Malaysia Airlines outlines funding strategies

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Malaysia Airlines (MAS) has outlined three pillars to resolve its working capital requirements, including the issuing of a sukuk, or Islamic bond.

The proposed M$2.5 billion ($802 million) sukuk would have an effective tenure of 10 years and the carrier would have a call option to redeem the issue in full after the 10th year, says MAS.

During the first 10 years, the sukuk's profit rate would be based on the "prevailing market rate at the time of issuance". After the 10th year, the profit rate would "rise by a pre-determined rate".

Pending regulatory approval, the carrier will draw M$1 billion from the issue in June 2012, with the balance to come later, says MAS.

The carrier adds that it has a bridging loan from a "local commercial bank", which will ensure the carrier has sufficient working capital and cash until the funds from the first tranche of the proposed sukuk are received.

"The second pillar of our funding plan consists of our proposal to lease our new aircraft from an external entity," says MAS. "We are in discussions with MOF Inc to lease six new Airbus A380s and two new Airbus A330s with a total capital value of M$5.3 billion from a special purpose vehicle [SPV], which would be wholly owned by MOF Inc."

MOF Inc is owned by the ministry of finance.

This plan has received in-principle approval, but still requires government and regulatory approvals.

MAS proposes that the SPV issue bonds or a sukuk for subscription by institutional investors. The aircraft would form the collateral for any SPV debt market issues, with MAS using the cash flow generated by the aircraft to pay the SPV for the aircraft leases.

Five of the aircraft would be delivered in 2012 and the other three in 2013.

When the sukuk and leaseback arrangement with the SPV are in place, the carrier plans to raise any further capital necessary for 2012 from commercial sources, such as operating leases, finance leases and commercial debt.

"Funding commitments and proposals have been received from numerous third party financiers for the remaining aircraft capex obligations in 2012, and also for some capex obligation in 2013," says the carrier.

The carrier adds that any shortfall in its funding plans can be filled by its majority shareholder, Khazanah Nasional, Malaysia's sovereign wealth fund.

MAS posted a loss after tax of M$171 million for the first quarter of 2012, an improvement from a loss of M$242 million in the same period last year.