Costs and Benefits of Bond Financing in GCC - Assignment Example

Bonds are generally referred to validity periods over 10 years and below this period it is referred to as notes. This distinction has disappeared except in the US market. Gulf Cooperation Council (GCC) countries traditionally have been dependant on bank loan debt financing for their financial needs. In the past decade, globalization has necessitated the widening of horizon and bond financing is increasingly growing in these markets. Emirates Group has been innovative in its financing option. Considering the changes in the world economy and responding to the new opportunities Emirates has been the first company to issue bonds in UAE.

Their first bonds were issued in July 2001 for Dhs 750 million, which was oversubscribed by 2.5 times (Annual report, 2001-2002). This also has the credit of the first few bonds to be launched in local currency and listed in the Dubai financial market. It has proved to be a stepping stone in restructuring the Dubai financial markets. One of the problems in GCC countries to access new financial instruments has been the absence of credible credit ratings. UAE central bank had taken an initiative to award sensible credit ratings to outperforming UAE companies.

Emirates received a "zero" risk weightage and hence increased credibility and reduced underwriting costs during the bond issue. The costs and benefits of the Emirates bond issue should be understood in the context of their long term strategic goal. At the time when Emirates issued bonds, they had surplus cash flow and were not in a crunch to raise money. They have taken a considerable risk to launch bonds with attractive offerings to customers. As per a General Manager in the Emirates Bank Group, "EK has priced its bonds at 70 basis points over Emirates Interbank Offered Rate (EIBOR); which is generous compared to the terms at which EK has been raising money in the past from the financial institutions.

EK has sweetened the deal by offering attractive interest rates and incurred legal costs and fees and this connotes that this is more of a strategic decision and augur well; in that, it has an ambitious expansion plan for extending its service to several long haul routes and aircraft to reach out to the Americas and Australasia" (Kumar, 2001). As per the company's financial reports, 2001-2002, net proceeds from the issue of bonds were equal to AED ('000) 1,495,188. As per Note 15 of their annual report borrowings bonds were netted as in Table 2.

As per the table below and the note by Emirates Banking group GM, Emirates has incurred heavy expenses on issuing bonds. These expenses have overweighted the competitive advantage benefits gained by raising finance by issuing bonds.15. Borrowings and lease commitments - non-current2002AED'0002001AED'000Lease commitments (Note 17)3,570,9943,179,142Bonds (see (a) and (b) below)1,495,188-Term loans (Note 16)40,37830,128Dnata account (Note 18)69,87370,4715,176,4333,279,741(a) Bonds at face value1,500,000