Corporate bonds are in high demand these days and companies are banking on money markets to finance themselves.
Iran's largest carrier, Mahan Air, is one of the companies with an established presence in Iran's young money markets. The airline is issuing Islamic bonds or sukuk for funding its new projects.
As Iranian airlines are benefitting from the January lifting of western sanctions against Tehran over its nuclear program, the trouble for Mahan is that it still faces US sanctions unrelated to the nuclear issue. So, overhauling its fleet will remain costly and difficult.
Government officials are now considering legal actions to remove Mahan from the US Treasury’s list of sanctioned entities for allegedly supporting Iranian military activity in Syria.
> High-Yield Bonds in Demand
The Tehran-based airline plans to sell five trillion rials ($145 million at current market exchange rate of 34,610 rials per dollar) worth of Ijarah sukuk to finance its expansion in the coming months, SENA reported.
Ijara is the Arabic term for rent. The sukuk is basically a rent-to-own contract indirectly between bond buyers and the issuer. In this case, Mahan may buy an aircraft and use the profits from using them to repay the money it borrowed for their purchase.
Expectation of a rate cut by the Central Bank of Iran has boosted demand for high-yielding bonds. The CBI is discussing lowering the interest rate cap on one-year deposits to 16% from the current 21%. Thus, long-term bonds with 21% annual yields are in high demand.
If the central bank imposes the cap, newer bonds will yield six percentage points less than current rates each year. Mahan has yet to announce the yield the upcoming bonds bear.
The largest current issuers of Ijarah sukuk are fixed-line operator Telecommunications Company of Iran and mobile telecoms provider RighTel. TCI, which provides DSL and data services, has 4.5 trillion rials ($130 million) of outstanding Ijarah debt.
RighTel, Iran's third largest mobile operator, comes second with three trillion rials ($87 million) of outstanding Ijarah bonds. Mahan's upcoming bond offering will give it the top spot.
> Making Most of Debt Financing
Mahan's bond offering was announced in a joint press meeting between Mahan Air and Central Securities Depository of Iran's chief executives, Hamid Arabnejad and Mohammad Reza Mohseni.
This is the Tehran-based carrier's largest corporate bond offering so far, SENA quoted CSDI public relations as saying. The two discussed funding sources for Mahan's new projects.
"Mahan has been able to get part of its funding from the debt market through selling sukuk," Mahan's chief executive, Arabnejad, said.
The carrier's previous bond issue was a week ago. It sold 2.1 trillion rials ($61 million) of Ijarah sukuk last week, according to SENA.
It will use the raised money to buy two airbus airplanes. Demand for the sukuk was high. The bonds sold out on the first day.
Mahan offered Iran's first-ever corporate Ijarah bonds in 2009 and raised 291 billion rials ($8.4 million) in the process.
The airline has announced plans to commence flights to Copenhagen and Paris on the first half of 2016. It flies to 24 international destinations in Europe, Far East and the Middle East. The airline carried 5.4 million passengers in 2015.
Mahan is Iran's first "private" airline wholly owned by Mol-Al-Movahedin Charity Institute based in the southern province of Kerman. It started operating in 1992 and has grown to own the largest fleet among Iranian carriers. Its fleet of 60 planes surpass the national carrier Iran Air's 39 aircraft.
