bedrock of our funding plans and will allow us to plan for operational improvement on the route toward sustainable profitability. We are committed to turning around Malaysia Airlines," he said.

Malaysia is the world's top market for Islamic bonds, accounting for about 70 per cent of global issuance. Islamic finance conforms to Shariah law, which forbids charging interest and requires deals to be based on tangible assets, providing some insulation from credit turbulence.

Airline officials said the bond will count as part of the airline's equity.

Ahamd Jauhari said that a plan to lease six new Airbus A380 superjumbos and two new Airbus A330 planes, with a total value of 5.3 billion ringgit ($1.67 billion), would be finalized by next month.

The airline has said the government is expected to set up a special entity to buy the aircraft, which are crucial to its recovery, and subsequently lease them to Malaysia Airlines to help it cut costs.

Malaysia Airlines has received its first A380 plane, which is expected to start flying to London soon. Four more new planes will be delivered this year and another three in early 2013. The airline narrowed its first-quarter loss to 171 million ringgit ($53.7 million) from 242 million ringgit ($76 million) a year earlier.

The funding plans came after Malaysia Airlines last month canceled a share swap with budget rival AirAsia amid union protests against the deal. Analysts said the flag carrier, which has ceded all low-cost routes to AirAsia, may find it tough to bank on the premium sector alone.

Malaysia Airlines has had multiple business recovery plans in recent years and while they have made some improvement, some analysts said the restructurings haven't gone deep enough to produce real change.