malik and zaman

Islamic Pre-Delivery Payments Financing for Acquisition of 3 Boeing 777s : 

Islamic Pre-Delivery Payments Financing for Acquisition of 3 Boeing 777s Kaleem Malik Dy. Managing Director Pakistan International Airlines Saad Zaman Managing Director Citi Islamic Investment Bank E.C.

Background: 

Background In 2002, PIA embarked on a fleet replacement and modernization plan and under Phase I of this plan, signed a contract with Boeing for purchase of 3 new 777-200ER aircraft, to be delivered in 1Q 2004 U.S. Exim Bank guaranteed financing was expected to be available on delivery of the aircraft, although no formal arrangements had yet been made for re-opening of Exim-financing for Pakistan. PIA was required to make pre-delivery payments to Boeing totaling $150 million and therefore required a bridge financing Facility, to be taken out through lomg term Exim-guaranteed funding.

Key Considerations for PIA: 

Key Considerations for PIA AVAILIBILITY PERIOD Since payments to Boeing were due over a few months, PIA wanted an availiblity period that would enable it to optimise its financing costs. PRICING PIA required funding to be available within a couple of months, as pre-delivery payments to Boeing were due to commence shortly after signing of the contract. TIMING PIA required an committed funding solution from potential arrangers to ensure it could meet its commitments to Boeing. This was particularly relevant given the prevailing and imminent uncertainty in the region. COMMITTED FUNDING Since this was only Phase –I of an ambitious fleet replacement plan, pricing was always a critical factor in determining the best PDP financing solution.

Key Considerations for Potential Arrangers: 

Key Considerations for Potential Arrangers WHAT SECURITY? The new aircraft were only going to be available in the future and hence could not be used as a form of security or for structuring purposes. INDUSTRY & MARKET RISK Since Exim-guaranteed financing was still not committed at the time of the bridge, investorc would want a ‘self-liquidating’ structure. SELF -LIQUIDATING STRUCTURE The proposed $ 150 million Facility would be the largest commercial financing Facility for a Pakistani corporate and hence some form of credit enhancement would be required. CREDIT ENHANCEMENT FOR CROSS BORDER RISK The Aviation industry was in relative turmoil following the events of 9/11 and the imminent war in the Middle East would cause additional portfolio concerns with investors.

The Solution – A Receivable-Backed Ijar’a Facility: 

The Solution – A Receivable-Backed Ijar’a Facility Citi Islamic Inv. Bank, IDB and UBL jointly offered to arrange a US$ 150 million, 3 year Ijar’a Financing Facility structured agianst PIA’s existing fleet and UK / Saudi Ticket Receivables: Lessor: Lessee: Amount: Underlying Assets: Source of Repayment: Maturity: Pre-payment: Availability : Investors: Fly PIA Limited Pakistan International Airlines Corporation US$ 150 million PIA’s existing fleet of aircraft PIA’s ticket and cargo sales receivables from UK & KSA 3 Years Mandatory on Exim disbursement; optional otherwise In line with Boeing’s payment schedule Islamic and conventional banks based in the Middle East

Ijar’a Facility – Overview of Structure: 

Islamic Investors Citi Islamic SPV – Fly PIA Ltd. Citigroup London Collection Agent / Security Trustee “Modaraba” (Funding) Agreement. All the risks/rewards pertaining to the lease arrangements are passed on to the Islamic Investors. $ $ Ijar’a (Lease) & Asset Purchase Agreement $ - Escrow mechanism for PIA’s UK and Saudi sales receivables $ - Payment of Principal and lease rentals Assignment of Boeing Purchase Contract Ijar’a Facility – Overview of Structure

A Success Story : 

A Success Story The Ijar’a Facility was over-subscribed by 30%, despite being syndicated in the midst of the Iraq war. It was one of the most widely syndicated aviation deals in the Middle East, with participation from 13 institutions across UAE, Bahrain and Saudi Arabia. Strong interest across the market, with almost equal participation from Islamic and conventional banks. All payments to Boeing made on schedule, based on the Facility availability period.

US Ex-Im Bank Facility: 

US Ex-Im Bank Facility Citigroup was also selected by PIA as the “Guaranteed Lender” under the US Ex-Im guaranteed financing Citigroup acted as the Sole Lead Arranger, Placement Agent, and Paying Agent under this facility Ex-Im guarantees 85% of the aircraft value at time of delivery

US Ex-Im Bank Facility: 

The Ex-Im facility was disbursed on schedule with the delivery of each of the 3 aircraft in 1Q2004; 1st Ex-Im transaction done in Pakistan since May 1998 Excess funds from the first two disbursements were used to directly repay the outstanding balance under the Ijar’a Facility Upon repayment of the Ijar’a facility, title of aircraft was transferred back to PIA US Ex-Im Bank Facility

Slide 10: 

Global Recognition of the Financing Package Deal of the Year Awards for 2003