The US$100 million Islamic convertible Murabahah financing for Gulf Finance House (GFH), which was completed in November 2009, was a landmark transaction for the Islamic and Bahraini financing markets. The GFH transaction is understood to be the first internationally placed Bahraini convertible and the first time that a Murabahah commodity based facility had been used in the international convertible market.
Deal Structure and Syndication
The instrument utilized a Luxembourg securitization vehicle to allow the facility to be syndicated to international convertible investors in the form of tradable securities whilst staying within GFH’s restrictive corporate authorizations and maintaining Shariah compliance for the underlying convertible Murabahah instrument.
The instrument was syndicated to a combination of international convertible investors for whom the ability to take ownership of Euro clearable “marketable” certificates was key and to GCC based investors for whom it was important that the underlying instrument was Shariah compliant.
Underlying Transaction Structure
The underlying Islamic financing was structured as a convertible commodity Murabahah. Its principal documentation comprised a master Murabahah agreement, an investment agency agreement and a call option and conversion agreement.
The master Murabahah agreement was between GFH and Deutsche Bank, acting as investment agent. The investment agent funded the purchase of commodities from funds advanced to it by a Luxembourg securitization vehicle (Sonata Securities) under the investment agency agreement. Under the master Murabahah agreement, the investment agent agreed to purchase certain Shariah compliant commodities at the request of GFH from a commodities broker. Immediately after purchasing the relevant commodities, the investment agent would sell the commodities to GFH at a markup and on deferred payment terms.
Convertibility of the instrument was then embedded in the settlement mechanics of the deferred sale price by allowing the cost price component of it to be settled by the delivery of GFH shares at a fixed conversion price at the investment agent’s election with the Murabahah profit paid in cash. The financing was raised on an unsecured basis.
Repackaging Certificate Structure
GFH’s extraordinary general meeting authorization required the financing transaction to be executed in the form of a Murabahah facility and the authorization was drafted to only allow for a single counterparty. However, in order to achieve best terms for the facility, it was deemed by the arranger to be important that the facility was syndicated to a range of investors, including international convertible investors, to drive demand tension on pricing of the financing.
A large proportion of international convertible investors are unable to invest through participations in facilities, with their charters restricting them to investing in “marketable” securities. To facilitate their participation in the transaction, Sonata Securities was utilized to provide the funding under the Murabahah facility to GFH.
The vehicle then issued limited recourse certificates secured against the facility with recourse only to the payments Sonata Securities receives under the Murabahah facility. Credit risk on GFH and the economic benefits under the Murabahah facility were in effect passed on to the certificate holders.
In order to allow investors the ability to exchange certificates for shares, the Murabahah facility was structured to allow partial conversions with individual certificates having a unilateral exchange right.
The certificates were issued in a Euro clearable format which enabled them to be held by international convertible accounts under their standard custody arrangements and constituted “marketable” securities for their charters.
Allen & Overy LLP
One Bishops Square
London E1 6AD