Etihad Airways – Structured Financing Transactions with ADCB

by Adam Boukadida, Deputy Treasurer, Etihad Airways

Etihad Airways has a proud tradition of innovation and excellence, which extends across its business. Treasury is no exception, as illustrated in the team’s recent structured finance transactions which it recently concluded with the support of partner bank Abu Dhabi Commercial Bank (ADCB). This article provides more information on these transactions, and the outcomes for the business.

Transaction detail

Etihad Airways recently completed two structured transactions which were unique for an international business. The two transactions were:

1. A first ever transaction in the aircraft financing market for Cash Advance cum Forward Sale & Leaseback of 2017 deliveries; USD300m advance on the back of stand-by letters of credit (SBLCs) issued by ADCB;
   
   
2. Structured Borrowing Obligation (SBO) of AirBerlin AED726m, supported with an EY corporate guarantee.

Both of these transactions were extremely time-critical and involved ADCB’s engagement beyond the end of year to understand third party requirements, both commercially and legally.  

ADCB engaged proactively with lawyers and lessors to draft mutually acceptable language that addressed the risk of the forward sale & leaseback transaction in a manner that protects both Etihad and lessors in a cost effective fashion.  ADCB’s high credit rating provided lessors with the required assurance to address any credit risk concerns.  Etihad was, therefore, in a position to accelerate USD300m in cash flow which under a conventional sale & leaseback arrangement would have been received piecemeal based on 2017 deliveries.   

For the AirBerlin transaction, ADCB lent AED726m directly to AirBerlin, with the support of an EY corporate guarantee.  This was delivered in record time with a plain vanilla structure, compared to another financial institution that was less willing to take credit risk on AirBerlin and wanted first recourse to EY.  

Transaction execution

The end-to-end execution we experienced was exceptional. We set up SBLCs in favour of our counterparty in each case, which was a smooth and rapid process, and concluded at a competitive rate without diluting or jeopardising services. SBLCs involve a number of different parties, so it was very helpful to work with a strategic partner that was able to co-ordinate the process. Furthermore, as our trade finance requirements are international in scope, ADCB’s international footprint and network was invaluable.

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Transactions in context

We executed our two transactions successfully with ADCB, the first of which effectively enabled us to repay a short-term overdraft through a bridging loan secured with a trade finance transaction. In the second, in which the supplier was a leasing company, the SBLC successfully met the needs of both our bank and the supplier’s bank, with ADCB as issuer.

Trade finance is an area that is likely to benefit significantly from some of the emerging fintech developments, but in the meantime, although processes and documentation are relatively manual in nature, this has been fairly minimal beyond regular good governance and control requirements. As an existing client of ADCB, we did not need to go through lengthy know your customer (KYC) processes, and pre-agreed lines were already in place. ADCB was very accommodating and flexible in helping to meet cut-off times given that we were dealing with three banks in tandem.

Future evolution

Trade finance is an evolving area, both in terms of underlying products, and the services that are required of banks to support them, in line with changing trends and requirements in international trade. Furthermore, technology is likely to open up new opportunities to streamline trade documentation processes in the future. While corporations such as Etihad rely on their banks to offer competitive pricing in product areas such as cash management and trade finance, there is a degree of commoditisation in basic products. As a result, banks need to differentiate themselves in the quality and responsiveness of support, and ability to understand and anticipate changing customer needs. These are major reasons why we continue to invest in, and value our relationship with ADCB as we work together to facilitate strategic transactions and business growth in the future.