On the 11th January 2013, Abu Dhabi Equity Partners (ADEP), a Cayman-registered emerging markets Islamic investment house, concluded the first Shariah compliant financing to emerge from a BRIC country and also the first transaction to utilize actual soft commodity to back a physical financing. The deal, which was structured using Wakalah and Murabahah, was carried out to provide short-term working capital to the issuer, an unnamed alcohol chemical producer. The structure was chosen due to the familiarity of investors with the profit assurance scheme of Murabahah.
The deal combined a mix of asset-backed financing, capital and profit protection from ‘A’-rated global investment banks and involved global trading houses as counterparties. The transaction was used to finance a leading sugar and ethanol producer in the agriculture state of Mato Grosso do Sul, enabling investors to buy and own the title from an unnamed alcohol chemical producer to allow the sale of ethanol at a principal plus agreed profit-rate to global petrol distribution companies on collateralized payment against a delivery basis. The deal’s advisors include White & Case, Macquarie Bank, Deutsche Bank, Khalij Islamic and Peterson Control Union Group, who will oversee monitoring and inspection.
In terms of the challenges faced while structuring Brazil’s first Shariah compliant deal, Muneef Tarmoom, the managing partner at ADEP, said: “ADEP’s transaction was pioneering in two fronts; by its use of actual physical soft commodity to back financing, and its introduction of Shariah finance to a new leading BRIC market. Such factors brought multiple structuring challenges on the legal, Shariah, operations, insurance, price and profit protection, off-taker availability and administrative fronts. The challenges were addressed by significant ADEP resource investment in understanding the agricultural sector value chain, Islamic structuring options, and Brazilian market macro and micro environment dynamics.
“This is in addition to building, over a period of more than two years, deep relationships with the growers, suppliers, trading companies, banks and logistics companies; and working with its select network of global legal and Shariah advisors, monitoring companies, as well as ‘A’- rated global banks. By solving said challenges, ADEP is now able to offer investors countless short term Shariah agri-product backed liquidity management instruments over a three to 12-month tenure, from a leading global agricultural production source,” he added.
The deal’s investors comprised mostly those from the gulf region and the Americas and utilized commodities such as sugar, cattle, soy, ethanol, corn and cotton amongst others. Moving forward, it is not unexpected to see more deals of this nature, as the GCC currently imports over 62% of agriculture products from Brazil, and the country is seen as an obvious food security partner for the region. — NH